The Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. Announced at the beginning of the sowing season for certain crops, it provides a price signal to farmers and guarantees a floor price for their produce.
- Genesis: The system was first introduced in 1966-67 for Wheat following the Green Revolution to incentivize farmers to adopt high-yielding varieties.
- Dual Purpose: It serves as a safety net for farmers to prevent “distress sales” and ensures a steady supply of food grains for the Public Distribution System (PDS).
- Legal Status: MSP currently lacks statutory backing; it is a policy decision enforced through executive orders, not an Act of Parliament.
Institutional Framework and Price Determination
The determination of MSP involves a rigorous socio-economic and technical evaluation process conducted by specialized bodies.
- Commission for Agricultural Costs and Prices (CACP): An attached office of the Ministry of Agriculture and Farmers Welfare that recommends MSPs. It considers factors like cost of production, market price trends, demand-supply balance, and inter-crop price parity.
- Cabinet Committee on Economic Affairs (CCEA): Chaired by the Prime Minister, this committee takes the final decision on the MSP levels recommended by the CACP.
- Cost Concepts used by CACP:
- A2: Covers all paid-out expenses in cash and kind (seeds, fertilizers, hired labor, fuel).
- A2+FL: Includes A2 plus an assigned value of unpaid family labor.
- C2: A comprehensive cost that includes A2+FL plus the rentals and interest forgone on owned land and fixed capital assets.
- Current Formula: Following the Union Budget 2018-19, the government fixed MSP at a level of at least 1.5 times the A2+FL cost of production.
Coverage of Crops under MSP
The government currently announces MSPs for 22 mandated crops and a Fair and Remunerative Price (FRP) for Sugarcane.
| Category | Number of Crops | Included Crops |
| Cereals | 7 | Paddy, Wheat, Maize, Sorghum, Pearl Millet, Barley, and Ragi. |
| Pulses | 5 | Gram, Tur (Arhar), Moong, Urad, and Lentil (Masur). |
| Oilseeds | 7 | Groundnut, Rapeseed-Mustard, Soybean, Sesamum, Sunflower, Safflower, and Nigerseed. |
| Commercial | 3 | Copra, Sugarcane (FRP), Cotton, and Raw Jute. |
- Trivia: While Toria and De-husked coconut are also covered, their MSPs are fixed based on the MSPs of Rapeseed-Mustard and Copra, respectively.
Procurement Mechanisms and Agencies
The announcement of MSP is ineffective without physical procurement. Several agencies are tasked with buying produce at the floor price.
- Food Corporation of India (FCI): The nodal central agency for the procurement of wheat and paddy.
- NAFED: National Agricultural Cooperative Marketing Federation of India; primarily procures pulses and oilseeds.
- Cotton Corporation of India (CCI): Specifically for cotton procurement.
- Decentralized Procurement (DCP): Under this scheme, State Governments procure, store, and distribute food grains themselves for PDS, with the Central Government reimbursing the costs.
PM-AASHA: Strengthening the MSP Delivery
To ensure that farmers actually receive the MSP, the Pradhan Mantri Annadata Aay Sanraksan Abhiyan (PM-AASHA) was launched in 2018. It comprises three components:
- Price Support Scheme (PSS): Physical procurement of pulses, oilseeds, and copra by central nodal agencies with support from state governments.
- Price Deficiency Payment Scheme (PDPS): Inspired by Madhya Pradesh’s Bhavantar Bhugtan Yojana, the government pays the farmer the difference between the MSP and the actual market price, avoiding physical handling of the crop.
- Private Procurement & Stockist Scheme (PPPS): Piloting private sector participation in procurement operations for oilseeds.
Critical Issues and Policy Challenges
- Skewed Procurement: Heavy focus on Wheat and Paddy in Punjab, Haryana, and Western UP has led to a monoculture that depletes groundwater and ignores nutritional crops like millets.
- Awareness Gap: According to the Shanta Kumar Committee (2015), only about 6% of farmers in India actually benefit from MSP-linked procurement.
- Inadequate Infrastructure: Lack of procurement centers in remote areas forces small farmers to sell to local traders below the MSP.
- WTO Concerns: India’s MSP program is often challenged at the World Trade Organization (WTO) under the “Amber Box” subsidies, as it is viewed as a trade-distorting price support.
Significant Facts for Prelims
- Sugarcane Pricing: Sugarcane is unique because its price is termed Fair and Remunerative Price (FRP), governed by the Sugarcane (Control) Order, 1966. Some states also announce a State Advised Price (SAP), which is usually higher than the FRP.
- Open Market Sale Scheme (OMSS): Used by FCI to sell surplus food grains at pre-determined prices in the open market to enhance supply and moderate prices.
- Economic Cost of Foodgrains: This includes the MSP, procurement incidentals (labor, transport, taxes), and distribution costs. The difference between the Economic Cost and the Central Issue Price (CIP) is the Food Subsidy.