The Hindu Business Line : MSP policy: Is it back to the Abhijit Sen formula?

New Delhi, Dec. 7 First, it was the Abhijit Sen Committee formula of pegging minimum support price (MSP) of crops at their ‘C-2’ cultivation cost levels.

Then came the M.S. Swaminathan Commission’s report that called for fixing the MSPs to cover “at least 50 per cent more than the weighted average cost of production”. And now, in the background of crashing global commodity prices, it could well be back to the Abhijit Sen formula.

The latest data on estimated ‘C-2’ costs of cultivation for 2008-09 – which is yet to be officially made public by the Commission of Agricultural Costs and Prices (CACP) – shows that in crops such as paddy (grade ‘A’ varieties), wheat and rapeseed-mustard, the Centre’s current effective procurement prices already meet the Swaminathan criteria of 50 per cent cost-plus.

In the case of common paddy, long-staple cotton (H-4) and bajra, the MSPs for 2008-09 range between 30 and 45 per cent of the corresponding ‘C-2’ costs. In all the other crops, the latest procurement prices are above ‘C-2’ costs. The ‘C-2’ costs include all actual expenses incurred in cash and kind by the farmer in producing a particular crop plus interest on value of owned capital assets (excluding land), rental value of owned and leased-in land, and imputed value of family labour.

Interestingly, till as recently as 2007-08, there were many crops – including cotton, soyabean, sunflower, sesamum, nigerseed, jowar and moong – the MSPs of which were set below their ‘C-2’ costs while covering only the ‘A-2+FL’ component. The latter does not take into account the opportunity cost of the farmer’s land and capital assets, as measured by interest and rental value.

The Abhijit Sen Committee, which submitted its report in mid-2002, recommended that in crops such as wheat and paddy, where the MSPs exceeded the ‘C-2’ costs, these be made equal over a period.

That, in turn, required a freezing of the MSPs at existing levels till they just about covered the ‘C-2’ costs. But with the tight domestic supply situation developing in most farm commodities from around 2006 – compounded by skyrocketing international prices – the Abhijit Sen Committee’s concerns gave way to those expressed by the National Commission on Farmers headed by Dr M.S. Swaminathan. The Commission’s report virtually pitched for converting the MSPs into MRPs or minimum remunerative prices, so that “the net take home income of farmers should be comparable to those of civil servants”.

This approach was especially reflected in the huge increases effected in the MSPs of kharif crops during the 2008-09 season.

Return to old formula

However, the plunge in commodity prices resulting from the global financial meltdown could prompt a return to the Abhijit Sen formula.

Wheat prices in November (Hard Red Winter No. 1, free-on-board Gulf of Mexico) averaged $226.84 a tonne, against a peak of $439.71 in March. Likewise, corn/maize (US No.2 yellow) and soybean (Chicago No. 2 first contract forward) have eased to $164.27 and $329.14 a tonne, from their average highs of $287.11 in June and $554.15 in July, respectively. Thai five per cent broken white rice averaged $563.25 a tonne in November (down from $1,015.21 in April), while in the cotton, the Cotlook Far Eastern ‘A’ index, has dropped from its peak of 80.18 cents/pound in March to last month’s 54.96.

“We may have to go back to the conservative MSP approach,” official sources pointed out. A test case would be the MSPs for the 2008-09 rabi crops, expected to be announced in the coming week.

The CACP has apparently proposed a hike in the wheat MSP to Rs 1,080 a quintal from the Rs 1,000 level of 2007-08. Whether the Union Cabinet would approve this remains to be seen.