MSP calculations will not include imputed land rent, says Arun Jaitley

Finance minister Arun Jaitley on Friday put to rest all speculation about the cost of farm produce, on which the minimum support price (MSP) will be based and will exceed the cost by 50 per cent.


The cost will include all paid expenses plus imputed value of family labour (FL), but not imputed land rent.


“My understanding is that this (MSP calculation) will be over A2+FL cost of production,” Jaitley said in his reply during the debate on Budget 2018-19 in the Rajya Sabha.


Broadly, A2+FL is cost plus own labour, while comprehensive cost (C2) includes all paid expenses incurred plus the imputed value of unpaid family labour, along with rentals and interest foregone on owned land and fixed capital.


MSP determined on the basis of C2 cost is much higher than the one fixed over A2+FL cost. 


Jaitley had proposed setting the MSP of Kharif crops like paddy at least 50 per cent higher than the cost of production. Since then, there has been confusion over whether the cost will be taken as A2+FL or C2.


The finance minister also said the current level of global oil prices bordered on the margin of the Centre’s comfort level. The government’s finances could be affected if prices continued to rise, he added.


The government has reckoned on an average crude oil price of $65 a barrel for 2018-19. For the financial year, it has budgeted Rs 249 billion as petroleum subsidies and nearly Rs 701 billion as fertiliser subsidies, an increase of 2 per cent and 8 per cent, respectively, over the revised estimates of 2017-18.


On the Budget proposal of free health insurance scheme for 500 million people, Jaitley said NITI Aayog was working on it, and he said the scheme was affordable.


He also said the 1 per cent increase in health and education cess on the income tax announced in the Budget does not raise the tax by one percentage point but only 1 per cent of the tax rate. The cess will help the government collect an additional Rs 110 billion. 


To a query on whether the cost of the health insurance scheme would be distributed between the Centre and states on a 60:40 or 75:25 basis, Jaitley said the NITI Aayog was working on it.


To Congress member Renuka Chowdhury's demand that the GST rate on pesticides should be reduced from 18 per cent, the finance minister said he would put the matter before the GST Council.


He also put forth statistics to counter allegations that the government had not done well on macro-economic parameters, including economic growth, the fiscal deficit, the current account deficit, and inflation. The government did not compromise on expenditure for meeting fiscal deficit targets, though the previous government had done so, he added. 


The finance minister also said that when the Vajpayee government left office, the yield on the benchmark 10-year government bond was 5.17 per cent. However, during the UPA’s time it hit a record of 9.48 per cent in April 2013. The yield has been in the range of 7.5-7.6 per cent during the Narendra Modi government's tenure so far. "In fact, it fell to around 6 per cent after demonetisation," he said.


When the yields were high, the government was paying higher interest on borrowings, instead of caring for the needs of the poor, he said.


The finance minister also countered the allegation that the government was increasing its revenue expenditure. He clarified that revenue expenditure figures seemed inflated due to the inclusion of Rs 61.31 billion compensation cess in 2017-18.


Critics have said that announcing an MSP on the basis of A2+FL might not mean much for farmers, since it was already over this level in many crops since the 2018 rabi season. In wheat, for example, the MSP announced by the government for the 2018 rabi was around 113 per cent above the A2+FL cost, while in the case of mustard it was 84 per cent more. In the case of gram, it was 73 per cent more.


NITI Aayog Member Ramesh Chand recently told Business Standard that it was important to ensure that MSP was accorded to as many farmers as possible. “In my view, there is no economic logic to give 50 per cent margin over C2, which include costs never paid by farmers.”


Farm activist Yogendra Yadav has alleged that by fixing the MSP on the basis of A2+FL cost and not C2, the government was saving almost Rs 95 billion, which it could have easily given to farmers.


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