The 1.5 times formula is used to determine the minimum support price (MSP) for crops. This was introduced during the Union Budget 2018-19. According to this formula, the MSP is fixed at 1.5 times the production cost for crops as a ‘pre-determined principle’. Under this formula, the Commission for Agricultural Costs & Prices (the commission that determines the MSP) only has to determine the production cost for a season and apply the formula.
What is the issue?
On December 1, 2020, the talks between the Government of India and the farmer unions failed to reach resolution. During the talks, the farmers refused to budge their demand of repeal of Electricity Amendment Bill 2020 and the three recent farm laws. The main disagreement in the talks is around the minimum support price. The farmers fear that the new laws will do away with the minimum support price being offered by the GoI.
How is the minimum support prices of crops fixed?
Every year the Commission for Agricultural Costs and Prices operating under the Ministry of Agriculture will recommend minimum support prices for 23 crops. This includes 14 crops that are grown during the post monsoon or kharif season and six crops grown in winter or Rabi season. While fixing the prices the Commission for Agricultural Costs and Prices considers several factors such as market price Trends, supply and demand of the commodity, inflation, terms of trade between non-agricultural sectors and agricultural sectors, environment (soil and water) and cost of cultivation.
During the 2018-19 Union budget, it was announced that the minimum support prices will henceforth be fixed at one and a half times of the production costs for the crops. In simple words now the only job of the Commission for Agricultural Costs and Prices is to estimate production cost of the crops for the season and apply the 1.5 times formula and recommend the minimum support price.
How is the production cost calculated?
The Commission for Agricultural Costs and Prices does not do any field-based cost estimates. On the other hand, it simply makes projections using crop specific and state specific production cost estimates. This data is are provided by the Directorate of economics and Statistics operating under Ministry of Agriculture. However this data has a 3 year lag and is not updated frequently .
The Commission for Agricultural Costs and Prices also projects three other kinds of production cost for every crop. They are A2, C2 and A2+FL. A2 covers all the costs incurred by the farmer. This includes fertilizers, seeds, pesticides, least inland, higher labour, irrigation. The A2+FL includes all the cost incurred under A2 and the value of unpaid family labour. C2 is a comprehensive cost that includes rental, interest foregone on own land and fixed capital assets along with the A2+FL cost.
