The Minimum Support Price or MSP is the rate at which the government buys grains from farmers. The aim of fixing MSP is to counter price volatility of agricultural commodities due to the factors like variation in their supply, lack of market integration and information asymmetry. It is fixed on the recommendations of the Commission for Agricultural Costs and Prices (CACP), which is an attached office of the Ministry of Agriculture and Farmers Welfare.
The CACP considers following factors while fixing MSP for agriculture produce:
- Demand and supply;
- Cost of production (A2 + FL method) [*A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others. Whereas A2+FL covers actual paid-out costs plus an imputed value of unpaid family labour].
- Price trends in the market, both domestic and international;
- Inter-crop price parity;
- Terms of trade between agriculture and non-agriculture;
- A minimum of 50% as the margin over cost of production; and
- Also likely implications of MSP on consumers of that product.
The Commission also makes visits to states for on-the-spot assessment of the various constraints that farmers face in marketing their produce, or even raising the productivity levels of their crops. While finalizing minimum support price, the members of the Commission visit to various states for on-the-spot assessment of the various constraints that farmers face in marketing their produce, or even raising the productivity levels of their crops. The all these inputs gathered by the commission will be used in the finalization of commission’s recommendation/report in two separate reports to the Government for minimum support prices for Kharif and Rabi seasons. The report received from the commission in turn will be circulated to state governments and concerned Central Ministries for their comments. On the basis of the feed-back received from all these stakeholders, the Cabinet Committee on Economic Affairs (CCEA) of the Union government takes a final decision on the level of MSPs and other recommendations made by the CACP. The Government agencies like Food Corporation of India (FCI) and state Government agencies buy the grains from the farmers at MSP finalized by the Government.
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