A. MSP and Procurement Prices

The price support policy was initiated by the Government to provide protection to agricultural producers against any sharp drop in farm prices. If there is a good harvest and market prices tend to dip, the government guarantees an MSP or floor price to farmers, which covers not only the cost of production, but also ensures a reasonable profit margin for the producers. MSP is announced each year and is fixed after taking into account the recommendations of the CACP (Commission for Agricultural Costs and Prices). CACP is an agency which advises the Government on a continuing basis about the level of MSP. Procurement prices are the prices of Kharif and Rabi cereals at which the grain is to be domestically procured by public agencies (for example, FCI [Food Corporation of India]) for release through public distribution services (PDS). Normally, the procurement price is lower than the open market price and higher than MSP. In the present system only one set of prices is announced for crops.

While recommending the prices the CACP takes comprehensive overview of the entire structure of the economy of a particular commodity and the likely effect of the price policy on the rest of economy particularly, on the cost of living, level of wages, industrial cost structure etc. An important consideration underlying the price policy is that it should compensate the farmers for the increasing input cost and provide incentive to increase investment in the agriculture. The MSPs are normally announced upfront before the commencement of sowing operations of the particular crop and have usually been remunerative and significantly higher than the cost.