In its 2014 poll manifesto, BJP had promised to guarantee farmers a price equal to 1.5 times the cost of production. However, finance minister, Arun Jaitely made the announcement in the budget speech for 2018-19. The minimum support prices [MSPs] determined on the basis of this formula will be applicable to crop production starting ensuing kharif season [April-September, 2018].
Later, replying to the debate in the parliament, Jaitely clarified that the production cost would be taken as ‘A2+FL’. A2 costs basically cover all paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilizers, chemicals, hired labor, fuel, irrigation etc whereas FL is the imputed value of unpaid family labor.
Under the extant dispensation, the Commission for Agricultural Costs and Prices [CACP] – a body in ministry of agriculture – 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 C2 cost. Dubbed as a more comprehensive measure, C2 cost forms the basis for determining the 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% 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 Dr 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% more than the weighted average cost of production” . The recommendation did not specifically mention the measure of costs that would be used. However, Dr Swaminathan has clarified “when we recommended 50% 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 of a recommendation. In retrospect – after the report was finalized and submitted – it cannot be said that Dr Swaminathan’s clarification now would also have the approval of other members.
On the substantive issue, the proposal for 50% 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 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 Rs 840 per quintal; A2+FL cost: Rs 1117 per quintal and C2 costs: Rs 1484 per quintal. In the total cost of Rs 1484 per quintal, the amount going towards farmer’s income is Rs 644 per quintal. Of this, Rs 277 per quintal is for family labor and Rs 367 per quintal for rental and interest.
Now, Team Swaminathan wants profit @ 50% to be given in addition to Rs 644 per quintal being the remuneration for the three factors of production viz. land, labor 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% of A2], the MSP would be Rs 1537 per quintal. This is marginally higher by Rs 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 Rs 2226 per quintal [1.5XC2] which is Rs 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 @ 50% over and above the returns already built into C2. The figure also gets inflated due a calculation flaw.
When, you take 50% of C2 which includes Rs 367 per quintal for rental and interest, this tantamount to giving profit on these two components as well. How can you give return on return? This is patently absurd. The extra cushion on this score works out to Rs 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]? 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 Rs 1675 per quintal. This is Rs 191 per quintal higher than the price under existing C2 methodology.
But, even in government’s formula, a calculation flaw remains. Herein, the profit is also given on imputed value of family labor. This results in excess of Rs 138 per quintal. This has to go. With this adjustment, the price would be Rs 1537 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.