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Minimum Support Price in Economy

Notes for
India: Critical Analysis for UPSC
UPSC Exam Exams

The MSP-based procurement system aims to protect crops from price volatility caused by
uncontrollable variables such as the monsoon, a lack of market integration, information
asymmetry, and other market imperfections afflicting Indian agriculture.
The MSP is set after the government properly investigates the major problems identified by the
Commission on Agricultural Costs and Prices.
The government presently establishes MSPs for 23 crops, but is not legally required to pay them
even if open market rates for those products are lower than their declared floor prices.
This article will help you understand the significance and determinants of the Minimum Support
price in India. Besides, it will also help you to critically analyse the structure of MSP in agriculture.
Study major topics of Indian Economy from the perspective of UPSC Exams.

What is the Minimum Support Price?

• The minimum support price (MSP) is a minimum price which is set by the central
government for any crop it deems remunerative for farmers.
• MSP is a kind of market intervention utilized by the Indian government to safeguard
farmers against a sharp decline in farm prices.
• Government agencies will purchase the whole quantity produced by farmers at the stated
minimum price if the market price for the commodity falls below the declared minimum
price due to bumper production and market excess.
• It is also the amount paid by government entities when they purchase a certain crop.
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• The procurement price is the price at which the crops are purchased. The MSP is
announced prior to planting, whereas the Procurement Price is issued after the crops have
been harvested.

When was the MSP first implemented in India?

• At the time of independence, India had a significant shortfall in cereal output. After a
difficult first decade, India chose to implement major agricultural reforms.
• The Minimum Support Price was established for the first time by the Centre in 1966-67.
For the first time, the MSP for wheat was established at Rs 54 per quintal.

What Was the Need of Introducing MSP?

• On the route of the Green Revolution, Indian authorities recognized the necessity for
farmers to be rewarded for growing food crops.
• Otherwise, they will not choose crops such as wheat and paddy since they are labor-
intensive and do not yield high returns.
• As a result, the MSP was created in the 1960s to incentivize farmers and improve output.

How Many Crops Are Protected Under The MSP?

• Currently, the Centre offers MSP for 23 crops.
• Cereals like bajra, wheat, maize, rice barley, ragi, and jowar; pulses like tur, chana, masur,
urad, and moong; and oilseeds like safflower, mustard, niger seed, soyabean, groundnut,
sesame, and sunflower are examples covered under MSP.
• The MSP also includes raw jute, cotton, copra, and sugarcane as commercial crops.

Check the details on the Economy Notes here.

How Does The Government Decide The MSP In Agriculture?

• There are two primary agricultural seasons in India: Rabi and Kharif. The MSP is
announced by the government at the start of each planting season.
• The MSP is recommended by the Commission on Agricultural Costs and Prices.
Considering these recommendations the government decided on MSP.
• These suggestions are based on some equations that have been set in stone. This covers
the actual costs incurred, as well as the value of fixed assets or rent paid by the farmers.

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• At the outset of each cropping season, the government publishes the MSP. A2, FL, and
C2 are the techniques that the government uses to determine the MSP for various crops.

What Are The Determinants Of MSP In India?

• Commission on Agricultural Costs and Prices is responsible for complete assessment of
the overall structure of the economy of a specific product or set of commodities.
• Besides, the Commission considers the following criteria in developing recommendations
on the level of minimum support prices and other non-price measures:-
o Production costs.
o Changes in the cost of raw materials.
o Price parity between inputs and outputs.
o Price trends in the market.
o Supply and demand.
o Price parity between crops.
o The impact on the cost structure of the manufacturing sector.
o The impact on the expense of living.
o The impact on the overall price level.
o Price condition on a global scale.
o Farmers are paid the same amount that they are paid by the government.
o Effect on issue pricing and subsidy implications

What is the Significance of MSP for farmers in India?

• Farmers are protected from price volatility and market flaws by MSP.
• Agricultural commodity prices are naturally volatile, thus a very strong harvest in any year
results in a dramatic drop in the price of that commodity during that year.
• The fixed crop price and stable markets promote increased investment and the use of
advanced farming methods.
• MSP gives a price signal to the market, indicating that if merchants do not offer higher
prices than MSP, the farmer may not be able to sell his goods.
• As a result, MSP acts as an agro-commodity market anchor or benchmark.
• While MSP does not guarantee that market prices will always be higher than MSP, it does
guarantee that they will not be much lower.

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What Are The Drawbacks Of Msp In India?

