All you wanted to know about minimum support prices

The Centre recently announced an increase in the minimum support prices (MSP) for pulses, oil seeds and paddy for the upcoming kharif season. While the MSP hike was modest for cereals, pulses saw a ₹375 to ₹425 a quintal hike from last year’s levels. 

What is it?

In theory, an MSP is the minimum price set by the Government at which farmers can expect to sell their produce for the season. When market prices fall below the announced MSPs, procurement agencies step in to procure the crop and ‘support’ the prices. The Cabinet Committee of Economic Affairs announces MSP for various crops at the beginning of each sowing season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP takes into account demand and supply, the cost of production and price trends in the market among other things when fixing MSPs.

The FCI and Nafed help the Centre procure select food crops with the help of the States. Procured farm products are kept in government warehouses and distributed through the PDS and various food security programmes. Currently, there are 20-plus crops that have an MSP announced for them every year before the beginning of the kharif and rabi seasons. Gram, tur, urad, moong and lentil under pulses and cereals and oilseeds have official MSPs.

Why is it important?

Price volatility makes life difficult for farmers. Though prices of agri commodities may soar while in short supply, during years of bumper production, prices of the very same commodities plummet. MSPs ensure that farmers get a minimum price for their produce in adverse markets. MSPs have also been used as a tool by the Government to incentivise farmers to grow crops that are in short supply.

But while this sounds good in theory, it has not worked perfectly in practise. Yes, India’s foodgrain crops have seen sharp increases in acreage in the last few years and the Centre’s buffer stocks now exceed the minimum norms in rice and wheat, after many years of increases in MSP. The government’s central pool carries 39.8 million tonnes (vs. norm of 20.1 mt) of rice and wheat, up from 24.27 mt in 2010-11.

In pulses and oilseeds though, increases in MSP have not proved as effective with production struggling to keep up with demand. This appears to be because actual procurement by Central agencies has been low. Nafed, for instance, procured only 3.21 per cent of kharif oilseeds in 2014-15 season. There is thus a call for the Centre to walk the talk by procuring sizeable quantities at the MSP.