Explained: The increase in minimum support prices for 14 crops and what it means for farmers

The Cabinet Committee on Economic Affairs on Tuesday announced an increase in minimum support prices for 14 crops grown in the kharif (summer) season, including paddy, cotton, soyabean, pulses and millets.

In a press release, the Ministry of Agriculture called this a “paradigm shift” and a “historic” decision. The announcement also marked the fulfilment of Finance Minister Arun Jaitley’s Budget declaration this year to increase minimum support prices to 50% above the cost of production. According to the agriculture ministry, this increase in prices would be a step towards helping farmers double their incomes by 2022 – a promise made by Prime Minister Narendra Modi and reiterated numerous times in the last four years.

Scroll.in explains the move.

1. What is minimum support price and how is it calculated?

The government promises farmers a minimum support price for 23 crops. The minimum support price represents a promise from the Centre that it will step in and buy these crops if their market prices fall below a certain level. This price is based on the estimated cost of production and represents a promise from the government to step in and buy the crops at the set prices should market prices fall below a certain level.

Each year, the Commission for Agricultural Costs and Prices estimates the cost of production for various crops, using three definitions.

The first is A2, which represents the actual amount farmers spend on growing a crop each season. This includes inputs such as seeds, fertilisers, pesticides, and wages for agricultural workers.

The second definition, A2+FL, represents the actual input costs as well as the implied economic value of family members working on the farm, which offsets the wages the farmer might otherwise have paid.

The third definition is C2, which represents A2+FL and the value of capital assets, including rent and interest on the land.

The government has increased minimum support prices this year to at least 50% above A2+FL.

2. Why is setting minimum support prices at 50% more than cost of production significant?

This was one of Modi’s campaign promises in the run-up to the 2014 general elections. But months after coming to power, the Bharatiya Janata Party government scrapped the states’ policy of paying their own bonus amount above the minimum support price to farmers.

Increasing the minimum support price to 50% above the cost of production was also a key demand of farmer groups that protested all through 2017 – though they believe the minimum support price should be 1.5 times C2, not A2+FL.

However, only the minimum support price for bajra is close to 50% more than C2. The others are mostly around 14% above C2. Sesamum is just 3% more than C2. And the minimum support price for paddy, an important crop in North India, is just 12% above C2.

Minimum support prices compared to C2 production cost

The demand itself originates in the 2006 report of the National Commission on Farmers led by agricultural scientist MS Swaminathan, which recommended, among others, that the minimum support price be at least 1.5 times C2. And for much of the last 10 years, the minimum support price for most crops has in fact been 50% more than A2+FL.

3. Is this really the highest increase in MSP?

The last time minimum support prices went up this much over the previous year was in 2012-2013, when the Central government raised prices by 15% (paddy) to 53% (jowar). Before and after that, the increase in minimum support prices has tended to be incremental, ranging between 1% and 10% in any given year.

This year, the increase in minimum support prices ranges from 4% (tur or arhar dal, a crop with highly volatile, politically sensitive prices) to 52% (ragi). The minimum support price for nigerseed has gone up 45% over last year, which does represent the highest increase since 2009-2010, as the agriculture ministry said.

4. Do minimum support prices help farmers?

While the government promises minimum support prices for 23 crops, in practice, it procures mostly paddy and wheat – both foodgrains that it can channel into the public distribution system for economically disadvantaged people – and some pulses. Even in the case of paddy and grain, most of the procurement is done in the northern states of Haryana and Punjab. For farmers in other states, there is less certainty of whether the government will buy their crops.

As for other crops, the minimum support price remains for the most part on paper. The government is also experimenting with other schemes to support farmers when market prices fall. Last year, for instance, BJP-ruled Madhya Pradesh and Haryana promised to pay registered farmers the difference between market price and cost of production for certain crops in the event of market failure. But these schemes have had limited success so far.