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25th October 2023 (11 Topics)

MSP calculations needs revision

Context:

Recently, the need for MSP revision was highlighted, as if the MS Swaminathan recommendations were followed, the Minimum Support Price (MSP) of the six crops would be higher.

Key Highlights:

  • The National Commission of Farmers also known as the Swaminathan Commission recommended that the MSP should at least be 50 per cent more than the weighted average CoP, which it refers to as the C2 cost.
  • The government maintains that the MSP was fixed at a level of at least 1.5 times of the all-India weighted average Cost of prices (CoP), but it calculates this cost as 5 times of A2+FL.
  • Below is the projected cost of production for the Rabi Marketing Season (RMS) 2024-25 for different crops based on A2+FL and C2 formulae.

Cost Concepts used calculating MSP

  • There are several cost concepts that the Commission for Agricultural Costs and Prices (CACP) considers while recommending MSPs of 23 crops.
    • Cost A2 - These are the costs the farmer actually pays out of his/her pocket for buying various inputs ranging from seeds to fertilisers to pesticides to hired labour to hired machinery or even leased-in land.
    • Cost A2 +FL - In agriculture, farmers also use a lot of family labour and if their cost is imputed and added to cost A2, that concept is called cost A2+FL.
    • Cost C2 - the Comprehensive cost (cost C2), it includes imputed costs of family labour, imputed rent of owned land and imputed interest on owned capital.
    • National commission on farmers head by M.S Swaminathan recommended a 50 per cent margin over C2, which is also being the demand of the farmers.

Challenges in Hiking MSP

  • The government believes that providing a 50% margin over the C2 cost for all crops is not feasible.
  • Typically, the C2 cost is significantly higher, around 35-40% more than the A2+FL cost, which would necessitate substantial MSP (Minimum Support Price) increases. For instance, the MSP for paddy would need to increase by 46%, cotton by 52%, and so on.
  • It's worth noting that the cost-plus pricing approach for MSPs, whether it's based on cost A2+FL or C2, has its risks as it doesn't take into account the demand side.
  • The terms of reference for the Commission for Agricultural Costs and Prices (CACP) fail to consider factors like demand-supply dynamics, production costs, price trends in both domestic and international markets, terms of trade, and price parity between different crops when making MSP recommendations.

Verifying, please be patient.

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