Minimum Support Price

Published on 11 Mar 2025

Minimum Support Price (MSP) is a price floor set by the Government of India to guarantee a minimum price for certain agricultural products. This is done to protect farmers from sharp price fluctuations and to ensure a remunerative price for their produce.

Determinants of Minimum Support Price (MSP) in India

The Commission for Agricultural Costs and Prices (CACP) determines the MSP for various crops based on several factors:

• Cost of Production: The CACP considers the average cost of production, including costs of inputs like seeds, fertilizers, labour, and land rent.   

• Demand and Supply: The demand for the crop in domestic and international markets, as well as the expected supply, influences the MSP.   

• Price Trends: The historical price trends of the crop, both domestic and international, are taken into account.   

• Inter-crop Price Parity: The MSP is determined considering the relative prices of other crops to maintain price parity.   

• Terms of Trade: The terms of trade between agriculture and non-agriculture sectors are also a factor in MSP determination.   

• Inflation: The rate of inflation is considered to ensure that farmers' purchasing power is not eroded.

• Government Policy Objectives: The MSP is also influenced by government policy objectives, such as food security and rural development.  

Key features of MSP 

• Price Floor: MSP is a minimum price set by the government for certain agricultural products.

• Government Procurement: If market prices fall below MSP, the government is obligated to purchase the crop at the MSP.

• Announced Before Sowing: MSP is typically announced before the sowing season to provide farmers with price certainty.

• Mandated Crops: The government mandates MSP for 22 crops, including both kharif and rabi crops.

• Here is a list of some major crops for which MSP is typically announced:

• Kharif Crops (14): Paddy, Bajra, Jowar, Maize, Arhar (Pigeon Pea), Ragi, Moong (Green Gram), Groundnut-in-shell, Urad (Black Gram), Soyabean, Niger seed, Sunflower, Sesamum, Cotton.

• Rabi Crops (6): Barley, Wheat, Gram, Rapeseed/Mustard seed, Masur (Lentil), Jute.

• Other Commercial Crops (2): Copra, Safflower.

Significance of MSP

• Income Support: MSP provides a safety net for farmers, especially during price fluctuations and crop failures.

• Example: MSP for wheat and rice has been crucial in providing income stability to farmers in these states, particularly during periods of low market prices.

• Food Security: By ensuring a minimum price for key crops, MSP encourages production and contributes to food security.

• Encouraging Adoption of Technology: MSP can incentivize farmers to adopt modern agricultural practices and technologies, as they are assured of a minimum return.

• Example: MSP has encouraged the adoption of farm mechanization, such as tractors and harvesters, by providing a guaranteed market for produce.

• Price Stability: MSP helps stabilize agricultural prices, reducing volatility and providing a predictable environment for farmers.

• Rural Development: By supporting farmers' incomes, MSP contributes to rural development and poverty alleviation.

• Encouraging Production of Specific Crops: By setting MSP for certain crops, the government can encourage their cultivation, ensuring adequate supply and potentially reducing dependence on imports.

• Regional Development: MSP can help promote balanced regional development by supporting farmers in less developed areas.

• Social Stability: MSP can contribute to social stability by ensuring a minimum income for farmers, reducing rural distress, and mitigating social unrest.

• Buffer Stock Management: MSP is essential for maintaining a buffer stock of food grains, which is crucial for ensuring food security and price stability during periods of shortage.

• Example: The Food Corporation of India (FCI) procures food grains at MSP and maintains a buffer stock to stabilize prices during periods of shortage.

Issues with MSP and recent strikes

• Fiscal Burden:

• High Procurement Costs: The government's obligation to purchase crops at MSP, especially in bumper harvest years, can lead to a significant financial burden.

• Example: During the 2020-2021 procurement season, the government purchased a record 38.99 million tonnes of wheat and 60.2 million tonnes of rice at MSP, leading to a financial burden exceeding ₹3.1 lakh crore.

• Market Distortions:

• Overproduction: MSP can incentivize farmers to cultivate crops with guaranteed prices, leading to overproduction and market gluts. This can depress prices for other crops.

• Inefficient Allocation: MSP can distort resource allocation, encouraging farmers to focus on MSP crops even if they are not the most suitable for their land or market conditions. 

• Example: The cultivation of water guzzling crops as sugar cane in regions with less water availability.

• Environmental Concerns:

• Excessive Input Use: MSP can encourage the excessive use of inputs like fertilizers and pesticides, leading to environmental degradation, such as soil erosion, water pollution, and loss of biodiversity.

• Monoculture: The focus on a few MSP crops can promote monoculture, reducing crop diversity and making the agricultural system more vulnerable to pests and diseases.

• Example: The extensive cultivation of water intensive crops as Rice and wheat in regions of Punjab and Haryana

• Regional Disparities:

• Unequal Benefits: MSP benefits may not be equally distributed across regions. Farmers in some areas may have better access to procurement centres and transportation facilities, while others may face challenges.

• Crop Choices: Regional variations in soil, climate, and market conditions can influence the choice of crops cultivated. MSP may not always incentivize the most suitable crops for a particular region.

• Example: Lack of cultivation of millets that nutrient rich due to lack of MSP.

• Inefficient Procurement Systems

• Storage and Logistics: Inadequate storage and transportation facilities can lead to losses in quality and quantity of procured crops.

Corruption and Inefficiencies: There have been concerns about corruption and inefficiencies in the procurement process, which can reduce the benefits to farmers.

Tags:
Economy

Keywords:
Agriculture Farm subsidies Minimum support price CACP

Syllabus:
General Studies Paper 3

Topics:
Agriculture and Food Security