Economic cost of foodgrains

Indian Economy glossary

Topic: Agricultural Marketing, MSP, Buffer Stocks and PDS · NCERT: Beyond NCERT

Meaning

The economic cost of foodgrains is the full cost to the government of buying grain and getting it to the ration shop.

Economic cost = MSP + procurement incidentals + distribution costs

  • Procurement incidentals are the costs of buying: mandi fees and cess, the arhtiya's (commission agent's) commission, labour and gunny bags.
  • Distribution costs are the costs of moving and holding grain: freight, storage, handling, interest and transit losses.

This figure matters because the food subsidy is worked out from it.

Example

Suppose FCI buys wheat from a Punjab farmer at MSP. It also pays mandi fee, cess, commission, labour and bags. It then pays to store the wheat, bear interest on it and move it by rail to another state. Every rupee spent along this chain adds to the economic cost.

Don't confuse with

  • Central issue price (CIP): this is the price at which the Centre releases grain to states. Economic cost is what the grain actually costs the Centre. The gap between the two is the subsidy.
  • Minimum support price (MSP): MSP is only one part of the economic cost.

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