The Government’s commitment to ensure a MSP for crops that is equal to 1.5 times the cost of production is much ado about nothing. Interests of farmers are well protected under the existing mechanism of fixing MSP. The need is to focus on ensuring that they get it on ground zero
In its 2014 poll manifesto, the Bharatiya Janata Party had promised to guarantee farmers a price equal to 1.5 times the cost of production. However, the promise came too late, when Union Finance Minister Arun Jaitely made the announcement in the Budget speech for 2018-19.
later, replying to a debate in Parliament, Jaitely clarified that the production cost would be taken as actual paid out cost plus imputed value of family labour (A2+Fl). Actual paid out cost (A2) costs basically cover all paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, whereas Fl is the imputed value of unpaid family labour.
Under the extant dispensation, the Commission for Agricultural Costs and Prices (CACP) adds to A2+Fl, the rental value of owned land and imputed cost/or interest on owned fixed capital assets to arrive at what it calls as comprehensive cost (C2 cost). Dubbed as a more comprehensive measure, C2 cost forms the basis for determining the minimum support price (MSP). The recommendations made by CACP are normally accepted by the Government.
The clarification offered by Jaitely on what should be the cost of production for the purpose of arriving at 50 per cent mark up (albeit towards profit of farmers) has led to disappointment among farmers leaders who argue that A2+Fl is a narrow base and is out of sync with the recommendation of the National Commission on Farmers (NCF) under the chairmanship of MS Swaminathan.
In its fifth report submitted in October 2006, NCF had recommended that MSPs, which act as a floor price to avoid distress sales, should be “at least 50 per cent more than the weighted average cost of production”. The recommendation did not specifically mention the measure of costs that would be used. However, Swaminathan clarified: “When we recommended 50 per cent over costs, we meant complete costs called C2, which includes all assumed costs”.
The clarification given by the chairman now cannot be taken to mean that the Commission had meant it that way. A recommendation emerges from deliberations and is based on consensus among members. The same principle applies to the clarification given in respect to a recommendation. In retrospect — after the report was finalised and submitted — it cannot be said that Swaminathan’s clarification now would also have the approval of other members.
On the substantive issue, the proposal for 50 per cent profit in addition to C2 costs is seriously flawed. First, it ignores the fact that already under C2, there are three components viz, imputed value of family labor, interest on own capital and rental value of owned land which contribute to the income of the farmer. let us illustrate with an example.
In case of paddy, all-India weighted average A2 cost for 2017-18 Kharif season, as projected by the CACP, is `840 per quintal; A2+Fl cost: `1,117 per quintal and C2 costs: `1,484 per quintal. In the total cost of `1,484 per quintal, the amount going towards farmer’s income is `644 per quintal. Of this, `277 per quintal is for family labour and `367 per quintal for rental and interest.
Now, team Swaminathan wants a profit of 50 per cent to be given in addition to `644 per quintal being the remuneration for the three factors of production viz, land, labour and capital brought in by the farmer himself. If we insist on the former, then it can come only in substitution of the latter. You cannot have both.
In this scenario of giving profit in lieu of imputed values for own land and capital (A2+Fl plus 50 per cent of A2), the MSP would be `1,537 per quintal. This is marginally higher by `53 per quintal over what the farmer is currently getting. So, the switch-over to new formula does not make any material difference vis-à-vis price received under the extant dispensation.
On the other hand, under Swaminathan formula, the MSP will work out to be `2,226 per quintal (1.5XC2) which is `742 per quintal higher than the existing price. This may be music to the farmers but it sacrifices on the principle in as much as it gives them profit of 50 per cent over and above the returns already built into C2. The figure also gets inflated due to a calculation flaw. When you take 50 per cent of C2, which includes `367 per quintal for rental and interest, this tantamount to giving profit to these two components as well. How can you give a return on returnIJ This is patently absurd. The extra cushion on this score works out to `183 per quintal which is totally unjustified and untenable.
Clearly, computing MSP as 1.5 times C2 cost suffers from serious anomalies apart from the fact that this was not even the recommendation of NCF. This should be avoided not just because this will have huge financial implications and in turn, subsidy payments under National Food Security Act (NFSA) but more so on the ground that the methodology is flawed.
What about the formula contemplated by the Government viz, MSP based on 1.5 X (A2+Fl)IJ This is free from giving return twice over first as imputed value of own capital and owned land and then, a component of profit. The price computed on this basis works out to `1,675 per quintal. This is `191 per quintal higher than the price under existing C2 methodology.
But even in the Government’s formula, a calculation flaw remains. Herein, the profit is also given on imputed value of family labour. This results in excess of `138 per quintal (0.5x277). This has to go. With this adjustment, the price would be `1,537 per quintal which is marginally higher than the current price.
To conclude, it is a typical case of ‘much ado about nothing’. The interests of farmers are well protected under the existing mechanism of fixing MSP. The Government needs to focus on ensuring that they actually get it on ground zero.
(The writer is a freelance journalist)
