Minimum Support Price (MSP)

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Mains Examination: General Studies Paper 3

Indian Economy: Agriculture and Related Issues

In News:

• Recently the Cabinet Committee on Economic Affairs (CCEA) has approved the increase in Minimum Support Price (MSP) for all mandated Kharif crops for 2023-24.

About MSP:

• Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in agricultural prices.
• The Cabinet Committee on Economic Affairs announces the MSP at the beginning of each sowing season, taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP).
• MSP protects producer-farmers from distress sales during bumper production years.
• background
• MSP was first introduced for wheat in the year 1965-66. Later it was extended to coarse grains.
• In the year 1965, the government decided to set up a permanent body called the Agricultural Prices Commission to recommend the MSP. In the year 1985, its name was changed to Commission for Agricultural Costs and Prices.

Crops covered in MSP:

• Central government announces MSP (not legally guaranteed) for 22 mandated crops and fair and remunerative price for sugarcane.
• It includes the following crops:

• 14 Kharif crops (Paddy, Jowar, Bajra, Maize, Ragi, Arhar/Arhar, Moong, Urad, Groundnut, Soybean, Sunflower, Sesame, Niger seed, Cotton),
• 6 rabi crops (Wheat, Barley, Gram, Lentil/lentil, Rapeseed and Mustard, and Safflower) and
• 2 commercial crops (Jute and Copra).
• In addition, the MSP for rapeseed and desiccated coconut is also fixed on the basis of MSP of rapeseed and mustard and copra respectively.

Fair and Remunerative Price (FRP):

 

• FRP is the minimum price at which sugar mills buy sugarcane from farmers.
• The Cabinet Committee on Economic Affairs announces the FRP on the recommendations of the CACP.

Latest Minimum Support Price: Kharif (2023-24)

• The increase in MSP for Kharif crops is in line with the announcement made in the Union Budget 2018-19 to fix MSP at a level of at least 1.5 times the all-India weighted average cost of production (COP).

Calculation of MSP:

While recommending the MSP, the CACP looks at the following factors:

• Demand and supply of a commodity;
• Cost of making;
• Market price trends (both domestic and international);
• Inter-crop price parity;
• the terms of trade between agriculture and non-agriculture (ie, the ratio of prices of agricultural inputs and agricultural products);
• Minimum 50 per cent as margin on the cost of production;
• The potential effects of the MSP on consumers of that product.

Calculation formula:

• The CACP itself does not make any field-based cost estimates. It estimates using state-wise, crop-specific cost of production estimates provided by the Directorate of Economics and Statistics in the Ministry of Agriculture.
• CACP calculates three types of costs A2, A2+FL and C2 for each mandated crop for different states.
• A2 Cost: This is the lowest cost and includes all costs directly paid by the farmer - cash and others - seeds, fertilisers, pesticides, hired labour, leased land, fuel, irrigation etc.
• A2+FL Cost: This includes A2 plus an imputed value of unpaid family labour.
• C2 cost: This is the highest of the three costs and is a more comprehensive cost defined as factoring in rent and interest for owned land and fixed capital assets, on top of A2+FL.
• The National Commission for Farmers, headed by MS Swaminathan, recommended the MSP under the C2+50 percent formula. That is, the total cost of the crop (C2) and the profit on it is 50 percent.
• Government announces MSP on the basis of A2+FL.

Procurement System:

• Food Corporation of India (FCI), along with State Government Agencies (SGAs), procures food grains under MSP.
• There are two types of systems: centralized procurement system and decentralized procurement system

Centralized Procurement System:

• Procurement of food grains in the Central Pool is done either directly by FCI or through State Government Agencies (SGAs).
• Central Pool refers to stocks procured through MSP operations for welfare schemes and disaster relief.
• The quantity procured by the SGAs is handed over to FCI for storage in the same State and subsequent release against Government of India (GOI) allocation or movement of surplus stock to other States.
• The cost of food grains procured by state agencies is reimbursed by FCI.

Decentralized Procurement System:

• The state government itself makes direct purchase of food grains. It also stores and distributes these food grains under NFSA and other welfare schemes.

Economic Cost to Government:

• Total cost includes acquisition and distribution cost.
• This is the MSP and the incidental cost of procurement, which includes state taxes, commission to agents, cost of bagging material, mandi labour, transportation to depots, etc.

Government's concerns:

• Burden on the exchequer: The economic cost of procurement for FCI is very high, which is ultimately borne by the Central Government. Thus there is diversion of funds from investment in agricultural infrastructure.
• Lack of storage facility: In the last six years, over 40,000 tonnes of food grains have got spoiled due to improper handling and storage.
• Environmental degradation: The MSP has created a highly distorted incentive structure in favor of wheat and rice and, along with highly subsidized electricity and urea, is causing an environmental disaster in some areas of North-West India.

Farmer's Concern:

• No legal statutory backing: A farmer cannot demand MSP as a matter of right.
• Calculation on MSP: The protesting farmers are demanding MSP based on C2 cost instead of A2+FL.
• Political Tool: MSP acts as a tool in the hands of policy makers to change production patterns and encourage certain crops. Nearer to elections, governments announce higher MSPs to win farmer votes.
• Limited procurement: While the government has provisions for MSP for many crops, it buys only a few of them and that too only from a few states. Households growing paddy and wheat dominate the charts of MSP awareness and the produce sold under it.
• Delayed procurement: Government procurement agencies come late to the market and by the time procurement begins, most farmers have sold their produce to private players.
• Limited Awareness: The benefit of MSP is mostly going towards big farmers while small and marginal are left out of benefits.
• Consider inflation for input costs: Farmers' organizations demand MSPs to be in line with rising input costs, including fertilizers and irrigation.

Consumer Concerns:

• Economic aspects: A sharp increase in MSP (or a higher MSP over a sustained period) could lead to a rise in food inflation.

Recommendations:

• Include more crops in MSP like millet, horticulture etc.
• Instead of focusing on MSP, benefitting farmers from schemes like PM-KISAN, PM-ASHA schemes etc. This will provide direct support to them and reduce the financial burden of the government.
• Farmers should be provided assistance regarding what crops to grow, when to sow, when to apply plant nutrients and which pests are attacking their crops etc.

Infrastructure Development:

• The state should intervene to provide post-harvest technology to farmers to ensure better shelf life for their produce.
• Roads should be constructed to connect villages to mandis.
• Adequate facilities for grain storage and irrigation should be developed, as nearly 50 per cent of the land is rain-fed and there is a lack of adequate godowns to store their produce at the village level.

Source-The Hindu

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Mains Exam Question

• What is the Minimum Support Price? What is the method of its determination?
• Discuss the challenges faced by the farmers due to the recent increase in the MSP of Kharif crops by the government and its impact on the Indian economy giving suggestions for their solutions.