Economics

Minimum Support Price(MSP)

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.

MSP is a “minimum price” for any crop that the government considers as remunerative for farmers and hence deserving of “support”.

Crops under MSP:

The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for

22 mandated crops and fair and remunerative price (FRP) for sugarcane. CACP is an attached office of the Ministry of Agriculture and Farmers Welfare. The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 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.

Factors for Recommending the MSP:

The CACP considers various factors while recommending the MSP for a commodity, including cost of cultivation.

It takes into account the supply and demand situation for the commodity, market price trends (domestic and global) and parity vis-à-vis other crops, and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

Three Kinds of Production Cost:

The CACP projects three kinds of production cost for every crop, both at state and all-India average levels.

• ‘A2’: Covers all paid-out costs directly incurred by the farmer in cash and kind on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
• ‘A2+FL’: Includes A2 plus an imputed value of unpaid family.
• ‘C2’: It is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.
•  CACP considers both A2+FL and C2 costs while recommending MSP.
• CACP reckons only A2+FL cost for return.

However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.

The Cabinet Committee on Economic Affairs (CCEA) of the Union government takes a final decision on the level of MSPs and other recommendations made by CACP.