MINIMUM SUPPORT PRICE (MSP)

1. MSP is the minimum price set by the government for certain agricultural products, at which the products would directly be bought from the farmers if the open market prices are less than the cost incurred.
2. It fosters to insure the farmers against a steep decline in the prices of their goods and to help them prevent losses.
3. MSP is set by the government of India twice a year for 24 commodities.

4.The Commission for Agricultural Costs and Prices (CACP) considers the following key factors while recommending the Minimum Support Price (MSP) for agricultural crops in India:

• Cost of production - Includes costs like seeds, fertilizers, pesticides, irrigation, labor, machinery, interest on working capital etc. incurred by farmers. A fair return over cost of production is added.
• Demand and supply - Estimates of production, stock levels, domestic and export demand are analyzed to balance price growth with enough buffer stock.
• Price trends in domestic and global markets - Price trends are studied to ensure Indian farmer interests are protected from international price volatilities.
• Inter-crop price parity - MSPs are balanced between crops to prevent over-production of one at cost of another. Relative profitability is maintained.
• Terms of trade between agriculture and non-agriculture sectors - Broad parity is maintained between prices farmers pay and receive to protect their interests.
• Likely implications of MSPs on consumers - MSPs are set keeping in mind impact on consumers, especially price rise in cereals, pulses, edible oils.
• Objectives of production policy and procurement - MSPs aim to incentivize farmers to adopt modern technology and produce surplus for procurement and price stabilization.
• International costs and prices - World prices, freight rates, import duties etc. are considered to keep domestic prices aligned.

So CACP takes a comprehensive view accounting for producer and consumer interests, market factors as well as national socio-economic goals while recommending MSPs.

Benefits of the Minimum Support Price (MSP) system in India:

• Provides a minimum guaranteed price to farmers for their crops and protects them from potential price falls during bumper production.
• Encourages farmers to invest in new technologies, seeds, fertilizers etc. to increase productivity as price risk is reduced.
• Supports crop diversification by incentivizing farmers to grow a wider basket of crops through attractive MSPs.
• Enables maintaining buffer stocks of grains, pulses etc. for food security and price stabilization. 
• Protects farmers from volatility and sudden drops in international commodity prices by ensuring domestic rates do not fall below MSP.
• Transmits inflationary signals across the economy helping align the price structure between agriculture and non-agriculture sectors. 
• Promotes growth of agriculture sector by making it more stable, predictable and remunerative for farmers.
• Helps India maintain self-sufficiency and food security in major staple crops like wheat, rice, pulses, oilseeds etc. 
• Frees farmers from dependence on traders and money lenders by assuring a minimum income from farming.
• Smoothens price risks and uncertainty in agricultural markets, thereby reducing wastage and inefficiencies.

However, MSP also has limitations and economic costs if expanded imprudently. The aim should be optimal price support aligned to larger goals.