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Minimum Support Price

25 Dec, 2019 Divesh Mishra

In the year 2017-18, India produced over 280 m tonnes (28 cr tonnes) of food grain. Please keep in view that this figure does not include production of fruits, vegetables, spices and dry fruits. Majority of this 280 m tonnes of food grain production is in the form of paddy and wheat. Then come the coarse grain, pulses and lastly oil seeds. As an average over 1100 KGs of grain is available to each Indian family for the year which is sufficient to meet its hunger and calorific demands.

Often the price of food grain goes below the cost of production and this is a major reason for farmer distress. In such scenario, the Central Government intervenes and the tool it uses is called MSP, or the Minimum Support Price.

Last month, in June, the government increased the MSP for the Kharif crops (also known as the summer crops) including paddy where the MSP was increased by Rs 200 per quintal. In all, the MSP was increased to 1.5 times of the cost of production (which includes cost of inputs and labour including those of family hands).

Example: It means if the cost of producing paddy is Rs 1500 per quintal, but the demand and supply gap is pushing down the market price of paddy to Rs 1400 per quintal, the government is committed to buy paddy from farmers at Rs. 1500*1.5=2250.

It is expected that this policy of MSP increase would cost the government Rs 1,20,000/- cr and would increase inflation by approximately 20 bps. However, this would also encourage the farmer to produce more lentils and pulses. Kharif crops constitute around 25% of our entire agricultural production and the impact on the rural economy is likely to be highly positive.

Please keep in view that the government is original, direct buyer from the farmers mainly of two crops: wheat and paddy which it buys through the state and central agencies.