Minimum Support Prices for Agricultural Produce

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Mains Paper 3: Agriculture | Issues related to direct & indirect farm subsidies & minimum support prices

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Need for a shift in India’s agricultural policy and moving towards less subsidies


Need for change in agri policy

  1. India needs a good blend of investments and subsidies in its agriculture policy
  2. There is not a severe constraint on resources to invest in rural areas, be it roads, water (irrigation), sanitation, and even housing
  3. Including agri-research and development (R&D) and quality education in this list of rural investments would ensure handsome payoffs — reducing poverty and propelling agri-growth at a much faster pace than has been the case so far

India’s policy so far

  1. Most countries support agriculture to ensure food security and/or enhance farmers’ income, so does India
  2. The main policy instruments to support farmers in India include subsidised fertilisers, power, agri-credit and crop insurance on the input side, and minimum support prices for major crops on the output front
  3. A recent study, conducted jointly by the OECD and ICRIER, estimated that India’s trade and marketing policies have inflicted a huge negative price burden upon the country’s farmers
  4. The Producer Support Estimate (PSE) for India works out to be minus (-) 14 per cent of the gross farm receipts for the period 2000-01 to 2016-17
  5. This is primarily because of restrictive export policies (minimum export prices, export bans or export duties) and domestic marketing policies (due to the Essential Commodities Act, APMC, etc)

Return on investments low

  1. Public capital formation in agriculture has been declining from 3.9 per cent of agri-GDP in 1980-81 to 2.2 per cent in 2014-15
  2. Input subsidies on fertilisers, water, power, crop insurance and agri-credit have risen from 2.8 per cent to 8 per cent of the agricultural GDP during the same period
  3. The rapid increase in input subsidies has squeezed public investments in agriculture
  4. Therefore, India has not got the biggest bang for its buck being spent in the agriculture space
  5. The results show that expenditure incurred on Agri-R&E (Research and Education), roads or education are five to 10 times more powerful in alleviating poverty or increasing agri-GDP than a similar expenditure made on input subsidies

Impact of excessive subsidies

  1. Excessive input subsidies have caused large-scale inefficiencies in the agriculture system
  2. For example, fertiliser subsidies, especially on urea, have led to the imbalanced use of soil nutrients
  3. The subsidy on irrigation water has resulted in an inefficient use of scarce water
  4. Highly subsidised power has led to over-exploitation of groundwater
  5. Subsidy on the interest rates on crop loans has diverted substantial amounts of agri-credit to non-agricultural use

Policy suggestions

  • Investment in public irrigation is very expensive, as it involves long lags, and the gap between the potential created and potential utilised has increased over time
  1. To give higher returns, this leaky system must be fixed, it should be made more transparent and the gap between potential created and utilised bridged
  • The present system of delivering subsidies through the pricing policy needs to be shifted to an income policy, which could be well-targeted, and leakages minimised— on the lines of JAM trinity
  1. Many OECD countries, as well as emerging countries such as China, are moving in that direction
  2. Indian farms can also benefit from this move where input subsidies at least are given as DBT on a per hectare (ha) basis
  • Investments need to be prioritised towards agricultural research and development, roads and education
  1. At the global level, the private sector is leading in agri-R&D
  2. If India needs to access that technology, it needs to develop a proper IPR regime, which is in the interest of farmers as well as investors

Way Forward

  1. India needs to make moves to give its farmers access to the best technologies in the world
  2. This, in turn, can augment their productivity and incomes and give the nation long-term food security
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