ALL ABOUT MINIMUM SUPPORT PRICE (MSP)
WHAT IS MSP?
Minimum Support Price (MSP) is the price set by the Indian government on agricultural products while purchasing directly from the farmers such that it guarantees a minimum profit for farmers for their harvest even if there is a fluctuation in prices for the crops in the market due to various unwanted reasons such as monsoon, poor market integration etc. The Indian government sets the MSP for 24 commodities twice a year under the recommendation of the Commission for Agricultural Costs and Prices (CACP)’s report. Thus, MSP sets a floor price below which the market prices cannot fall for all those commodities in the list for which the MSP has been set. MSP also aims to procure food grains for the public through Public Distribution Systems (PDS).
HOW WAS MSP ESTABLISHED?
The MSP system was established from 1966–67 for wheat and later it was expanded to include other essential food crops such as paddy and corn. The commodities under MSP were sold to the poor under subsidized rates under the PDS. At the beginning of MSP in 1966, the MSP for wheat was Rs.54 per quintal. The current MSP for wheat is Rs.1975 per quintal.
Although MSP came into existence from 1966 officially, it has its origin during World War 2, introduced in India by the British before independence.
The shortages in food during the mid-1960s led India to reform its agricultural structure and policy reforms to achieve foodgrain self-sufficiency. Various institutional reforms were made to modernize farming practices and improve agricultural production. These reforms included the structural changes in the agricultural administrative arrangements, land reforms, initiation of Minimum Support Price for major agricultural products, improvements in the field of agricultural research and developments and the introduction of new technologies, popularly known as Green Revolution.
HOW IS MSP CALCULATED?
If a farmer had a very good harvest in any year, the price for that particular commodity falls very low during that year which in turn will have its adverse effect on the future supply of that commodity as the farmers will withdraw from sowing that crop in the following years. This will lead to an increase in price for that commodity among the consumers. To balance this situation, the MSP is set by the government each year before the sowing season.
There are three formulas proposed by the CACP for calculating the cost of production. They are — A2, A2+FL, C2 expenses. A2 includes the expenses such as costs of seeds and fertilizers, fuel, hired labour, chemicals and irrigation used in production. A2+FL includes all the A2 expenses that we already mentioned, along with that an unpaid cost of Family Labour (FL) is added. C2 includes all the A2+FL expenses and along with that other expenses such as rents, interest foregone on owned land and fixed capital assets.
From the 2018–19 Union Budget, the government announced that MSP should be kept at 1.5 times the cost of production as per the recommendations from the chairman of National Commission for Farmers (NCF), Prof. M.S. Swaminathan. The Union Minister of Agriculture and Farmers Welfare, Narendra Singh Tomar said that the CACP considers both the A2+FL costs and C2 costs while calculating MSP.
FACTORS CONSIDERED WHILE CALCULATING MSP
We already discussed the formulas for calculating the MSP based on the cost of production and the role of CACP in it. The CACP considers the following factors while formulating the MSP, they are:
- Demand and supply of the commodity.
- Market price trends over 3–6 months.
- Cost of production.
- Effect on issue prices for subsidy.
- International market prices of commodities.
- Agricultural wage rate received by the farmers.
- Cost of production of commodities in various regions.
- Cost of storage, transportation, and marketing services.
- Cost of cultivation per hectare in various regions.
- Input-output price difference.
LIST OF CROPS UNDER MSP SYSTEM
7-types of cereal crops — Paddy, Wheat, Jowar, Bajra, Ragi, Maize, Barley
8-types of oilseeds — Mustard, Sunflower, Groundnut, Sesame, Soya bean, Toria, Safflower, Niger seed
5-types of pulses — Toor, Urad, Moong, Gram, Lentils
4-types of other crops (commercial crops) — Virginia Tobacco, Raw cotton, Jute, Copra
BENEFITS AND DRAWBACKS OF MSP
As we have defined MSP as a safeguard for our farmers, there are other benefits as well as drawbacks for the MSP system. Some of the benefits of the MSP system are:
- It gives our farmers a hope to earn more in the next sowing season even if the current situation is not favourable due to reasons such as sudden climatic changes or other natural calamities.
- It helps farmers in achieving profits, thereby the farmers can invest more in developing the agricultural infrastructure such as adopting new farming techniques, new machinery for farming, better irrigation systems etc.
- MSP is declared before the starting of the sowing season, this helps farmers to identify which crops have high demand and which crops they can target to produce according to their agricultural conditions such as soil type and region.
- The MSP system has given small and marginal farmers a chance to compete in the market with the large farmers to some extent.
- It helps the government to have control over the growth of crops that are low in production by setting a higher price for that particular crop and adding it to the list of commodities under MSP.
- The government can ensure food for the below poverty line people by distributing these commodities under the market price through the Public Distribution System (PDS).
