MSPs are the prices at which the government buys certain crops from farmers in order to protect them against a severe drop in prices. It is an essential component of Agriculture Price Policy, and it aims to provide farmers with assistance while keeping prices accessible for consumers.
Every year at the start of both crop seasons, the government declares MSP after considering the views of state governments and Central Ministries/Departments concerned for agricultural crops such as cereal, pulses, oilseeds, and commercial crops based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
Furthermore, if farmers get favourable conditions for selling their goods or a higher price than the MSP, they are allowed to sell to non-government parties. The concept first began in 1966 with the Green Revolution.
Furthermore, MSPs lack statutory support; a farmer cannot seek MSP as a matter of right. The farmer unions who led the yearlong agitation that led to the repeal of the three farm laws, want the government to enact legislation conferring mandatory status to MSP, rather than just being an indicative or desired price.
Crops covered by MSPs include:
7 types of cereals (paddy, wheat, maize, bajra, jowar, ragi and barley),
5 types of pulses (chana, arhar/tur, urad, moong and masur),
7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, nigerseed),
4 commercial crops (cotton, sugarcane, copra, raw jute)
While recommending MSPs, the CACP looks at the following factors:
the demand and supply of a commodity;
its cost of production;
the market price trends (both domestic and international);
inter-crop price parity;
the terms of trade between agriculture and non-agriculture (that is, the ratio of prices of farm inputs and farm outputs);
a minimum of 50 percent as the margin over the cost of production; and
the likely implications of an MSP on consumers of that product.
CACP is an attached office of the Ministry of Agriculture and Farmers Welfare. The Cabinet Committee on Economic Affairs (CCEA) of the Union government takes a final decision on the level of MSPs and other recommendations made by the CACP.
Advantages of MSP
Farmers are certain that their goods will be paid a reasonable price as a result of the Minimum Support Priceprograme, which motivates them.It guarantees enough food grain production in the nation, hence ensuring food security.
It protects farmers from extreme price changes. MSP is announced before to the crop cycle to allow farmers to make informed decisions.
MSP increases the farmers' income and when they have more disposable income in hand, they can invest in new technology. It also helps in achieving the Government's goal of doubling farmers income by the year 2022.
As the government provides MSP on limited crops, though it does create a sense of security among farmers there is an added setback to it- farmers tend to not diversify the basket of crops they produce and produce crops on which the government provides MSP. This fixation is neither good for the environment nor for the economy.
MSP has increased the government's operational cost of acquiring food grains. Rising FCI transportation and storage costs are other major causes of this rise. This increased cost has an impact on investment in other industries, such as agri-infrastructure.
WTO and MSP
India has carefully walked the fine line between food and livelihood security and policies designated as "trade-distorting" under WTO legislation. India is a founding member of the WTO and a signatory to the multilateral Agreement on Agriculture (AoA), which, among other things, governs domestic agricultural subsidies provided by countries. The 'disciplines' on agricultural subsidies attempt to reduce trade-distorting assistance, which, although being given locally, has a negative impact on the worldwide market competitiveness.
Subsidies are divided into two categories under this agreement based on their ability to distort trade. The first category is Green Box subsidies. Subsidies of this kind are permissible since they have little or minor trade-distorting effects. The number of Green Box subsidies that may be provided is unlimited.
The Amber Box subsidies, which are described in Article 6 of the AoA, are the other type. These subsidies have the potential to harm trade and distort the relevant market. To maintain conformity with worldwide rules, they must be steadily lowered. In the case at hand, an MSP measure would come within the Amber Box and hence would have to be limited at 10% of the entire value of the relevant product (de minimis level), as required by the AoA. If India's domestic support surpasses the acceptable level, the agreement would be violated. India was forced to invoke the Bali Peace Clause, which prohibits WTO members from filing complaints against developing-country members who are in compliance with certain obligations.
While many industrialized nations will continue to criticize India's agricultural subsidy promises, the MSP clause is not inherently prohibited under WTO rules and may be incorporated in farm legislation. It is perfectly legal for India to give domestic assistance in the form of MSP as long as it is less than the de minimis amount specified in the World Trade Organization's Agriculture Agreement.