MSP calculations still continue with old formula & not on comprehensive cost

The Union government on October 18, 2023 announced an increase in Minimum Support Price (MSP) for six Rabi crops for the 2024-25 marketing season. The announcement has once again set off discussions on the government not following MS Swaminathan Comission’s recommendation of adding a profit margin of 50 per cent on the cost of production to calculate MSP.

If the recommendations were followed, the MSP of the six crops — rapeseed and mustard, wheat, safflower, barley, gram and lentils — would be higher; for example, the MSP for wheat, which is the main Rabi crop, would be Rs 2,478 per quintal as opposed to Rs 2,275 announced by the government.

This means that farmers will lose Rs 203 on every quintal of wheat sold in the mandis (market). MSP is the minimum price at which the government procures crops from farmers.

In Wednesday’s announcement, the highest increase in MSP has been approved for lentils (masoor dal) at Rs 425 per quintal, followed by rapeseed and mustard at Rs 200 per quintal.

Wheat and safflower got an increase of Rs 150 per quintal each. Barley and gram saw MSP hike of Rs 115 per quintal and Rs 105 per quintal respectively.

MSP is the minimum price at which the government procures crops from farmers. The actual amount depends on the method used to calculate cost of production (CoP). Fixing MSP based on the Swaminathan report has been a long demand of farmer groups and was a major demand during the year-long farmers' protest in 2021-22.

The government bases its announcement on the recommendations given by the Commission for Agricultural Costs & Prices (CACP), which details three major formulae to arrive at MSP. These are:

• A2: Costs incurred by the farmer in production of a particular crop. It includes several inputs such as expenditure on seeds, fertilisers, pesticides, leased-in land, hired labour, machinery and fuel
• A2+FL: Costs incurred by the farmer and the value of family labour
• C2: A comprehensive cost, which is A2+FL cost plus imputed rental value of owned land plus interest on fixed capital, rent paid for leased-in land

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 CoP, but it calculates this cost as 1.5 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.

  Source: CACP calculations

The Cabinet Committee on Economic Affairs (CCEA), which approved the MSP, in its statement on October 18 has referred to the ‘A2+FL’ costs as the cost of production on which it has based its MSP calculations.

Now if the C2+50% formula is to be applied, the difference between the declared MSP and the one that the farmers have been demanding ranges between Rs 203 per quintal and Rs 1,380 per quintal, depending on the crop.

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