MSP for Crops: What is MSP & How is MSP calculated? - Know 1.5-times formula & List of crops under MSP 2020-21

MSP for Crops: The farmers across India are protesting against the three agricultural laws, namely, Essential Commodities (Amendment) Act, 2020, Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 and Farmers’ Produce Trade Act and Commerce (Promotion and Facilitation) Act, 2020. Though the central government has held a few rounds of talk with the farmer unions, the issue remains unresolved as of now. The main reason behind the farmers' protest is the Minimum Support Price (MSP) for crops.

The farmers fear that these new farm laws will do away with the MSP for crops. The MSP is the minimum price that farmers get for their crops, above the production cost. In 2018-19, the Union Budget announced that the MSP for crops will now be kept at 1.5 times the production cost with an aim to double farmer incomes by 2022. Accordingly, the Government has increased the MSPs for marketing season 2020-21 for Kharif, Rabi and other commercial crops.

Here we have shared what is MSP, how is MSP calculated and the 1.5 times formula to calculate the increased MSP. Also, look at the list of crops put under the MSP for marketing season 2020-21.

What is MSP?

The Minimum Support Price (MSP) is the price fixed by government of the crops produced by farmers. It is the price which government pays to procure the crops from farmers. The MSP is a guarantee price that safeguards farmers with a minimum profit for their harvest, in case the open market keeps lesser price for their crops.

Who fixes the Minimum Support Price (MSP)?

The Central Government fixes the Minimum Support Price (MSP) of the 23 agricultural crops based on the recommendations of Commission for Agricultural Costs and Prices (CACP), which is also responsible for fixing the FRP (Fair and Remunerative Price) of sugarcane.

The CACP fixes the MSP after taking into consideration the domestic and international prices of crops, intercrop price parity, and the demand-supply situation.

How is MSP Calculated?

The Swaminathan Committee prescribed three variables to determine the production cost. These three variables are:

A2: These are the out-of-pocket expenses incurred by farmers including loans for fertilisers, fuel, machinery, irrigation, etc. and cost of leasing land.

A2+FL: This is the estimated value of the unpaid labour for harvesting crops such as contribution of family members and others. It is in addition to paid-out cost.

C2: Comprehensive Cost (C2) is the actual cost of production as it takes into account for rent and interest foregone on the land and machinery owned by farmers, in addition to the A2+FL rate.

As per the Committee, the ideal formula to calculate the MSP would be:

MSP = C2+ 50% of C2

What is 1.5 times formula to calculate the increased MSP?

The Union Budget 2018-19 called for increasing the MSP at 1.5 times the production cost. However, the Budget speech did not mention the formula to calculate the 1.5 times MSP formula.

However, the ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ of the CACP stated the given 1.5 times formula to calculate the MSP:

1.5 times MSP Formula = 1.5 times the A2+FL costs

However, farmers demand that the 1.5-times MSP formula should be applied on the C2 costs. Considering this, the Government in March 2020 stated that the Production Cost is one of the main factors to determine the MSP and the CACP considers all the costs in comprehensive manner.

The CACP considers both C2 and A2+FL costs to determine the MSP. CACP considers the A2+FL formula for return and C2 formula as a benchmark reference costs to make sure that the MSP covers the production cost.

List of Crops under MSP for 2020-21

Have a look at the list of Kharif Crops under MSP for marketing season 2020-21:

Why Farmers fear that Farm Laws will do away with the MSP?

Farmers fear that the three farm bills passed by the central government will do away with the MSP as these bills mention just a little or nothing about the MSP. Though the government has announced verbally that the MSP will stay, farmers find it hard to trust the same.