What is MSP, how is it calculated using C2+50 Formula?.
Round the year, India’s farmers produce a host of agricultural commodities such as paddy (rice) in the kharif season (in which sowing happens in June and harvesting in November) or wheat in the rabi season (in which sowing happens in November and harvesting in March). For the most part, farmers sell their produce in the market.
But what if the prices in the market are too low to adequately remunerate farmers?
This can often happen if there is a bumper crop that season, or if the international prices of a particular commodity are quite low (and as such imports are very cheap).
In such a scenario, India’s farmers, who are already some of the poorest citizens of the country, will struggle to make ends meet. Apart from their individual troubles, if farmers give up farming as a result of low prices, it can even put the country’s food security at risk.
The so-called minimum support prices or MSPs announced by the government each year are a way to preempt such an eventuality.
Support prices
During each cropping season, the government announces minimum support prices for 23 crops. Simply put, the MSP for a crop is the price at which the government is supposed to procure/buy that crop from farmers if the market price falls below it.
As such, MSPs provide a floor for market prices, and ensure that farmers receive a certain “minimum” remuneration so that their costs of cultivation (and some profit) can be recovered.
The MSPs serve one more policy purpose. Using them, the government incentivises the production of certain crops, thus ensuring that India does not run out of staple food grains.
Typically, MSPs create the benchmark for farm prices not just in those commodities for which they are announced, but also in crops that are substitutes.
Crops covered
Crops covered by MSPs include:
* 7 types of cereals (paddy, wheat, maize, bajra, jowar, ragi and barley),
* 5 types of pulses (chana, arhar/tur, urad, moong and masur),
* 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, nigerseed),
* 4 commercial crops (cotton, sugarcane, copra, raw jute)
How much?
Who decides what the MSP would be and how? The MSPs are announced by the Union government and as such, it is the government’s decision. But the government largely bases its decision on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
While recommending MSPs, the CACP looks at the following factors:
* the demand and supply of a commodity;
* its cost of production;
* the market price trends (both domestic and international);
* inter-crop price parity;
* the terms of trade between agriculture and non-agriculture (that is, the ratio of prices of farm inputs and farm outputs);
* a minimum of 50 per cent as the margin over the cost of production; and
* the likely implications of an MSP on consumers of that product.
C2+50 Formula of MSP
The 1.5-times MSP formula was originally recommended by the M S Swaminathan, the National Commission for Farmer’s head and was also promised that 2014 Lok Sabha election by the BJP that it should have been applied on the C2 costs.
Three variables are prescribed by the Swaminathan Committee to determine the production cost namely;
A2: It is the out-of-pocket expenses which is incurred by farmers like a loan for fertilisers, fuel, machinery, irrigation, etc. and cost of leasing land
A2+FL: Is the estimated value of the unpaid labour for harvesting crops like the contribution of family members, etc. In addition, it is paid-out cost.
C2: It is Comprehensive Cost which is the actual cost of production. It takes into account for rent and interest foregone on the land and machinery owned by farmers further in addition to the A2+FL rate.
The ideal formula which is recommended by the Committee to calculate the MSP is:
MSP = C2+ 50% of C2
And the 1.5 times formula to calculate the increased MSP is
1.5 Times MSP Formula = 1.5 times the A2+FL costs
The demand of the farmers is that the 1.5 times MSP formula should be applied on the C2 costs. The Government after considering this stated that the Production Cost is one of the main factors to determine the MSP. Also, the CACP considers all the costs in a comprehensive manner.
To determine the MSP, the CACP considers both C2 and A2+FL costs. For return, the CACP considers the A2+FL formula and C2 formula as a benchmark reference costs which makes sure that the MSP covers the production cost.
Parameters for Calculation of MSP
On November 18, 2004, the Central Government constituted the National Commission on Farmers (NCF) with MS Swaminathan as its chairman.
- The main objective of the committee was to come up with a sustainable farming system.
- His objectives also included making agricultural commodities cost-competitive and more profitable.
All produce?
The government does not procure all farm produce at MSPs. Actual procurement (at MSP) varies with crop and geography. Also, MSPs have no statutory backing — a farmer cannot demand MSP as a matter of right. The farmer unions who led the yearlong agitation that led to the repeal of the three farm laws, want the government to enact legislation conferring mandatory status to MSP, rather than just being an indicative or desired price.
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