Government Approves Significant Minimum Support Price Hikes for Key Rabi Crops

• Lentil and Mustard: The highest increase in MSP for rabi Crops has been approved for lentils (Masur Dal) at ₹425 per quintal followed by rapeseed and mustard at Rs 200 per quintal.
• Wheat and Safflower: Rabi crops such as wheat and safflower an increase of ₹150 per quintal each has been approved.
• Barley and Gram: For barley and gram the Minimum Support Price has been increased by ₹115 per quintal and ₹105 per quintal respectively.
• Base of increase: The revision of the Minimum Support Price for these rabi crops is in line with the union budget 2018 -19 announcement which fixed the MSP at a level of at least 1.5 times the average cost of production.
• Objective: This increased MSP will ensure remunerative prices to the farmers and incentivise crop diversification under Rabi crops. 

Understanding MSP: A Critical Tool for Farmers’ Income Security and Price Stability in Agricultural Market

• About: The Minimum Support Price is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers.
• Introduction: MSP system was started in 1966-67 for wheat and was expanded further to include other essential food crops, which was then sold to the poor under subsidised rates under public distribution system (PDS).
• Features:
  • Minimum Price for Crops: MSP is a “minimum price” for any crop that the government considers as remunerative for farmers and hence deserving of “support”.
  • Safety Net to farmers: It is a price support mechanism that acts as a safety net given to farmers to ensure guaranteed prices and assured markets for their products. 
  • Safes Crop Price Volatility: The Minimum Support Price-based procurement system is aimed to save the crops from price fluctuations due to various unwarranted factors such as the monsoon, information asymmetry etc. 

Also Read: Cabinet Raises MSP for Six Rabi Crops for Marketing Season 2024-25

Crucial Factors in Determining Minimum Support Price

• Fixed by CACP: It is fixed twice a year on recommendations of the Commission for Agricultural Costs and Prices and then approved by Cabinet Committee on Economic Affairs (CCEA). 
• The CACP determines the Minimum Support Price based on the expenses incurred by the farmer.
• When a farmer grows a crop he incurs costs some of it explicit and some implicit or unpaid.
  • The CACP considers the following costs:
    • A2: covers all cash and kind expenses incurred by farmers on seeds fertilizers chemicals hired labour fuel irrigation etc.
    • A2 + FL: Actual cost plus an imputed value of unpaid family labour. Government considers a 2 plus FL as production cost.
    • C2: includes A2+FL along with revenues forgone on owned land (rent) and fixed capital assets (interests). 
• It takes 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.
• The National Commission on Farmers (Swaminathan Committee) had also recommended Minimum Support Price should be at least 50% more than the weighted average cost of production.

Crops under Minimum Support Price:

• The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
• The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.
• 7 types of cereals (Paddy, wheat, maize, bajra, jowar, ragi and barley), 4 commercial crops (cotton, sugarcane, copra, raw jute); 7 oil seeds (rapeseed-mustard, groundnut, soybean, sunflower, sesamum safflower, and Niger seed); 5 types of pulses (chana, arhar/tur, urad, moong and masur).
• In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively.

Must Read Article on MSP: Minimum Support Price (MSP)

Multi-Faceted Importance of Minimum Support Price in India’s Farming Sector

• Economic Stability for Farmers: 
  • MSP provides economic stability to farmers by ensuring that they receive a guaranteed price for their crops. 
  • This stability is crucial, especially during years of adverse weather conditions or economic challenges, such as droughts, demonetization, GST rollout, economic slowdown, and the pandemic. 
  • These events can severely impact market prices, making it difficult for farmers to cover their production costs.
• Risk Mitigation: 
  • Farming is inherently risky due to uncertainties related to weather, pests, and market demand. 
  • MSP acts as a safety net, alleviating the uncertainty faced by farmers. 
  • Knowing that they can sell their produce to the government at a predetermined price provides them with financial security.
• Preventing Exploitation: 
  • Farmers often have limited bargaining power in the market. 
  • If market prices fall below the cost of production, farmers could face financial ruin. 
  • Minimum Support Price prevents this exploitation by ensuring that farmers receive a fair price, protecting them from market fluctuations.
• Consumer Protection: 
  • MSP also benefits consumers. 
  • If farmers are unable to cover their costs, they might reduce production of certain crops, leading to reduced supply. 
  • This decrease in supply can drive up market prices, affecting consumers. 
  • MSP helps maintain a stable supply of essential commodities, preventing drastic price fluctuations in the market.
• Balancing Production Patterns: 
  • MSP can be used strategically to influence agricultural production patterns. 
  • By offering higher MSP for specific crops (e.g., pulses) compared to others (e.g., paddy), the government can encourage farmers to shift their focus to crops that are in higher demand or are crucial for the nation’s food security. 
  • This policy can help achieve a balanced agricultural output.

