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 COMPLETE MINIMUM SUPPORT PRICE (MSP) CONCEPT
Definition:
To ensure agricultural producers against any sharp fall in farm prices and in
the backdrop of food scarcity and price fluctuations provoked by drought, floods
and international prices for exports and imports.
✓ Minimum Support Price was introduced in 1966-67 by Govt of India as a market
intervention. For the first time, MSP was introduced for wheat on the wake of
Green Revolution.
✓ MSP is a part of India’s Agriculture Price Policy. MSP is the price at which the
government purchases crops from the farmers. MSP is the guaranteed ‘minimum
floor price’ that farmer must get from the government in case the market price of
the crops falls below the MSP. The Rationale behind MSP is to support the
farmer from excess fall in the crop prices.
✓ The MSP for various crops is announced by the central government at the
beginning of every crop seasons on the recommendation of CACP.
✓ The MSP is a fixed assured price that farmers gets in case price falls heavily due
to a bumper harvest. MSP in a sense work as an insurance policy for the farmers
to save them from price falls.
✓ The most important aim of the MSP policy is to save the Indian farmer from
making distress sales.
✓ In the event of glut and bumper harvest, when market prices fall below the
announced MSP, the government through its agencies buys the entire stock
offered by the farmers at the MSP.

Who decides MSP?

• The Cabinet Committee on Economic Affairs (CCEA), Government of India,
determines the Minimum Support Prices (MSP) of various agricultural
commodities in India based on the recommendations of the Commission for
Agricultural Cost and Prices (CACP).

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 About CACP
• CACP was earlier named Agricultural Prices Commission, which came into
existence in January 1965, and works as an attached office of the Ministry of
Agriculture and Farmers Welfare, Government of India.
• Currently, the Commission comprises a Chairman, Member Secretary, one
Member (Official) and two Members (Non-Official); the non-official members
are representatives of the farming community and usually have an active
association with the farming community.
• In the form of Price Policy Reports CACP submits its recommendation to the
Govt every year.
CACP recommends MSPs of 23 commodities, which comprise
✓ 7 Cereals - Paddy, wheat, maize, sorghum, pearl millet, barley and ragi.

✓ 5 Pulses - Gram, tur, moong, urad, lentil),

✓ 7 Oilseeds - Groundnut, rapeseed-mustard, soyabean, seasmum, sunflower,

safflower, nigerseed, and

✓ 4 Commercial crops - copra, sugarcane, cotton and raw jute

History of MSP
➢ The system of MSP in India was started in the mid 1960’s amid food shortages.

The idea was to create a favourable environment and incentivise farmers to

increase production by adopting “High Yield Variety” seeds and technology for
cereals like Wheat and Rice.
➢ The adoption of the MSP Policy in India was mainly due to food scarcity and

price fluctuations provoked by drought, floods and international prices for

exports and imports.
➢ The policy, in general, was directed towards ensuring reasonable food prices for

consumers by providing food grains through Public Distribution System (PDS)

and inducing adoption of the new technology for increasing yield by providing a
price support mechanism through Minimum Support Price (MSP) system.
➢ In order to provide farmers an assured price for their crops and motivating them

to adopt advanced technology to increase production the Agricultural Price

Commission was setup in the year 1965 (Renamed as Commission for

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 Agriculture Cost and Price in 1985) on the recommendation of LK JHA
Committee.
➢ The role of Agriculture Price Commission is to advise government on agriculture
price policy.

Objectives of MSP
✓ Government’s agricultural policy has three important components- the MSP,
Buffer Stocks and issue of food grains through the PDS. The interconnectivity
between the three is very clear. MSP helps to procure adequate food grains
through FCI, state agencies and cooperatives. The PDS network through the
policy of issue price delivers it to the weaker sections.
✓ MSP is price fixed by Government of India to protect the farmers against
excessive fall in price during bumper production years. The minimum support
prices are a guarantee price for their produce from the Government.
✓ Assure remunerative and relatively stable price environment for the farmers
✓ Encouraging investment in Agriculture
✓ Increase production and availability of food grains
✓ Evolving a cropping pattern more suitable for the economy
✓ Accessibility and affordability of food grains
✓ Buffer stock for emergency and PDS for food security.

Recent Developments (Budget 2018-19)

In order to address the rural distress, the Govt has decided to fix the MSP to 1.5
times the cost of production for various crops.

Calculation of MSP
➢ The CACP in deciding the MSP for various crops takes into account a lot of
comprehensive factors including the supply and demand factors of each crop.
➢ It adopts several cost concepts like A2, FL and C2
➢ Cost A2 – Includes the actual costs paid by farmer for purchase of various inputs
like seeds, fertilisers, pesticides, hired labour, rent of land & machinery, if hired.
➢ Cost A2 +FL – FL refers to Family Labour. If the hitherto unaccounted family
labour cost is accounted and added to cost A2, it becomes A2+FL.
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➢ Cost C2 – C2 stands for Comprehensive Cost. It includes notional costs of family
labour, notional rent of owned land and notional interest on owned capital.
➢ M.S Swaminathan headed National Commission on Farmers recommended a 50
per cent margin over C2, which is also being the demand of the farmers.
➢ The government is using 50 per cent margin of Cost A2 or cost A2+FL. But even
then the MSPs given by the government is less than cost C2.

