1.5-times formula for crops MSP

1.5-times formula for crops MSP

Why in News?

• Talks between farmer unions and the government failed to reach a resolution, as farmers refused to budge from their demand of the repeal of the three farm laws and the Electricity Amendment Bill 2020.
• The main bone of contention in these talks is the minimum support price (MSP) for crops, which farmers fear the new laws will do away with, and want the government to guarantee in writing.
• The MSP assures the farmers of a fixed price for their crops, well above their production costs.
• The Union Budget for 2018-19 had announced that MSP would be kept at levels of one and half times of the cost of production.

How did the government fix MSPs of crops before every planting season?

• The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture would recommend MSPs for 23 crops.
• These included 14 grown during the kharif/post-monsoon season and six in rabi/winter (wheat, barley, chana, masur, mustard and safflower), apart from sugarcane, jute and copra.
• The CACP considered various factors while recommending the MSP for a commodity, including cost of cultivation.
• It also took into account the supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-à-vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

What changed with the 2018 budget?

• The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1½ times of the production costs for crops as a “pre-determined principle”.
• Simply put, the CACP’s job now was only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.

How was this production cost arrived at?

• The CACP does not do any field-based cost estimates itself.
• It merely makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry. The latter are, however, generally available with a three-year lag.

• The CACP further projects three kinds of production cost for every crop, both at state and all-India average levels.
• ‘A2’ covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
• ‘A2+FL’ includes A2 plus an imputed value of unpaid family labour.
• ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

Which production costs were taken in fixing the MSPs?

• In 2018, then Finance Minister Arun Jaitley’s Budget speech did not specify the cost on which the 1.5-times formula was to be computed.
• But the CACP’s ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ report stated that its MSP recommendation was based on 1.5 times the A2+FL costs.

IE