May , 2018
Minimum Support Price should be more equitable and broad-based
14:35 pm

Kishore Kumar Biswas

In India, the Commission for Agricultural Costs and Prices recommends the minimum support prices (MSP) for agricultural commodities (currently for 23 products). On the basis of the recommendation, the Government of India announces the MSPs at the beginning of the sowing seasons. The MSP is a form of market intervention by the government which guarantees highest prices at which the government is ready to buy the entire products of certain crops directly from the farmers. The most important purpose of it is to protect them from a sudden fall of prices of agro-products, particularly, in the period of bumper products. But if the market prices are higher than MSP the farmers can sell their products in the market. It is expected that introduction of proper MSP will minimise distress sale of the farmers and help procuring grains for the public distribution system.

The Commission considers a lot of factors to decide the MSPs. These factors vary among the regions. The cost of cultivations per hectare and quintal and structure of cost, prices of inputs and their changes, expected prices of the products in the internal markets, area of cultivation, amounts of import and export, level of stocks, total and per capita consumption, international prices and its changes, derivative prices of some of the goods like sugar cotton, edible oil and jute and cost of marketing etc. are important factors to determine the MSPs. 

Increase in MSP by 50%

The union government has decided to increase the MSP, which will cover all cost of cultivations plus 50% of that. But it is reported that only paid –out cost and cost of engaged family labour is going to be considered for determining total cost. A section think that if the imputed rental value of farmers’ land is not added the total cost computation will remain undervalued. The NITI Ayog has undertaken a thorough study on MSP that has pointed out a lot of weaknesses of the MSP system.  Therefore, one has to think the of the steps to be taken to have the benefits of the MSP.

Professor Ashoke Gulati, a noted agricultural economist, and Tirtha Chatterjee, a researcher, have recently written an article in a national media where they have pointed out that the most important thing in this matter is to get the benefit of the MSP and not the rate is the most important thing. There are some commodities like paddy, wheat, sugarcane where MSPs go up by a considerable extent. But the producers of other items do not reap the benefit of the MSP to a high extent. The union and state governments are interested in giving relief to the farmers. The famous Bhavantar Bhugtan Yojna (BBY) of Madhya Pradesh is a famous instance of this. It is a Price Deficiency Scheme (PDS) in Kharif 2017. But the MP government suddenly stopped it for the Rabi crop. This was mainly because it had not benefited even 25% of the targeted farmers. This was the case when the market prices of a lot of crops were below the MSP. Gulati and Chatterjee mentioned that the Indian government has had a serious debate over whether to scale up PDP scheme or procure through private trade or look at direct income support (DIS) on per hectare basis. The model has been announced by Telangana and Karnataka for 2018.

The scaling up of the PDS system or BBY system is needed to reach as many farmers as to be covered. In this scheme, the government is to cover the difference between market price and MSP to all farmers. Gulati and Chatterjee pointed out that the in an all-India picture, quite a lot of farmers remain unregistered as sellers due to deficiency in the infrastructure in many places, notably, in states like Bihar and UP. They have worked out to have an estimate of `43,700 to ` 87,400 crore as conservative estimate depending upon if the market prices are 10% to 20% below the MSP. They have mentioned that the estimate would be much higher in such a situation as have been in the current period where the prices of commodities like pulses and oil seeds are lower by more than 20% of the MSP.

Enhancement of MSP and its impact on economy

There are two sets of prices. One is based on paid-out cost and family labour cost. The second is the rental cost of land added to it. In the two cases the MSP will be very different from each other after 50% enhancement. The MSP of bajra will need only 5% enhancement if paid-out and labour cost only is considered. But that will be as high as 25% if rental cost is also added. The difference will be more in the case of, say, sunflower. required enhancements will be 20% and 53%, respectively. For jowar, price will have to raise by 91% to 94% when rental cost is also considered. Will this solve the inherent problems in agriculture? Gulati and Chatterjee have raised a few more important issues.

First, implementation of cost plus pricing system actually does not consider the demand factor of the products. In such a situation, market distortion in the agricultural market is inevitable. Without suitable demand enhancement price depression of some commodity is possible. In that case the situation may turn towards worse. Secondly, for commodities like cotton and paddy India may face tough competition in international market. In that case Indian domestic market of these commodities may face severe crisis. Thirdly, the proposed increased MSP system may lead to inflation, which may lead to unsustainability problem in agriculture.

It is suggested that Direct Income Support is a better policy to help the crisis- prone agriculture in the country. This is because it is thought to be equitable, crop neutral, and easy to implement.

Some Features of a NITI Ayog Evaluation Report of MSP

An evaluation report of NITI Ayog, published in January 2016, found that MSP did not have the desired positive impact on the income, enabling them to adopt modern technologies and practices of farming. It was seen that very few farmers in Assam, Bihar, Gujarat, West Bengal, Uttar Pradesh, Uttarakhand and Odisha sold their produce at MSP in the reference period. So their income was not impacted by MSP. Quite a few farmers are unaware of MSP.


The NITI Ayog study observed that on the whole, the MSP has succeeded in providing floor rate for major food grains like paddy and wheat and other produces such as Gram (black and green), spices and oilseeds (groundnut, mustard), sugarcane, jute and cotton, and it did not allow market prices to fall below the MSP fixed for them. It was also observed that the MSP has been playing a critical role in stabilising market prices in addition to helping the beneficiaries in the adoption of modern technologies in farming. The study also noticed that many farmers continued to sell their produce in the open market to get better returns. But there are problems also. When the procurement centres are far away and involve heavy transportation cost then selling even at MSP are very difficult. There are other problems such as non-opening of Procurement centres timely, lack of covered storage facility for temporary storage of produces lack of electronic weighing equipment in some places, delays in payments etc. In many cases, untimely information of MSP prevents farmers from planning. In many cases, small and marginal farmers resorted to distress sales due to urgent need for money. It is also known that for a section of farmers the MSP was too low to cover the rising farming costs.

But the NITI Ayoug study observed that in spite of strength and weakness, almost all the beneficiaries were unanimous in the view that the MSP should continue as it insulated them from  unfavourable market conditions by assuring them a minimum return for their produce.

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