Context:

The farmers across India are protesting and one of the main reasons behind the farmers’ protest is the Minimum Support Price (MSP) for crops which raises questions on the cost of Production.

The cost of agricultural produce is calculated

• The CACP calculates the cost of production at three levels:
  • A2, which includes the cost of inputs such as seeds, fertilizer, labor;
    • A2+FL, which includes the implied cost of family labor (FL); and
• C2, which includes the implied rent on land and interest on capital assets over and above A2+FL.

MSP Calculated

• The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture would recommend MSPs for 22 crops.
• The CACP considered various factors while recommending the MSP for a commodity, including the cost of cultivation.
• It also took into account:
  • The supply and demand situation for the commodity
  • Market price trends (domestic and global) and parity vis-à-vis other crops  implications for consumers (inflation), environment (soil and water use)
  • Terms of trade between agriculture and non-agriculture sectors.
  • The ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ of the CACP stated the given 1.5 times formula to calculate the MSP:
  • 1.5 times MSP Formula = 1.5 times the (A2+FL) costs.

Swaminathan Committee

• The Swaminathan Committee prescribed three variables to determine the production cost. These three variables are:
• As per the Committee, the ideal formula to calculate the MSP would be:
• MSP = C2+ 50% of C2.