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EXPLAINED: What Is The Guaranteed MSP Demand For Which Farmer Groups Are Gearing Up To Continue Stir

If we look into the history of farmers’ movement in India, it is full of various episodes of contestations between state and farmers. (File/PTI)

If we look into the history of farmers’ movement in India, it is full of various episodes of contestations between state and farmers. (File/PTI)

Protesting farmers are insisting that rules be brought in to assure the fixing of MSP even as the Centre is looking to come up with alternatives to the system

The year-long farmers’ protest won a big success with PM Narendra Modi’s announcement that the three contentious farm laws brought in by his government will be repealed. However, the farmers’ groups are pushing for the fulfilment of a charter of demands before they end their campaign, key among which is the call for the Centre to enshrine Minimum Support Price (MSP) system in law. While the Modi government has pledged to double farm incomes, the efficacy of the MSP scheme has been a matter of debate in policy circles and among experts. Here’s what you need to know.

Why Are Farmers Demanding Guaranteed MSP?

While MSPs have been announced for selected crops since the mid-1960s — during a time when the country was pursuing solutions to achieve food sufficiency under ‘Green Revolution’ strategies — there is no legal basis to the practice, which means that the government is not obligated to come up with MSP or procure all the different crops produced in the country.

MSP was a key factor in the protests over the new farm laws as the rules they brought in paving the way for farmers to sell their produce outside mandis (under the agricultural produce market committee, or APMC, system by doing away with statutory requirements) and engage in contract farming made no mention of buyers needing to pay a minimum price for farm produce.


While the Centre maintained that the new laws would lead to price maximisation for farm produce, the protesting farmers saw the absence of an MSP requirement as a direct threat to their income, claiming that it left them at the mercy of buyers, who could dictate prices to them in a good season.

In an open letter to PM Modi following his announcement of the decision to repeal the three new farm laws, the Samyukta Kisan Morcha (SKM) said, “MSP based on the comprehensive cost of production (C2 + 50 per cent) should be made a legal entitlement of all farmers for all agricultural produce, so that every farmer of the country can be guaranteed at least the MSP announced by the government for their entire crop."

Why Is MSP Announced By The Govt?

According to a reference note prepared by the Lok Sabha (LS) Secretariat, MSP is a “tool which guarantees the farmers, prior to the sowing season, that a fair… price is fixed for their upcoming crop to encourage higher investment and production of agricultural commodities".

MSP is given as an insurance against a scenario where a “very good harvest in any year results in a sharp fall in the price of that commodity… which in turn has an adverse impact on the future supply as farmers withdraw from sowing that crop".

“The prices of agricultural commodities are inherently unstable, primarily due to the variation in their supply, lack of market integration and information asymmetry," the note says, adding that the Centre has thus been following the agricultural price support system since 1965 “to protect the interests of the farmers/producers against any sharp decline in agricultural prices".

How Is MSP Calculated?

A matter of some debate, this is where the formulae of A2+FL and C2 come in. The MSP is determined annually for the two crop cycles of Kharif and Rabi seasons by the Centre based on the recommendations of the Commission for Agricultural Cost and Prices (CACP), which functions under the Union Agriculture Ministry.

MSPs are announced twice a year — before the sowing season to enable farmers “to have an idea about the extent of price insurance cover provided by the government" — for a total of 23 crops with the idea being to “cover the cost of production together with certain profit margin" to farmers.

The CACP arrives at the MSP for a particular crop based on what is known as the “A2+FL cost". This includes all costs borne by the farmer like that of hired labour, machinery or animals, rent on land and the spend on inputs like seeds, fertilisers, irrigation, etc. The formula also takes into account the “imputed value of wages of family labour and depreciation of farm machinery and building".

The principle followed, the agriculture ministry said, is to keep the MSP “at levels of one-and-half times of the cost of production", in keeping with which, the MSP for all mandated Kharif, Rabi and other commercial crops was fixed so as to ensure a profit of at least 50 per cent over the cost of production for the agricultural years 2018-19 and 2019-20. This 50 per cent profit margin is thus calculated over the “A2+FL cost".

However, the ministry notes that some farmers and farmers’ organisations have been demanding that the MSP be calculated on the C2 cost, which takes into account the total cost of production, including the “notional value of imputed rental value of owned land and interest on owned capital in addition to the A2+FL cost". The CACP considers both C2 cost and A2+FL cost, but “the gain on MSP is reckoned only with respect to A2+FL cost, which means the C2 cost is not considered while calculating the net gain to farmers".

While the Agriculture Ministry says the cost of production is “one of the important factors in the determination of MSPs", it points out that “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".

But farmers’ groups have said that the 50 per cent profit formula — recommended by the MS Swaminathan-led National Commission on Farmers — should be applied to the total cost of production, that is, C2 costs, claiming that it was what was envisaged in the commission’s recommendations.

Why Does The Govt Want To Go Off MSP?

While MSPs are announced for close to two dozen crops, it is pointed out that only about 6 per cent of farmers in India are actually able to avail of the guaranteed rates with the Food Corporation of India (FCI) being the nodal central agency, along with other state agencies, for the procurement of wheat and paddy, the crops that dominate such procurement “sometimes even at the expense of other crops such as pulses and oilseeds".

The LS Secretariat note says that raising farm incomes is not possible through the MSP policy “because it is neither possible nor desirable for the government to buy each and every commodity in the markets across the country". Among the issues flagged with MSPs is the propensity for the mechanism to trigger market inefficiencies like what is “commonly reflected in the prices ruling lower than the notified MSP for many commodities".

Further, with procurement being “disproportionately focussed on wheat and rice", it results in buffer stocks of paddy and wheat above the required norms, along with frequent price spikes in pulses and edible oils.

Another issue, it is argued, is that states with higher wheat and rice production, like Punjab and Haryana, derive the biggest benefit from MSP regime “while the other states with less production lag behind". A related drawback is that of a “lack of proper awareness about the MSP among farmers".

Given the “plenty of hurdles in the implementation of the MSP scheme", the Centre has proposed other means of insulating farmers against the threat of “losing their investments in the case of falling price in the market dominated by the middlemen".

Among the strategies mooted for addressing the shortcomings of the MSP regime and “offer a robust alternative system" is one of income guarantee for farmers instead of an MSP guarantee, as envisaged under direct cash transfers schemes like the Pradhan Mantri Kisan Samman Nidhi.

Some states are also reported to have brought in what are known as ‘price deficiency procurement schemes’ (PDPSs) under which, if the sale price of an agricultural item goes below the average wholesale price “the farmers may be compensated to the difference between MSP and the actual price" subject to a ceiling. Such compensation would be directly credited to the farmer’s account while the losses incurred in the implementation of this scheme would be shared between the Centre and the state. Madhya Pradesh has already implemented a ‘Bhavantar Yojana’ based on PDPS concept on a pilot basis.

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first published:November 22, 2021, 13:10 IST