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MINIMUM SUPPORT PRICE (MSP) – Indian Economy UPSC Notes

MSP is the price at which the Government of India guarantees to purchase crops from farmers, irrespective of market price fluctuations.
Amith
Estimated read time: 3 min

MINIMUM SUPPORT PRICE (MSP)

The Minimum Support Price (MSP) is the price at which the Government of India guarantees to purchase crops from farmers, irrespective of market price fluctuations. It acts as a safety net to ensure farmers get a fair price for their produce.

Objective of MSP

  1. To safeguard farmers from price volatility in the market.
  2. To ensure remunerative prices and boost agricultural productivity.
  3. To encourage the adoption of modern farming techniques.
  4. To maintain food security by ensuring a steady supply of essential crops.

HOW MSP IS DETERMINED?

The MSP is announced by the Government of India at the beginning of the sowing season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).

Factors Considered by CACP

  1. Cost of Production: Includes input costs such as seeds, fertilizers, labor, and irrigation.
  2. Demand and Supply: Ensures alignment with market conditions.
  3. Market Price Trends: Evaluates domestic and international price trends.
  4. Inter-Crop Price Parity: Avoids excessive focus on one crop at the cost of others.
  5. Impact on Consumers: Balances the interests of consumers and farmers.
  6. Terms of Trade: Between agriculture and non-agriculture sectors.
  7. Environmental Sustainability: Encourages crops with lower environmental impacts.

HOW MSP WORKS?

  1. The government announces MSP for 23 crops, including paddy, wheat, pulses, oilseeds, and cotton.
  2. Procurement Agencies like the Food Corporation of India (FCI) and state agencies procure these crops at MSP.
  3. These crops are stored and distributed under the Public Distribution System (PDS).

EXAMPLE OF MSP

  1. Paddy (Rice):
    • Suppose the government announces an MSP of ₹2,183 per quintal for paddy.
    • If the market price falls to ₹1,800 per quintal, farmers can sell their paddy to government agencies at ₹2,183, ensuring a fair income.
  2. Wheat Procurement:
    • In Punjab and Haryana, wheat is procured in large quantities during the Rabi season due to the announced MSP, ensuring food security for the nation.

EXAMPLE WITH GRAPH

Consider the MSP for wheat. Assume the government sets an MSP at ₹2,000 per quintal. Here's the graphical representation:

Graph Description

  • X-Axis: Quantity of Wheat (in quintals)
  • Y-Axis: Price of Wheat (₹ per quintal)
  1. Supply Curve (Upward Sloping): Shows the relationship between price and quantity supplied by farmers.
  2. Demand Curve (Downward Sloping): Indicates how much consumers are willing to buy at different prices.
  3. Market Equilibrium Price: Without government intervention, assume the market equilibrium price is ₹1,800 per quintal (where demand meets supply).
  4. MSP Line: The government sets the MSP at ₹2,000 per quintal, which is above the market equilibrium price.

Explanation with the Graph

  1. Market Scenario without MSP:

    • At ₹1,800 (equilibrium price), farmers sell only the quantity where demand equals supply. Many farmers may incur losses due to low market prices.
  2. Impact of MSP:

    • At ₹2,000 (MSP), farmers are assured a higher price for their wheat.
    • If the market price falls below ₹2,000, government agencies like FCI step in to purchase the surplus wheat at MSP, ensuring farmer protection.

Graphical Representation

I will now create a graph to visualize this.

MINIMUM SUPPORT PRICE

Graph Explanation

  1. Demand Curve (Blue Line): Represents the quantity of wheat consumers are willing to buy at different prices.
  2. Supply Curve (Green Line): Represents the quantity of wheat farmers are willing to supply at different prices.
  3. Market Equilibrium: At ₹1,800, the quantity demanded equals the quantity supplied.
  4. MSP (Red Dashed Line): Set at ₹2,000, above the market equilibrium price. Farmers are assured this price, even if the market price drops below it.

BENEFITS OF MSP

  1. Income Support: Protects farmers from distress sales and ensures a steady income.
  2. Encourages Production: Promotes the cultivation of essential crops, ensuring food security.
  3. Price Stability: Shields the agricultural sector from market fluctuations.
  4. Rural Development: Boosts rural economy and employment.
  5. Strategic Stockpile: Helps maintain buffer stocks for PDS and emergencies.

CRITICISM OF MSP

  1. Crop Bias: Focus on wheat and rice has led to over-cultivation, ignoring other crops like pulses and oilseeds.
  2. Regional Imbalance: MSP benefits are mostly concentrated in states like Punjab and Haryana.
  3. Environmental Concerns: Overproduction of water-intensive crops (e.g., paddy) has caused groundwater depletion.
  4. Market Distortion: MSP can discourage crop diversification and lead to surplus procurement.
  5. Inadequate Procurement: Not all farmers benefit due to limited government procurement facilities.

WAY FORWARD

  1. Promote crop diversification by ensuring MSP for a wider range of crops.
  2. Improve procurement infrastructure in underserved states.
  3. Educate farmers about MSP and other government schemes.
  4. Encourage sustainable farming practices alongside MSP.

RECENT DEVELOPMENTS

  1. The 2020 Farm Bills sparked debates about MSP, with farmers demanding legal guarantees for MSP.
  2. The government announced higher MSPs for Rabi and Kharif crops in 2024 to tackle inflation and support farmers post-COVID.


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