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Economic Survey Series-3: MSP- limitations and challenges in its calculation

Methodology for cost calculation of MSP

Government of India established Commission for Agricultural Cost and Pricing in 1965 (as Agriculture Price Commission and renamed in 1985) to recommend minimum price for various agriculture produce to optimize the use of resources and induce sustainability in terms of production.

It is an attached office to Ministry of Agriculture.

Methodology for cost calculation

A2 cost includes all actual payments made by farmers like

  1. Payments made for inputs like seeds, fertilizers, pesticides, etc.
  2. Payments made to hired labour
  3. Payments made for hired machinery
  4. Payments made for leased in land

A 2 + FL cost: It includes

  1. Cost A 2 and
  2. Imputed cost of family labour as agriculture also utilizes a lot of family labour

C 2 cost: It includes

  1. Cost A 2
  2. Imputed cost of family labour
  3. Imputed rent of owned land
  4. Imputed interest of own capital (excluding land)

C 3 cost: It includes

  1. Cost C 2
  2. 10% of cost C 2 to account for managerial remuneration to the farmers

What are the limitations in the present methodology of cost calculation of MSP by CACP?

  1. It ignores demand- supply conditions of the market
  2. It ignores the price trends in the domestic market
  3. It also ignores the price trends in the international market
  4. It fails to analyze the terms of trade- either in favour or against Indian economy.
  5. It is uni-dimensional i.e. it takes care of the cost of production of a particular crop and ignores inter-crop price parity.

What are the challenges in the implementation of Swaminathan Commission?

C 2+ 50% as proposed by Swaminathan Commission faces several challenges in its implementation. Such challenges are:

  1. It is impractical as
  • It will increase pressure on fiscal deficit and probably not possible under existing condition.
  • It is not possible to implement universally for all crops or even for maximum of the crops.
  1. It will bring tremendous pressure on inflation.
  2. Since it cannot be implemented universally, giving such MSP for selected crops will only distort the cropping pattern and sustainable agriculture.
  3. High Indian agriculture product price will make it less competitive in the international market and will be against the government target to increase agri-export.
  4. Moreover, it will bring make Indian position weak in WTO, as high domestic price will attract more agri-import from different countries and being a member of WTO, India can’t limit its import. Again the burden will shift from farmers to the government to fulfill the procurement obligation and we know what the government will do? It will simply increase the taxes.


60-70 years’ disparity maintained between agriculture and non-agriculture products’ prices can’t be leveled in 4 or 5 years. I agree with the Swaminathan Committee that farmers needs to be compensated for 60 years of wrongs, however, the MSP as the means of compensation is neither possible nor desirable from sustainability point of view.

So, other way out should be explored to compensate the farmers like

  1. Value addition to farmers produce
  2. Minimization of post harvest losses through better cold storage and warehouse facilities.
  3. Eliminating the role of middle man with better e-marketing system
  4. Commercialization of agriculture
  5. Encouraging food processing industries
  6. Development of tech based infrastructure so that farmers get best price from high price zones.
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