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Explained: How the 1.5-times formula for crops MSP is calculated

The major demand of the protesting farmers has been that the government guarantee in writing the MSP system, which assures them of a fixed price for their crops, 1.5 times of the cost of production.

By: Explained Desk | New Delhi |
Updated: December 2, 2020 7:16:51 am
Farmers protest, Farm bills 2020, Minimum support price explained, farm bills explained, farmers bills 2020, MSP, how is MSP calculated, indian expressThe farmers’ delegation after their first meeting with the Union Minister for Agriculture, Narendra Singh Tomar, at Vigyan Bhavan in New Delhi on Tuesday. (Express Photo: Tashi Tobgyal)

Talks between farmer unions and the government failed to reach a resolution on Tuesday, as farmers refused to budge from their demand of the repeal of the three farm laws and the Electricity Amendment Bill 2020. The main bone of contention in these talks is the minimum support price (MSP) for crops, which farmers fear the new laws will do away with, and want the government to guarantee in writing.

The MSP assures the farmers of a fixed price for their crops, well above their production costs. The Union Budget for 2018-19 had announced that MSP would be kept at levels of one and half times of the cost of production. As per a government release of March this year, “accordingly, the Government has increased the MSP for all mandated Kharif, Rabi and other commercial crops with a return of at least 50 per cent of cost of production for the agricultural year 2018-19 and 2019-20.”

So how exactly is this 1.5 times formula arrived at, and what changed with the Union Budget for 2018-19?

How did the government fix MSPs of crops before every planting season?

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The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture would recommend MSPs for 23 crops. These included 14 grown during the kharif/post-monsoon season and six in rabi/winter (wheat, barley, chana, masur, mustard and safflower), apart from sugarcane, jute and copra. The CACP considered various factors while recommending the MSP for a commodity, including cost of cultivation.

It also took into account the supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-à-vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

Also read | Talks with Centre: Rabi sowing over, farmers have time on their side

What changed with the 2018 budget?

The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1½ times of the production costs for crops as a “pre-determined principle”. Simply put, the CACP’s job now was only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.

Farmers protest, Farm bills 2020, Minimum support price explained, farm bills explained, farmers bills 2020, MSP, how is MSP calculated, indian express All figures in Rs/quintal

How was this production cost arrived at?

The CACP does not do any field-based cost estimates itself. It merely makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry. The latter are, however, generally available with a three-year lag.

The CACP further projects three kinds of production cost for every crop, both at state and all-India average levels. ‘A2’ covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc. ‘A2+FL’ includes A2 plus an imputed value of unpaid family labour. ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

Which production costs were taken in fixing the MSPs?

In 2018, then Finance Minister Arun Jaitley’s Budget speech did not specify the cost on which the 1.5-times formula was to be computed. But the CACP’s ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ report stated that its MSP recommendation was based on 1.5 times the A2+FL costs.

Farm activists, however, had said that the 1.5-times MSP formula — originally recommended by the National Commission for Farmers headed by agricultural scientist M S Swaminathan and promised in the BJP’s 2014 Lok Sabha election manifesto — should have been applied on the C2 costs.

About this, the government’s press release from March this year said: “From time to time, some farmers and farmers’ organizations have been agitating and making certain demands like increase in MSP for agricultural crops on the basis of C2 system. Cost of production is one of the important factors in the determination of MSPs. While recommending its price policy, the CACP considers all costs in a comprehensive manner which is based on the methodology recommended by Expert Committees from time to time. 📣 Express Explained is now on Telegram

CACP considers both A2+FL and C2 costs while recommending MSP. CACP reckons only A2+FL cost for return. However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.”

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