Recently, the Cabinet Committee on Economic Affairs approved an increase in the Minimum Support Prices (MSPs) for Kharif crops for the 2018-19 marketing season. Subsequently, the Commission for Agricultural Costs and Prices (CACP) released its price policy report for Kharif crops for the marketing season 2018-19.
The central government notifies MSPs based on the recommendations of the CACP. These recommendations are made separately for the Kharif marketing season (KMS) and the Rabi marketing season (RMS). Post harvesting, the government procures crops from farmers at the MSP notified for that season, in order to ensure remunerative prices to farmers for their produce.
In this blog post, we look at how MSPs are determined, changes brought in them over time, and their effectiveness for farmers across different states.
How are Minimum Support Prices determined?
The CACP considers various factors such as the cost of cultivation and production, productivity of crops, and market prices for the determination of MSPs. The National Commission on Farmers(Chair: Prof. M. S. Swaminathan) in 2006 had recommended that MSPs must be at least 50% more than the cost of production. In this year’s budget speech, the Finance Minister said that MSPs would be fixed at least at 50% more than the cost of production.
The CACP calculates cost of production at three levels: (i) A2, which includes cost of inputs such as seeds, fertilizer, labour; (ii) A2+FL, which includes the implied cost of family labour (FL); and (iii) C2, which includes the implied rent on land and interest on capital assets over and above A2+FL.
Table 1 shows the cost of production as calculated by the CACP and the approved MSPs for KMS 2018-19. For paddy (common), the MSP was increased from Rs 1,550/quintal in 2017-18 to Rs 1,750/quintal in 2018-19. This price would give a farmer a profit of 50.1% on the cost of production A2+FL. However, the profit calculated on the cost of production C2 would be 12.2%. It has been argued that the cost of production should be taken as C2 for calculating MSPs. In such a scenario, this would have increased the MSP to Rs 2,340/quintal, much above the current MSP of Rs 1,750/quintal.
Which are the major crops that are procured at MSPs?
Every year, MSPs are announced for 23 crops. However, public procurement is limited to a few crops such as paddy, wheat and, to a limited extent, pulses as shown in Figure 1.
The procurement is also limited to a few states. Three states which produce 49% of the national wheat output account for 93% of procurement. For paddy, six states with 40% production share have 77% share of the procurement. As a result, in these states, farmers focus on cultivating these crops over other crops such as pulses, oilseeds, and coarse grains.
Due to limitations on the procurement side (both crop-wise and state-wise), all farmers do not receive benefits of increase in MSPs. The CACP has noted in its 2018-19 price policy report that the inability of farmers to sell at MSPs is one of the key areas of concern. Farmers who are unable to sell their produce at MSPs have to sell it at market prices, which may be much lower than the MSPs.
How have MSPs for major crops changed over time?
Higher procurement of paddy and wheat, as compared to other crops at MSPs tilts the production cycle towards these crops. In order to balance this and encourage the production of pulses, there is a larger proportional increase in the MSPs of pulses over the years as seen in Figure 2. In addition to this, it is also used as a measure to encourage farmers to shift from water-intensive crops such as paddy and wheat to pulses, which relatively require less water for irrigation.
What is the effectiveness of MSPs across states?
The MSP fixed for each crop is uniform for the entire country. However, the production cost of crops vary across states. Figure 3 highlights the MSP of paddy and the variation in its cost of production across states in 2018-19.
For example, production cost for paddy at the A2+FL level is Rs 702/quintal in Punjab and Rs 2,102/quintal in Maharashtra. Due to this differentiation, while the MSP of Rs 1,750/quintal of paddy will result in a profit of 149% to a farmer in Punjab, it will result in a loss of 17% to a farmer in Maharashtra. Similarly, at the C2 level, the production cost for paddy is Rs 1,174/quintal in Punjab and Rs 2,481/quintal in Maharashtra. In this scenario, a farmer in Punjab may get 49% return, while his counterpart in Maharashtra may make a loss of 29%.
