Economics Prelims cum Mains

How the 1.5-times formula works out MSP


The News

  • The Central government announced steep hikes in the minimum support prices (MSPs) for most crops planted in the current kharif season based on a new formula, which pays farmers 1.5 times their estimated production costs.



  • Currently, the government fixes MSP of 23 commodities based on the recommendation of the Commission for Agricultural Costs & Prices (CACP).
  • The CACP has three formulae to arrive at the cost of production: A2, A2+FL and C2.
  • A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others.
  • A2+FL covers actual paid-out costs plus an 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.
  • The Budget for 2018-19 announced that the government will fix the minimum support price of Kharif 2019 crops at least 1.5 times than the cost of production.
  • The government will take the A2+FL formula (covering actual paid out cost plus imputed value of family labour) to determine the cost of production of agri-crops and fix accordingly the MSP.


Crops for which MSP is fixed

  • The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture recommends MSPs for 23 crops.
  • These include 14 grown during the kharif/post-monsoon season and six in rabi/winter (wheat, barley, chana, masur, mustard and safflower), apart from sugarcane, jute and copra.


Factors that are considered while recommending MSP

  • Cost of cultivation
  • Supply and demand situation for the commodity
  • Market price trends (domestic and global)
  • Parity vis-à-vis other crops
  • Implications for consumers (inflation), environment (soil and water use)
  • Terms of trade between agriculture and non-agriculture sectors.



How is the production cost arrived at?

  • The CACP does not do any field-based cost estimates itself.
  • It merely makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry.
  • These projections are made assessing likely changes in input costs based on the latest price data from other sources such as the Labour Bureau (for wages) and Office of the Economic Adviser (which compiles wholesale prices).
  • The CACP further projects three kinds of production cost for every crop, both at state and all-India average levels A2, A2+FL and C2.
  • The government will take the A2+FL formula (covering actual paid out cost plus imputed value of family labour) to determine the cost of production of agri-crops.
  • This is multiplied by a factor of 1.5 and the MSP is fixed accordingly.


Impact of the new formula

  • From the table, it can be seen the MSPs for 2018-19 derived from this formula are substantially higher than last year’s.
  • The overall increase in the support price could be between 8 per cent and 47 per cent depending on crops and their cost of production this year.
  • The increases work out to more than 10% for 11 out of the 14 kharif crops.


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