Increase in the Minimum Support Prices (MSP)

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    Recently, the Cabinet Committee on Economic Affairs under the chairmanship of Prime Minister approved the increase in the Minimum Support Prices (MSP) for all mandated rabi crops for marketing season 2023-24.

    Key Points

    • Increase in MSPs:
      • Rs 110 per quintal (5.46 per cent) increase for the wheat crop.
      • Other rabi crops — barley, gram, lentil (masur), rapeseed & mustard, and safflower — have increased in the range of 2.01 per cent to 9.09 per cent. 
    • Maximum rise in MSP of:
      • In absolute terms, the highest increase in the MSP has been approved for lentils (masur) at Rs 500 per quintal.
      • Followed by rapeseed and mustard (Rs 400 per quintal), safflower (Rs 209 per quintal), gram (Rs 105 per quintal), and barley (Rs 100 per quintal).
    • Increase in wheat MSP:
      • The increase in the wheat MSP is higher in both absolute and percentage terms compared to last year. 
      • In absolute terms, a hike of Rs 110 per quintal in the MSP of wheat is the highest since 2017-18, when an equal hike was made — from Rs 1,625 to Rs 1,735.
    • In line with Union Budget 2018-19: 
      • It was announced for fixing the MSP at a level of at least 1.5 times of the All-India weighted average cost of production, aiming at reasonably fair remuneration for the farmers. 

    Need of Rise in Wheat MSP

    • The increase in the wheat MSP assumes significance in view of lower production and procurement in the just-ended rabi season. 
    • Wheat production is estimated at 106.84 million tonne during 2021-22, which is lower than the target (110 million tonnes) for the year and 109.59 million tonne actual production recorded in 2020-21.
    • While there has been a marginal dip in production during 2021-22, there has been a sharp decline in the procurement of wheat for the Central pool. 
    • There has been a sharp increase in the retail and wholesale prices of wheat and ‘atta’ (wheat flour) in recent months.

     

     

    Minimum support price (MSP)

    • Meaning:
      • The MSP for a crop is the price at which the government is supposed to procure/buy that crop from farmers if the market price falls below it.
      • MSPs provide a floor for market prices, and ensure that farmers receive a certain “minimum” remuneration so that their costs of cultivation (and some profit) can be recovered.
    • Objective:
      • The government incentivises the production of certain crops, thus ensuring that India does not run out of staple food grains.
      • MSPs create the benchmark for farm prices not just in those commodities for which they are announced, but also in crops that are substitutes.
    • What if the prices in the market are too low?
      • This can often happen if there is a bumper crop that season, or if the international prices of a particular commodity are quite low.
      • In such a scenario, India’s farmers, who are already some of the poorest citizens of the country, will struggle to make ends meet.
      • Apart from their individual troubles, if farmers give up farming as a result of low prices, it can even put the country’s food security at risk.
      • MSPs announced by the government each year are a way to preempt such an eventuality.
    • Support prices:
      • During each cropping season, the government announces minimum support prices for 23 crops.
    • Crops covered:
      • 7 types of cereals (paddy, wheat, maize, bajra, jowar, ragi and barley)
      • 5 types of pulses (chana, arhar/tur, urad, moong and masoor)
      • 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, nigerseed)
      • 4 commercial crops (cotton, sugarcane, copra, raw jute)
    • Who decides what the MSP would be and how?
      • The MSPs are announced by the Union government and as such, it is the government’s decision.
      • But the government largely bases its decision on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
    • While recommending MSPs, the CACP looks at the following factors:
      • The demand and supply of a commodity
      • Its cost of production
      • The market price trends (both domestic and international)
      • Inter-crop price parity
      • The terms of trade between agriculture and non-agriculture (that is, the ratio of prices of farm inputs and farm outputs)
      • A minimum of 50 per cent as the margin over the cost of production.
      • The likely implications of an MSP on consumers of that product.
    • Three kinds of Production cost:
      • The CACP projects three kinds of production cost for every crop, both at state and all-India average levels.
      • ‘A2’: Covers all paid-out costs directly incurred by the farmer in cash and kind on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
      • ‘A2+FL’: Includes A2 plus an imputed value of unpaid family labour.
      • ‘C2’: It is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.
      • CACP considers both A2+FL and C2 costs while recommending MSP.

