Minimum Support Prices for Agricultural Produce

[op-ed snap] Supporting farmers, the middle wayop-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: Not much

Mains level: Various support schemes for farmers and their effectiveness


Measures to increase farm output & income

  1. Recently, there has been an active discussion on the strategies for raising farm output by providing remunerative prices to agricultural products
  2. Over the years, between the price and non-price factors, on balance, the latter has been seen as more effective
  3. When output increases well beyond the market demand at a price remunerative to producers, market prices decline and in the absence of effective price support policy, farmers are faced with a loss of income, depending on how much the price decline is

Various mechanisms of farmer support

  1. The effectiveness of a price support mechanism such as the Minimum Support Price (MSP) for addressing price decline would depend on how effective the system is for managing the supply-demand imbalances
  2. The scheme of “price deficiency compensation”, which amounts to paying the difference between the market price and MSP, has gained acceptance in states such as Madhya Pradesh, Rajasthan and Haryana
  3. At the other extreme is the “open procurement system”, that has been in vogue quite effectively in the case of rice and wheat, where procurement is open-ended at the MSP

Gauging the effectiveness of these schemes

  • The “price deficiency” scheme may compensate the farmers when prices decrease below a certain specified level
  1. However, the market prices may continue to fall as the supply exceeds the “normal demand”
  2. Nearly all the produce may become eligible for the “deficiency payments” in theory as the prices, in general, would have fallen for all the producers
  3. An alternative is the limited procurement scheme. Under this scheme, the government will procure the “excess”, leaving the normal production level to clear the market at a remunerative price
  4. Thus, procurement will continue until the market price rises to touch the MSP
  • The effectiveness of the limited procurement system would depend on several factors
  1. The timing and speed with which the procurement is implemented are critical. It is important to determine the excess supply, which will indicate how much is to be procured
  2. Equally important is the quick assessment of price trends, particularly in the period immediately after the harvest begins, to arrive in the key markets
  3. In any case, the idea is not to absorb all the output but a quantity that would keep the supply-demand balance at the trend level
  4. The suggested “limited procurement system” will not work if the MSP is fixed at a level to which the market price will never rise
  5. A limited procurement option is necessary only in times of a sharp increase in production

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