Some drawbacks/limitations of the MSP system are:
- Although MSP is set by the government and is intended to help farmers, very few farmers succeed in selling their produce at MSP(less than 10% according to a report by National Sample Survey Office in 2012–13). The majority of the small and marginal farmers sell at prices below MSP, this is due to lack of awareness about the MSP system and their inability to compete with large scale farmers.
- India’s yield per hectare is the lowest compared to other countries. To improve this, agricultural productivity needs to improve. MSP alone cannot help to achieve this goal, we need more different kinds of interventions in both technology-based and on an institutional basis.
- Another major drawback is the lack of machinery by the government to procure crops other than wheat and paddy. Wheat and paddy are procured in bulk by the Food Corporation of India (FCI). This creates irregular procurement of other crops which denies incentive or bankability for the farmers to produce these other crops.
- Most of the states do not have the funds to procure crops at the rates (MSP) announced by the central government. This creates problems for the farmers, as they will be forced to sell their produce below MSP to other agencies (private sector).
- The farmers sell their produce through the middlemen in the mandis. Mandis are MSP based procurement systems for buying and selling produce from farmers. The problem here is the farmers have to depend on these middlemen, commission agents etc., to sell their produce at MSP and most of the average farmers don’t get access to these mandis and are forced to sell their produce in the market.
PROBLEMS FACED BY THE FARMERS
We all know that agriculture is one of the risky fields because of various uncontrollable factors, it also accounts for the participation of 50% of India’s workforce in it and contributes about 15–20% of the total GDP of India. Let’s go through a few reports to see how the agricultural policies were reformed, what all problems our farmers faced a few years back — A report by Prof. M.S. Swaminathan — the man who saved India from food shortages and helped the agricultural sector to grow, helped the government to implement schemes and policies that would help the poor farmers. He was the first citizen of a developing country to hold the post of elected President of the Nobel Prize-winning Pugwash conference on science and world affairs.
The National Commission of Farmers (NCF) under the chairmanship of Prof. M.S. Swaminathan has submitted five reports and two drafts of a National Policy for farmers providing solutions for the problems and crisis faced by the farmers.
Let’s take a quick look into the summary of each report and find out problems faced by the farmers.
- SERVING FARMERS AND SAVING FARMING — FIRST REPORT
The NCF was set up in 2004 by the United Progressive Alliance (UPA) government to assess India’s agricultural crisis. This report was submitted on Dec 29th 2004 and was meant to reduce the farmers’ distress and to reduce the decline in farm incomes.
Findings & suggestions:
The report says that the major reason for Indian agricultural crisis were — Unfinished land reform agendas, quantity and quality of water, technology fatigue, accessible-adequate-and timely institutional credits, and assured markets.
With the use of technology for deeper penetration for water extraction, the groundwater levels had fallen. This report asked for the initiatives like a ‘million wells recharge programme’ that would help the farmers with financial assistance.
The report suggested that 50,000 farm schools should be established to share and educate others in effective farming practices.
The report suggests that Soil Health Clinics run by the Self Help Groups (SHGs), could issue Soil Health Cards to the farmers that’ll help them in identifying micro-nutrient deficiencies in the soil.
To meet the input costs, the rural poor farmers had to borrow 84% of their credits from non-formal sources. About 77% of marketing costs were avoidable losses incurred during handling, storage and transportation.
2. SERVING FARMERS AND SAVING FARMING: FROM CRISIS TO CONFIDENCE — SECOND REPORT
This report was submitted on Aug 11th 2005. It focuses on public spending and administrative initiatives that were required to mitigate the agricultural crisis. These initiatives include reforming the supply of credit, setting up state-level farmers commissions, and compiling a census of farmer suicides. All these initiatives had to be implemented immediately, the commission said and would continue till the end of the 11th Five-year plan (2007–2012).
Findings & suggestions:
The NCF suggested renaming the ‘Ministry of Agriculture’ to ‘Ministry of Agriculture and Farmer’s Welfare’ because the well-being of the farmers should be the ministry’s primary goal.
To implement the measures mentioned in the report and to begin to address the crisis, about Rs.8337 crores was needed.
Assured remunerative crop pricing could increase the crop productivity of small farmers and could also reduce farmer suicides.
The NCF suggested when formulating policy, arid regions should be separated from semi-arid regions, so that specific policies for drought-proofing, land management and livelihood security could be developed.
Post-harvest losses could be reduced with training, appropriate equipment and a tightening of the supply chain.
The commission recommended a technology mission on sugarcane, a joint programme with sugarcane growers, banks, sugar factories and research organisations to produce 80 tons per hectare sugarcane yield in 5 years.
3. SERVING FARMERS AND SAVING FARMING, 2006: YEAR OF AGRICULTURAL RENEWALS — THIRD REPORT
This report was submitted on Dec 29th 2005 and it recommends a programme to increase the farm productivity and profitability without any ecological harm. It contains records of the NCF team’s observation from field trips to two important agricultural locations — Punjab and Maharashtra. It highlights the role of technology and says that the effective implementation of research could help achieve a much more successful agricultural economy.
