THE LOWDOWN ON MSP ROADMAP

Author: Vikas Vasudeva

Read the full article here.

The Union Budget 2018-19 proposed to give farmers a minimum support price (MSP) 1.5 times of the production cost. The agriculture sector provides food security to 1.3 billion people, absorbs 54% of the workforce and touches the lives of two-thirds of the rural population. Yet, there is a widening disparity between the farm-dependent population and those working in other sectors.

Public procurement of wheat and paddy was announced at the MSP in 1965-66 to address grain shortage.

Production cost was calculated using two broad concepts – Cost A 2 and Cost C 2.

1. Cost A 2 – includes all expenses paid by the farmer in cash or kind (includes cost of seed, fertilizer, farmyard manure, pesticides, hired labour, machine labour, irrigation and maintenance costs, rent paid for leased-in land, depreciation of assets, interest on the working capital, the imputed cost of owned seed, farmyard manure and machine labour.)
2. Cost C 2 – includes Cost A 2 plus the imputed cost of family labour, the interest on fixed capital and the rental value of owned land.

A formula for MSP was recommended by the National Commission on Farmers, 2006. Dr. M.S. Swaminathan, in his report submitted to the Central government in 2006, recommended that MSP be based on production cost (C 2 cost) plus a 50% margin. The Union Finance Minister Arun Jaitley, in his budget speech, announced the MSP fixation on the basis of production cost plus a 50% margin. The technical detail in this regard, though, was missing in the speech. Production cost means all paid-out costs, including the rent paid for leased-in land and the imputed value of family labour.

Why does it matter?

Finance Minister announced that the MSP for the Rabi crops for the crop year 2017-18 had been fixed on the basis of production cost plus a 50% margin, which is not borne out by data. That indicates that the Central government may be working on some other definition of production cost rather than the C 2 cost.

MSP is not the solution for all the problems as 85% of the farmers in the country own less than 5 acres of land and have little marketable surplus. Sole reliance on MSP would not raise their standard of living. Other solutions include:

1. Staggered MSP can be used to reduce the glut in the market during the harvesting season.
2. Easing the role of procurement agencies.
3. Minimising storage losses and costs.

 What next?

The Ramesh Chand Committee, constituted to examine the methodological issues in fixing MSP, gave the following recommendations:

1. For calculating production cost, family labour head should be considered a skilled worker.
2. Interest on working capital should be given for the whole season against the existing half season
3. The actual rental value prevailing in the village should be considered without a ceiling on the rent.
4. Post-harvest costs, including cleaning, grading, drying, packaging, marketing and transportation, should be included.
5. The cost C 2 should be raised by 10% to account for the risk premium and managerial charges.

Many experts believe that to address the current agrarian crisis, MSP should be fixed on the basis of the Ramesh Chand Committee’s report.