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Indian Economy

Minimum Support Price for Crops

  • 04 Dec 2020
  • 6 min read

Why in News

One of the major demands of protesting farmers has been that the government guarantee in writing the Minimum Support Price system, which assures them of a fixed price for their crops, 1.5 times of the cost of production.

Key Points

  • Minimum Support Price:
    • MSP is a “minimum price” for any crop that the government considers as remunerative for farmers and hence deserving of “support”.
    • It is also the price that government agencies pay whenever they procure the particular crop.
    • The Union Budget for 2018-19 had announced that MSP would be kept at levels of 1.5 the cost of production.
  • MSP is given for the following crops:
    • The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
      • CACP is an attached office of the Ministry of Agriculture and Farmers Welfare, Government of India.
        • It came into existence in January 1965.
        • It is an advisory body whose recommendations are not binding on the Government.
    • The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.
    • In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively.
    • The list of crops are as follows:
      • Cereals (7): Paddy, wheat, barley, jowar, bajra, maize and ragi,
      • Pulses (5): Gram, arhar/tur, moong, urad and lentil,
      • Oilseeds (8): Groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and niger seed,
      • Raw cotton, Raw jute, Copra, De-husked coconut, and
      • Sugarcane (Fair and remunerative price).
    • The CACP considered various factors while recommending the MSP for a commodity, including cost of cultivation.
      • It also took into account the supply and demand situation for the commodity, market price trends (domestic and global) and parity vis-à-vis other crops, and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.
  • Changes made by the 2018-19 budget:
    • Budget for 2018-19 announced that MSPs would henceforth be fixed at 1.5 times of the production costs for crops as a “predetermined principle”.
    • CACP’s job is now only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.
  • Mechanism of arriving at Production Cost:
    • The CACP does not do any field-based cost estimates itself.
    • It makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry.
      • The latter are, however, generally available with a three-year lag.
    • 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.
    • Issues with the Pricing:
      • In the 2018-19 Budget Speech, the government did not specify the cost on which the 1.5-times formula was to be computed.
      • The CACP’s ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ report stated that its MSP recommendation was based on 1.5 times the A2+FL costs.
      • Farm activists demand that the 1.5-times MSP formula originally recommended by the National Commission for Farmers headed by agricultural scientist M S Swaminathan should be applied on the C2 costs.
      • Government’s Stand:
        • CACP considers all costs in a comprehensive manner which is based on the methodology recommended by Expert Committees from time to time.
        • CACP considers both A2+FL and C2 costs while recommending MSP.
        • CACP reckons only A2+FL cost for return. However, C2 costs are used by CACP primarily as benchmark reference costs.

Source:IE

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