Explained: What is MSP? Why Are Farmers Demanding a Legal Guarantee For it?

Setting an MSP insulates farmers from price drops and encourage production even if there is a bumper crop.

The farmers – representing over 200 farmer unions – also want waiver of farm loans and criminal cases against those protesting farm laws dropped.

(Photo: Aroop Mishra/The Quint)

Huge security build-up continued on inter-state borders between Punjab and Haryana on the second day on Wednesday, 14 February, as protesting farmers headed to the national capital to lodge their protest over unfulfilled demands, including legal guarantee of minimum support prices (MSP) of crops.

You can follow all the live updates from the farmers' protest here.

The farmers – representing over 200 farmer unions – also want waiver of farm loans and criminal cases against those protesting farm laws dropped.

But what is MSP? How exactly does it benefit farmers? The Quint explains.

What is MSP?

The Minimum Support Price system is essentially a safety net to farmers in the form of a minimum price for particular crops that the government guarantees to farmers, regardless of any change in circumstances.

Setting an MSP is meant to insulate farmers from price drops and encourage production even if there is a bumper crop (which would normally lead to a fall in prices) to ensure reserves are maintained.

If market prices for these crops falls below the specified MSP, then the government purchases the produce offered by the farmers at the MSP, thereby saving them from having to make distress sales.

According to News18, the Centre procures about 30 percent of the wheat and rice produced in India and about 6-7 percent of other crops, at the MSP under this system.

Who Sets the MSP?

The Centre sets the MSP for certain crops at the beginning of every crop season based on the recommendation of the Commission for Agricultural Costs and Prices (CACP).

The CACP determines the MSP, currently based on a formula that was prescribed by the Swaminathan Commission, a government-formed panel that had submitted several reports between December 2004 and October 2006 which set out suggestions for solving the problems faced by farmers.

The formula requires the assessment of three categories of costs:

A2: the actual expenses paid by farmers in cash and kind for seeds, fertilisers, pesticides, paid labour, irrigation, etc.

A2+FL: the A2 cost along with an adjustment for the costs of unpaid family labour (given traditional Indian farming practices involve families).

C2: A2+FL along with all other production costs, including loans, rentals, cost of land and other fixed capital assets, i.e. a comprehensive cost of production.

The MSP is set at a particular level above the C2 for each crop and applies across the country. In addition to the current C2 level, the CACP also takes into account demand and supply, domestic and international price trends, inter-crop price parity and the likely implications of MSP on consumers of the crop.

It is generally supposed to be set at a minimum of 50 percent over the C2 level.

Is MSP Set for All Crops?

No. The Centre currently sets the MSP for 23 crops based on CACP recommendations:

7 cereals: paddy, wheat, maize, sorghum, pearl millet, barley and ragi

5 pulses: gram, tur, moong, urad, lentil

7 oilseeds: groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed

4 commercial crops: copra, sugarcane, cotton and raw jute

You can find the current MSPs here. You can find the CACP’s recommendations here.

Why was the MSP System Introduced?

When the Green Revolution began in the 1960s, India was looking to shore up its food reserves to prevent shortages. The MSP system, which started with an MSP for wheat in 1966-67, provided a way to ensure that the Centre had reserves of essential food crops which could be sold to the poor at subsidised rates under the PDS system, while also helping address farmer distress.

Is the MSP Set Out in Any Law or Statutory Framework?

The concept of MSP is not found in any law, i.e., Act of Parliament, even though it has been around for decades. Abhijit Sen, the former chairman of the CACP, explained it as follows to the Indian Express in 2020,

“It is only a government policy that is part of administrative decision-making. The government declares MSPs for crops, but there’s no law mandating their implementation.”

As the Express points out, even the CACP is not a statutory body, but is instead an attached office of the Ministry of Agriculture and Farmers Welfare. This means that there is no legal compulsion for the government to procure crops at MSP, and it cannot be imposed on private traders either.

The CACP actually tried to address this lack of statutory backing for the MSP system by recommending in 2018 a legislation that would give farmers a right to sell their crops at MSP. However, this recommendation was not accepted by the Centre.

Sugarcane farmers are entitled to some sort of MSP under law because of an executive order under the Essential Commodities Act, which requires the fixing of a ‘fair and remunerative price’ for sugarcane, which is determined in accordance with the CACP’s MSP recommendation.

Do Farmers in All States Benefit from the MSP System?

The 2015 Shanta Kumar Committee found that only around 6 percent of farmers actually sell their crops at MSP rates. This is because procurement at MSP by the government does not happen in a uniform manner, and, because it is the same across India, doesn’t necessarily benefit all farmers.

For instance, the C2 of paddy increased by 11.2 percent in Bihar from 2004-05 to 2014-15 and 11.9 percent in West Bengal, while the MSP – based on a weighted average of C2 across the country – rose by 10.6 percent in the same period, according to the Hindustan Times.

Government procurement under MSP is only done in a large way for wheat and rice, given their importance for the PDS system. The National Food Security Act 2013 creates an obligation on the government to ensure the PDS system provides grain at a subsidised rate, hence this demand.

This also explains why the protests are strongest in Punjab and Haryana, which produce these crops in massive quantities.

More than 85 percent of wheat and paddy grown in Punjab, and 75 percent of the two crops in Haryana, is bought by the government at MSP rates, according to data from the Agriculture Ministry.

To illustrate this point, Punjab, Haryana and Andhra Pradesh account for 50 percent of the rice procured under the MSP mechanism. Paddy farmers in other states, even such as West Bengal where there is high production and consumption, do not really benefit from the MSP regime. For wheat, it is Punjab, Haryana and Madhya Pradesh which account for the lion’s share of procurement under the MSP system.

The Hindustan Times notes that according to the National Sample Survey’s data from 2012-13, only 13.5 percent of paddy farmers actually benefited from the MSP system, and only 16.2 percent of all paddy farmers in India availed of it. Only 32.2 percent of paddy farmers were even aware of the system, 39.2 percent for wheat farmers.

(You can read the Hindustan Times article on these discrepancies here. The Shanta Kumar Committee Report can be found here.)