Budget 2018

Budget 2018: Focus on MSP ideal for tackling farm distress

The forthcoming budget should accord top priority to measures that translate into remunerative prices for farm produce with immediate effect.

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Non-price factors like technology, market reforms, infrastructure and institutions take time to deliver results.
By Ramesh Chand

The agriculture sector and farmers are passing through a difficult phase. The sector suffered a blow from back-to-back droughts during 2014-15 and 2015-16 followed by low and depressed farm level prices during 2016-17 and kharif 2017, mainly due to global price trends. This has intensified the demand for ensuring MSP (minimum support price) and raising MSP.

The forthcoming budget needs to take a call to launch effective measures to address the agrarian distress, with emphasis on measures that deliver immediate results. This includes price as well as non-price factors.


Non-price factors like technology, market reforms, infrastructure and institutions are quite important to raise growth and farmers’ income, but they take time to deliver results and thus are important for medium and long term, whereas better prices result in immediate effect on farmers’ income and also on productivity and growth. In the light of this the forthcoming budget should accord top priority to measures that translate into remunerative prices for farm produce with immediate effect. MSP is one such instrument.

The government notifies MSP for 23 commodities and FRP (fair and remunerative price) for sugarcane. These crops cover about 84% of total area under cultivation in all the seasons of ayear. About 5% area is under fodder crops which are not amenable for MSP-type intervention. Thus, the present list of MSP crops covers close to 90% of the cultivated area. The system of MSP, if implemented fully, will leave only a very small segment of producers without price benefit.

This system is facing two serious issues. One, MSP is notified for 23 crops but effectively ensured only for two-three crops. Two, given the low scale of production, attributable to small size of holdings, the margin over cost in the prevailing system of MSP does not generate reasonable surplus (income) for the farmers. Not surprisingly, farmers have been demanding effective implementation of MSP for all the crops and keeping MSP 50% higher than cost.
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MSP can be implemented in two ways. One, physical procurement of commodity and two, cash payment to farmers to compensate for the difference between MSP and price received by them. While the central government bears responsibility for ensuring MSP and procurement of wheat and paddy/rice, some states have been undertaking limited procurement of MSP crops other than wheat and paddy to ensure MSP for farmers. Implementation of MSP in all the crops requires coordinated efforts and cost sharing between states and the Centre. Private sector can also be involved to implement procurement based MSP.

The second issue relates to making MSP adequately remunerative. Farmers have been demanding to keep MSP 50% higher than what is defined as Cost C2 by CACP (Commission for Agricultural Costs and Prices). While 50% margin or return over cost seems adequate, the term “cost” in agriculture involves complexity.

Agriculture being a family-based business and using mostly own resources involves two types of investments – costs which are actually incurred and costs which are not incurred by farmers but are imputed.

To maintain this distinction between paid out costs and costs not actually incurred by the producers, CACP uses two broad concepts, namely Cost A2 and Cost C2. Cost A2 includes all expenses paid by farmers in cash or kind in production of the crop like seed, fertiliser, manure, chemicals, hired human, bullock and machine labour, irrigation expenses, maintenance cost, etc. It also includes imputed cost of own seed, manure, bullock and machine labour, rent paid for leased in land, depreciation of assets and interest on working capital. Cost C2 is arrived at by adding to Cost A2, imputed cost of farmers’ own family labour, interest on fixed capital and rental value of own rent.
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Now, the question is: What cost should be considered for giving margin of 50% — A2 or C2? Logically, margin is estimated or provided on costs and investments actually incurred, like Cost A2 in agriculture.In India, 88% land is self-cultivated. The landowner has the opportunity to earn rent but he is not paying it while doing self-cultivation.

MSP must cover land rent and interest on fixed capital but there is no justification of any sort to pay further margin on the imputed value of land rent and interest on fixed capital.
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There is some justification for giving 50% margin on farmers’ own family labour used in the production for consideration of managerial and entrepreneurial skill. Thus, there is a strong rationale to give margin on Cost A2 plus imputed value of family labour (Cost A2+FL) at prevailing wage rate.

It is concluded that ensuring MSP for all 23 crops with 50% margin over Cost A2+FL will be a significant and giant step in meeting long-pending demand for remunerative MSP for farmers, addressing agrarian distress and moving towards the goal of doubling farmers’ income by 2022.

(The author is member, Niti Aayog. The views expressed are personal.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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