Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
MSP is price fixed by Government of India to protect the producer – farmers – against excessive fall in price during bumper production years. The minimum support prices are a guarantee price for their produce from the Government. The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, govt. agencies purchase the entire quantity offered by the farmers at the announced minimum price.
Determinants of MSP
1. Cost of production (CoP) is one of the important factors in the determination of MSP of mandated crops.
2. Besides cost, the Commission considers other important factors such as demand and supply, price trend in the domestic and international markets, inter-crop price parity, terms of trade between agricultural and non-agricultural sectors and the likely impact of MSPs on consumers, in addition to ensuring rational utilization of natural resources like land and water.
3. The pricing policy is rooted not in ‘cost plus’ approach, though cost is an important determinant of MSP.
Commission for Agricultural Costs and Prices
Commission for ‘Agricultural Costs and Prices’ (CACP), set up with a view to evolve a balanced and integrated price structure, is mandated to advice on the price policy (MSP) of 23 crops. CACP submits its recommendations in the form of Price Policy Reports every year, separately for five groups of commodities namely kharif crops, rabi crops, sugarcane, raw jute and copra.
Source: India Year Book 2019