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It was in the mid-sixties that the adverse food crisis resulted in technological change, and ultimately institutional changes for the Indian agricultural sector. With a series of reforms, such as the land reforms, administration changes in form of new committees focused on the agricultural sector, nationalisation of banks, India transformed its agricultural sector. Out of all the reforms, pricing policy of the agricultural produce remains of the most integral component of the Agriculture Price Policy of India.[1]

Pricing policy of the Indian government is reflected by the Minimum Support Price (MSP). It targets to ensure support price to farmers and affordable price to the consumer through Public Distribution System (PDS). The incentive system was conceptualised during the pre-green revolution era, and it was a result of LK Jha Committee report, the “Agricultural Prices Commission” came into being in January 1965. Since March 1985, the “Agricultural Prices Commission” has been known as “Commission for Agricultural Costs and Prices” (CACP). MSP for major agricultural products is fixed by the government, each year, after taking into account the recommendations of the CACP, which is directed to provide insurance to agricultural producers against sharp fall in farm prices. MSP is hugely a market intervention scheme, concerned with fixing a floor price (below which market prices cannot fall), calculated on the basis of factors such as; cost of production, changes in input prices, input-output price parity, trends in market prices, demand and supply, inter-crop price parity, effect on industrial cost structure, effect on cost of living, effect on general price level, international price situation, parity between prices paid and prices received by the farmers, effect on the issues prices and implications for subsidy.[2]

Currently, there are 24 major crops that are covered under the MSP (paddy rice, wheat, five coarse grains, four pulses, eight oilseeds, cotton, jute, tobacco and sugar cane). MSP has proved to be helpful in several ways. From a situation of massive shortages, India has emerged as a grain surplus country with self-reliance in food grains, and this inherent process of self-sufficiency subsumed the in-built proposition of attaining food security at the national level. A strong base has been created for grain production and for meeting grain demand in the medium term. The policy has had a favourable impact on farm income and has led to a transformation in the well-endowed, mainly irrigated regions.[3]

One of the major areas of impact, historically, has been food inflation. Officially, the cost concepts of MSPs are classified as – a) A2: farmers paid out costs; b) FL: the imputed value of family labour; c) C2: most comprehensive; in addition to A2 and FL, it includes imputed costs of owned land and owned capital. In a bid to boost the farm income, to offset the impact of last year’s supply glut and address larger discontent amongst the agricultural community ahead of the key state elections, the government has proposed support prices at 50% above the production costs for the kharif crop in the FY19 Budget. Although there was confusion, since the government didn’t define, 50% above which cost, Finance Minister Arun Jaitley later clarified that, farmers will be paid 50% returns over their A2+FL costs, falling short of the desired C2 coverage.

The 50% above the production cost MSP is expected to yield very little results in terms of increase in farmers’ income for calculation of FY19’s calculation; as the existing markups are only slightly lower than the proposed 50%.[4] For instance, for paddy, it already stands at 38.76%, maize at 36.49%. The MSPs are 50 per cent or more than the latter only in bajra (pearl millet), arhar (pigeon pea), urad (black gram), wheat, barley, chana (chickpea), masur (lentil) and mustard. This suggests there is small headroom for MSPs to be raised from current levels i.e. 10-15% for the highly-weighted items of paddy, maize, soyabean etc. and only a sharper 35-40% for a select variety of pulses. In addition, increase in MSP might even lead to substantial upward movement in food inflation. Given that gross margin over A2+FL for maize is 36.49%, to fulfil its promise, the government will have to increase the MSP by almost 14.5%, which will push up maize prices in domestic markets and also in supplementary industries such as feed and poultry. For sunflower seed, jowar, nigerseed and ragi, the MSP will have to go up by more than 30%, which will distort the market prices.

In the evaluation report of MSP for farmers, NITI Aayog in its findings stated that only 21% of the farmers expressed their satisfaction to the MSP declared by the Government, while only 10% of the farmers were aware of the MSP before the sowing season[5]; which shows that governments over the years have been unsuccessful in disseminating information about MSP, as announced by the government. Out of meagre proportion of farmers who were aware of MSP, 75.09 and 75.58 per cent of farmers (in rabi and kharif, respectively) have not sold the produce to procurement agencies. 25% of farmers reported that there is no procurement agency/local purchaser available to procure the produce at MSP. Ideally speaking, the benefit of MSP should reach all farmers across all states and for which a good network of procurement agencies with required infrastructure is also must.[6] The centre is yet to announce the MSP for kharif crops, and how the promised increase in MSP will pan out in the markets will be known in at least 6-7 months.


[1] Malamasuri, K. Parmar, P. Malve, S. Soumya, B. (2013). A Historical Prospective for Minimum Support Price of Agricultual Crops. Kisan World A Journal of Agriculture and Rural Development, 46-48.

[2] K.S. Aditya, S.P. Subash, K.V. Praveen, M.L. Nithyashree, N. Bhuvana, S. Akriti. (2017) Awareness about Minimum Support Price and Its Impact on Diversification Decision of Farmers in India. Asia & the Pacific Policy Studies, 514–526 doi: 10.1002/app5.197

[3] Extension of MSP: Fiscal and Welfare Implication. (2018, June 19). Integrated Research and Action for Development, p. 4-5.

[4] Commission for Agricultural Costs and Prices. (2017). Price Policy on Kharif Crops, p.132.

[5] Evaluation Report on Efficacy of MSP on Farmers. (2016)  NITI Aayog Report, p. 87.

[6] K.S. Aditya, S.P. Subash, K.V. Praveen, M.L. Nithyashree, N. Bhuvana, S. Akriti. (2017) Awareness about Minimum Support Price and Its Impact on Diversification Decision of Farmers in India. Asia & the Pacific Policy Studies, 514–526 doi: 10.1002/app5.197

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Written By Parth Gupta

Economics Undergrad (Batch 2019) | Panjab University, Chandigarh

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