Thursday, December 24, 2020

MSP – Minimum Support Price or Maximum Sales Price? What profit does farmer makes?

Government defines Minimum Support Price, MSP, as a tool which gives guarantee to the farmers, prior to the sowing season, that a fair amount of price is fixed to their upcoming crop to encourage higher investment and production of agricultural commodities. The MSP is in the nature of an assured market at a minimum guaranteed price offered by the Government.

MSP is declared by central government for 23 crops on the advice of the Commission for Agricultural Costs and Prices (CACP). CACP calculates three different costs of production for each crop in the list.

1.       A2 (actual paid out cost) = spend on seeds, fertilisers, pesticides, and hired labour and machinery

2.       A2+FL = A2 + the economic value of the efforts of family members working on the farm

3.       C2 (comprehensive cost) = A2+FL+ imputed rent and interest on owned land, other assets and capital

Swaminathan report recommends that MSP should be at least 50% higher than total cost, C2. During the election campaign for the 2014 Lok Sabha elections, Narendra Modi had campaigned that his government would implement the recommendations made by the Swaminathan commission on farmers. Even though the PM and his party continues to claim that they have implemented 50% profits for the farmers, the truth was revealed in response to an RTI by PP Kapoor in April of 2016. Agriculture Ministry in response to his RTI said – “The recommendation of the Swaminathan commission regarding the minimum support price (MSP) was rejected by the government because the MSP is decided by the Commission for Agricultural Costs and Prices after taking into consideration all the varieties. Therefore, deciding a minimum 50% hike over the cost could lead to distortions in the market.”

Currently, the MSP is calculated using A2 + FL. Even though UPA government also announced MSP at 50% profit over A2+FL, the PR of current regime is unmatched and hence the world is told that Modi is the PM to provide farmers with 50% profits over their costs.

As per a study by in February 2020, considering MSPs for Kharif crops announced in 2019-20 – “if all crops falling in the purview of MSP are included, the margin of total profit is only 14% over cost C2.”

Still, if MSP is indeed the minimum price a farmer gets for his/her produce we are sure that farmer gets atleast 14% profits. That would still be something to take home. However, this 14% number will be true if we assume-

1.       The calculations of costs involved which form the basis of the MSP (A2+FL and C2) are accurate and reflect ground reality; and

2.       Every farmer is able to sell his/her produce at least at MSP.

Let us look at question 2 first.

Shanta Kumar report (2015) indicates that at present only 6% of farmers in India have access to MSP and that too for about 35% of their produce. So, in a way only 2% produce gets MSP.  If one adds all agricultural households having sold paddy and wheat to any procurement agency, during July2012-June2013, the number of households comes to just 5.21. This figure of 5.21 million households as a percentage of total number of agricultural households (90.2 million) comes to just 5.8 percent. But if one adjusts this with common households that sell both paddy and wheat, and/or by the percent of quantity sold by each household at MSP, the figure of direct beneficiaries comes even lower. For staples other than wheat and paddy, the situation is far worse.”

A report published by in Feb 2019 shows the relation between declared MSP and average selling price of the crop for month of Oct 2018.

Note – that barring one exception, the national average selling price is significantly lower than MSP. In many cases the selling price is lower than C2. So even if our answer to question 1 is yes, that we can 100% rely on production cost numbers A2+FL and C2, the farmers don’t have access to selling prices which are in excess of MSP and only 6% farmers have access to MSP for about 30-35% produce. This means that profits for farmers are much less than 14% (against C2), many a times they make losses.

Let us look at question 1. How reliable are C2 & A2+FL numbers?

As per a report by (February 2020), where they accessed communications from various state governments to the central government in regard to MSP for Kharif crops for 2019-20, atleast nine states, including BJP ruled states, have disagreed with CACP advised costs. Some of the observations of state governments are -

Haryana (BJP Khattar Government) – After examining the CACP report, the state agriculture department said in its letter, sent on May 18, 2019, “It is pertinent to mention that the price of diesel, pesticide, fertiliser, machines and other inputs has increased this year as compared to the previous year. Lower availability of labour is also a major contributor in increasing the cost of cultivation.”

For Bajra they said - “Department of Agriculture and Farmers Welfare has estimated the input cost for the crop as Rs 2,170, but the CACP has recommended Rs 2,000 per quintal as the MSP.”

“The state government is making strong efforts for diversification of Paddy to Maize crop, therefore, we need strong support for increasing the MSP of this crop for adoption by the farmers…. CACP has recommended Rs 1,760 per quintal which is very less and does not even cover the cost of cultivation. The MSP of Maize should be fixed at Rs 2,350 per quintal.”

Uttar Pradesh (BJP Yogi Government) – The state assessed the Cultivation Cost (C2) of paddy to be Rs 1,679 per quintal and recommended the MSP to be Rs 2,520 per quintal. However, the Centre fixed the MSP at Rs 1,815 per quintal.

Karnatka - “The MSP fixed for the 2019-20 season is inadequate compared to the state’s cultivation cost. Because of this, the profit margin of the farmers is either little or negative.”

So, we can’t even trust the production cost numbers which are being used to calculate MSP numbers.

Which essentially means the farmers lose out on all sides of the equation. Neither are the costs as per Swaminathan recommendations (C2), nor are the calculated costs as per ground reality, and nor are the selling prices at or higher than MSP.

If you run a business, you know how a profit and loss analysis is done. Any big corporation before bidding for any work spend days planning to come with best possible profits to win the work. They consider all sorts of costs - Compensation to workers (starting from the top management, to the assistants and clerks to print and office boys who serve coffee), Rent of offices and factories they use, Depreciation of their assets, Cost of raw materials, Design and engineering costs, costs of testing and validations, costs for travel of team members, costs of entertainment (team and clients), logistics costs (Transportation, handling of equipment), Cost of internet, Phones, Car fuel, Taxi bills, legal fees, Insurance, electricity bill, customs, octroi and all possible other costs – before they come to a price on which they will sell their products ad services so that they can make reasonable profits.

How do governments and public institutes prepare their financial statements? – with as much detail as corporates.

So, why is it that when a farmer’s profitability has to be calculated, suddenly all the costs to be considered seem like a burden?

The truth is - agriculture in general is a loss-making proposition.

Swaminathan reports in an urgent wake up call (this was 2005-2006) state “The acute agricultural distress now witnessed in the country, occasionally taking the form of suicides by farmers, is the symptom of a deep seated malady arising from inadequate public investment and insufficient public action in recent years. The precise causes of the agrarian crisis are many and varied, but there are five basic factors which are central to the present crises. These are: unfinished agenda in land reform, quantity and quality of water, technology fatigue, access, adequacy and timeliness of institutional credit, and opportunities for assured and remunerative marketing.”

The farmers are fighting for the last - assured and remunerative marketing.




(first published on 08 Dec 20 @ MSP – Minimum Support Price or Maximum Sales Price? What profit does farmer makes? (

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Sukhdev Singh is milking a buffalo when I call him. We are speaking after a long gap. His voice carries the same cheerful energy I remember....