All you wanted to know about Minimum Support Price

NALINAKANTHI V | Updated on January 24, 2018



The government recently increased the minimum support price (MSP) of key food crops such as paddy and pulses. This has had the farming community, which was bogged down by the delay in onset of the south-west monsoon, cheering.

What is it?

MSP is the minimum price paid to the farmer for procuring food crops. It offers an assurance to farmers that their realisation for the agricultural produce will not fall below the stated price.

The government uses the MSP as a market intervention tool to incentivise production of a specific food crop which is in short supply. It also protects farmers from any sharp fall in the market price of a commodity. MSPs are usually announced at the beginning of the sowing season and this helps farmers make informed decisions on the crops they must plant.

MSP is computed on the basis of the recommendations made by the Commission for Agricultural Costs and Prices (CACP). So, how does the CACP fix the MSP? It considers factors such as the cost of production, change in input prices, market price trends, demand and supply, and a reasonable margin for farmers.

The Food Corporation of India, which is the nodal agency for procurement, along with State agencies, establishes purchase centres for procuring food grain under the price support scheme. The State government decides on the location of these centres with the aiming of maximising purchases. In 2009, the country experienced the worst drought, since the 1972 famine, on the back of a 22 per cent below-normal rainfall. That year, the government procured 22 lakh tonne rice, 5 lakh tonne higher than in the previous year.

Why is it important

The share of agriculture in the India’s GDP has fallen steadily from around 25 per cent in the early part of the century to less than 17 per cent now. But almost half of India’s population is dependent on agriculture for livelihood.

Farming is a risky business with the farmer’s income dependent on the vagaries of weather and pests, as well as local and international price trends. The MSP mechanism shields farmers to an extent, from such risks, by guaranteeing a floor price for their produce.

MSP also ensures that the country’s agricultural output responds to the changing needs of its consumers. This year, for instance, the prices of pulses have shot up sharply due to a sharp fall in production in the just concluded rabi season. The Centre has thus hiked the MSP of pulses by a larger margin than for paddy, to expand sowing of pulses in the coming year.

Why should I care?

MSP is a tool to achieve food security and tackle shortages of key food items. Rural prosperity, sales of discretionary goods and consumer goods have risen steadily over the last few years. Hence, higher MSP and rising farm income can augur well for companies that make consumer durable goods, automobiles or FMCG.

Besides, higher farm profits will encourage farmers to spend more on inputs, technology etc, which can have a positive rub off on companies in the agri inputs and farm equipments space.

But on the flip side, sharp and frequent increases in MSP can feed inflation too. For instance, it is believed that it was sustained MSP increases on paddy and wheat that fuelled high food inflation in the years to 2013.

The bottomline

You can’t please everyone. If you want to keep farmers happy with higher MSPs, you may be left with unhappy consumers.

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Published on June 22, 2015

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