MSP only partly relieves farmers’ pain

One of the vociferous demands by farmers for almost a decade is to fix MSP, as mentioned in the recommendations made in 2006 by the National Commission on Farmers (NCF), generally referred to as MS Swaminathan Committee Report.

Important suggestions and recommendations have been made in the NCF report for ‘faster and more inclusive growth’. One of the recommendations is that MSP should be at least 50 per cent more than the weighted average cost of production. The NCF report did not elaborate on what really constituted ‘weighted average cost of production”.

Weighted average cost

It is not an easy task with several variables and subjectivity (crop-wise peculiarities in cost and region-wise variations in cultivation practices for the same crops, to name a few) to arrive at one number as ‘weighted average cost’. The CACP (Commission for Agricultural Costs and Prices) took efforts to work out the cost at three stages of production, known as: A2, A2+FL and C2.

A2 costs basically cover cultivation expenses, incurred by farmers on inputs like seeds, fertilisers, pesticides, hired labour, fuel, and irrigation. A2+FL covers all these cultivation expenses plus non-cash expenses such as imputed value of unpaid family labour. C2 costs are more comprehensive, accounting for the rentals and interest forgone on owned land and fixed capital assets, respectively, on top of A2+FL.

If a farmer realises A2 from his harvested crop, it is just a cash break-even presuming that he gets average yield of ‘fair average quality’. If the farmer realises A2+FL, he is marginally above break-even because he covers the cost of his own labour or labour put in by his family. If A2+FL is taken as the cost and if realisation is 50 per cent above this cost, the farmer will be in a position to operate above break-even. The surplus equivalent to 50 per cent of his cost of production, is available to meet the fixed expenses, indirect expenses and yet leave some surplus. Hence, in the event of market price falling below the MSP, the farmer would manage to meet all his expenses and still have some surplus.

C2 cost includes return on fixed capital over and above A2+FL. Normally any commercial venture measures its viability based on the return on investment from the surplus generated. The approach to determine viability of farming operations is in no way different. Hence to say that MSP needs to be C2 plus 50 per cent, implies that a venture should have assured minimum net profit margin of 50 per cent.

One would wish that our farmers get this kind of returns or even more. But considering that MSP is a safety net in the event of market fall, expecting to get such returns through MSP is in a way undermining the objective of MSP. So, for the first time it is ensured that MSP is not below 1.5 times A2+FL.

However, it is not that CACP is oblivious of relevance of C2. Though A2+FL is taken as cost basis, CACP has estimated C2 cost also and has compared to see where the recommended MSP stands with regard to C2. Current MSP while covering A2+FL cost by 1.5 times, it reasonably covers C2 cost. If we take a look at the increase in cost (A2+FL) over last year, the average cost increase is about 5 per cent whereas increase in MSP is about 24 per cent (overall average). In the case of ragi it is more than 50 per cent increase.

This indicates that in order to meet the commitments made in the Union Budget, consideration of “cost“ has taken precedence over other vital factors like demand and supply, and price trends in international/domestic trades.

Procurement pressure

This is likely to affect those commodities which have to go through manufacturing process before it goes to consumers (like daal, flour, edible oil, etc). Commodities such as maize, moong, soybean, sunflower seed, nigerseed, cotton are more likely to come under MSP procurement pressure.

As and when this contingency arises, which is more likely this year, the procurement mechanism should also be quick and efficient. The response time of the administration should be better than before. Exporters and processors can also be entrusted with MSP procurement with proper checks and balances under the Bhavantar scheme.

As regards the farmers, enhancing MSP addresses only one part of their challenge. They should be aware that MSP applies to fair average quality (FAQ) of the crop. They can realise support price only if the quality is fair average. It is not uncommon where harvested crop at farm level does not entirely meet FAQ. Enhanced MSP is of no benefit if quality is below average.

Let us hope that the market will remain fair to both farmers and consumers.

The writer is former Head of Agri Services Division of ADM India.

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