How the 1.5-times formula for crops MSP is calculated?

News: The talks between farmer unions and the government failed to reach a resolution.The main bone of contention in these talks is the Minimum Support Price (MSP) for crops which farmers fear the new laws will do away.

Facts:

• MSP: It is the minimum price paid to the farmers for procuring food crops. It is announced by the Government at the beginning of the sowing season.
• How was the MSP calculated before? The Commission for Agricultural Costs & Prices (CACP) would recommend MSPs for 23 crops by taking into account the supply and demand situation for the commodity; market price trends and implications for consumers (inflation), environment and terms of trade between agriculture and non-agriculture sectors.
• What changed with the Union Budget for 2018-19? The Budget for 2018-19 announced that MSPs will be fixed at 1.5 times of the production costs for crops as a predetermined principle.Simply put, the CACP’s job now is only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.
• How is this production cost arrived at? CACP considers both A2+FL and C2 costs while recommending MSP.However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.
  • A2: It covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
  • ‘A2+FL’: It includes A2 plus an imputed value of unpaid family labour.
  • ‘C2’: It is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets on top of A2+FL.

Additional Facts:

Commission for Agricultural Costs and Prices (CACP): It is an attached office of the Ministry of Agriculture and Farmers Welfare. It is not a statutory body set up through an Act of Parliament.

Link for our 7PM Editorial of similar article (Why Farmers are protesting and what is MSP system?)