Minimum Support Price (MSP)

Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).

MSP is price fixed by Government of India to protect the producer – farmers – against excessive fall in price during bumper production years.
The minimum support prices are a guarantee price for their produce from the Government.
The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

Historical perspective of MSP:

The Price Support Policy of the Government is directed at providing insurance to agricultural producers against any sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. Till the mid 1970s, Government announced two types of administered prices :

Minimum Support Prices (MSP)
Procurement Prices
The MSPs served as the floor prices and were fixed by the Government in the nature of a long-term guarantee for investment decisions of producers, with the assurance that prices of their commodities would not be allowed to fall below the level fixed by the Government, even in the case of a bumper crop.
Procurement prices were the prices of kharif and rabi cereals at which the grain was to be domestically procured by public agencies (like the FCI) for release through PDS.
It was announced soon after harvest began. Normally procurement price was lower than the open market price and higher than the MSP.
This policy of two official prices being announced continued with some variation upto 1973-74, in the case of paddy. In the case of wheat it was discontinued in 1969 and then revived in 1974-75 for one year only.
Since there were too many demands for stepping up the MSP, in 1975-76, the present system was evolved in which only one set of prices was announced for paddy (and other kharif crops) and wheat being procured for buffer stock operations.

Determination of Minimum Support Price (MSP)

In formulating the recommendations in respect of the level of minimum support prices and other non-price measures, the Commission takes into account, apart from a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities, the following factors:-

Cost of production
Changes in input prices
Input-output price parity
Trends in market prices
Demand and supply
Inter-crop price parity
Effect on industrial cost structure
Effect on cost of living
Effect on general price level
International price situation
Parity between prices paid and prices received by the farmers.
Effect on issue prices and implications for subsidy

Read Also Need for MSP Reforms

The Commission makes use of both micro-level data and aggregates at the level of district, state and the country. The information/data used by the Commission, inter-alia include the following :-

Cost of cultivation per hectare and structure of costs in various regions of the country and changes there in;
Cost of production per quintal in various regions of the country and changes therein;
Prices of various inputs and changes therein;
Market prices of products and changes therein;
Prices of commodities sold by the farmers and of those purchased by them and changes therein;
Supply related information – area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry;
Demand related information – total and per capita consumption, trends and capacity of the processing industry;
Prices in the international market and changes therein, demand and supply situation in the world market;
Prices of the derivatives of the farm products such as sugar, jaggery, jute goods, edible/non-edible oils and cotton yarn and changes therein;
Cost of processing of agricultural products and changes therein;
Cost of marketing – storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; and
Macro-economic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.

The increase in MSP for Kharif Crops is in line with the Union Budget 2018-19 announcement of fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production (CoP), aiming at reasonably fair remuneration for the farmers.

The pricing of sugarcane:

The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10 sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis.
As this sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966 was amended in October, 2009 and the concept of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane.
A new clause ‘reasonable margins for growers of sugarcane on account of risk and profits’ was inserted as an additional factor for working out FRP and this was made effective from the 2009-10 sugar season. Accordingly, the CACP is required to pay due regard to the statutory factors listed in the Control Order, which are;

the cost of production of sugarcane;
the return to the grower from alternative crops and the general trend of prices of agricultural commodities;
the availability of sugar to the consumers at a fair price;
the price of sugar;
the recovery rate of sugar from sugarcane;
the realization made from sale of by-products viz. molasses, bagasse and press mud or their imputed value (inserted in December, 2008) and;
reasonable margins for growers of sugarcane on account of risk and profits (inserted in October, 2009).

States also announce a price called the State Advisory Price (SAP), which is usually higher than the SMP.

Crops covered:

Government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane. The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops. In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively. The list of crops are as follows.

Cereals (7) – paddy, wheat, barley, jowar, bajra, maize and ragi
Pulses (5) – gram, arhar/tur, moong, urad and lentil
Oilseeds (8) – groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed
Raw cotton
Raw jute
Copra
De-husked coconut
Sugarcane (Fair and remunerative price)
Virginia flu cured (VFC) tobacco

The Fair and Remunerative Price (FRP) of sugarcane payable by sugar mills for 2020-21 sugar season (October-September) is as follows:

FRP of sugarcane for 2020-21 sugar season at Rs.285/- per quintal for a basic recovery rate of 10%;
premium of Rs. 2.85 per quintal for every 0.1% increase above 10% in the recovery; and
reduction in FRP by Rs. 2.85 per quintal for every 0.1 percentage point decrease in recovery, in respect of those mills whose recovery is below 10% but above 9.5 percent. However, for mills having recovery 9.5 % or below, the FRP is fixed at Rs 270.75 per quintal.