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The ongoing protests over legalising the Minimum Support Price (MSP) have brought attention to the challenge of determining a fair price for farmers’ produce.
While the government currently provides MSP for 23 crops, the remuneration is not enough to make farming profitable.
Agriculture and market experts suggest that the Commission for Agricultural Costs and Prices (CACP) must rethink how it measures the cost of agricultural produce in order to ensure a fair price to farmers without worsening the already rising food inflation. They also emphasise the need to align MSP with the country's macroeconomic goals and climate variations.
Anil Sharma, former chairman (Northern Region), The Institute of Cost Accountants of India, Kolkata told Down To Earth (DTE) that MSP should include all farming costs. Below is a summary of what he told DTE:
While calculating MSP for different crops, CACP considers only A2 and FL costs. Costs of capital, lease rent for own land, own machinery and post-harvesting costs are ignored. In his 2004-06 reports, M S Swaminathan recommended a comprehensive cost (C2) structure, which includes all costs, to determine MSP for different crops. However, for various reasons, costs other than A2 and FL continue to be overlooked.
In contrast, when calculating the costs of products manufactured in industry, all types of costs are considered to determine the actual cost of production. Even the notional value of items available at no cost is included in the total cost. In industry, accrual-based accounting is practiced, where expenses or costs, even if not paid at the time, are added to the total cost of a product. Decision-making processes in the industry also consider opportunity costs to reach final conclusions.
Indian accounting standards (Ind AS), cost accounting standards and Cost Records Rules-2014 under the Companies Act 2013 and Income Tax Act 1961 prescribe methodologies for recording business transactions to ensure accountability and transparency while determining the actual cost and margin for manufactured or traded products. These standards also help in determining the tax liability of businesses.
As India progresses towards a US $10 trillion economy, it is time to treat agriculture as a complete business proposition and adopt a formal costing and accounting mechanism. This would ensure greater transparency in determining MSP and calculating the actual costs and margins of agricultural produce.
To accurately calculate the cost of agricultural produce, A2, FL, and all other incurred costs must be considered. An indicative list of such costs includes: seeds, fertiliser, pesticides, etc, irrigation, labour, fuel, electricity, hired machinery, land rent, interest on own capital, rental value for land, farm equipment and other consumables, depreciation on machinery and other assets, repair and maintenance of machinery, insurance of crops and farm equipment, packing material, treatment of residues such as husk, stubble, taxes, transportation, storage, and stacking and restacking, commissions to agents, and others.
By recording all these, we can determine the per-hectare or per-quintal cost of produce and per-quintal cost of quantity sold. Additionally, factors related to the environment, seasonality, supply and demand, nutritional values, natural calamities, irrigation systems, soil conditions, infrastructure and subsidies should also be considered.
The ultimate objective of any business and trade is to achieve reasonable returns on invested money for a respectable livelihood.
This was first published in the 1-15 August, 2024 print edition of Down To Earth