A minimum support price or MSP is a risk mitigation or market intervention strategy that ensures a minimum price for 23 crops against any sharp change in farm prices. The central government will announce the MSP or minimum support price before the sowing season based on the CACP or the “commission for agricultural costs and prices“. After the harvest, the farm produce would be directly brought by the notified government agencies like FCI, NAFED, etc.

HOW DID THE GOVERNMENT CONCEPTUALISE MSP OR MINIMUM SUPPORT PRICE

After independence, the government of India tried to implement many ways to increase food production and farmer’s income. In 1964, the prime minister of India, Shri Lal Bahadur Shastri, decided to appoint the Food Grains Prices Committee or L.K Jha Committee to study price policy.

The committee under Shri L.K Jha was mandated to look into relevant matters like

1. Determine producer’s prices for food grains on an all-India basis.
2. To find out reasonable margins for the wholesalers and retailers.
3. Determine consumer prices for the 1964-1965 crop period.
4. To suggest terms of reference for an establishment or agency which will provide advice on MSP or minimum support price.

After studying all aspects, including the wholesale price trends in the post-harvest season. L.K Jha committee submitted its report. This report also recommended MSP, which was higher than the averages of the post-higher than the averages of the post-harvest prices. The report also recommended to constitute APC.

For example, the average price of paddy at the wholesale level from 1961- 1962 to 1963-1964 was between 28.56 Indian rupees and 38.36 Indian rupees per quintal.

After revisions and views from the state government, the central government introduced MSP in 1966- 1967. However, the difficulty in enforcing the minimum prices led most states to withdraw.

Initially, it was available to Wheat. Later, it extended to rice. At present, MSP covers 23 c

AGRICULTURAL PRICES COMMISSION or APC

Based on L.K Jha’s committee recommendation, the government established the APC or Agriculture Prices Commission in 1965. The primary duty of the APC was to advise the government on the price of crops.

While recommending the price policy, the APC should consider the following points.

1. Incentive to the farmer for adopting new farm methods and technology.
2. Cost of living.
3. Level of wage and industrial cost structure.
4. Ensure rational use of land for production.

In 1980, the framework was restructured to bring balance between the demand for grains and the supply of grains. They reconstituted APC into CACP or Commission For Agricultural Costs And Pri

CACP or COMMISSION FOR AGRICULTURAL COSTS AND PRICES

Currently, CACP, an attached office of the Ministry of Agriculture and Farmers Welfare, is responsible for recommending MSP to the government.

CACP comprises a chairman, a member secretary, one official member, and two non-official members. The official members are representatives of the farmers.

Currently, CACP recommends MSP of 23 agricultural commodities, including seven cereals, five pulses, seven oilseeds and four commercial crops.

TERMS OF REFERENCE OF CACP or COMMISSION FOR AGRICULTURAL COSTS AND PRICES

1. CACP should consider the relevance of incentivising farmers to adopt new farming technology.
2. Need to ensure rational and optimised utilization of resources like land.
3. The effect of the price policy on the Indian economy should be considered to avoid adverse effects that may arise due to the price policy. (For example, cost of living.)
4. May suggest non-price measures related to credit policy to increase the achievements of CACP’s objectives.
5. CACP should recommend measures necessary to make the MSP effective.
6. While calculating MSP, CACP should look into the changes in terms of trade between agricultural and non-agricultural commodities sectors.
7. To monitor the developing price situation and make necessary recommendations to the government.
8. To conduct studies in respective crops as may be prescribed by the government of India.
9. Collect relevant information for the determination of MSP.
10. Organise research on the field of price policy.
11. Advise the government on price policy and any problems related to agricultural prices and other production.
12. To ensure competitive agriculture, CACP is mandated to integrate recommended non-price measures with price recommendations effectively.

HOW IS MSP PREPARED IN INDIA?

To declare MSP by the government of India, CACP should submit price policy reports.

To prepare respective price policy reporters, CACP will send detailed questionnaires to state agriculture departments, agriculture ministry, farmers’ groups and national agriculture-related organisations.

