What is MSP? Understanding Minimum Support Price

What is MSP? Understanding MSP and its impact on farmers.

There has been a great debate of late over MSP, which stands for Minimum Support Price for agricultural produce. There is varied opinion on the government’s move of hiking the MSP by 50%, and whether it takes the right considerations. While, it is best left for experts to give their opinion, we as individuals and organizations involved in the agricultural sector must at least talk about what MSP is and its influence.  After all it has always been one of the major demands in all of the farmer movements in the country.

What is MSP? How did it come into place?

It was in the early 1960s, when India was facing an enormous crisis of cereals. This led to development of new agricultural policies and the start of the Green Revolution.

In 1964, the government set up the Food Corporation of India (FCI) to procure food-grains from farmers at remunerative prices, and through the public distribution system distribute them to consumers and also  maintain buffer stock for food security.

In order to buy there had to be a policy on pricing. In 1965, to advise on price policy for agricultural commodities and its impact on the economy, an Agricultural Prices Commission was set up.

It was with this that the Price Support Policy of the Government came in, providing a fail safe to agricultural producers against sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. If no one else buys it, the government will buy the stock at this minimum guaranteed prices. This is what came to be know as Minimum Support Price.

This, one price policy took its final shape around 1974-76. The MSP serves as long-term guarantee for investment decisions of producers. It came with an assurance that prices would not fall below this fixed level, even in case of a bumper crop.

MSP was introduced to give financial stability into the agricultural system and encourage production.

The minimum support prices are announced for 23 commodities on the basis of recommendations of Commission for Agricultural Costs and Prices (CACP), by the Government of India at the beginning of the sowing season.

Why did MSP gain such importance in agricultural policies?

The major objectives of MSP is to support the farmers from distress sales at severely low prices and to procure food grains for public distribution.

Ideally, the market price will always remain higher than the minimum support price being provided by the government. With the government guarantee, the farmer can always sell at the MSP, if he cannot procure a better price elsewhere.

Thus, MSP becomes a very important benchmark for the producer, because it helps him estimate the revenue, aiding the financial planning and also influencing borrowing decisions if any.

This is the reason why the demand to increase MSP has been one of the major points in most of the farmer protests. As it directly dictates the farmer’s income.

While, there are many other non-price factors which have an long-term impact on agricultural development like technology, irrigation, development of infrastructure, market reforms, better procurement & storage facilities and institutions, but MSP has always remained contentious as it is directly linked with the farmer’s pocket and is tangible.

MSP for Kharif Crops

Current Status of MSP : The Pros , The Cons & What can be Done Better?

The MSP just saw  50% hike,  much to the relief of many farmers. The trouble with MSP is that while it is touted as an all-important factor for farmers promising instant rise in their income, and stability, it also has many drawbacks in implementation.

Pros of MSP:
  1. One price policy. Assured pay. Directly influences farmer’s pocket. (Prices for all crops from 2009 to 2018.)
  2. Considers various factors when fixing the price, does not leave the farmer at the mercy of the market.
  3.  Procurement for PDS and Buffer stock for food security come from this planning.
  4. Has a heavy influence on market prices. Also helps the farmer grow and match up with the other sectors in terms of income.
Cons of MSP & What can be done better:
  1. Hiking MSP without investing in infrastructure is just a short-term play. While it does deliver immediate results, long-term developments to back-it up are also important.
  2. MSP covers numerous costs. Like cost of sowing (A2), labour (FL), etc. These considerations are controversial with suggestions that it should be based on comprehensive costs (C2), which includes the land rent costs.
  3. Too much of an hike on MSP, either paves way for inflationary effects on the economy, with rise in prices of  foodgrains and vegetables, or loss to government treasury if it decides to sell at lower price as compared to the higher MSP it bought at.
  4. MSP is a nationwide single price policy. But the actual costing for production varies from place to place, more severely so in areas with lack of irrigation facilities and infrastructure. Thus, not all farmers have equal benefits.
  5. Market prices should ideally never be below MSP.  If they fall below, in concept the farmer can always sell it to the government, which will then resell it or store as buffer. But practically this does not always happen. Market value in many cases does fall below MSP due to lack of infrastructure and procurement apparatus on government’s behalf.
  6. MSP is notified for 23 crops but effectively ensured only for two-three crops.

Thus, MSP while still being significant is not the only go to solution for solving all the woes for farmers.