Minimum Support Price (MSP) for Farmers – Ruminations for the Grassroots.


Minimum Support Price (MSP) is an insurance given by the Government of India to insure farmers and agricultural workers against any sharp fall in farm prices. MSP is a policy instrument at the disposal of the government and is introduced based on the recommendations of the Commission for Agricultural Costs and Prices (CACP) generally at the beginning of sowing season. The major objective of MSP is protecting and supporting farmers during bumper production periods by pouring food grains for public distribution. There are two ways in which an effective MSP can be implemented, viz. procurement of commodities and as remunerative. The remunerative nature for farmers compensates the difference between MSP and the prices received by them.

With the agrarian crisis looming large, the policies need to emphasize on measures that can bring forth immediate results. These results could be achieved through the components of price and non-price factors. Non-price factors are long-term oriented and rely on market reforms, institutional reforms and innovations in technology in order to bring in an upward drift growth and income brackets of the farmers. Price factors are short-term oriented that necessitate immediate upward drift in remunerative prices for farm produce. It is within the ambit of price factors that MSP stands. The government notifies MSP for 23 commodities and FRP (fair and remunerative price) for sugarcane. These crops cover about 84% of total area under cultivation in all the seasons of a year. About 5% area is under fodder crops which is not amenable for MSP intervention. According to this arithmetic, close to 90% of the total cultivated area is applicable to MSP intervention, leaving a small segment of producers amenable to price benefits, if the MSP were to be fully implemented.

So, how exactly does the CACP determine the Minimum Support Price (MSP)? CACP takes the following factors under consideration while determining the MSP:

  1. Cost of cultivation per hectare and structure of costs across various regions in the country and the changes therein.
  2. Cost of production per quintal across various regions of the country and the changes therein.
  3. Prices of various inputs and the changes therein.
  4. Market prices of products and the changes therein.
  5. Prices of commodities sold by the farmers and of those purchased by them and the changes therein.
  6. supply-related information like area, yield and production, imports, exports and domestic availability and stocks with the Government/Public agencies or industry.
  7. Demand-related information, which includes the total and per capita consumption, trends and capacity of the processing industry.
  8. Prices in the international markets and the changes therein.
  9. Prices of the derivatives of the farm products such as sugar, jaggery, jute, edible and non-edible oils, cotton yarns and changes therein.
  10. Cost of processing of agricultural products and the changes therein.
  11. Cost of marketing and services, storage, transportation, processing, taxes/fees, and margins retained by market functionaries, and
  12. Macroeconomic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.

As can be seen, this is an extensive set of parameters that the Commission relies on for calculating the Minimum Support Price (MSP). But, then the question is: where does the Commission get access to this data set? The data is generally gathered from agricultural scientists, farmer leaders, social workers, central ministries, Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (NAFED), Cotton Corporation of India (CCI), Jute Corporation of India, traders’ organizations and research institutes. The Commission then calculates the MSP and sends it to the Central Government for approval, which then sends it to the states for their suggestions. Once the states given their nods, the Cabinet Committee on Economic Affairs subscribes to these figures that are then released on CACP portals.

During the first year of UPA-1 Government in the centre in 2004, a National Commission on Farmers (NCF) was formed with M S Swaminathan (Research Foundation) as its Chairman. One of the major objectives of the Commission was to make farm commodities cost-competitive and profitable. To achieve this task, a three-tiered structure for calculating the farming cost was devised, viz. A2, FL and C2. A2 is the actual paid out costs, while, A2+FL is the actual paid-out cost plus imputed value of family labour, where imputing is assigning a value to something by inference from the value of the products or processes to which it contributes. C2 is the comprehensive cost including imputed rent and interest on owned land and capital. It is evident that C2 > A2+FL > A2

The Commission for Agricultural Costs and Prices (CACP) while recommending prices takes into account all important factors including costs of production, changes in input prices, input/output parity, trends in market prices, inter crop price parity, demand and supply situation, parity between prices paid and prices received by the farmers etc. In fixing the support prices, CACP relies on the cost concept which covers all items of expenses of cultivation including that of the imputed value of the inputs owned by the farmers such as rental value of owned land and interest on fixed capital. some of the important cost concepts are C2 and C3:

C3: C2 + 10% of C2 to account for managerial remuneration to the farmer.

