Making sense of Minimum Support Price

Dr. Parveen Kumar

Since its inception in the mid sixties by the then Prime Minister of India Late Lal Bahadur Shastri, the Minimum Support Price (MSP) has been the most contentious issue in Indian agricultural sector. It would not be wrong to say that all through these years the MSP has been and is the bone of contention between the government and the farming community. MSP basically is a market intervention by Government of India to insure farmers from sharp fall in farm prices. MSP is the price at which Government purchases from the farmers’ whatever the price may be. MSP is arrived at by Commission for Agricultural Cost and Prices (CACP). Based on the recommendations of the Commission for Agricultural Costs and Prices, the Department of Agriculture and Co-operation, Government of India, declares Minimum Support Prices (MSP) for 22 crops before their sowing seasons. The idea behind MSP is to give guaranteed price and assured market to the farmers and protect them from the price fluctuations and market imperfections. The guaranteed price and assured market are expected to encourage higher investment and in adoption of modern farming practices.
The system of MSP in India came amid food shortages. The idea was to create a favourable environment and incentivize 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. At the start of sowing season, the government announces MSP for about 24 crops in the country. This includes 07 cereals viz. Paddy, Wheat, Barley, Jowar, Bajra, Maize and Ragi; 05 pulses that include Gram, Arhar, Moong, Urad, Lentil; 08 Oilseeds that include Groundnut, Rapeseed/ Mustard, Toria, Soyabean, Sunflower Seed, Sesamum, Safflower seed, Niger seed. Besides these MSP is also announced for four cash crops Copra, Virginia flu curved Tobacco, raw cotton and Jute. In case of sugarcane, MSP has been assigned a statutory status and as such the announced price is termed as statutory minimum price, rechristened as Fair Remunerative Price (FRP). There is statutory binding on sugar factories to pay the minimum announced price and all those transactions or purchase at prices lower than this are considered illegal.
With the recent enacting of three new laws by the government, the MSP has once again been in the limelight. Many farmer bodies are up against the Government for the implementation of the recommendation of the National Commission on Farmers (NCF) popularly known as M S Swaminathan Commission, on fixing minimum support prices (MSP) of agricultural crops. Led by the opposition parties farmer bodies allege that the Modi Government is yet to implement the BJP’s 2014 election promise of bringing in the NCF’s recommendation of fixing MSP at 50% more than the comprehensive cost or ‘C2 cost’ of production. On the contrary, the Government claims it has already implemented the recommendation by awarding an MSP 1.5 times the cost of production of various crops.
Let us try to understand what the basic issue is. The production costs of agricultural crops in India are defined under three categories: A2, A2+Family Labour (FL), and C2. A2 includes all expenses, in cash and kind, incurred by farmers on agri-inputs like seeds, fertilizers, pesticides, hired labour, etc.; rent paid for leased land; interest on working capital; and depreciation on implements and farm buildings. A2+FL includes A2 cost plus an imputed value of unpaid family labour. C2 cost includes the expenses incurred over and above A2+FL. Specifically, C2 incorporates A2 + FL + interest on the value of owned capital assets (excluding land) + rental value of owned land (net of land revenue). The fact is, in its report, the NCF did not clearly specify which definition of cost of production A2 or A2+FL or C2 should be considered while fixing MSP. The NCF in its 5th report recommended that MSP should be fixed at least 50% more than the weighted average cost of production. On this basis, the farmer organizations and critics of government agricultural policies have demanded that MSP be fixed at 50% more than the C2 cost. However Professor Swaminathan has quoted as saying that ‘When we recommended 50% over costs, we meant complete costs called C2, which includes all assumed costs.’ The Present government in the run up to 2014 parliamentary elections in its manifesto had promised that if voted to power, it would ‘take steps to enhance the profitability in agriculture by ensuring a minimum of 50% profits over the cost of production.’ The same has been implemented since 2018 in response to farmer protests, but based on the A2+FL cost incurred by farmers. But the farmer bodies are protesting to include C2 costs also while deciding at the MSP.
Now, with the enactment of three new laws, there is also apprehension among the farming community that the MSP regime will slowly vanish; so it should also have been given a legal status by including it in the new laws. It is here pertinent to mention that MSP is an assurance given by the Government not a legal binding for the Government. Making MSP legal could worsen the condition for the farming community. The produce of the farmer is of different quality or grades. The trader will not purchase the B grade produce at MSP announced by the Government, if it is made legal a binding.
MSP although is a very nice and noble initiative but it suffers from some inherent defects. The MSP announced every year is the same throughout country but for states, there are some issues. For maize, the state of Bihar has reported the cost of cultivation as 32, 262/ha and in Maharashtra the cost of cultivation reported is Rs. 51, 408/ha. Similarly the yield is also different in different states, In states like Andhra Pradesh, the yield of maize stands at 68.2 q/ha while the yield for the same crop in Bihar is 36.4q/ha. This wide variation in cost of cultivation and yield of different crops across different states is not accounted for in the final MSP declared by the Government.
However the states are at liberty to provide bonus to the farming community to compensate for this variation. In 2016, a startling report of NITI Aayog on the MSP had revealed that 81 per cent of the farmers knew that the government would give MSP on many crops. Only 10 per cent of the farmers were aware of the right price before the sowing season. What is required is the farming community should be made aware of the MSP of different crops well in advance. MSP is also not effective without the Government procurement.
Ultimately the resource poor farmer has to sell the produce to the local traders at below the MSP. To help farmers, the respective state Government should ensure that the procurement centres be established at the Panchayat level where the farmers could sell their produce to the Government agencies at the Minimum Support Prices announced by the Government. Only then would the MSP fulfill its objective.
(The author is a Scientist at KVK-Leh)