MSP and it’s Future: Mathematical Analysis

MSP and Punjab

MSP is the minimum cost price of a crop at which government agency FCI procures the crop from farmers. MSP is only given on wheat and rice, however it is declared for all 23 crops.

For the analysis we will only consider MSP of wheat and the farmers of Punjab because Punjab and Haryana farmers are main beneficiaries of MSP.

No, govt is not doing any extra favor to farmers of Punjab, MSP was started only for green revolution states and MSP was one way to encourage farmers to grow more wheat when India used to take wheat in donation from US.

Average land holding in Punjab per family is 3–5 acres. most farmers follow the 2 crop cycle(wheat-paddy) due to guaranteed MSP. Average yield of wheat per acre is 20 quintals. input costs are 11000 per acre.

Assuming average family owns 3 acres, earning at 1925 MPS is:

1925*20*3–11000*3= 82,500

the process from sowing to harvest takes 7 months of time. monthly early is 11,785rs.

Now let’s talk about inflation trends in India

India inflation rate for 2019 was 7.66%, a 2.8% increase from 2018.

Inflation rate for 2018 was 4.86%, a 2.37% increase from 2017.

Inflation rate for 2017 was 2.49%, a 2.45% decline from 2016.

Inflation rate for 2016 was 4.94%, a 0.93% decline from 2015.

For farmers major factors that contribute to production cost are seeds, chemicals, hired labor, irrigation, fertilizers and fuel.

MSP Formula

MSP in India is given according to A2+FL

What is A2+FL?

The MSP is usually based on the recommendations by the Commission for Agricultural Costs and Prices. This estimation is usually done based on three types of calculation methods. These are A2 method, A2+FL method and C2 method.

As per the A2 method, MSP is set 50% higher than the amount farmer spends on farming including spending on seeds, fertilisers, pesticides, and labour.

C2 method, on the other hand, makes the calculation by including a wider range of inputs. This includes besides factors used to calculate A2, the economic value of the efforts of family members working on the farm and the value of other spending including rent and other assets. After calculating these, MSP is set at 50% above the derived amount.

While the National Commission on Farmers (NCF) headed by MS Swaminathan opted for this method to calculate MSP, it was not the one that was finally chosen.

The present MSP has been calculated based on the A2+FL method. The method is a middle ground between the other methods were the MSP is set 50% higher than the amount that derives from adding the amount farmer spend on farming including spending on seeds, fertilisers, pesticides, and labour and the value of labour provided by the family members for agriculture.

‘A2+FL’ includes A2 plus an imputed value of unpaid family labour. ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

MSP Calculation

if we continue A2+FL in future it is clear that the earning will not increase proportionately to inflation. Last year meagre 50 rs was increased in the MSP of wheat. 50rs of 1925 is 2.5%. Assuming not more than 4 percent MSP will be increased each year in next 10 years.

MSP in 2030 will be 2923rs per quintal at 4 percent annual increase. Assuming the yield will increase to 21 quintals per acre, total salary per month will be

2923*21*3/7= 26,307 per month.

Assuming there will be fragmentation after 10 years since land will be divided and passed on to next generation(assumption that most families will have 2 children which won’t be true in all the cases ).

final salary= 26,307/2=13153

After 10 years an average Punjabi farmer will be earning13,153 rs per month. Now let us check what is the value of 13,153 with inflation rate 5 percent.

PV=FV(1/1+Inflation)^Years in future)=8074rs

So in ten years an average Punjabi farmer will be earning 13153rs( 8074rs of today). Can we live off 8000rs today? NO!

P.S — I have kept inflation low at 5 and MSP increase high at 4 to take the best case scenario. going by current trends inflation can be around 8 percent and MSP increase will be around 3 percent annually which will bring the salary even below 10,000 and 6k of today.