MSP hikes and Issues

Recently, as on meeting WTO obligations and suggestions to address labour shortages and rising wages, key Central government ministries and departments had conveyed apprehensions to the Union Ministry of Agriculture and Farmers’ Welfare on its proposal to hike the minimum support price (MSP) for kharif crops in the 2023-24 season.

• In June 2023, Cabinet chaired by Prime Minister approved the increase in MSP ranging from 6 per cent to 10 per cent.
• The recommendations of the Commission for Agricultural Cost & Prices (CACP), the Department of Expenditure in the Ministry of Finance, the Niti Aayog, and the Department of Commerce has opposed this move saying an increase in MSP would make it difficult to keep inflation in check.

What is 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”.

Objectives of MSP:

• Agricultural Price Stabilization: MSP acts as a floor price, preventing extreme price fluctuations and providing stability to farmers' income.
• Crop Diversity: It encourages farmers to cultivate a diverse range of crops by assuring fair prices for various produce.

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.

MSP and effects on Economy:

• Farmers' Income and Livelihood: MSP provides a safety net for farmers, ensuring a reasonable income even during market downturns.
• Income Redistribution: Increased income for farmers can lead to improved rural purchasing power and reduced income inequality.
• Food Security: MSP ensures a steady supply of essential commodities, contributing to food security and stability in prices for consumers.
• Inflationary Pressure: Higher MSP can contribute to inflation, as increased procurement costs may lead to higher consumer prices.
• Fiscal Burden: Government procurement at MSP requires substantial financial resources, affecting fiscal deficit targets.
• Trade Balance and Exports: Higher MSP might increase domestic prices, affecting export competitiveness and trade balances.
• Distorted Crop Choice: Farmers might prioritize crops with MSP, leading to overproduction of certain crops and neglecting others.
• Supply Chain Efficiency: MSP-led procurement can strain storage and distribution systems, leading to wastage and inefficiencies.
• Market Distortions: High reliance on MSP could discourage private investment in agriculture due to market uncertainties.
• Policies and Regulations: MSP necessitates government intervention, potentially impacting free market dynamics.
• Rural-Urban Linkages: MSP's impact on rural income affects rural-urban migration patterns and urban development.