Issues with MSP

✓ The NSSO estimates that around 16.2% of farmers sold to any procurement
agency.
✓ Wheat and rice farmers account for only 6% of farmers in the country but get
maximum benefit of MSP.
✓ Hence, the benefits of the MSP system are rather limited.
✓ Much of this procurement seems to be happening from the larger farmers in a
few states like Punjab, Haryana, Andhra Pradesh, Madhya Pradesh and
Chhattisgarh.

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✓ If MSP becomes the highest price at which farmers can sell then there's
something wrong either with the market or the way farmers are growing the crop.
✓ Minimum Support Prices (MSPs) have distorted cropping patterns due to their
use in certain commodities in selected regions. It has resulted in biased towards
wheat and rice leading to excessive production of these crops at the cost of other
crops.
✓ Economic Survey of 2015-2016 points out- "MSP has disproportionately focused
on wheat, rice and sugarcane at the expense of other crops such as pulses and
oilseeds"
✓ Report of the High Level Committee on Reinventing the Role and Restructuring
of the Food Corporation of India (Shanta Kumar Committee) 2015 points out
✓ "Currently, MSPs are announced for 23 commodities, but price support operates
primarily in wheat and rice and that too in selected states. This creates highly
skewed incentive structures in favour of wheat and rice"
✓ There has been an excessive focus on the procurement of wheat, rice and
sugarcane at the expense of other crops such as pulses, oilseed and coarse grains.
✓ These distortions have led to the depletion of water resources, soil degradation
and deterioration in water quality in the North-west.
✓ The MSP mechanism has led to the overproduction of paddy and wheat.
✓ In 2017, the Food Corporation of India was expected to hold a stock of 135 lakh
MT of rice but it had 248 lakh MT of rice in its reserves, which is 83% more
than what is required.
✓ When it comes to wheat, the stock needed to be maintained was 74 lakh MT, but
it had a total stock of 132 lakh MT which was 77% more.
✓ Increase in public stockholding of cereals.
✓ Massive increase in buffer stocks of cereals leading to unmanageable cost of
storage and transportation.
✓ According to the National Sample Survey (NSS) 'Survey of Agricultural
Households 2013' even for paddy less than one-third of farmers were aware of
the MSP and for other crops such awareness was negligible
✓ Diversion of land and resources away from important crops like pulses, oilseeds
which are necessary for nutritional security.

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✓ The shortages in the production of pulses and other protein-based products has
led to their price rise and protein-based food inflation.
✓ Increased to fiscal burden of subsidies on the government.
✓ Poor Awareness: NITI Aayog found that a low proportion of farmers (10%) was
aware of MSPs before the sowing season. 62% of the farmers were informed of
MSPs after sowing their crops
✓ Non remunerative Price: It was found in many States that farmers were unable
to get cost of cultivation from MSP announced by govt.
✓ The current MSP system has many flaws. First, its reach is limited, in terms of
both the crops and the geographical area it covers. Though every year MSPs are
announced for 20+ crops before the sowing season begins, actual procurement at
MSP is restricted to a few crops such as paddy and wheat. This has led farmers
to excessively focus on the crops with assured procurement.
✓ One measure that can help reduce distortions in the MSP system is the system of
“Price Deficiency Payment.” While MSP may still be used for need-based
procurement, under the deficiency payments system, a subsidy may be provided
to farmers on other targeted produce, contingent on prices falling below an MSP-
linked threshold.
What are the views of Commission for Agricultural Costs and Prices about
MSP?
✓ The Commission for Agricultural Costs and Prices (CACP) recommended that
the Centre bring out a legislation which would give MSP some legal teeth
thereby giving farmers the right to sell their produce at those prices.
✓ The Commission for Agricultural Costs and Prices is a statutory panel under the
Ministry of Agriculture which makes the recommendations for MSPs for 23
kharif and rabi crops. Its suggestions are not binding on the government.
Suggestions
• Increasing Awareness
• Timely Payment:
• Advance Announcement
• Improved facilities at procurement centres, such as drying yards, weighing
bridges, toilets, etc. should be provided to the farmers.
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• More godowns should be set up and maintained properly for better storage and
reduction of wastage.
• The Procurement Centers should be in the village itself to avoid transportation
costs. National Commission of farmer also recommended mandi to be in 5km
radius for producer.
• Reviewing Method of MSP: There should be meaningful consultations with the
State Government, both on the methodology of computation of MSP as well as
on the implementation mechanism. The criteria for fixing MSP should be current
year’s data and based on more meaningful criteria rather than the historical costs.
• In light of this, the NITI Aayog has come out with three models.
✓ The market assurance scheme
✓ The price deficiency procurement scheme
✓ Private procurement and stockist scheme
• National Commission for Farmers (NCF) had recommended that MSP should be

at least 50% more than the weighted average cost of production.

