Minimum Support Price

Minimum Support Price

News: The Minimum Support Prices (MSP) for the Khari season 2022-23 were recently approved by the cabinet. The rates for 14 Kharif crops have been increased, the hikes ranging from 4% to 8%.

What is MSP?
• MSP is the rate at which the government buys grains from farmers. Currently, it fixes MSPs for 23 crops grown in both Kharif and Rabi seasons (Including FRP for sugarcane).
• The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.

How is it calculated?
• The MSP is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers.
• The Union Budget for 2018-19 had announced that MSP would be kept at levels of 1.5 the cost of production.
• The MSP is fixed twice a year on the recommendations of the Commission for Agricultural Costs and Prices (CACP), which is a statutory body and submits separate reports recommending prices for kharif and rabi seasons.

Which production costs are taken into consideration while fixing the MSPs?
• The CACP considers both ‘A2+FL’ and ‘C2’ costs while recommending MSP.
• A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others.
• A2+FL covers actual paid-out costs plus an imputed value of unpaid family labour.
• The C2 costs account for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL.

It is important to consider following points:
• CACP reckons only A2+FL cost for return.
• However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.

Issues associated with MSP regime:
• Limited Coverage - As against the official announcement of MSP for 23 crops, only two, rice and wheat, are procured as these are distributed in NFSA (National Food Security Act). For the rest, it is mostly ad-hoc and insignificant.
• Dependency on middlemen - The MSP-based procurement system is also dependent on middlemen, commission agents and APMC officials, which smaller farmers find difficult to get access to.
• Concerns with implementation - The Shanta Kumar Committee, in its report in 2015, stated that only 6% of the MSP could be received by the farmers, which directly means that 94% of the farmers in the country are deprived from the benefit of the MSP.
• Overproduction of Wheat and Paddy - Skewed MSP dominated system of rice and wheat leads to overproduction of these crops and discourages farmers to grow other crops and horticulture products, which has higher demand and subsequently could lead to increase in farmer’s income.
• The current MSP regime has no relation to prices in the domestic market. Its main purpose is to fulfil the requirements of NFSA making it effectively a procurement price rather than an MSP.

Way Forward:
• A true MSP requires the government to intervene whenever market prices fall below a predefined level, primarily in case of excess production and oversupply or a price collapse due to international factors.
• MSP can also be an incentive price for many of the crops which are desirable for nutritional security such as coarse cereals, and also for pulses and edible oils for which India is dependent on imports.