Questions arise about the rationale and implications of adopting Dr Swaminathan's proposed methodology for MSP calculation

Co-terminus with the legal guarantee for Minimum Support Price (MSP) for all crops, another demand raised by the farmers relates to how the MSP is fixed. They want it to be calculated based on the recommendations of the National Commission on Farmers (NCF) under Dr MS Swaminathan (2006).     

All along, the Commission for Agricultural Costs and Prices (CACP) - a statutory body under the Ministry of Agriculture & Farmers Welfare – has been setting MSP at the level of the so-called comprehensive cost or C2 cost. C2 is arrived at by adding three components viz. A2 covers all paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilizers, chemicals, hired labour, fuel and irrigation; FL is the imputed value of unpaid family labour; and rental value of owned land and imputed cost that would be incurred on owned fixed capital assets (OFCA), call it to return on assets or RoA.          

Put simply, MSP is equal to A2 + FL + RoA. It takes care of all the costs incurred by the farmer for growing the crop – both paid out and own – besides including an element of profit i.e. RoA. That is why it is bandied as ‘comprehensive’. The formula was used for determining MSP till FY 2017-18. The Government normally accepts recommendations made by CACP. 

In its fifth report submitted in October 2006, the NCF recommended that MSP should be “at least 50 per cent more than the weighted average cost of production”. The recommendation did not specifically mention what ‘measure of costs’ would be used. However, Dr Swaminathan clarified: “When we recommended 50 per cent over costs, we meant complete costs called C2, which includes all assumed costs”.

Can the clarification given by him many years after the report was finalized and submitted be taken to mean that the Commission had meant it that way? A recommendation emerges from deliberations and is based on consensus among members. This also applies to a clarification given on an important aspect of the recommendation. That would not have been possible as you can’t expect Dr Swaminathan to go back to other members and check. The big question is: Is giving the farmer at least 50 per cent more than the ‘C2’ costs logical?        

The purported rationale for giving 50 per cent extra is that she should get a handsome profit after covering all paid-out costs. Profit as it is understood in business parlance is essentially meant to give a return to the owner for her invested capital. In the case of a farmer, her investment in crop growing business is by way of ‘land’ and ‘OFCA’ besides her labour. But, remuneration/return for all these is already incorporated under C2. To give a further sweetener (read: 50 per cent profit) over and above these would be illogical. Let us understand this with the help of an example.

In the case of paddy, the all-India weighted average A2 cost for the 2017-18 Kharif season, as estimated by the CACP, was Rs 840 per quintal; A2+FL cost: Rs 1,117 per quintal and C2 costs: Rs 1,484 per quintal. In the total cost of Rs 1,484 per quintal, the amount going towards the farmer’s income was Rs 644 per quintal (1484-840). Of this, Rs 277 per quintal (1117-840) was for FL and Rs 367 per quintal (1484-1117) for RoA.

If one were to go by NCF recommendation as clarified by Dr Swaminathan, the farmer would have to be given Rs 742 per quintal (0.5x1,484) in addition to an income of Rs 644 per quintal already built into C2 thus taking the total to Rs 1386 for each quintal of paddy. This translates to 93 percent of C2 costs. Taken as a proportion of the revised MSP of Rs 2226 per quintal, this will be 62 per cent. Where does one get such a fantastic return?

This is happening because the farmer is being remunerated twice over first under C2 and then a further profit of 50 percent. Furthermore, the way profit is calculated ’50 per cent of C2’, you end up giving a ‘return on return’: RoA component under C2 being Rs 367 per quintal, she gets a fortuitous gain of Rs 183.5 (0.5x367).   

Unequivocally, there is a flaw in the above method. Either, the government should continue with the extant method of using C2 for fixing MSP. On the other hand, if, it wants to go for 50 per cent profit, then this should be applied only to the paid-out costs namely A2. In other words, MSP should be set at A2+FL plus 50 per cent of A2. On this basis, in the above example, the MSP would be Rs 1537 per quintal (1117+0.5x840).

What did the Modi – government do? 

In its poll manifesto for 2014, the BJP had promised to implement NCF recommendations on MSP. The announcement in this regard was made by the then Union Finance Minister Arun Jaitley in his Budget speech for FY 2018-19. Later, while replying to a debate in Parliament, Jaitley clarified that ‘the production cost would be taken as actual paid A2 plus FL’. In other words, it decided to set MSP at A2+FL plus 50 per cent of A2+FL; it comes to Rs 1675 per quintal (1117x1.5).    

The formula adopted by the incumbent government also suffers from a flaw to the extent that ‘it also adds return on the imputed cost of family labor’ which is unjustified. Have received wage/income for the work done on the field, how can a farmer also earn a profit on it? In the above example, this fortuitous amount is Rs 138 per quintal (277x0.5).       

Moreover, the very approach of the Dr Swaminathan committee of arriving at a profit by taking a percentage of the cost is susceptible to sharp increases in payments to farmers. With every rupee increase in the cost, farmers’ profit will increase by 0.5 rupees. At present, most of the agricultural inputs are subsidized. On fertilizers, there is a massive subsidy (urea is sold at about 1/10th of its cost). If the subsidy is slashed leading to a steep rise in the cost of fertilizers, the formula will give an unwarranted bonanza to the farmers by a corresponding increase in profit. At a fundamental level, profit is meant to reward an entity for the capital invested in any enterprise. This is precisely what was being done before the FY 2018-19. That formula (read: C2 for fixing the MSP) ought to have been continued.  

The MSP setting exercise suffers from another aberration. The cost of producing a crop varies from place to place depending on the soil conditions, weather, irrigation, price of inputs and so on. However, to arrive at MSP, the CACP takes the ‘weighted average’ (WA) cost of production. When the price determined in this manner is given to all farmers, those producing at a higher cost stand to lose whereas others with lower cost make a fortuitous gain.     

Today, the government is trapped in the vicious cycle of having to procure farmers’ produce at ever-increasing MSP, now under pressure to pick up ‘all of it’ at MSP which can denude the exchequer. This, in turn, is because it is trying to substitute the role of the market. It should disentangle from this trap and focus on agri-market reforms which alone can help farmers get a good price.

(The writer is a policy analyst, views are personal)