Minimum Support Price (MSP) Part I

  • Agriculture is the backbone of the Indian Economy"- said Mahatma Gandhi six decades ago.
  • Even today, the situation is still the same, with almost the entire economy being sustained by agriculture, which is the mainstay of the villages. 
  • It contributes 16% of the overall GDP and accounts for the employment of approximately 52% of the Indian population. 
  • Rapid growth in agriculture is essential not only for self-reliance but also to earn valuable foreign exchange.
  • Indian farmers are second to none in production and productivity despite the fact that millions are marginal and small farmers. 
  • They adopt improved agriculture technology as efficiently as farmers in developed countries. 
  • It is felt that with the provision of timely and adequate inputs such as fertilizers, seeds, pesticides and by making available affordable agricultural credit /crop insurance, Indian farmers are going to ensure food and nutritional security to the Nation.
  • It is envisaged to make available relevant information and services to the farming community and private sector through the use of information and communication technologies, to supplement the existing delivery channels provided for by the department. 
  • Farmers’ Portal is an endeavour in this direction to create a one-stop-shop for meeting all informational needs relating to Agriculture, Animal Husbandry and Fisheries sectors production, sale/storage of an Indian farmer.
Farmer's Portal
  • With this Indian Farmer will not be required to sift through the maze of websites created for specific purposes.
  • Once in the Farmers’ Portal, a farmer will be able to get all relevant information on specific subjects around his village/block /district or state. 
  • This information will be delivered in the form of text, SMS, email and audio/video in the language he or she understands. 
  • These levels can be easily reached through the Map of India placed on the Home page. 
  • Farmers will also be able to ask specific queries as well as give valuable feedback through the Feedback module specially developed for the purpose.
  • Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
  • The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
MSP is price fixed by the Government of India to protect the producer - farmers - against excessive fall in price during bumper production years. 
  • The minimum support prices are a guaranteed price for their produce from the Government. 
  • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
  •  In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

Historical perspective of MSP

  • The Price Support Policy of the Government is directed at providing insurance to agricultural producers against any sharp fall in farm prices. 
  • The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. 
  • Till the mid-1970s, Government announced two types of administered prices :
  • Minimum Support Prices (MSP)
  • Procurement Prices
  • The MSPs served as the floor prices and were fixed by the Government in the nature of a long-term guarantee for investment decisions of producers, with the assurance that prices of their commodities would not be allowed to fall below the level fixed by the Government, even in the case of a bumper crop. 
  • Procurement prices were the prices of Kharif and rabi cereals at which the grain was to be domestically procured by public agencies (like the FCI) for release through PDS. 
  • It was announced soon after harvest began.
  • Normally the procurement price was lower than the open market price and higher than the MSP. 
  • This policy of two official prices being announced continued with some variation up to 1973-74, in the case of paddy.
  • In the case of wheat, it was discontinued in 1969 and then revived in 1974-75 for one year only. 
  • Since there were too many demands for stepping up the MSP, in 1975-76, the present system was evolved in which only one set of prices was announced for paddy (and other Kharif crops) and wheat being procured for buffer stock operations.

Determination of MSP

In formulating the recommendations in respect of the level of minimum support prices and other non-price measures, the Commission takes into account, apart from a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities, the following factors:-

  • Cost of production
  • Changes in input prices
  • Input-output price parity
  • Trends in market prices
  • Demand and supply
  • Inter-crop price parity
  • Effect on industrial cost structure
  • Effect on the cost of living
  • Effect on a general price level
  • International price situation
  • Parity between prices paid and prices received by the farmers.
  • Effect on issue prices and implications for subsidy

The Commission makes use of both micro-level data and aggregates at the level of district, state and the country. 

The information/data used by the Commission, inter-alia include the following:-

  • Cost of cultivation per hectare and structure of costs in various regions of the country and changes therein;
  • Cost of production per quintal in various regions of the country and changes therein;
  • Prices of various inputs and changes therein;
  • Market prices of products and changes therein;
  • Prices of commodities sold by the farmers and of those purchased by them and changes therein;
  • Supply related information - area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry;
  • Demand related information - total and per capita consumption, trends and capacity of the processing industry;
  • Prices in the international market and changes therein, demand and supply situation in the world market;
  • Prices of the derivatives of the farm products such as sugar, jaggery, jute goods, edible/non-edible oils and cotton yarn and changes therein;
  • Cost of processing of agricultural products and changes therein;
  • Cost of marketing - storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; and
  • Macro-economic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.

The increase in MSP for Kharif Crops is in line with the Union Budget 2018-19 announcement of fixing the MSPs at a level of at least 1.5 times the All-India weighted average Cost of Production (CoP), aiming at reasonably fair remuneration for the farmers.

The topic covered in the blog pertains to UPSC papers on GS 3 Agriculture and Essay type questions. Don’t forget to subscribe so that you never miss out on such important and interesting topics. Check out our previous blogs on various topics here.

Blog Post written by:
Anurag Trivedi
UPSC Mentor