Minimum Support Prices for Agricultural Produce

[op-ed snap] Resolving the farmer-consumer binaryop-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: OECD, ICRIER

Mains level: Agriculture policy making in India and how it can be improved


Ensuring food security

  1. Given the overarching food security concern of 1.32 billion people in India, the country’s policymakers have a challenging task
  2. On the one hand they need to incentivise farmers to produce more and raise their productivity in a sustainable manner, and on the other, they need to ensure that consumers have access to food at affordable prices, especially those belong to the vulnerable sections

Maintaining fine balance

  1. In order to find a fine balance between these twin objectives, India has followed myriad policies that impact both producers and consumers
  2. These policy instruments range from domestic marketing regulations (for example the APMC Act, Essential Commodities Act, ECA), budgetary policies (such as input subsidies), trade policies (such as Minimum Export Prices, MEP or outright export bans and tariff duties) to food subsidies for consumers through the public distribution system
  3. These policies work in complex ways and their impact on producers and consumers are sometimes at variance with the initial policy objectives

Research on the nature of agriculture policies

  1. The OECD and ICRIER jointly undertook research over two years to map and measure the nature of agricultural policies in India and the ways they have impacted producers and consumers
  2. The report includes key policy indicators like Producer Support Estimates (PSEs) and Consumer Support Estimates (CSEs)
  3. In the case of PSEs, it basically captures the impact of various policies on two components:
  • One, the output prices that producers receive, benchmarked against global prices of comparable products; and
  • Two, the various input subsidies that farmers receive through budgetary allocations by the Centre and states

How is the data used?

  1. The two are combined to see if farmers receive positive support (PSE) or negative as a percentage of gross farm receipts
  2. It covers about two-thirds of India’s agricultural output
  3. A positive PSE (in percentage) means that policies have helped producers receive higher revenues than would have been the case otherwise
  4. Negative PSE (in percentage) implies lower revenues for farmers (an implicit tax of sorts) due to the set of policies adopted

Data from India

  1. The negative PSEs were particularly large during 2007-08 to 2013-14 when benchmark global prices were high but Indian domestic prices were relatively suppressed due to restrictive trade and domestic marketing policies
  2. This means is that there has been a pro-consumer bias in India’s trade and marketing policies, which actually hurts the farmers and lowers their revenues compared to what they would have received otherwise

Policy changes required

The first policy change that is needed is to “get the markets right” by reforming its domestic marketing regulations (ECA and APMC), promoting a competitive national market and upgrading marketing infrastructure

  • India also needs to review its restrictive export policies for agri-products which have inflicted large negative price support to farmers during the period studied
  • These changes will reduce and, in time, eliminate the negative market price support to farmers and allow them to earn much-improved returns

Second, the report recognises concerns of policy-makers to protect consumers from potential price hikes when global prices are on the rise

  • It argues for switching to an income policy approach through the Direct Benefit Transfer (DBT) targeted to the vulnerable sections of the population
  • The report shows that this would generate better outcomes all round, including for nutrition quality
  • This can be done gradually over a three-five year period, starting with cities and grain surplus states

Third, Indian agriculture and farmers would be much better-off if input subsidies are contained and gradually reduced

  • The equivalent savings can be channelled simultaneously towards higher investments in agri-R&D, extension, building rural infrastructure for better markets and agri-value chains, as also on better water management to deal with climate change

Fourth, given that agriculture is a state subject, a greater degree of coordination is required between the Centre and states, and also across various ministries for a more holistic approach towards reforming agriculture

Way forward

  1. These policy changes, many of which are already underway, will make Indian agriculture more competitive, more vibrant, sustainable and resilient, and will also augment farmers’ incomes on a sustained basis

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