Then, the commission will make field visits to states to find out problems that exist at the grassroots level.

After these processes and based on their results, CACP will finalise price reports and submit them to the government.

The central government then circulates these price reports to state governments and other departments for their comments and feedback. After their feedback, the Cabinet Committee on Economic Affairs (CCEA) takes the final decision and declares MSP.

HOW MANY CROPS ARE UNDER MSP or MINIMUM SUPPORT PRICE

At present, CACP recommends MSP of 23 agricultural commodities. It includes seven cereals, five pulses, seven oil seeds and four commercial crops.

Kharif crops under MSP scheme- Paddy, Jowar hybrid, Jowar Maldandi, Bajra, Maize, Ragi, Tur or Arhar, Moong, Urad, Groundnut, Sunflowerseed, Soyabean black, Soyabean yellow, Sesamum, Niger seed, Medium-staple Cotton, Long-staple Cotton.

Rabi crops under MSP- Wheat, Barley, Gram, Lentil or Masur, Rapeseed or Mustard, and Safflower.

Commercial crops under MSP- Jute, Copra (Milling and Round). For sugar cane, a fair and remunerative price is announced.

Now, you may have a question in your mind. Why are these 23 crops included in MSP while others are excluded?

The answer is simple. These 23 crops together cover 82 per cent of the total cropped area and 75 per cent of crop value. Other agriculture products like Onion are included in the market intervention scheme.

WHAT ARE THE POSSIBLE WAYS TO ENSURE PRICE GUARANTEE TO FARMERS?

The two possible ways or methods to ensure price guarantee to farmers are the following

1. Procurement by government agencies when the price falls below MSP.
2. Paying the difference between MSP and the actual price received by the farmer into the farmer’s account.

In the procurement method, the cost involved is very high. The cost for physical procurement, handling, storage, and transportation are cost-intensive processes. The estimated cost for procurement will be 15 per cent of MSP, and if operations are not done effectively, the expense will again increase.

In the case of price deficiency payment, it is very simple and needs only less than 2 per cent of MSP. It doesn’t need working capital. But there are deficiencies. But there are drawbacks, like

1. Deficiency payment may be required for a much larger percentage of marketed surplus.
2. Traders may try to keep the price purposely low as the farmers are to be compensated by the government.

IMPLEMENTATION OF MSP or MINIMUM SUPPORT PRICE

When there is a need to execute the MSP in a market organisation, such as the Food Corporation of India, the Jute Corporation of India, Cotton Corporation of India, NAFED will step in.

Under this scheme, the farmer should register through an online portal. Whenever such registered farmers offer food grains within the stipulated procurement time, products will be purchased at MSP.

PROBLEMS WITH PROCUREMENT AT MSP

1. According to the standing committee report submitted by chairman Sudip Bandyopadhyay, the procurement rate is low due to the lack of adequate infrastructure. For example, the share of FCI in direct procurement is less than five per cent.
2. Lower staff strength at the ground level results in procurement refusal at centres by pointing out uncertified technical reasons. For example, They will reject procurement by citing moisture content without proper analysis.
3. Underutilisation of FCI-owned storage facilities also hampers procurement.
4. Grains will get damaged while stored due to inadequate scientific measures.
5. MSP is useless for farmers when it surpasses the market price and harmful when it is below it.
6. Only 6 per cent of farmers benefit from MSP, and most are unaware of MSP. This makes procurement ineffective.

HOW IS MSP FIXED IN INDIA?

Three different approaches are utilised to find out MSP.

They are

1. A2 method
2. A2 + FL method
3. C2 method

A2 method

Expenditure on various inputs paid by farmers such as seeds, fertilisers, chemicals, machine labour, irrigation expenses, interest paid on working capital, depreciation and rent paid for leased land, etc. A2 excludes the imputed value of rent for own land.

A2 + FL method

Expenditure on various inputs + implied cost of Family labour. Using 1.5 times the A2 +Fl cost raises the MSP of twelve crops from 4 to 47 per cent. The average weighted increase for the MSP-notified commodities comes to 6.3 per cent. Raising A2 + FL by fifty per cent suggests that the time spent by the farmer and his family in the production field will be valued at a fifty per cent higher rate than the wage paid to hired labourers.

