Minimum Support Prices for Agricultural Produce

1.5x Formula for crops MSP calculation


From UPSC perspective, the following things are important :

Prelims level: MSP calculation

Mains level: Fixation of MSP and its legal backing

Talks between farmer unions and the government failed to reach a resolution. 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.

Try this:

Q.There is also a point of view that agriculture produce market committees (APMCs) set up under the state acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine. (CSM 2014)

What is MSP?

  • The MSP assures the farmers of a fixed price for their crops, well above their production costs.
  • MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidised grains through the PDS, isn’t an entitlement for farmers.
  • They cannot demand it as a matter of right. It is only a government policy that is part of administrative decision-making.
  • The Centre currently fixes MSPs for 23 farm commodities based on the Commission for Agricultural Costs and Prices (CACP) recommendations.

Why in news yet again?

  • 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.
  • This year the govt. has increased the MSP for all mandated Kharif, Rabi and other commercial crops with a return of at least 50 per cent of the cost of production for the agricultural year 2018-19 and 2019-20.
  • This is the ambiguity from where this 1.5 times formula arrived at.

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

  • The CACP considered various factors while recommending the MSP for a commodity, including the 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.

What changed with the 2018 budget?

  • The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1.5 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.

How was this production cost arrived at?

  • The CACP projects three kinds of production cost for every crop, both at the 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.

Now try this PYQ:

Q.The economic cost of food grains to the Food Corporation of India is Minimum Support Price and bonus (if any) paid to the farmers plus:

(a) Transportation cost only

(b) Interest cost only

(c) Procurement incidentals and distribution cost

(d) Procurement incidentals and charges for godowns

Which production costs were taken in fixing the MSPs?

  • In 2018, then FM Arun Jaitley’s 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.

What are the farmer’s demands?

  • Farm activists, however, had said that the 1.5-times MSP formula should have been applied on the C2 costs.
  • CACP considers A2+FL and C2 costs, both while recommending MSP. It 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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