What is MSP or Minimum Support Prices?

You must have heard of this term several times in the budget or parliamentary discussions, or related news. It might seem that the decision regarding MSP only affects farmers, but in a broader sense, it affects the day to day expenses of all consumers.

MSP or Minimum Support Price is an initiative by the Government of India to insure farmers from any sharp fall in prices. As agricultural sector remains the largest contributor to GDP in the country, it is necessary to protect the interests of these producers.

What is MSP?

A minimum guaranteed price is fixed to the farmer as the rate they will fetch irrespective of the market rates. This option to sell one's produce to the government seems especially helpful in protecting farmers from an excessive drop in prices during times of larger outputs in production.

What is the government's overall agenda in MSP?

• To incentivize farmers to produce more (especially crops that are less in supply) and ensure food security in the country.
• To procure a supply for Public Distribution (Ration, free mid-day meals, etc.).

Who decides the price and how?

The Cabinet Committee of Economic Affairs decides the MSP for various crops from recommendations of the Commission for Agricultural Costs and Prices (CACP). These recommendations are made based on the cost of production, demand-supply ratio, price trends in the domestic and international market, trade policies in agriculture, etc. There are over 20 crops that are given MSPs, and the rates are announced at the beginning of the agricultural seasons (Kharif or Rabi). These are calculated every 4 months. The categories include Kharif crops, Rabi crops, sugarcane, raw jute, and copra.

How does it work?

The MSP is always less than the market price. The farmers sell their produce to the market at market rates first, when they are higher and what remains unsold can be sold to the government at decided prices (MSP). The Food Corporation of India (FCI) helps the government in the procurement of food grains, whereas, the National Agricultural Cooperative Marketing Federation of India Ltd (NAFED) helps in procuring pulses and oil-seeds. This is further distributed to the citizens through the Public Distribution System at subsidized rates.

How does it affect consumers?

The rate of MSPs does affect the availability of foodgrains in India. Good rates encourage production of crops that may not otherwise prove lucrative to farmers. For example, pulses and oil-seeds. In the past, pulses have been imported into India due to a shortage in supply, causing inflation in consumer prices. A provision like MSP promotes diversity in the type of produce, thus stabilizing rates from reduced imports.

Limitations

• There have been numerous issues around MSP like additional bonuses issued by the state governments.
• The MSP does not apply to vegetables, horticulture, fruits or dairy products.
• As there no limit on how much the farmers can sell to the government, there has been excessive buffer stock accumulated in the government warehouses.