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Monday, July 23, 2018

How the 1.5-times formula works out MSP

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”.

Written by Harish Damodaran | New Delhi | Updated: July 6, 2018 9:44:47 am
The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture recommends MSPs for 23 crops. (Express Archive)

On Wednesday, the Centre announced steep hikes in the minimum support prices (MSPs) for most crops planted in the current kharif season. This was based on a new formula, which pays farmers 1.5 times their estimated production costs.

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

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

It also takes 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.

So, what has changed now?

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 will be only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula. Thus, the all-India average production cost for paddy in 2018-19 has been projected at Rs 1,166 per quintal, 1.5 times of which is Rs 1,749 — rounded off to an MSP of Rs 1,750 per quintal.

How the 1.5-times formula works out MSP

How is 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. For the 2018-19 season, the CACP has used the directorate’s state-wise cost estimates for the latest three years, from 2013-14 to 2015-16. These have been projected for 2018-19 by assessing likely changes in input costs based on the latest price data from other sources such as the Labour Bureau (for wages) and Office of the Economic Adviser (which compiles wholesale prices).

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 have been taken in fixing the MSPs for this kharif season?

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 states that its MSP recommendation is based on 1.5 times the A2+FL costs. From the accompanying table, it can be seen the MSPs for 2018-19 derived from this formula are substantially higher than last year’s. The increases work out to more than 10% for 11 out of the 14 kharif crops.

Farm activists, however, say 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. Had that been done, the MSP for common paddy alone (on a C2 cost of Rs 1,560) would have been Rs 2,340 per quintal, and not Rs 1,750 as announced.

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