Swaminathan Commission Report categorically states that farmers should get an MSP, which is 50% higher than the comprehensive cost of production. this cost + 50% formula came from the Swaminathan Commission and it had categorically stated that the cost of production is the comprehensive cost of production, which is C2 and not A2+FL. C2 includes all actual expenses in cash and kind incurred in the production by the actual owner + rent paid for leased land + imputed value of family labour + interest on the value of owned capital assets (excluding land) + rental value of the owned land (net of land revenue). Costs of production are calculated both on a per quintal and per hectare basis. Since cost variation are large over states, CACP recommends that MSP should be considered on the basis of C2. However, increases in MSP have been so substantial in case of paddy and wheat that in most of the states, MSPs are way above not only the C2, but even C3 as well.

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This is where the political economy of MSP stares back at the hapless farmers. Though 23 crops are to be notified on MSP, not more than 3 are are actually ensured. The Indian farm sector is also plagued by low scale production restricted by small-sized holdings, which ensures that margin over cost within the prevailing system generates at best low income for the farmers. This is precisely the point of convergence of reasons why the farmers have been demanding effective implementation of MSP by keeping the MSP 50% higher than the costs incurred. Farmers and farmers’ organizations have demanded that the MSP be increased to cost of production + 50%, since for them, cost of production has meant C2 and not A2+FL. At present, the CACP adds A2 and FL to determine the MSP. The Government then adds 50% of the value obtained by adding A2 and FL only to fix the MSP, thus ignoring C2. What the farmers and farmers’ organizations have been demanding is an addition of 50% to C2 to fix the MSP, which is sadly missing the hole point of Governmental announcements. This difference between what the farmers want and what the government gives is a reason behind so much unrest as regards support prices to the farmers.

Ramesh Chand, who is currently serving in the NITI Aayog, is still a voice of reason over and above what the Government has been implementing by way of sops. Chand has also recommended that the interest on working capital should be given for the whole season against the existing half-season, and the actual rental value prevailing in the village should be considered without a ceiling on the rent. Moreover, post-harvest costs, cleaning, grading, drying, packaging, marketing and transportation should be included. C2 should be hiked by 10% to account for the risk premium and managerial charges.

According to Ramesh Chand of NITI Aayog, there is an urgent need to take into account the market clearance price in recommending the MSP. This would reflect both the demand and supply sides. When the MSP is fixed depending on the demand-side factors, then the need for government intervention to implement MSPs would be reduced only to the situation where the markets are not competitive or when the private trade turns exploitative. However, if there is a deficiency price payment mechanism or crops for which an MSP declared but the purchase doesn’t materialize, then the Government should compensate the farmers for the difference between the MSP and lower market price. such a mechanism has been implemented in Madhya Pradesh under the name of Bhavantar Bhugtan Yojana (BBY), where the Government, rather than accept its poor track record in procurement directly from the farmers has been compensating the farmers with direct cash transfers when the market prices fall below MSP. The scheme has had its downsides with long delays in payments and heavy transaction costs. There is also a glut in supply with the markets getting flooded with low-quality grains, which then depress the already low crop prices. Unless, his and MS Swaminathan’s recommendations are taken seriously, the solution to the agrarian crisis is hiding towards a capitalist catastrophe. And why does one say that?

In order to negotiate the price deficient mechanism towards resolution, the Government is left with another option in the form of procurement. But, here is a paradox. The Government clearly does not have the bandwidth to first create a system and then manage the procurement of crops for which the MSP has been announced, which now number 20. If there is a dead-end reached here, the likelihood of Government turning towards private markets cannot be ruled out. And once that turn is taken, thee markets would become vulnerable to whims and fancies of local politicians who would normally have influencing powers in their functioning, thus taking the system on their discretionary rides.

There obviously are certain questions that deem an answer and these fall within the ambit of policy making. For instance, is there a provision in the budget to increase the ambit of farmers who are covered by the MSP? Secondly, calculations of MSP involve private costs and benefits, and thus exhibit one side of the story. For an exhaustive understanding, social costs and benefits must also be incorporated. With a focus primarily on private costs and benefits, socially wasteful production and specialization is encouraged, like paddy production in north India with attendant consequences to which we have become grim witnesses. Would this double-bind ever be overcome is a policy matter, and at the moment what is being witnessed is a policy paralysis and lack of political will transforming only in embanking the vote bank. Thats a pity!

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