Minimum support price or MSP is the guaranteed price at which farmers can sell their produce and goods. The government buys the crops from the farmers at pre-set prices to save the farmers from price fluctuations or lack of market access. These price fluctuations occur due to poor market integration, poor monsoon and lack of information. The Commission for Agricultural Costs and Prices (CACP) fixes the MSP for various crops twice a year. These crops include wheat, maize, bajra, ragi, groundnut, cotton, jute etc. MSP was introduced in 1966 when India was facing a deficit in crop production. In the wake of the Green Revolution, the Indian Government realised that they needed to give some incentives to farmers to grow labour intensive crops like wheat and paddy. These crops also didn’t fetch good prices in the market.
The CACP while fixing the prices, takes into consideration some costs. These costs are:-
A2: Expenses incurred on seeds, fertilisers, labour, irrigation and fuel
A2+FL: A2 costs and also includes the value of unpaid family labour
C2: Includes A2+FL and revenue on owned land and interest on fixed capital that is foregone.
The CACP generally uses A2+FL while fixing the MSPs for several crops. C2 costs are kept as a benchmark to check if the recommended prices cover the costs in major producing states. Various other Ministries and Departments also help the CACP in determining the MSPs. In the last decade, the growth rate of MSPs has consistently been declining for both rabi and kharif crops.
Advantages of MSP- MSPs provide an incentive for farmers to grow a crop which may be in short supply, It has helped in transferring incomes to the rural areas, It leads to crop rotation, Profits coming from MSP can be invested in new machinery and equipment by the farmer and also can prevent farmer suicides.
Disadvantages of MSP- Only 6% of Indian farmers actually sell at MSP because of the lack of awareness, As the MSP is announced just before the sowing season many farmers may have started growing some other crop, lack of government machinery and procurement measures, some states benefit more than others.
In the future a higher budget must be allocated toward MSP and adopt a more scientific approach to increase product per hectare. Awareness must be spread about crop diversification as this can prevent supply shocks. Modern warehousing infrastructure is needed like storage facilities and weighing bridges to extend shelf life and prevent rotting of crops. Lastly, MSP should be fixed based on current costs and not on historical costs. These are some ways the MSP system can be improved.
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