Typically, Minimum Support Prices (MSPs) create the benchmark for farm prices not just in those commodities for which they are announced, but also in crops that are substitutes.

• Round the year, India’s farmers produce a host of agricultural commodities such as paddy (rice) in the kharif season (in which sowing happens in June and harvesting in November) or wheat in the rabi season (in which sowing happens in November and harvesting in March).
• For the most part, farmers sell their produce in the market.

But what if the prices in the market are too low to adequately remunerate farmers?

This can often happen if there is a bumper crop that season, or if the international prices of a particular commodity are quite low (and as such imports are very cheap).

• In such a scenario, India’s farmers, who are already some of the poorest citizens of the country, will struggle to make ends meet. 
• Apart from their individual troubles, if farmers give up farming as a result of low prices, it can even put the country’s food security at risk.
• The so-called minimum support prices or MSPs announced by the government each year are a way to preempt such an eventuality.

What exactly is MSP? 

MSP is the rate at which the government buys grains from farmers. Currently, it fixes MSPs for 23 crops grown in both Kharif and Rabi seasons. 

How is it calculated? 

The MSP is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers. 

• The Union Budget for 2018-19 had announced that MSP would be kept at levels of 1.5 the cost of production. 
• The MSP is fixed twice a year on the recommendations of the Commission for Agricultural Costs and Prices (CACP), which is a statutory body and submits separate reports recommending prices for kharif and rabi seasons.  

Crops covered by MSPs include:

• 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)

While recommending MSPs, the CACP looks at the following factors:

• The demand and supply of a commodity;
• Its cost of production;
• The market price trends (both domestic and international);
• Inter-crop price parity;
• The terms of trade between agriculture and non-agriculture (that is, the ratio of prices of farm inputs and farm outputs);
• A minimum of 50 per cent as the margin over the cost of production; and
• The likely implications of an MSP on consumers of that product.

Which production costs are taken in fixing the MSPs? 

The CACP considers both ‘A2+FL’ and ‘C2’ costs while recommending MSP. 

1. A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others. 
2. A2+FL covers actual paid-out costs plus an imputed value of unpaid family labour. 
3. The C2 costs account for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL. 

The limitations of MSP: 

The government does not procure all farm produce at MSPs. Actual procurement (at MSP) varies with crop and geography.

1. Also, MSPs have no statutory backing — a farmer cannot demand MSP as a matter of right. 
2. As state governments procure the last mile grain, the farmers of states where the grain is procured completely by the government benefit more while those in states that procure less are often affected. 
3. The MSP-based procurement system is also dependent on middlemen, commission agents and APMC officials, which smaller farmers find difficult to get access to. 

The farmer unions who led the yearlong agitation that led to the repeal of the three farm laws, want the government to enact legislation conferring mandatory status to MSP, rather than just being an indicative or desired price.

Source: Indian Express