    Significance of MSP

    • Better price for their crops: With the increase in the MSP, farmers will get a better price for their crops and procurement will also be done.
    • Promotion to grow oilseeds: As farmers get a secured price for their crops, it will encourage more and more farmers to grow oilseeds as well as prompt them to shift away from grains.
    • Crop Diversification: There are slightly higher increases in the MSP for pulses, oilseeds and coarse cereals which helps in achieving the motive of diversifying crops.
    • Differential Remuneration and protection to farmers: It helps in diversifying the crops in land use pattern. It protects farmers from the unwarranted fluctuation in prices provoked by the international level price variations. Any sharp fall in the market price of a commodity can be handled as MSP acts as a shock absorber.
    • Mend demand supply imbalance: Concerted efforts were made to realign the MSPs in favour of oilseeds, pulses and coarse cereals. It encouraged farmers to shift to larger areas under these crops and adopt best technologies and farm practices, to correct demand – supply imbalance. 
    • Focus on Nutri-Rich crops: The added focus on nutri-rich nutri-cereals is to incentivise its production in the areas where rice-wheat cannot be grown without long term adverse implications for groundwater table.
    • Needs of consumers: MSP ensures that the country’s agricultural output responds to the changing needs of its consumers.  Ex: The government hiked the MSP of pulses to expand sowing of pulses.  
    • Food Crops: The MSP incentivises production of a specific food crop which is in short supply.  
    • Forward chain: The MSP leads to higher farm profits which encourage farmers to spend more on inputs, technology etc.
    • Atma-nirbhar Bharat: To boost pulses and oilseeds production and reduce the country’s dependence on imports, the government increased the support price of tur by Rs 300 to Rs 6,300 per quintal for the 2021-22 crop year from Rs 6,000 per quintal last year.

     

    Challenges associated with MSP

    • Protest by Farmers: Farm unions have been protesting for more than six months on Delhi’s outskirts, demanding legislation to guarantee MSP for all farmers for all crops, and a repeal of three contentious farm reform laws.
    • MSP and Inflation: When announcing the MSP, inflation should be taken into account. But often the price is not increased upto that mark. Example, this time MSP for Maize has not even considered inflation then how it will benefit farmers! Also, frequent increase in the MSPs can lead to inflation too.
    • High Input costs: The input costs have been rising faster than sale prices, squeezing the meager income of the small farmers and driving them into debt.
    • Lack of Mechanism: There is no mechanism that guarantees that every farmer can get at least the MSP as the floor price in the market. So proper mechanisms need to be fixed for all times to come.
    • Restriction in Exports: Even after producing surplus grains, every year a huge portion of these grains gets rotten. This is due to the restrictions under WTO Norms, that grain stocks with the FCI (being heavily subsidised due to MSP) cannot be exported.
    • Limited Awareness: Farmers, specially small and marginalised ones, are less aware about the time of announcement of MSPs. It leads to them being left out of the whole virtuous cycle.
    • Economically Unsustainable: The economic cost of procured rice and wheat is much higher for the FCI than the market price of the same. Due to this, the FCI’s economic burden eventually will have to be borne by the Union government and may subsequently lead to divergence of funds from being invested in agriculture infrastructure.

    Way Ahead

    • Agriculture is, perhaps, the only business where there is a high probability of both production and price risks. It may be more worthwhile to consider “how best” to make MSP work for the farmer.
    • Public procurement needs to continue for staple cereals, but farmers of non-staple food crops need to be provided with direct income transfers.

    Source: IE

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