Minimum Support Price (MSP)

 The Minimum Support Price (MSP) is the price at which the government purchases crops for the farmers, to insure farmers against any sharp fall in farm prices.

It is announced by the Government on the basis of the recommendation of the Commission for Agricultural Costs and Prices (CACP), at the beginning of the sowing season.

Background

The idea of MSP was first proposed in 1966 and it was inspired by the Green Revolution. The government is in charge of maintaining the Minimum Support Price to keep a lid on important agricultural commodities each year, equally affecting both the Kharif and the Rabi crops.

MSP is a type of insurance that the government offers to farmers in the event that a price fluctuation could directly impact them and subsequent production. In this manner, the market prices are constrained from falling below the fixed price, giving farmers the best possible situation.

Importance of Minimum Support Price:

1. Fixed Remunerations: The farmers are financially secured against the vagaries of price instability in the market. It provides security to farmers from the risk of crop failure and less production.
2. Informed decision making: MSP are announced at the beginning of the sowing season, this helps farmers make informed decisions on the crops they must plant. This advance information helps the farmer to make an informed decision about which crop to sow for maximum economic benefit within the limitations of his farm size, climate and irrigation facilities.
3. Diversification of crops: The MSP announced by the Government of India for the first time in 1966-67 for wheat has been extended to around 24 crops at the present. This has encouraged the farmers to grow these diverse crops to maximise their income.
4. Benchmark for private buyers: MSP sends a price-signal to market that if merchants don’t offer higher than MSP prices the farmer may not sell them his produce. Thus it acts as an anchor or benchmark for the agro-commodity It ensures the market prices will not be drastically lower than MSP.
5. Targeted crops: MSP is used as a tool to incentivize production of specific food crops which is short in supply. MSP motivates farmers to grow targeted crops and increased production.
6. Enhance purchasing power: Slow farm growth and increasing farmer’s distress demand for more MSP for farmers. It helps in enhancing the purchasing capacity of farmers.

Various issues associated with Minimum Support Price:

1. Non-proportional increase: The support prices that are being provided do not increase at par with increase in cost of production. A rating agency, CRISIL pointed out that the increase in MSP has indeed fallen during 2014-17.
2. Reach: The benefits of this scheme do not reach all farmers and for all crops. Not all farmers have been able to get the benefits of MSP because of lack of awareness. There are many regions of the country like the north-eastern region where the implementation is too weak.
3. Excess storage: MSP without sufficient storage has resulted in huge piling of stocks in the warehouses. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.
4. Market distortion: It distorts the free market by favouring some particular crops over other crops.
5. Fiscal burden: Open-ended procurement of paddy and wheat at MSPs is completely out of sync with market prices and lead to fiscal burden.
6. Impact agricultural exports: Hikes in MSP also adversely affect the exports by making Indian farm goods un-competitive especially when international market prices are lower.
7. Ecological problem: MSP leads to non-scientific agricultural practices whereby the soil, water are stressed to an extent of degrading ground water table and salinization of soil.
8. Crop diversity: MSP affects the crop diversity of india. With MSP cropping patterns get affected as it leads to production of MSP supported crops as it guarantee returns.

Read: Don’t support minimum support prices

Way forward:

1. Alternate income models: Instead of relying on MSP alone, the government needs to explore alternate models to boost farmer’s income like horticulture.
2. Market Intervention Scheme: A counterpart of the MSP is the Market Intervention Scheme under which the state government procures perishable commodities like vegetable items.
3. Price Deficiency Payment: To solve the problem of MSP, Both NITI and Economic Survey recommend Price Deficiency Payment (PDP) in which the government pays the farmers the difference between modal rate (the average prices in major mandis) and the MSPs. Some states like Madhya Pradesh (Bhavantar Bhugtan Yojana), Haryana government (Bhavantar Bharapai Yojana) have launched price deficit financing schemes.
4. Income support: By moving from price to income support, all market-distorting input and output subsidies can be collapsed into the Pradhan Mantri Kisan Samman Nidhi or PM-KISAN scheme.
5. Stock diversification: The government should stock sufficient quantities of all essential food items— not only rice and wheat, that enable effective market intervention, with the interest of poor consumers better taken care of through targeted cash transfers.

Read: Legalising MSP: Challenges and way forward – Explained, pointwise

The procurement policy of the government needs reforms that are easier to implement. Efforts must be made to balance market price and farmers’ support. Cash transfer gives better choices to farmers than imposing subsidies.