Finance ministry has announced a hike in MSP for Kharif crops in budget 2018-2019.
Farmers are not satisfied with the announcement as the MSP formula used by the government is blurred.
What are the cost concepts used for 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.
What is the stand of the government in this regard?
In 2014 the union government has promised to offer 50 per cent margin over cost C2 but this was never spelt out in detail.
Recently Finance ministry has announced that the MSP will be in lines with its earlier announcement on Rabi crops.
For rabi crop the government is using 50 per cent margin of Cost A2 or maybe cost A2+FL, by this the MSPs given by the government is still lower than cost C2.
The ministry also claims that only the present administration offers 50% margin in cost A2+FL, but the fact is even in FY 2013-14, the MSPs for all rabi crops were way above 50 per cent over cost A2+FL.
What are the challenges in hiking MSP?
The government senses it is impractical to give 50 per cent margin over cost C2 in all crops.
The C2 is normally 35-40 per cent higher than cost A2+FL, this would have required massive increases in MSPs.
For example, paddy MSP would have to go up by 46 per cent, cotton by 52 per cent and so on).
It may also be mentioned that cost plus pricing of MSPs, be it cost A2+FL or C2, is fraught with dangers as it totally ignores the demand side.
The terms of reference of CACP fails to consider demand-supply, cost of production, price trends in domestic and international markets, terms of trade, inter-crop price parity, etc before recommending the MSP.
