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Budget 2018: More to MSP hike than meets eyes

Budget 2018: Finance minister arun Jaitley’s declaration on Thursday to raise the benchmark prices of crops to at least one-and-a-half times of the cost of production in the coming kharif season unnerved analysts for its sheer potential to disrupt government finances.

While clarity is awaited, the cut in the food subsidy bill for decentralised procurement states by Rs 7,000 crore to Rs 31,000 crore for FY19 suggests the Centre perhaps doesn’t expect a massive premium over the prices at which it’s procuring grains now. So, instead of the more ambitious C2 formula favoured by farm scientist MS Swaminathan, the government could stick to the usual A2+Fl formula to calculate the costs of production, according to some analysts.

The MSPs of some summer-sown crops like tur and urad already ensure more than 50% premium over and above the cost of production, according to this formula. But in some key crops, such as paddy, the premiums are substantial, if not 50%.

The MSPs of paddy, maize, ground nut and soyabean enjoy premiums in the range of 36-44%. However, even if the government announces higher MSPs for these crops, since its procurement is mostly limited to paddy, the impact won’t be very substantial. However, most rabi crops currently enjoy much higher premiums than 50%. In fact, the wheat MSP currently includes a 112% premium.

 

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According to the Commission for Agricultural Costs and Prices that recommends the MSPs of various crops, the A2+Fl formula takes into account actual paid-out cost plus imputed value of family labour in the production of a crop.

The C2 formula, however, factors in a whole lot of costs, including imputed rent on land and interest on capital, which make the cost of production much higher than the level on which the CACP bases its recommendations.

While the government has cut the food subsidies for decentralised states, it has budgetted `1,38,123 crore subsidy for FCI in FY19 against Rs 1,01,982 crore in FY18. This budgetted subsidy also includes part of the carry-forward dues the government owes FCI. This suggests it doesn’t think the costs will be unbearable even if it makes such an announcement.