Minimum support price is the government scheme to safeguard the interest of the farmers. GOI declares the MSP of various agricultural produce and assures the farmers that their agriculture produce will be purchased at the MSP. The Food Corporation of India acts as the Nodal agency of the GoI. MSP scheme is implemented through state agencies. MSP is recommended by the commission for agricultural costs and prices.(CACP) and approved by cabinet committee on economic affairs. The CACP project three kind of production costs for every crop both at the state and all India average. These three kind of production costs are as follows:
- A2: It covers all paid-out costs directly incurred by the farmer in cash and king on seeds, fertilizers, pesticides, hired labour, leased-in land, fuel, irrigation etc.
- A2+FL: It includes A2 plus an imputed value of unpaid family labour.
- C2: It is a more comprehensive cost that factors in rental and interest forgone on owned land and fixed capital assets, on top of A2+FL.
When market prices goes down due to excess supply the government assured farmers of minimum assured price. The Government becomes the buyer of the produce. It help to ensure income security for the farmers in the case of lower market prices for market produce. It hence save farmers from debt trap. The money earned can be utilised for further investment and consumption purpose.