Explained: What is Minimum Support Price (MSP)?

The protesting farmer unions' have two fundamental demands-- repeal of Farm Laws 2020 enacted by the Central Government and legal guarantee for the MSP for various crops every year.

The demand for a legal MSP is a longstanding one and no steps have been taken so far by any government to address it. The farmers fear that without legal backing to MSP, they will be left at the mercy of local traders and middlemen.

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What is the Minimum Support Price (MSP)?

Minimum Support Price (MSP) is a fixed price paid by the Government of India to farmers whenever they procure a particular crop. It is fixed prior to the sowing season to encourage higher investment and production of agricultural commodities. It is to be noted that MSP cannot be altered in any given situation.  

Legal MSP: The Government can make MSP legally binding by either forcing private players to procure crops at MSP or the Government can itself procure the entire production from the farmers at MSP. 

How many crops are procured under MSP?

The Government has fixed MSPs for 23 crops-- 7 kinds of cereal (Paddy, Wheat, Maize, Bajra, Jowar, Ragi and Barley), 5 pulses (Chana, Arhar/Tur, Urad, Moong and Masur), 7 oilseeds (Rapeseed-Mustard, Groundnut, Soybean, Sunflower, Sesamum, Safflower and Nigerseed) and 4 commercial crops (Cotton, Sugarcane, Copra and Raw Jute).

However, the Government is not legally bound to pay MSP even if open market rates for the said produce are ruling below their announced floor prices. 

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Importance of MSP:

With globalization resulting in freer trade in agricultural commodities, protecting the farmers is the need of the hour. 

1- MSP protects farmers from price fluctuations and market imperfections. 

2- The guaranteed price for the crops and assured markets encourage higher investment and adoption of modern farming practices. 

Need for MSP:

The prices of agricultural commodities are inherently unstable and thus, a very good harvest in any year results in a sharp fall in the price of that commodity during that year which in turn will have an adverse impact on the future supply as farmers withdraw from sowing that crop in the next/following years. This then causes a paucity of supply next year and a major price hike for consumers. To counter this, MSP for major agricultural products is fixed by the Government of India, each year. 

Who sets the Minimum Support Price (MSP) for farmers?

The Minimum Support Price (MSP) is set by the Centre for select crop and is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).

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How CACP considers the MSP?

The Commission for Agricultural Costs and Prices (CACP) determines the MSP based on the formula derived from the Swaminathan Committee-- a panel formed by the Government of India to address the issues faced by the farmers. 

1- A2: It covers all the expenses incurred by farmers on seeds, fertilizers, chemicals, hired labour and so on. 

2- A2+FL: It covers actual costs and an assigned value of unpaid Family Labour. 

3- C2: It covers A2+FL, in addition to the revenues forgone on owned land and fixed capital assets. 

For instance, if MSP has been announced at Rs. 1,975 per quintal for Wheat at A2+FL cost of Rs. 960-- the farmer will get a profit of Rs. 1,015 per quintal. 

History of Minimum Support Price (MSP)

The MSP based system has its origin in the rationing system that was introduced by the British during World War II. In the year 1942, a food department was introduced by the British administration which was later upgraded into the ministry of food. The ministry of food was later expanded into the departments of food and agriculture. 

In the mid-60s, India faced acute food shortages and started shoring up its food reserves. India also adopted the Green Revolution programme. 

In the year 1964, the Food Corporation of India (FCI) was established to procure foodgrains at remunerative prices from the farmers. In 1965, the Agriculture Prices Commission (APC) was established to regulate the pricing of procured food grains. In 1985, the APC was renamed as Commission for Agricultural Costs & Prices (CACP). 

The procured food grains were then routed to the Public Distribution System (PDS), ensuring food security for every Indian citizen, a pre-Independence system of rationing.  

Reports on PDS and MSP

In 2009, an SC-appointed panel, the Justice DP Wadhwa Committee, mentioned in a report that the PDS system is inefficient and corrupt. There is an unholy nexus between the transporters, the fair price shop owners and officials of the department of food and civil supply.

As per a 2012-13 report by the National Sample Survey Office (NSSO), less than 10% of the Indian farmers sell their produce at the Minimum Support Price (MSP) set by the Centre. As reported by India Today, the current estimates suggest that only 6% of the Indian farmers have access to the MSP based procurement system. 

In 2014, the Narendra Modi administration constituted a committee to study the food procurement mechanism under the chairmanship of former Union Minister Shanta Kumar. The committee recommended that the government must move 'in-kind' delivery of foodgrains to a system of direct cash transfer to target populations.

In June 2020, Chief Economic Advisor (CEA) Dr. Krishnamurthy Subramanian suggested that the coverage of the PDS should be brought down to 20% from 70% and a system of direct cash transfer to the beneficiary should be introduced.

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