C2 method

A2 + FL + implied cost of land rent + all other implied costs. The M.S. Swaminathan committee recommended this method. CACP considers both A2+FL and C2 costs while recommending MSP. CACP considers only A2+FL cost for return. However, C2 costs are used by CACP primarily as benchmark reference costs to see if the MSP recommended by CACP at least cover these costs in some of the main producing States.

MSP may not be restricted to 1.5 times the cost and can be higher. It will not be allowed to be lower than this level.

Many factors are considered when calculating MSP. The margin given over and above the cost is determined by analysing demand and supply, the price situation at the international level, and other relevant economic factors. This creates a price difference between crops. For example, the cost of Wheat is much lower than that of Bajra, but its MSP is much higher than that of Bajra.

Farmers’ groups are now requesting CACP to set MSP at 50 per cent more than the comprehensive cost of production or C2 instead of the existing A2+FL cost.

COMMITTEES ON MSP

S.R SEN COMMITTEE

The government decided to set up a special expert committee on the cost of production or the S.R. Sen Committee on 30th January 1979. The main objective of the S.R. Sen committee was to review methodology, procedure, and other related matters concerned with the cost of production estimates.

The head of this committee was Dr S.R Sen, the then chairman of the International Food Policy Research Institute.

The other members of this committee were Dr.Daroga Singh, Dr. S.P Pant and Dr.Hanumatha Rao.

Major recommendations of S.R. Sen committee.

1. Instead of a single crop, the committee recommended using a crop complex for sampling. Sub-sampling should be dropped off, and the enquiry should be conducted for the same sample holding for three years.
2. Prepare stae-wise cost estimates for all important crops.
3. The committee favoured calculating the cost of inputs based on actual paid-out expenses.
4. Recommended to construct a parity index of prices and prices received by the farmers.
5. The Committee rejected any automatic or mechanical use of the cost data in the fixation of prices.
6. The committee recommended the construction of the following indexes.

• Index number of physical quantities of input and output.
• Index number of prices received.
• The index number of the gross value of output.
• Index number of cost A1 and cost C2.
• Index number of farm business income.

HANUMANTHA RAO COMMITTEE

The government constituted this committee on 6th January 1990 to review the methodology on the estimation of cost of production and MSP. Dr C.H Hanumatha Rao was the chairman of this committee.

Major recommendations of the Hanumantha Rao committee.

1. Recommended to combine a complex crop approach with a single crop approach for calculating representative estimates for minor crops.
2. Recommended to use a sample of ten clusters per crop in a state.
3. Causal hired labour should be evaluated on the basis of actual wages paid.
4. It is recommended that family labour be included, and it should be valued on the basis of the actual wage rate for casual labour.
5. To include the management input of the farmer, the paid-out costs should be raised by ten per cent.
6. Weighted interest rates should be revised every five years.
7. CACP should publish details like methodology in their reports.
8. The central analytical unit should be strengthened.

Y.K ALAGH COMMITTEE

An expert committee under Y.K Alagh was set on 7th May 2003 to study the methodological issues in the fixation of MSP.

The major recommendations where

1. Recommended to assign statutory status to CACP.
2. Recommended to value family labour on the basis of the actual market rate for casual labour.
3. The rate of interest should be taken into account while calculating the cost of production.
4. Data on crop insurance premiums should be collected.

BENEFITS OF MSP

1. The government will purchase surplus food grains and pulses at a minimum support price, which will help control the rise in the market price.
2. MSP will help avoid food shortages in India. In case of shortages, the government can intervene with the procured grains and other farm products.
3. MSP can improve farmers’ income.
4. MSP will prevent farmers from the evil clutches of traders. They purposively reduce prices to increase their profits.
5. Ensure stability in food prices.
6. It helps to achieve food security at the national level.
7. MSP helps the healthy growth of the agricultural economy.