Minimum support price: Need for improved methodology, institutional reforms

There were long drawn farmer protests in 2020 demanding legalising minimum support price (MSP) and that demand appears to have regained momentum recently.  Notwithstanding formal legalisation, MSP continues to remain at the core of the discourse on remunerative prices and other farmer related issues.

There are two contentious questions related to MSP. First, how is the MSP fixed? Second, how to ensure that farmers get the recommended MSP?

While the government is mainly working on the second issue, many farmer groups raise their concerns about the first issue, the way MSP is fixed, and contend that MSPs do not adequately cover the expenditures incurred by the farmer.

MSP is recommended by the Commission for Agricultural Costs and Prices (CACP), set up in 1965, initially mandated to advise on price policy for 11 agricultural crops. The mandate of the CACP has been continually expanded and currently recommends MSPs for 23 crops, although effective procurement is limited to a handful of crops.

The mandate of CACP focusses on important aspects of agriculture, which include production, inter-crop price parity and sustainability and inflation, among others.  However, farmers’ concerns related to farm income, viability of farming, disparities between agricultural and non-agricultural income, input prices and infrastructure are conspicuous by their absence in the CACP’s mandate.

MSP is determined on the basis of a host of factors including cost of production, domestic and international prices, supply-demand scenario, inter-crop price parity, nation’s requirements, etc. However, cost of production is a very important factor. 

Data on cost of cultivation of crops is collected through an annual survey. Since 2018-19, MSPs are being fixed at 50 percent above the A2+FL cost, where A2 refers to the paid-out costs on account of seeds, fertiliser, labor, etc, and FL refers to the imputed value of family labour.

Farmers have been contending that the present system does not cover the cost of production adequately and have been demanding that the MSP be based on C2, which includes, in addition to A2+FL, the costs on owned fixed capital, owned land and managerial inputs that farmers incur. We analyse the way the MSP is fixed and suggest some needed reforms.

At present, there appears to be some underestimation of the costs of land, labour and capital. The land rent is estimated on the basis of prevailing rents in the village for identical types of land, subject to the ceiling of fair rents given in the land legislation of the state concerned. However, this needs to be calculated at the prevailing rent or as the actuals reported by the farmer without any ceilings applied.

The prevailing land rents are way above the ceiling in many states. The family labour cost is computed on the basis of actual market wage rate for unskilled labour in the locality or statutory wage rate whichever is higher. This does not recognise the value of farmers’ skills in terms of decision making, risk taking and time spent on various activities. Head of the family’s labour input should be valued at skilled wage rates.

For the computation of interest on owned fixed capital and working capital, only interest rates charged by the institutional sources are considered, that too for half of the crop period. Crop loans are taken by farmers at the time of sowing and repaid after the harvest. Thus, interest is paid for the full life of a crop season. Therefore, interest on working capital should be estimated for the whole period of the crop season, and on actual rates paid by the farmers.

The cost of cultivation does not include post-harvest costs such as cleaning, grading, drying, packaging, marketing and transport of produce to market. Since data on these costs is collected in the survey, these costs should also be used in computing the cost of cultivation.

Improvements are also needed in the sampling methodology of the cost of cultivation surveys. The marginal and small landholdings, which constitute 85 per cent of the total number of landholdings in the country, are grossly underrepresented at present. The present methodology uses multi-stage sampling with tehsils, villages and households forming the units at different stages.

One village is included from each selected tehsil/block. Ten households are selected from every village with two households each from marginal, small, semi-medium, medium and large farmer categories. However, 69 per cent of the farm households in the country belong to marginal (<1 ha) and 16 per cent to small category (1-2 ha). Therefore, adequate representation should be given to marginal and small-class households. Since tehsils/blocks are large geographical entities, two villages, instead of one, should be selected for wider coverage.

Perhaps the most important reform required is to expand the scope and functioning of CACP.

CACP is the ideal body to articulate the interests of farmers and agriculture sector. It should be actively consulted in all the trade policy decisions since import tariffs, taxes and international trade can have a strong effect on cost of production, prices and farm income. Also, CACP makes many non-price recommendations, related to marketing, etc, which need to be taken seriously by the government.

Using the wealth of data and information that CACP has at its disposal, it should publish information on farm incomes for different crop complexes and specific categories of farmers, and make recommendations related to farm incomes and remunerative prices. These reforms of pricing methodology and CACP will go some way in addressing the concerns of farmers.

C S C Sekhar is Professor, Institute of Economic Growth, University of Delhi. He can be reached at csekhar@iegindia.org .
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