Findings & suggestions:
The average monthly per capita consumption expenditure of farm households across India was Rs. 502 in 2003. Endemic hunger was high in families without land or livestock, and in households with small landholdings without irrigation.
Besides the Tsunami attack in 2004 and the earthquake in Kashmir in 2005, Indian farmers were hit by a lack of administrative support and post-harvest infrastructure. The proposed National Agricultural Renewal Year Programme of 2006–07 would focus on enhancing the soil health, increasing the irrigated area, efficient water use, credit and insurance reform, upgrading and disseminating farming-related technology, and farmer centred-marketing.
The NCF recommended adopting a ‘National Policy for Farmers’ before 2008, the 61st anniversary of India’s independence. With more than 20,000 scientists and an expenditure of Rs. 30.6 billion, India’s agricultural R&D wing is among the largest in the world.
With a domestic market of more than a billion people, only 6.18% of India’s agricultural commodities in 2002–03 entered the global market.
The report points out that in China, the interest rate for loans to farmers was zero.
4. SERVING FARMERS AND SAVING FARMING, JAI KISAN: A DRAFT NATIONAL POLICY FOR FARMERS — FOURTH REPORT
This report was submitted on April 13th 2006 to the then Minister of Agriculture — Sharad Pawar, summarising the recommendations made by the commission in its earlier reports. The NCF presented a Draft National Policy for Farmers that focused on the ‘human element’ in agriculture, and rejected the idea that agricultural progress must be measured only through the amount of foodgrains and other farm commodities.
Findings & suggestions:
The NCF said that the implementation of its recommendations from earlier reports would help achieve a 4% growth rate in agriculture and, in turn, an 8% growth rate in the country’s overall GDP.
To make farming a viable activity, five core areas need attention: land, water, credit and insurance, technology and markets. Nearly 75% of children were underweight due to inadequate nutrition. To address this, NCF said it is imperative to revive traditional nutrition-centred farming systems. It suggested that dying crops and dying wisdom be harnessed for local-level, community-managed food security systems like ‘Community Food Banks’.
The expansion of irrigation infrastructure was sluggish because of a flawed land acquisition machinery, delayed implementation of relief and rehabilitation policies, political and hydrological concerns in water transfer, and the declining capital share of irrigation in the Five-year plans.
The NCF recommended the creation of a proactive, pro-poor and gender-sensitive National Policy on Livestock, as well as a National Agricultural Biosecurity System to help protect the livelihood security of farm and fish worker families.
5. SERVING FARMERS AND SAVING FARMING: TOWARDS FASTER AND MORE INCLUSIVE GROWTH OF FARMERS’ WELFARE — FIFTH & FINAL REPORT, VOL.1
This report was submitted on Oct 4th 2006 to the then Minister of agriculture — Sharad Pawar. Volume 1 of the final fifth report addressed the issues of small farmers, especially the one with the small landholdings, how the agricultural sector can be revamped, how the agriculture’s ecological foundations can be strengthened and how disenchanted youth can be drawn to work on farms.
Findings & suggestions:
In the 1990s the actual average landholding of a farm family was bigger than the minimum required to keep it above the official poverty line only in seven states — Andhra Pradesh, Gujarat, Haryana, Madhya Pradesh, Rajasthan, Punjab and West Bengal.
The report says that India produced over 22,000 agricultural graduates and postgraduates annually, and one-fourth of these were women. However, about 40% of these graduates and postgraduates remained unemployed, highly underemployed or misemployed.
The NCF felt that business and financial management should be added to training in all applied areas of agricultural education, and a course in seed technology, for instance, could instead be on seed technology and business.
6. SERVING FARMERS AND SAVING FARMING: TOWARDS FASTER AND MORE INCLUSIVE GROWTH OF FARMERS’ WELFARE — FIFTH & FINAL REPORT, VOL.2
This report was also submitted on Oct 4th 2006 to the then Minister of Agriculture — Sharad Pawar. Volume 2 reiterates the need to address India’s agricultural crisis. It also summarises all the state-level consultations organised by the Commission that ultimately led to the Revised Draft National Policy for Farmers.
Findings & suggestion:
The NCF held 22 state-level consultations between May and September 2006. The topics discussed were land, water, livestock, credit, insurance, technology and inputs, markets and other key sectors, and the crops specific to each region.
At the consultation for Assam and the North-Eastern states, it was observed that the Draft National Policy for Farmers needed a separate section on the North East.
The Maharashtra and Goa consultation observed that agriculture was an activity in the service of the nation and needed a special budget.
At the Kerala consultation, it was suggested that farmers’ rights be defined, special farmers’ courts are set up, and a constitutional body to hear farmers’ grievances be established. At consultations in many states, people welcomed the idea of state and central awards for successful farmers.