• The main issue with the MSP is a lack of government procurement apparatus for all
products except wheat and rice, which are actively procured under the PDS by the Food
Corporation of India.
• Even though it has been present for decades, the notion of minimum support price is not
mentioned in any law. While the government declares MSP twice a year, there is no law
requiring MSP.
• In 2018, the CACP suggested legislation that would allow farmers to sell their crops at
MSP. The Centre, on the other hand, did not accept this proposal.
• Middlemen, commission agents, and APMC officials all play a role in the MSP-based
procurement system. Smaller farmers have a hard time getting access to these
stakeholders.
• MSPs are only specified for specific crops. Farmers are encouraged to produce crops for
which MSP has been declared.
• There is no legal requirement for the government to purchase crops at MSP, and private
traders cannot be forced to do so either.
Practice the Multiple Choice Questions on MSP here!

Legalizing MSP in India

• MSP has no legal standing in India, despite the fact that it has been a government policy
since 1966-67.
• Farmers unions have been clamouring for MSP to be made legal for a long time.
• MSP was also suggested by CACP a few years ago to be made legal.

Advantages of Legalising MSP in India: -

• If MSP is made legal, the government must ensure that farmers' produce is purchased at
the declared MSP, either directly or through private parties.
• The legal status of MSP will have to encompass 100% of farmers, as opposed to the
existing 6%.
• If the government makes the MSP a legal body, it will be required to cover all crops, all
producers, and to lift these crops if the market price falls below the MSP.
• Even if only small and marginal farmers are included by the MSP programme, 85 percent
of small and marginal farmers will profit.

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Disadvantages of Legalising the MSP: -

• When MSP becomes a legal entitlement, procurement will only grow in terms of quantity,
but it will still fall short of reaching any significant portion of the farmer population.
• With even more supplies built up, FCI will be compelled to slash prices even further.
• When such sales of agricultural produce are paired with the prohibition on purchasing
below the MSP directly from farmers, all channels for selling by farmers are effectively
closed.
• Traders and other purchasers will find it cheaper to acquire grains directly from FCI at
lower rates than the MSP since FCI dumps more at lower prices than the procurement
price.
• Another possible outcome is the emergence of a huge black market, in which tiny dealers
buy grains from farmers in informal marketplaces for a fraction of the MSP.
• For crops purchased at MSP, a standard of "fair average quality" has been established.
Traders would face significant challenges if the harvest fails to fulfil quality requirements.
• Legalizing MSP will have an impact on free-market principles, resulting in a disparity
between producers and consumers.
• One of the main reasons against legalising MSP is that it may have a negative influence
on the country's macroeconomic prospects by causing an unexpected spike in inflation.
• MSP is classified as a harmful subsidy by the WTO since it has an impact on the market.
India's subsidising programmes have sparked outrage among industrialised countries.

Recent Farm Laws and MSP Issue in India

The recently adopted Farm Laws break the APMC mandis' monopoly, allowing for the selling and
purchase of commodities outside of these state-run market yards.
Farm Laws: -
• The Farmers (Empowerment and Protection) Arrangement on Price Assurance and Farm
Services Bill, 2020, permits farmers to enter into a contract farming agreement with a
buyer for the purchase of commodities at predetermined rates.
• Farmers can sell their product outside of APMC mandis to whoever provides a better price,
including the final buyer, under the Farmers Produce Trade and Commerce (Promotion
and Facilitation) Bill, 2020.

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• The Essential Commodities (Amendment) Bill, which declassifies onions, grains, pulses,
potatoes, edible oilseeds, and oils as essential commodities under normal situations, is
the third bill.
o These laws faced serious opposition from farmers.

Why are the Farmers Protesting?

• Farmers are dissatisfied with the three agricultural bills because none of them include
MSP.
• They are having difficulty trusting the government, despite Prime Minister Narendra Modi
and his cabinet orally promising farmers that the MSP system will remain.
• The three agriculture legislation proposed by the government, on the other hand, have
little to do with MSP.
• The government benefited from the fact that MSP is not protected by legislation. Farmers
have been free to sell their products to any organisation, including private corporations,
but they have sought a formal commitment from the government on MSP because they
are concerned that without one, corporations would begin abusing them.

In this article, we analyse the structure of MSP in India. We also tried to understand the
significance and drawbacks of Minimum Support Price provided by the Indian Government.
Besides, we also analyzed the farmers' concerns associated with recent Farms Laws and its
impact on MSP.
To study more topics from Indian Economy for UPSC, download the Testbook App now!

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