Complexities and Limitations in India’s Minimum Support Price System:

• Delayed Procurement Centers and Crop Discrepancy: There are delays in establishing procurement centers, especially for crops other than wheat and rice, managed by the Food Corporation of India. Disparities among states also exist; states with higher government procurement, like Punjab, benefit more compared to states with lower procurement rates, like Uttar Pradesh.
• Ecological Impact: The focus on MSP for wheat and paddy has led to ecological issues such as declining groundwater levels and increased salinity, particularly evident in states like Punjab.
• Fiscal Strain: The substantial food subsidy bill in 2020-21, amounting to nearly 30% of the central government’s net tax revenue, indicates a significant financial burden on the government.
• Limited Coverage: While MSP is officially announced for 23 crops, only rice and wheat are effectively procured due to their distribution under the National Food Security Act. For other crops, MSP implementation is sporadic and inconsequential.
• Ineffective Implementation and Farmer Deprivation: The Shanta Kumar Committee’s 2015 report highlighted that only 6% of farmers benefit from MSP, leaving 94% of farmers without its advantages.
• Procurement Focus vs. Market Prices: The current Minimum Support Price system lacks correlation with domestic market prices. Its primary purpose is to fulfill NFSA requirements, effectively functioning as a procurement price rather than a true MSP.
• Crop Dominance and Discouragement of Crop Diversity: The skewed focus on MSP for rice and wheat results in overproduction of these crops, discouraging farmers from cultivating other crops and horticultural products that have higher market demand and potential for increased farmer income.
• Dependency on Intermediaries: The MSP-based procurement system relies heavily on middlemen, commission agents, and Agricultural Produce Market Committee (APMC) officials. This dependence poses challenges for smaller farmers who struggle to access these intermediaries, creating complexities in the MSP process.

Strategic Reforms for Agricultural Pricing: A Path Forward

1. Implementing True MSP: To ensure stability in the agricultural sector, the government should step in when market prices fall below predefined levels, especially during times of excess production or international price collapses. 
   • This intervention is vital to prevent farmers from facing severe financial losses.
2. Incentivizing Desirable Crops: MSP can act as an incentive for crops crucial for nutritional security, such as coarse cereals, pulses, and edible oils, which are often imported. 
   • Additionally, strategic investments in animal husbandry, fisheries, fruits, and vegetables are essential due to their high nutritional value.
   • Encouraging the private sector to establish efficient value chains, supported by cluster-based approaches, can enhance these sectors.
3. Transitioning Agricultural Pricing Policies: A balanced approach integrating state-supported and market-driven agricultural pricing is necessary. 
   • A deficiency payments scheme, similar to Madhya Pradesh’s Bhavantar Bhugtan Yojana (BBY), can be explored. 
     • This scheme compensates farmers with cash transfers when market prices fall below MSP, reducing the burden on the government for physical procurement and storage.
4. Strengthening Procurement Systems: The government should enact a law enabling marginal and small farmers to sell their produce at MSP. 
   • Procurement strategies should align with each state’s production, ensuring a fair market for farmers. 
   • Diversification in procurement interventions, considering both demand and supply dynamics, is essential, especially concerning the Public Distribution System (PDS).
5. Tailoring Cropping Systems:
   • Crop planning should align with local consumption patterns, emphasizing the need for demand-driven cultivation. 
   • Prioritizing crops based on demand rather than seeking maximum prices, even when there’s limited market demand, is crucial for sustainable agriculture.
6. Gradual Shift to Income-Based Support: 
   • Programs like PM-KISAN, though a step in the right direction, require substantial enhancement to adequately support farmers, obviating the need for physical procurement and storage by the government.
7. Establishing Center-State Contributory Price Stabilization Fund: 
   • To shield farmers from significant price falls due to domestic or global trade factors, a Center-State Contributory Price Stabilization Fund should be created. 
   • This fund will act as a buffer, providing financial support during price fluctuations, ensuring farmers’ economic security.