Centre announces higher MSPs for six crops: A look at how minimum support prices are calculated, and what makes them important

The government's emphasis on MSPs is not surprising, as support prices have often been the focus of protests by farmers

FP Staff September 22, 2020 14:25:00 IST
Centre announces higher MSPs for six crops: A look at how minimum support prices are calculated, and what makes them important

Representational image. Reuters

In the past few days, Prime Minister Narendra Modi and several other Union ministers have responded to widespread farmers' protests by repeatedly stating that the system of minimum support prices (MSP) will remain.

In this backdrop, the Centre on Monday hiked the minimum support price for buying six rabi crops, including wheat, by up to six percent. The MSP of wheat, the biggest crop of the rabi season, has been hiked by Rs 50 to Rs 1,975 per quintal, agriculture minister Narendra Singh Tomar said in Lok Sabha. Besides, MSPs of lentil (masoor), gram, barley, safflower and mustard/rapeseed have been increased.

The government's emphasis on MSPs is not surprising, as support prices have often been the focus of protests by farmers. With the BJP having suffered several electoral losses due to agrarian distress, the Centre is likely to be fully aware of the risks involved in ignoring farmers' anger.

Further, it is also significant to note that according to official data, the number of wheat farmers who availed the MSP has doubled in the last five years. The number of such paddy farmers has increased by 70 percent during the same period.

Here is a look at minimum support prices, and what makes them so important:

How are MSPs determined?

Minimum support prices are the minimum prices set by the government at which farmers can expect to sell their produce for the season. If market prices fall below these levels, procurement agencies step in to procure the crop and ‘support’ the prices. This, in theory, helps farmers from price volatility.

The MS Swaminathan Commission, which is often cited by farmers seeking better prices for their produce, had recommended that the MSP should be 50 percent higher than the total cost of production.

MSPs are announced at the beginning of each sowing season by the Cabinet Committee of Economic Affairs based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP, in turn, makes its recommendations based on demand and supply, the cost of production and price trends in the market, among other factors.

This leads us to the issue of how exactly MSPs are calculated. Broadly, there are three methods of doing so — A2, A2+ FL and C2. The A2 method includes only the actual paid-out costs that the farmer, while the A2+FL method includes the paid-out costs as well as the imputed cost of family labour that goes into producing the crops. C2 includes paid-out costs, imputed family labour as well as imputed rent and interest on land and other capital assets. As is evident, the C2 method would ensure the highest price for the farmer.

The government presently calculates the minimum support prices based on the A2+FL method. The Swaminathan Commission had, however, stated that the MSP should be based on the comprehensive cost of production, which is the C2 method.

While higher MSPs can mean better prices for farmers, they can also increase the market prices of agricultural commodities for customers (which include farmers).

The Centre presently announces MSPs for a total of 25 agricultural commodities.

Political promises

Former finance minister Arun Jaitley, while presenting the 2018 Union Budget, that MSPs for kharif crops would be set at a minimum of one-and-a-half times the production cost, thereby fulfilling the BJP's electoral promise. He had then termed it as a 'historic' step towards the doubling of farmers' income.

However, an article by Vivek Kaul on Firstpost had then shown that the MSPs announced were, indeed based on the A2+FL method. He also pointed out that such prices have been announced before, including during the previous UPA regime in 2013-14.

While the minimum support prices announced are, in theory, the lowest prices at which farmers can expect to sell their produce, actual prices that cultivators get can often be lower than this level. For example, an article by Factly analysed prices of 14 kharif crops in 2018. It found that the actual national average selling prices for 10 of these crops were lower than the MSPs announced for them.

Thus, while hikes in MSPs have often been announced by governments in the past, the announcements need to be weighed against their implementation record.

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