Minimum Support Prices for Agricultural Produce

Centre hikes Kharif crop Minimum Support Price (MSPs)


From UPSC perspective, the following things are important :

Prelims level: MSP system

Mains level: Issues with MSP

The Centre has set the Minimum Support Price (MSP) for 17 kharif crops and variants.

What is MSP?

  • The MSP assures the farmers of a fixed price for their crops, well above their production costs.
  • MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidized grains through the PDS, isn’t an entitlement for farmers.
  • They cannot demand it as a matter of right. It is only a government policy that is part of administrative decision-making.
  • The Centre currently fixes MSPs for 23 farm commodities based on the Commission for Agricultural Costs and Prices (CACP) recommendations.

Fixing of MSPs

  • The CACP considered various factors while recommending the MSP for a commodity, including the cost of cultivation.
  • It also takes into account the supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-à-vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

What changed with the 2018 budget?

  • The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1.5 times of the production costs for crops as a “pre-determined principle”.
  • Simply put, the CACP’s job now was only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.

How was this production cost arrived at?

  • The CACP projects three kinds of production cost for every crop, both at the state and all-India average levels.
  • ‘A2’ covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilizers, pesticides, hired labor, leased-in land, fuel, irrigation, etc.
  • ‘A2+FL’ includes A2 plus an imputed value of unpaid family labor.
  • ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

How much produce can the government procure at MSP?

  • The MSP value of the total production of the 23 crops worked out to around Rs 10.78 lakh crore in 2019-20.
  • Not all this produce, however, is marketed. Farmers retain part of it for self-consumption, the seed for the next season’s sowing, and also for feeding their animals.
  • The marketed surplus ratio for different crops is estimated to range differently for various crops.
  • It ranges from below 50% for ragi and 65-70% for bajra (pearl millet) and jawar (sorghum) to 75% for wheat, 80% for paddy, 85% for sugarcane, 90% for most pulses, and 95%-plus for cotton, soybean, etc.
  • Taking an average of 75% would yield a number of just over Rs 8 lakh crore.
  • This is the MSP value of production that is the marketable surplus — which farmers actually sell.

Nature of MSP

  • There is currently no statutory backing for these prices, nor any law mandating their enforcement.

Farmers demand over legalization

  • Legal entitlement: There is a demand that MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce.
  • Private traders’ responsibility: Some says that most of the cost should be borne by private traders, noting that both middlemen and corporate giants are buying commodities at low rates from farmers.
  • Mandatory purchase at MSP: A left-affiliated farm union has suggested a law that simply stipulates that no one — neither the Government nor private players — will be allowed to buy at a rate lower than MSP.
  • Surplus payment by the govt.: Other unions have said that if private buyers fail to purchase their crops, the Government must be prepared to buy out the entire surplus at MSP rates.
  • Expansion of C2: Farm unions are demanding that C2 must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.

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