Minimum Support Price (MSP): How It Is Fixed, CACP, A2+FL and C2 Costs, Procurement, PM-AASHA and the Legal Guarantee Debate (UPSC Notes + PYQs)

Origins

MSP began in the mid-1960s, when India faced food shortages and depended on US wheat under PL-480. To get farmers to adopt the new high-yielding seeds of the Green Revolution, the government needed to assure them that prices would not crash after a good harvest. The Agricultural Prices Commission was set up in 1965 (renamed CACP in 1985), and the Food Corporation of India was set up the same year under the Food Corporations Act, 1964 to buy, store and move grain. MSP has no statutory backing; it is an administrative decision.

Crops covered

• 14 kharif crops: paddy, jowar, bajra, maize, ragi, arhar (tur), moong, urad, groundnut, soybean, sunflower, sesamum, nigerseed, cotton.
• 6 rabi crops: wheat, barley, gram, masur (lentil), rapeseed-mustard, safflower.
• 2 commercial crops: jute and copra.
• MSPs for toria and de-husked coconut are fixed on the basis of mustard and copra.
• Sugarcane has a Fair and Remunerative Price (FRP) fixed under the Sugarcane (Control) Order, 1966; several States, including UP, announce a higher State Advised Price.

How MSP is fixed

The CACP is an attached office of the Ministry of Agriculture. It studies cost of cultivation data, demand and supply, domestic and world prices, inter-crop price parity, terms of trade between farm and non-farm sectors, and the likely effect on consumers. It sends separate kharif and rabi price policy reports. The final decision is taken by the Cabinet Committee on Economic Affairs.

The CACP uses three cost concepts:

• A2: all paid-out costs: seeds, fertiliser, pesticides, hired labour, machinery, irrigation, leased land rent.
• A2+FL: A2 plus the imputed value of unpaid family labour.
• C2: a comprehensive cost that also includes rent on owned land and interest on owned capital.

The National Commission on Farmers (M.S. Swaminathan, 2006) recommended that MSP be at least 50% above the weighted average cost of production. The Union Budget 2018-19 adopted the rule of at least 1.5 times A2+FL; farm unions argue that it should be 1.5 times C2.

Procurement: where MSP actually works

An MSP helps only where someone buys at that price. FCI and State agencies procure mainly wheat and paddy, for the public distribution system under the National Food Security Act, 2013. Under decentralised procurement (since 1997-98) States buy and distribute grain themselves. For pulses and oilseeds, PM-AASHA (2018) has three parts: the Price Support Scheme (physical procurement by NAFED and others), the Price Deficiency Payment Scheme (paying the gap between MSP and market price, as Madhya Pradesh tried with Bhavantar) and a pilot of private procurement. Cotton is bought by the Cotton Corporation of India and jute by the Jute Corporation of India.

The Shanta Kumar Committee (2015) on restructuring FCI found that only about 6% of farm households sold to a procurement agency, based on the NSSO’s 2012-13 survey. Procurement is concentrated in Punjab, Haryana, Madhya Pradesh, Telangana, Chhattisgarh and parts of UP, so awareness and benefit vary greatly across States.

The legal guarantee debate

After the three farm laws of 2020 were repealed in late 2021, farmer groups demanded a law guaranteeing MSP. A committee under former agriculture secretary Sanjay Agrawal was set up in July 2022 on MSP, crop diversification and natural farming.

Problems with the current system

• Wheat-paddy bias deepens groundwater depletion in Punjab and Haryana and stubble burning.
• Huge grain stocks above buffer norms raise FCI’s costs.
• MSP is often announced after sowing decisions or not enforced in markets.
• Under the WTO Agreement on Agriculture, market price support counts towards the Aggregate Measurement of Support; India has invoked the “peace clause” (Bali, 2013) for rice.

Way forward

Use price deficiency payments for more crops, strengthen e-NAM and FPOs for better market prices, procure more pulses and millets to diversify cropping, build warehouse-based credit, and announce MSPs well before sowing.

MSP and food inflation

MSP affects more than farm incomes. Large hikes in rice and wheat MSP push up cereal prices and food inflation, and very high procurement swells FCI stocks far beyond buffer norms, raising storage costs and waste. Economists such as Ashok Gulati argue for shifting support towards income transfers like PM-KISAN and price deficiency payments, which help farmers without distorting markets as much.

PM-AASHA

The umbrella scheme PM-AASHA (2018) has three parts: the Price Support Scheme for pulses, oilseeds and copra; the Price Deficiency Payment Scheme, which pays the gap between MSP and the market price, tried in Madhya Pradesh as Bhavantar; and a pilot for private procurement. It aims to make MSP real for crops beyond rice and wheat.

PYQ trend

Prelims asked which crops have MSP (2018), FCI’s economic cost (2019), and what counts as public investment in agriculture (2020). Mains GS-III asks MSP with food security, procurement and diversification.

MSP: UPSC angle

MSP UPSC PYQs (Prelims)

Questions UPSC has actually asked, from the official papers. Pick an option to check yourself.

Mains PYQs on this topic

No UPSC Mains question from 2023-2026 is directly on this topic. Older papers (2013-2022) will be added as the Mains bank grows.

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FAQs

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