MSP (Minimum Support Price)

What is MSP?

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The MSP is the minimum price to be offered by the government to the farmers for the specified crops. The farmers can sell their crops to the government agencies at this price , in case market price is lower. Thus, MSP is a type of social security against market risk of prices becoming lower.

In agricultural commodities, price fluctuations is a routine phenomenon , particularly in countries like India where a big part of agriculture ( around 60% ) is rain-fed. The uncertain nature of monsoon creates uncertain rains resulting in to fluctuations in production and prices of agricultural goods. In such an environment , there is a need to ensure a price which can not only recover the cost of production but can also provide some sort of incentive so that farmers can look at agriculture not only as a way of livelihood but also as a way of getting prosperity. Attention may be given to the fact that, in India ,the MSPs are set higher at by 50 per cent as compared to the cost of cultivation calculated on the criterion of “ A2 plus FL” since 2018-19.

What is A2 plus FL? It is to be noted that both A2 plus FL are the symbols indicating the cost of cuiltivation. The cost symbol A2 covers all explicit costs incurred by the farmer in terms of what he pays to others either in cash ( like payments for hired labour, fertiliser ,pesticides, electricity bills and so on ) or in kind like payment of rent in terms of a per cent ( mostly 50 per cent ) of the total agricultural production. Similarly, the cost symbol FL shows estimated value of wages for family labour engaged in their family farming. This is a type of implicit cost since no cash or other payment is made to family members.

In India , MSPs are announced for 22crops ( fine cereals ,coarse cereals ,pulses ,oilseeds and commercial crops ) on the recommendations of the Commission on Agricultural Costs and Prices. For sugarcane a separate price is announced known as the FRP ( Fair and Remunerative Price ). These prices are given by sugar mills. State governments also announce SAP ( State Advised Price ). Both MSP and FRP are finally determined by the CCEA ( Cabinet Committee on Economic Affairs ). It is to be noted that the MSP can only protect farmers from market risk . It does not protect farmers from income risk resulting from crop failure. This becomes a significant issue in countries like India where a big part of agriculture is rainfed and not less than 86 per cent farmers are small and marginal. Due to this limitation, a need for crop insurance is always felt.