Critical Analysis of MSP

Table of Contents

Context: The Central Government has announced the Minimum Support Price (MSP) for kharif crops for 2023-24 season.

Critical Analysis of MSP Background

The Union Government has announced the MSP for 17 ‘kharif’ crops, like paddy, pulses (moong, arhar, urad), oilseeds like groundnut and soybean and cotton, for the marketing season of 2023-24 to ensure remunerative prices to the growers for their produce and to encourage crop diversification.
However, the farmers are unhappy with the ‘meagre’ hike in the MSP.

Types of Crops

Kharif (Crops planted between October and December): Rice, barley, cotton, groundnut, sugarbeet, ‘urad’, ‘moong’, ‘lobia’, ‘millets’, ‘til’, ‘andi’, ‘jute’, ‘vemp’, ‘arhar’, ‘sugarcane’, soyabean and lady finger.
Rabi (Crops planted between April and July): Wheat, millets grains mustard peas ‘barseem’, ‘masoor’, potatoes, tobacco, ‘lahi’ and ‘jai’.
Zaid (Crops planted mainly during the summer): Pumpkin, water-melon, red-melon, gourd, ‘torai’, cucumber, green chillis, tomatoes and sunflower.

What is Minimum Support Price (MSP)?

MSP for a crop is the price at which the government is supposed to procure/buy that crop from farmers if the market price falls below it.
Current MSP Crops: During each cropping season, the government announces minimum support prices for 23 crops. Crops covered are:
- 7 types of cereals (paddy, wheat, maize, bajra, jowar, ragi and barley),
- 5 types of pulses (chana, arhar/tur, urad, moong and masur),
- 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, nigerseed),
- 4 commercial crops (cotton, sugarcane, copra, raw jute)
Authority: The MSPs are announced by the Union government but the government largely bases its decision on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
Formula for calculation: The current formula for calculation of MSP by CACP includes both A2+FL and C2 costs.
- ‘A2’ covers all paid-out costs incurred by the farmer in cash and kind on seeds, fertilizers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
- ‘FL’ includes an imputed value of unpaid family labour.
- C2 includes the imputed cost of capital and the rent on the land.
The CACP uses A2+FL cost for return. However, C2 cost is used as a benchmark reference costs.
Significance:
- MSPs Provide minimum remuneration: MSPs provide a floor for market prices, and ensure that farmers receive a certain “minimum” remuneration so that their costs of cultivation (and some profit) can be recovered.
- MSPs provide a safety net for farmers: If the market prices are below the farmer’s cost of production they and their families can be ruined.
- MSPs protect the consumers against inflation: If one particular crop leads to the ruin of many farmers, then farmers will avoid growing cotton next season. This, in turn, will reduce supply and push up prices.
- Increase production pattern: Using MSPs, the government also incentivizes the production of certain crops, thus ensuring that India does not run out of staple food grains.
- Maintain Balance: MSP aims to provide a fair return to farmers while keeping in view the interest of consumers in a way that prices of food and other agricultural commodities are kept at a reasonable level.

What is Government’s Stand on MSP Hike?

The government announced that MSPs for the Kharif season will go up by an average of 7%; the actual range varies between 5% and 10.5% depending on the crop.
According to the government, the increase in MSP is in line with the Union Budget 2018-19 announcement of fixing the MSP at a level of at least 1.5 times the all-India weighted average cost of production.
The expected margin to farmers over their cost of production are estimated to be highest in case of bajra (82%) followed by tur (58%), soybean (52%) and urad (51%).
- For rest of the crops, margin to farmers over their cost of production is estimated to be at least 50%.
This is the highest MSP increase in the last 5 years and the second highest in the last decade.

Why are Farmers Unhappy with MSP Hike?

Faulty Estimates by the Government: According to the farmers, the cost of production estimates given by the government is extremely faulty as the increase in irrigation costs and fertilizer has not been considered.
Insufficient to Cover Losses: Latest MSP hikes will prove to be insufficient to cover huge losses. Small, marginal, and middle-level farmers can be pushed into indebtedness.
Inadequate Cost Consideration: According to the farmers, the cost of production used by the CACP to calculate the MSP (A2+FL costs) does not include all the expenses incurred by the farmers such as rent of land, interest on loans.
- The farmers are demanding MSP to be fixed as per the recommendation of the Swaminathan Commission.
- This commission had advised fixing the MSP for farm produce based on a comprehensive measure of cultivation costs that includes the imputed cost of capital and the rent on the land (called ‘C2’ ) to give farmers 50% returns.
Procurement at Less Price: It has also been noted that only three to four crops mainly wheat, paddy and cotton and at times some pulses were being procured at MSP by the Government while the remaining crops were being procured at much below the MSP.
Limited Procurement: According to a CRISIL research report, only few Kharif crops benefit from government procurement.
- Also, the procurement is concentrated in only a few states such as Punjab, Haryana, western Uttar Pradesh, Chhattisgarh, and Telangana for paddy, in Telangana and Maharashtra for cotton, and in Maharashtra and Karnataka for pulses.
MSP as Legal Right: Non-implementation of MSP and below-MSP-procurement creates hurdles in ‘crop diversification’. This necessitates giving ‘legal status’ to MSP as it is the floor or reference price.
- This move would certainly bind the private players to procure those crops at least at the MSP.
- While facilitating crop-diversification, it would raise farmers’ income.
Food Inflation: The prices of cereals went up by almost 14% in April 2023. From this perspective, the MSP hike is modest.

What will be Impact of this hike?

On Food Inflation: It is unlikely that this hike per se would spike inflation. However, it is noteworthy that food inflation may still spike if the normal monsoon is affected by El Nino.
On Government Finances: Higher MSPs and more procurement as well as the storage and disbursal of subsidized foodgrains are all expenditures that weigh down government’s financial health.
On rural Consumption: The 7% MSP increase might just be enough to cover the increase in cost of production.

Way Forward

Farming over the years for small and marginal farmers, has not turned out to be remunerative.
To alleviate farmers’ financial distress, the government should set up effective system to provide assured purchase and returns to farmers for all major crops at the MSP, as is done in the case of wheat and rice or extend subsidies on input costs.
Promoting crop diversification by encouraging farmers to cultivate high-value and climate-resilient crops can reduce their dependence on MSP for traditional crops.
Facilitating partnerships between the government, private sector, and farmer organizations can create market linkages, enhance value addition, and improve farmers’ bargaining power.
Developing mobile applications and platforms that provide real-time market information, weather updates, and best practices to farmers, enabling them to make informed decisions about crop selection and pricing.