Agriculture Policy

MSP Can Cover Comprehensive Cost, but Margin Cannot be 50 Percent, Say C Rangarajan and S Mahendra Dev

Paddy procurement in Ludhiana, November 2019. Photo by Vivian Fernandes.

In the context of farmers demanding minimum support prices (MSP) as a legal guarantee, economists C Rangarajan and S Mahendra Dev distinguish between ‘remunerative price’ and ‘minimum support price’ or MSP, in an article in the Times of India of March 15. They say that legally-guaranteed MSP that covers comprehensive or C2 cost (that is, all cash expenses of cultivation, the value of family labour, depreciation of farm equipment, the rental value of own cultivated land and the interest cost of own fixed capital) cannot have a margin of 50 percent, which the farmers demand. It can be about 10 percent. If the margin is as high as 50 percent, private traders will not buy and the government will be the only procurer. This is unsustainable. They say that it will be difficult for the government to be the back-stop procurer for the 21 commodities (other than wheat and rice) for which MSP is declared but procurement does not happen. This is because, it will be difficult to replicate the huge marketing structure, including storage facilities, created for the procurement of rice and wheat.

The authors say there are inter-state differences in cost. MSP is based on the weighted average cost for all of India. The cost of production varies across states. For paddy, for instance, the paid out cost and value of family labour is the lowest in Punjab at Rs 864 a quintal because Punjab has the highest paddy productivity, compared to the all India cost of Rs 1,455 a quintal. West Bengal has the highest paddy cost of production at Rs 1,766 per quintal. For the high-cost and low-yield states, legal MSP may not help, they say. These states should reduce the cost of cultivation and increase yields to have higher profit margins. The institutional arrangements to ensure fair and competitive markets are also essential for MSP to play its role in providing a protective price environment for farmers. The real issue, they say, is not so much about giving legal status to MSP – which can be done – but how to define the concepts ‘minimum’ and ‘support’ in MSP. The MS Swaminathan Commission’s recommendation of MSP as C2+50 percent needs “some” modification, they say.

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