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UPSC Mains 2023 Economy

(by CA Atul Mittal- Faculty of GS Economy for UPSC Prelims & Mains)

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Minimum support price

Why MSP ? The prices of agricultural commodities are inherently unstable, primarily due to the variation in their
supply, lack of market integration and information asymmetry.

A very good harvest in any year results in a sharp fall in the price of that commodity during that
year which in turn has an adverse impact on the future supply as farmers withdraw from sowing that
crop in the next / following years. This then causes paucity of supply next year and the subsequent
major price increase for consumers.

To counter this, Minimum Support Price (MSP) for major agricultural products is fixed by the Union
Government each year. The MSP is a tool which guarantees the farmers, prior to the sowing season,
that a fair amount of price is fixed for their upcoming crop to encourage higher investment and
production of agricultural commodities.

In addition to the MSP announced by the Central Government, State Governments also declare a
bonus, over and above the already declared MSP so as to promote agriculture practices in their
respective States.

MSP is a form of market intervention by the Government to insure agricultural producers against
any sharp fall in farm prices.

MSP seeks to ensure remunerative prices to the growers for their produce with a view to encourage
higher investment and production and to safeguard the interest of consumers by making available
supplies at reasonable prices

Government increases MSP to ensure remunerative prices to the growers for their produce and to
encourage crop diversification.

In the recent years, Government has been promoting the cultivation of crops, other than cereals
such as pulses, oilseeds, and Nutri-cereals/ Shree Anna, by offering a higher MSP for these crops to
encourage farmers to shift larger area under these crops and adopt best technologies and farm
practices, to correct demand – supply imbalance.
When MSP The MSPs are announced at the beginning of the each sowing season (e.g. Kharif and Rabi
announced seasons) so that the farmers may take a considered view whether the said particular crop will be a
profitable venture for them or not.

Government (Cabinet Committee on Economic Affairs) announces MSPs for 22 mandated crops and
fair and remunerative price (FRP) for sugarcane on the basis of recommendations of the
Commission for Agricultural Costs and Prices (CACP), after considering the views of State
Governments and Central Ministries/Departments concerned and other relevant factors.

Government in its Union Budget for 2018-19 had announced the fixing of MSP at a level of at least
1.5 times of the All-India weighted average Cost of Production, aiming at reasonably fair
remuneration for the farmers.
About CACP 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 mandated to recommend MSPs to incentivize the cultivators to adopt modern technology, and
raise productivity and overall grain production in line with the emerging demand patterns in the
country.
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Determinants While recommending the MSP of various commodities under its mandate, the CACP keeps in mind
of MSP 1. demand and supply,
2. cost of production,
3. price trends in the market, both domestic and international,
4. inter-crop price parity,
5. terms of trade between agricultural and non-agricultural sectors,
6. a minimum of 50 percent as the margin over cost of production; and
7. likely implications of MSP on consumers of that product.

It may be noted that cost of production is an important factor that goes as an input in determination
of MSP, but it is certainly not the only factor that determines MSP.

Since the cost of production varies in different States on account of differences in levels of
irrigation, resource endowment, farm mechanization, land holding size etc., CACP uses all-India
weighted average cost of production while making its recommendations and recommends uniform
MSP which is applicable to all states.

The costs considered are comprehensive and include all paid out costs such as those incurred
on account of hired human labour, bullock labour/machine labour, rent paid for leased in land,
expenses incurred in cash and kind on use of material inputs like seeds, fertilizers, manures, irrigation
charges, depreciation on implements and farm buildings, interest on working capital, diesel/electricity
for operation of pump sets etc, miscellaneous expenses and imputed value of family labour.
22 Mandated The mandated crops are 14 crops of the kharif season viz. paddy, jowar, bajra, maize, ragi, arhar,
crops moong, urad, groundnut-in-shell, soyabean, sunflower, sesamum, nigerseed and cotton; 6 rabi crops
viz. wheat, barley, gram, masur(lentil), rapeseed/mustard and safflower and 2 other commercial
crops viz. jute and copra.
MSP and its The objective of making farming profitable cannot be achieved through the procurement based
Challenges Minimum Support Price Policy because it is neither possible nor desirable for the Government to buy
each and every commodity in the markets across the country. Some of the challenges faced by the
existing MSP policy are as follows:

The MSP computed by the CACP, is based on an average cost taken for the whole of the country
while there is a substantial regional variation in the production cost of different crops.

Lack of proper awareness about the MSP among farmers- The successful implementation of the
MSP scheme can be achieved only if the targeted population is aware of most of the aspects of the
scheme like prevailing MSP, time of their announcement, the process of procurement, facilities
provided by the Government and payment mechanism.

Public procurement at MSP is disproportionately focused on wheat and rice and sometimes even
at the expense of other crops such as pulses and oilseeds. This results in buffer stocks of paddy and
wheat above the required norms, along with frequent price spikes in pulses and edible oils.

The difference between the international and the domestic price of crops may influence the
export and availability of crops for domestic consumption. When international prices are much higher,
farmers prefer to export, thereby resulting in lower procurement by the Government agencies which
leads to scarcity of foodgrains. Similarly, if the MSP exceeds international prices, it can lead to decline
in export as more farmers will sell their produce for government procurement.
GS Mains 2018
What do you mean by Minimum Support Price (MSP)? How will MSP rescue the farmers from the low income trap?

Agriculture optional 2021

The Minimum Support Price (MSP) and its determination

Agriculture optional 2017

Describe the significance of minimum support prices of agricultural produce in India. How are they worked out ?
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