Answer:

Minimum Support Price refers to the price at which government purchases crops from the farmers, whatever may be the quantum of the crops.

The Commission for Agricultural Costs and Prices (CACP) recommends MSP based on cost of cultivation, the overall shortage of grains as reflected by the trend in wholesale prices, and the need to keep in check the rate of inflation in the consumer’s interest.

The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. Further, such minimum support prices are fixed at incentive level, so as to induce the farmers to make capital investment for the improvement of their farm and to motivate them to adopt improved crop production technologies to step up their production and thereby their net income. In the absence of such a guaranteed price, there is a concern that farmers may shift to other crops causing shortage in these commodities. The policy of MSP has also other beneficial consequences like income security to farmer bringing investment into agriculture, building up buffers, a large network of FP shops, stabilizing price line and consumer welfare.

Fixing of MSP to cover the full costs of cultivation imposes a heavy burden on the government’s finances. Although the MSP is supposedly based on cost plus formula, the actual price offered in practice is higher and influenced by high expectations of rich farmers represented by politically strong farm lobbies. Moreover, the income transfers accrued disproportionately to large farmers confined mainly to surplus states.

The MSP regime has not only created price distortions in the output market but also a shift from the production of cereal crops to that of MSP administered crops. Further, it also led to accumulation of buffer stocks of grains and the credit blocked in these stocks put pressure on interest rates and crowded out more productive investment. Owing to above weakness, following reforms are suggested to revamp the MSP regime in India

♤ MSP policy should extend to all regions

♤ MSP should be national level floor price, rather than remaining confined to certain regions

♤ The MSP should be reduced to levels of average capital costs(that is all costs including imputed costs of family labour, owned capital, and rental on land)

♤ Procurement should be at market prices

♤ The MSP should be supplemented with variable import and export tariff for effective price stabilization

♤ When market prices is greater than MSP, government imports or make open market purchases

♤ There should be stable and predictable policy regarding open market sales

♤ Private trade should be encouraged.