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Farmers to Partially Benefit from MSP Fixed at 1.5x of Production Cost

India Ratings and Research (Ind-Ra) said that, the current problem faced by farmers is essentially an agricultural distress and not a generalised rural distress, and farmers’ distress is essentially emanating from shrinking agricultural margins.

Ind-Ra analysed the data for three periods: FY04-FY08, FY09-FY13 and FY14-FY18. In the analysis, agricultural gross value added/growth in minimum support price (MSP) of rice and wheat has been considered a proxy for an increase in output prices, while growth in agricultural wages has been considered a proxy for an increase in input prices.

While FY04-FY08 is characterised by low wage growth and relatively high agricultural output/MSP growth translating into higher margins, FY09-FY13 is characterised by agricultural output/MSP growth comparable with that in FY04-FY08 but high wage growth eroding margin growth. Meanwhile, FY14-FY18 is characterised by moderate agricultural output/MSP growth and almost similar wage growth, indicating thin margin growth for agricultural activity.

Another way to look at agricultural distress is to assess margins as a percentage of cost of production. A glance at farmers’ margins using the MSP over the A2+FL cost of rice and wheat provides some interesting insights. Firstly, wheat margins are relatively high compared with those of rice. Secondly, wheat and rice margins significantly increased during FY09-FY13 but fell below the FY04-FY08 levels in FY14-FY18, leading to widespread discontent among farmers. For example, a farmer’s rice margin increased to 82.3% in FY09-FY13 and subsequently fell to 38.6% in FY14-FY18. The FY14-FY18 margin was lower than 47.9% witnessed during FY04-FY08.

If C2 cost is considered over MSP, farmers’ margins turns out to be significantly lower than A2+FL cost during FY14-FY18, with the rice margin turning out to be as low as 6.2%.

According to Ind-Ra, the announcement of MSP at 1.5x of A2+FL cost. Fixing of MSP at 1.5x Cost of Production to Partially Benefit Farmers: On 4 July 2018, the government of India fixed the MSP for Kharif crops at least 50.0% higher than the A2+FL cost of production. The fixing of MSP using this formula will benefit farmers in FY19, as the MSP of rice fell below 1.5x of A2+FL cost during FY14-FY18. However, the MSP of rice during FY09-FY13 was higher than 1.5x of A2+FL cost.


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