The Minimum Support Price: MSP

The Agri bill 2020 has introduced in the Rajya Sabha after being passed in the Lok Sabha despite heavy opposition. There is resentment among farmer organizations for not mentioning the minimum support price (MSP). Farmers are afraid that due to these two laws, the system of MSP (MSP- Minimum Support Price) will end. Let us know what MSP is, how it is decided, and why it is necessary to stay?

What is MSP?

The Minimum Support Price (MSP) is the price fixed by government of the crops produced by farmers. It is the price which government pays to procure the crops from farmers. The MSP is a guarantee price that safeguards farmers with a minimum profit for their harvest, in case the open market keeps lesser price for their crops.

Why Support Price?

On the recommendation of the CACP-Commission for Agricultural Costs and Prices, the central government announces the minimum support price before the sowing season for some crops. This ensures the farmers that the government will give them a fixed price even if the price of their crops fall in the market. Through this, the government tries to reduce their loss.

However, not all governments give benefits to farmers. The worst is presently in Bihar and Madhya Pradesh, where farmers are not getting MSP. Anyway, the Shanta Kumar committee had said in its report that only 6 percent of farmers get the benefit of MSP. That is, 94 percent of farmers are dependent on the market.

Fixation of MSP

  • The MSP is fixed on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
  • Factors taken into consideration for fixing MSP include:

    • Demand and supply;
    • Cost of production (A2 + FL method)
    • Price trends in the market, both domestic and international;
    • Inter-crop price parity;
    • Terms of trade between agriculture and non-agriculture;
    • A minimum of 50% as the margin over cost of production; and
    • Likely implications of MSP on consumers of that product.

Who fixes the Minimum Support Price (MSP)?

  • The Central Government fixes the Minimum Support Price (MSP) of the 23 agricultural crops based on the recommendations of Commission for Agricultural Costs and Prices (CACP), which is also responsible for fixing the FRP (Fair and Remunerative Price) of sugarcane.
  • The CACP fixes the MSP after taking into consideration the domestic and international prices of crops, intercrop price parity, and the demand-supply situation.
  • The Commission also makes visits to states for on-the-spot assessment of the various constraints that farmers face in marketing their produce, or even raising the productivity levels of their crops.
  • Based on all these inputs, the Commission then finalizes its recommendations/reports, which are then submitted to the government.
  • The government, in turn, circulates the CACP reports to state governments and concerned Central Ministries for their comments.
  • After receiving the feed-back from them, the Cabinet Committee on Economic Affairs (CCEA) of the Union government takes a final decision on the level of MSPs and other recommendations made by the CACP.
  • Procurement: The Food Corporation of India (FCI), the nodal central agency of the Government of India, along with other State Agencies undertakes procurement of crops.

How is MSP Calculated?

The Swaminathan Committee prescribed three variables to determine the production cost. These three variables are:

A2: These are the out-of-pocket expenses incurred by farmers including loans for fertilisers, fuel, machinery, irrigation, etc. and cost of leasing land.

A2+FL: This is the estimated value of the unpaid labour for harvesting crops such as contribution of family members and others. It is in addition to paid-out cost.

C2: Comprehensive Cost (C2) is the actual cost of production as it takes into account for rent and interest foregone on the land and machinery owned by farmers, in addition to the A2+FL rate.

As per the Committee, the ideal formula to calculate the MSP would be:

MSP = C2+ 50% of C2

What is 1.5 times formula to calculate the increased MSP?

The Union Budget 2018-19 called for increasing the MSP at 1.5 times the production cost. However, the Budget speech did not mention the formula to calculate the 1.5 times MSP formula.

However, the ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ of the CACP stated the given 1.5 times formula to calculate the MSP:

1.5 times MSP Formula = 1.5 times the A2+FL costs

However, farmers demand that the 1.5-times MSP formula should be applied on the C2 costs. Considering this, the Government in March 2020 stated that the Production Cost is one of the main factors to determine the MSP and the CACP considers all the costs in comprehensive manner.

The CACP considers both C2 and A2+FL costs to determine the MSP. CACP considers the A2+FL formula for return and C2 formula as a benchmark reference costs to make sure that the MSP covers the production cost.

Why Farmers fear that Farm Laws will do away with the MSP?

Farmers fear that the three farm bills passed by the central government will do away with the MSP as these bills mention just a little or nothing about the MSP.

The three acts include:

  • The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020. …
  • Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020. …
  • Essential Commodities (Amendment) Act, 2020.

            The farmers of Uttar Pradesh, Punjab, and Haryana are not satisfied with the provisions of these Bills as they are afraid that these Bills may be the platform that the government (at the Centre) is setting up for the replacement or scrapping of the otherwise robust support system prevalent in their states for the purchase of their crops. They fear that the Minimum Support Price (MSP) guarantee that was their safety net since the Green Revolution of the 1960s kicked in, maybe snatched away from under the pretext of giving the farmers more playing ground and better platforms.

The state-government driven crop produce procurement infrastructure in these areas is very good. Procurement through the Food Corporation of India at promised MSP to farmers, which is declared before every agriculture season, encourages farmers to focus on taking more yield.

23 agricultural crops have MSPs, though the governments primarily buy only rice and wheat. Farmers fear the two recent bills as they feel these agriculture reform processes will kill the government procurement process as well as the MSP. And why we see most protesters from Punjab and Haryana? That is because they are the biggest beneficiaries of this safety net.

The CACP is an attached office of the Ministry of Agriculture and Farmers Welfare, formed in 1965. It is a statutory body that submits separate reports recommending prices for Kharif and Rabi seasons.

National Commission on Farmers: Swaminathan Committee
  • On 18th November, 2004, the Union government formed the National Commission on Farmers (NCF) with MS Swaminathan as its chairman.

    • The main aim of the committee was to come up with a sustainable farming system, make farm commodities cost-competitive and more profitable.
  • It, in 2006, recommended that MSPs must be at least 50% more than the cost of production.
  • It talked about the cost of farming at three levels:

    • A2: All the types of cash expenditure to generate the crop like seeds, manure, chemicals, labour costs, fuel costs and irrigation costs.
    • A2+FL: It includes A2 plus an imputed value of unpaid family labour.
    • C2: Under C2, the estimated land rent and the cost of interest on the money taken for farming are added to A2 and FL.

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