Figure 4 highlights the MSP of wheat and the variation in its cost of production across states in 2017-18. In the case of wheat, the cost of production in Maharashtra and West Bengal is much more than the cost in rest of the states. At the A2+FL level, the cost of production in West Bengal is Rs 1,777/quintal. This is significantly higher than in states like Haryana and Punjab, where the cost is Rs 736/quintal and Rs 642/quintal, respectively. In this case, while a wheat growing farmer suffers a loss of 2% in West Bengal, a farmer in Haryana makes a profit of 136%. The return in Punjab is even higher at 1.5 times or more the cost of production.
According to a press release, the Ministry of Civil Aviation is considering abolishing the development fee being levied at the Delhi and Mumbai airports. The Ministry has already asked the Kolkata and Chennai airports not to levy a development fee. According to the Ministry, this is being done to make air travel more affordable. Currently, development fee charged at the Delhi Airport ranges from Rs 200 to Rs 1300. At the Mumbai airport, the fee ranges from Rs 100 to Rs 600. It is pertinent to note that though, the Ministry has proposed abolishing the development fee, the airport operators may still levy a user development fee. In this blog we discuss some of the aspects of development fee and user development fee. What is a development fee and a user development fee? Development Fee (DF) is primarily intended to fund the establishment or upgradation of an airport. It is intended to bridge the gap between the cost of the project and the finance available with the airport operator. Currently only the Mumbai and Delhi Airports levy a DF. However, there are other types of tariffs, such as a user development fee (UDF), which may be levied by the airports. UDF is generally regarded as a revenue enhancing measure. It is levied by the airport operators to meet operational expenditure Section 22 A of the Airports Authority Act, 1994 (amended in 2003) gives the Airport Authority of India (AAI) the power to levy and collect a development fee on embarking passengers. The Act provides that the development fee can be utilised only for: (a) funding or financing the upgradation of the airport; (b) establishing a new airport in lieu of the airport at which is levied; and (c) investing in shares of a private airport in lieu of an existing airport . Unlike DF, UDF is not levied and collected under the Airport Authority of India Act but under Rule 89 of the Aircraft Rules, 1937. Under the Aircraft Rules, UDF may be levied and collected by either the AAI or the private operator. According to the Airport Economic Regulatory Authority, UDF is levied to ensure that the airport operators can get a fair return on their investments. What is the role of the Airport Economic Regulatory Authority? In 2008, the Airport Economic Regulatory Authority (AERA) was established to regulate aeronautical tariffs. Among others, AERA’s functions include determining the amount of DF and UDF for major airports. In case of non-major airports, the UDF shall be determined by the central government. What has been the role of the Supreme Court? In 2009, the central government permitted the Mumbai and Delhi Airports to levy a DF. The rate of was prescribed by the central government and not by AERA. In 2011, the Supreme Court held that this levy of DF was illegal. The Court based its decision on two grounds. Firstly, the court held that the rate of DF has to be determined by the AERA and not the central government. Secondly, the Court held that the power to levy the fee lies with the Airport Authority as the development fee can only be utilised for the performance of the purpose specified in the Act. The court held that while the Airport Authority can utilise the development fee for any of the functions prescribed in the Act, it can assign the power to levy a development fee to a private operator only for funding or financing the upgradation or expansion of the airport. Can private operators collect a development fee and a user development fee? In 2003, the government amended the Airport Authority of India Act to allow the AAI with the prior permission of the central government to: (i) to lease the premises of airports to private entities to undertake some of the functions of the AAI; (ii) levy and collect a development fee on the embarking passengers at a rate that may be prescribed. Till 2011, the power to collect the development fee lay only with the Airport Authority. However with the notification of the Airports Authority of India (Major Airports) Development Fees Rules, 2011, private operators have also been permitted to collect the development fee.