Price Support Scheme (PSS) for Oil seeds and Pulses

• The Department of Agriculture and Cooperation implements the Price Support
Scheme for Oil Seeds and Pulses through the National Agricultural Cooperative
Marketing Federation of India Ltd. (NAFED).
• NAFED is the nodal procurement agency for Oilseeds and pulses, apart from the
Cotton Corporation of India. So, when the prices of oilseeds, pulses and cotton
fall below MSP, NAFED purchases them from the farmers.

Procurement prices:
✓ Procurement price of a commodity refers to the price at which govt. procures the
commodity from producers/manufactures for maintaining the buffer stock or the
public distribution system.
✓ These prices are announced by the govt. of India on the recommendations of the
Commission for Agricultural Costs and Prices before the harvest season of the
crop.

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 MSP for pulses
✓ Low MSP and poor yields have made pulses an unattractive crop for famers.

Reasons for poor yield:

a. No amount of R&D has raised yield of pulses.
b. Pulses are increasingly being grown on less fertile land.

Buffer Stock
➢ It is the stock of food grains particularly, wheat and rice which the

government procures through the Food Corporation of India (FCI).

➢ The FCI purchases these cereals directly from the farmers of those states

where they are in surplus.

➢ The price of these commodities is decided much before the actual sowing season

of these crops. The food grains thus purchased by the FCI are kept in big
granaries and are called Buffer Stock.
➢ Maintaining buffer stock is a step taken by the government in order to ensure

food security in the country.

About FCI
• It was established under the FCI Act of 1964 with an objective of safeguarding
the interests of poor farmers, distributing the food grains across the country,
maintaining a sustainable level of food grains as Buffer Stock.

Issue price:
In order to help the poor strata of the society, the government provides them food
grains from the buffer stock at a price much lower than the market price. This
subsidized price is known as the Issue Price.
(OR)
The price at which the procured and buffer stock food grains are provided through
the PDS is called an issue price, in other words, the Price at which the FCI sells the
food grain for PDS consumption is known as Issue Price.

PRICE POLICY ON SUGARCANE

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The pricing of sugarcane is governed by the statutory provisions of the Sugarcane
(Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955.
Prior to 2009-10 sugar season, the Central Government was fixing the Statutory
Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a
sugar mill on 50:50 basis. As this sharing of profits remained virtually
unimplemented, the Sugarcane (Control) Order, 1966 was amended in October,
2009 and the concept of SMP was replaced by the Fair and Remunerative Price
(FRP) of sugarcane. A new clause ‘reasonable margins for growers of sugarcane on
account of risk and profits’ was inserted as an additional factor for working out FRP
and this was made effective from the 2009-10 sugar season. Accordingly, the
CACP is required to pay due regard to the statutory factors listed in the Control
Order, which are

• The cost of production of sugarcane;

• The return to the grower from alternative crops and the general trend of prices of
agricultural commodities;
• The availability of sugar to the consumers at a fair price;
• The price of sugar;
• The recovery rate of sugar from sugarcane;
• The realization made from sale of by-products viz. Molasses, bagasse and press
mud or their imputed value (inserted in december, 2008) and;
• Reasonable margins for growers of sugarcane on account of risk and profits
(inserted in october, 2009).
• States also announce a price called the state advisory price (sap), which is
usually higher than the smp.

The Swaminathan Commission Recommendations

• The National Commission on Farmer’s headed by Dr M.S Swaminathan
highlighted that the main reasons of agrarian agony in India were non
implementation of land reforms, water scarcity, lack of irrigation, technology
exhaustion, inadequate access and availability of institutional source of finance,
dependence on money lenders, weak market infrastructure, lack of opportunities
for assured and remunerative marketing, low investment in research and
development, low levels of education and skill, and lack of employability of
surplus workforce outside agriculture.

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• The Swaminathan commission had recommended serval path-breaking measure
to resolve agrarian distress in India. These recommendations are of a more vital
nature and in all likelihood will provide a long-term solution to the agrarian
crisis and farmers’ distress.
• The National Commission on Farmer’s recommendations are mainly in the
domain of land reforms, irrigation, productivity, credit, insurance, food security,
bio-resources, and public investment in agriculture, human development, and the
rural nonfarm sector.
• The Swaminathan commission has thus provided solutions to the agrarian crisis
and farmers’ distress both in the domain of the agriculture sector as well as
outside agriculture sector.

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