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MSP formula A2 A2+FL C2 Photo: Habib Billah · Pexels License · source ↗

MSP formula: A2, A2+FL and C2 cost concepts

The Commission for Agricultural Costs and Prices (CACP) measures the cost of cultivation of every notified crop in three layered cost concepts — A2, A2+FL and C2. These three numbers and the multipliers applied to them are the technical core of the MSP debate in India.

A2 — paid-out cost (operational)

A2 is the cash and kind expenditure the farmer actually pays out for that crop. It includes:

  • Seeds (purchased + farm-saved valued at market price)
  • Hired human labour, hired bullock labour, hired machine labour
  • Fertilisers and manures (purchased)
  • Plant-protection chemicals (pesticides, herbicides)
  • Diesel, electricity, irrigation charges
  • Interest on working capital
  • Land revenue, cesses

A2 is also called "out-of-pocket cost" and represents the floor below which the farmer makes an immediate cash loss on the crop.

A2+FL — paid-out cost plus imputed family labour

A2+FL adds the imputed value of unpaid family labour to A2. Family labour is valued at the average prevailing wage rate for casual farm labour in the village/state. A2+FL captures the operational cost where the farmer recognises the opportunity cost of his own and his family's labour.

This is the cost concept currently used by the Centre to determine MSP. Since the 2018-19 Union Budget, MSP is fixed at a minimum of 1.5 times A2+FL — the "1.5x A2+FL" formula.

C2 — comprehensive cost

C2 adds the following imputed costs to A2+FL:

  • Imputed rental value of owned land (the rent the farmer would earn if he leased the land out)
  • Imputed interest on owned fixed capital (machinery, livestock, farm buildings)

C2 captures the comprehensive opportunity cost of farming including land and own capital. It is approximately 30-40% higher than A2+FL depending on crop and state.

C3 — sometimes added by CACP

C3 = C2 + 10% of C2 for managerial functions of the farmer. CACP does not use C3 for MSP fixation, but it appears in cost-of-cultivation reports as a benchmark of fully-loaded production cost.

The Swaminathan Commission recommendation

The National Commission on Farmers, chaired by Dr M S Swaminathan, in its 5th report (October 2006) recommended that MSP be fixed at at least 50% above the comprehensive C2 cost — i.e. MSP = C2 + 50% (or C2 × 1.5). This is the famous "Swaminathan formula" that farmer movements demand.

The 1.5x A2+FL formula vs Swaminathan C2 + 50%

In the 2018-19 Union Budget, the Centre announced MSP at "1.5 times the cost of production". CACP confirmed this would be calculated as 1.5 × A2+FL, NOT 1.5 × C2. Because C2 is materially higher than A2+FL, the 1.5x A2+FL number is significantly lower than the C2 + 50% number demanded by farmer unions.

For instance, for kharif paddy 2024-25:

  • A2 ≈ Rs 1,533/q
  • A2+FL ≈ Rs 1,533/q (CACP estimate)
  • C2 ≈ Rs 2,084/q
  • MSP at 1.5 × A2+FL = Rs 2,300/q (announced)
  • MSP at 1.5 × C2 = Rs 3,126/q (Swaminathan demand)

The gap is approximately Rs 800/q on paddy alone. This is the core of the farmer-protest demand for "legal guarantee of MSP at C2 + 50%".

See also: MSP — Minimum Support Price, CACP, MSP 23-crop list, FCI procurement mechanism, Price Support Scheme.

Sources

  1. Cost concepts and methodology. Commission for Agricultural Costs and Prices.
  2. National Commission on Farmers — Reports. DA&FW (Swaminathan Commission).
  3. MSP at 1.5 times A2+FL. Press Information Bureau.