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How the 1.5-times formula for crops MSP is calculated?

Topics Covered: Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System objectives, functioning, limitations, revamping; issues of buffer stocks and food security; Technology missions; economics of animal-rearing.

How the 1.5-times formula for crops MSP is calculated?


Context:

The major demand of the protesting farmers has been that the government guarantee in writing the MSP system, which assures them of a fixed price for their crops, 1.5 times of the cost of production.

What is MSP?

The MSP (minimum support price) assures the farmers of a fixed price for their crops.

How was the MSP fixed earlier?

The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture would recommend MSPs for 23 crops.

  • 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 Union Budget for 2018-19?

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.

Which production costs were taken in fixing the MSPs?

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.

  • ‘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. ‘

It does not take into account C2 costs.‘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.

InstaLinks:

Prelims Link:

  1. Composition of CCEA.
  2. What is CACP?
  3. How many crops are covered under MSP scheme?
  4. Who announces MSP?
  5. Difference between Kharif and Rabi crops.

Sources: Indian Express.