Minimum Support Prices for Agricultural Produce

[op-ed snap] Reform agriculture marketing systems to address farm distressop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: Food Corporation of India (FCI), Commission on Agricultural Costs and Prices (CACP), Organisation for Economic Co-operation and Development (OECD)

Mains level: National Commission on Farmers (Swaminathan Commission) recommendations and how they can help in bringing farmers a better cost for their produce


MSP hike and its utility

  1. The recent increase in the minimum support prices (MSP) for major kharif crops has reignited the debate about food price policy
  2. Some analysts believe that the increase has been excessive, that it will push up inflation, both directly and also indirectly via the fiscal burden of higher subsidies
  3. Others maintain that the increase is not enough, that the government has not delivered on its promise of announcing MSPs that are 50% over cost, as had been recommended by the National Commission on Farmers (Swaminathan Commission)

Need of Food Price Policy

  1. Foodgrains are basic necessities
  2. Any sharp increase in their prices can be extremely stressful, especially for low income and poor households, leading in turn to heightened political tension
  3.  Conversely, any sharp drop in crop prices can cause widespread distress among the millions of small farmers for whom the proceeds of their marketed produce is the main source of their livelihood

Present Food Policy Regime

  1. The present food policy regime was established following two consecutive drought years that led to severe food shortages in the mid- 1960s
  2. It consists of the Food Corporation of India (FCI), which procures rice and wheat, along with some state agencies, the Commission on Agricultural Costs and Prices (CACP), which recommends procurement prices, and the public distribution system (PDS), which distributes foodgrains and a few other essential items at subsidized prices

Methodology adopted to hike MSP

  1. The government has in principle adopted the policy of fixing procurement prices at least 50% over what CACP calls cost A2 + FL
  2. A2 includes the actual or imputed cost of all purchased or own inputs such as seeds, fertilizers, manure, bullock or machine labour + actual rent on leased in land + actual interest on working capital
  3. FL is the imputed value of family labour
  4. Thus A2 + FL excludes the imputed value of owned fixed capital, such as farm machinery, and the rental value of own land
  5. Adding these components would give us cost C2, the cost on which the Swaminathan Commission had recommended a 50% markup for procurement prices

Why imputed values should be used?

  1. Imputed values are the opportunity costs of both inputs and factors of production, such as land, labour or capital
  2. This means the costs that the farmer would have incurred if s/he had acquired these from the market or what s/he would have earned if she had supplied these owned resources to the market
  3. If the imputed rental value of owned land is not included in the reckoning then the average rental value factored into the costing would be less than the actual rental value paid by those who have leased their land, the large bulk of whom are marginal or landless farmers

Why cost of production doesn’t matter much

  1. Cost of production is only one of several considerations factored into the determination of MSPs, such as the estimated demand-supply balance, global prices, etc.
  2. Besides, announcing an MSP means nothing unless it is supported by public procurement at the announced MSP

What does it mean for distressed farmers?

  1. MSPs are only one among a range of policies that impact farm revenues and costs
  2. Organisation for Economic Co-operation and Development (OECD) uses two comprehensive indices of the net impact of all such policies on agricultural producers and consumers, respectively called the producer support estimate (PSE) and consumer support estimate (CSE)
  3. Based on an application of these indicators for India, it is claimed that Indian producers have suffered a net negative impact amounting to 14% of farm receipts on average for the period 2000-01 to 2016
  4. This bias against producers would in fact be much more severe for the small, marginal and landless farmers who account for 80% of rural households and face multiple price and non-price risks on top of the non-viability of their tiny plots of land
  5. Their circumstances also force them to sell their small lots of marketable surplus at prices way below the announced MSPs while having to buy their inputs at high prices

Way Forward

  1. Distressed farmers need not depend on the government to recover their viability
  2. The Amul Dairy Cooperative is an outstanding example of how farmers empowered themselves through cooperation
  3. There are more recent success stories in the Kudumbashree programme in Kerala, the Society for Elimination of Rural Poverty in Andhra, and embryonic cases in other states of such cooperation led by women’s self-help groups, initially for mobilizing credit and later for other activities
  4. These examples point to the power of aggregation and collective action in activities ranging from marketing and purchasing of inputs and machinery to land pooling, water management, organic agriculture, dairy, fishery and even some non-farm activities
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