Minimum Support Prices for Agricultural Produce

Sep, 03, 2018

[op-ed snap] From Plate to Plough: Maharashtra vs Market

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: MSP calculation formulae

Mains level: Maharashtra’s decision of making MSP compulsory and what it might lead to


Context

MSP increase and states response

  1. The Centre’s announcement fixing MSPs at 50 per cent above costs (A2+FL) is viewed as a game-changer in wooing back the farming community
  2. Several states have buffered the MSP increases with bonuses
  3. Madhya Pradesh went a step ahead in the last Kharif when it tried price deficiency payments (Bhavantar Bhugtan Yojana), where it compensated farmers of selected crops for the difference between the realised price and MSP
  4. The scheme fizzled out because traders colluded, farmers suffered plummeting prices and despite concerted efforts, the state government could not compensate beyond one-fourth of the total production

Maharashtra’s decision to make MSP compulsory

  1. In a controversial move, the Government of Maharashtra (GoM) has made buying at MSP mandatory in the state for traders
  2. In case the order is not observed, the licence of the trader will be cancelled, a fine of Rs 50,000 imposed and he must serve a jail term of one year

What can be implications of this decision?

  • In the first scenario, let us assume that traders fall in line and buy everything at MSP or above
  1. What if supply exceeds demand for some Kharif products, which is likely to be the case for most pulses, oilseeds and coarse cereals?
  2. Market prices will tend to fall, possibly below MSPs
  3. If the high MSPs are translated into higher retail prices by not allowing any inward flow from neighbouring states, this would amount to creating a republic of its own with elevated price structures
  4. In that case, the GoM may face the wrath of consumers who would be paying much higher prices than consumers in neighbouring states
  • In scenario two, a private trader buys at MSP, unloads the produce at prevailing market prices that are below MSPs and incurs heavy losses
  1. No rational businessman would do that unless the government promises to compensate losses, akin to the BBY of Madhya Pradesh
  • In the third scenario, Maharashtra’s neighbouring states like Karnataka, Madhya Pradesh and Gujarat are selling the same crops at prices below MSP
  1. Maharashtra’s traders may move to the adjoining states and buy at market prices
  2. In that case, the GoM becomes the buyer-of-last-resort, resulting in a de facto takeover of the wholesale trade

What is actually required?

  1. The best way to deliver a better deal to farmers is to “get the markets right”
  2. Treat farmers as businessmen and facilitate a conducive environment for them to flourish
  3. Reform archaic laws like the Essential Commodities Act (ECA) 1955 and APMC Act
  4. Invite the private sector to build storage, assaying, grading, packing facilities at the back-end with farmer-producer-organisations (FPOs)
  5. Create competition for APMCs by facilitating private mandis
  6. Freeze the commission of the commission agents. As for the market fee, possibly cap it at 2 per cent of the value of agri-produce being transacted for all commodities across the country
  7. Big agri-processors and organised retailers, including e-commerce players, should be invited to buy directly from FPOs without paying any market fee
  8. The Negotiable warehouse receipt system (NWRS) needs to be stepped up, as does futures’ trading
  9. Export bans need to be banned and Minimum Export Price used judiciously

Way Forward

  1. A better approach to help farmers will be to move through an income policy, a la the Telangana model, which will have the least distortions
  2. It can subsume the input subsidies, setting input prices to be freely determined by the markets
Aug, 28, 2018

[op-ed snap] Supporting farmers, the middle way

Note4students

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


Context

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
Aug, 20, 2018

[op-ed snap] From Plate to Plough: Lean year as a foundation

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: All India Rural Financial Inclusion Survey (NAFIS), NABARD, Situation Assessment Survey (SAS), All India Debt and Investment Survey

Mains level: Contrast between NAFIS & Dalwai Committee report and way forward for Indian agriculture


Context

NABARD survey on farmer’s income

  1. NABARD presented the nation with a gift when it released the results of its All India Rural Financial Inclusion Survey (NAFIS)
  2. The survey estimates 2015-16 farmers’ income levels

About NAFIS

  1. NAFIS is based on a sample of 40,327 rural households in 29 states of which 48 per cent are agriculture households (agri-HHs)
  2. 87 per cent are small and marginal farmer households
  3. The survey combines the strengths of the NSSO’s Situation Assessment Survey (SAS) and RBI’s All India Debt and Investment Survey

Findings from NAFIS

  1. Based on household-level data, NAFIS estimates that an average Indian farming household earned Rs 8,931/month (Rs 1,07,172/year) in the agriculture year 2015-16
  2. This is up from Rs 2,115 earned in 2002-03 as per the NSSO’s SAS, implying a compounded annual growth rate (CAGR) of about 12 per cent in nominal terms and 3.7 per cent in real terms (2015-16 base) in 13 years
  3. The survey also estimates the income of non-agri rural HH at Rs 7,269/month, more than half of which comes from working as wage labourers
  4. On the financial aspects of these rural agri-HHS, NAFIS found for the reference year that about 43.5 per cent borrowed money with an average availed loan of Rs 1,07,083
  5. More than 60 per cent of these HHs borrowed from institutional sources, 30.3 per cent from non-institutional and 9.3 per cent from both
  6. More than half (52.5 per cent) of the agri-HHS were found to be indebted, with an average outstanding debt of Rs 1,04,602 for the year
  7. Almost 88 per cent of all rural HHs had bank accounts, and their monthly consumption expenditure on food was 51 per cent of total expenditure

Reasons for rise in estimates

  1. The rise in estimates is because of a wider definition of rural areas the NABARD survey includes areas that are bigger including Tier Three, Four and Five Towns
  2. If NAFIS followed NSSO’s definitions, the 2015-16 estimate of farmers’ income would have been somewhat lower, and so would have been its growth rate

Uses of NAFIS

  1. In terms of sources of income, NAFIS offers interesting insights, particularly for the Dalwai Committee
  2. The Dalwai Committee was set up in April 2016, to advise on the strategy to double farmers’ incomes by 2022

Farmers becoming labourers

  1. NAFIS estimates that in 2015-16, 35 per cent of farmers’ income came from cultivation, 8 per cent from livestock, 50 per cent from wages and salaries and 7 per cent from non-farm sectors
  2. It appears that working as labourers is a fall-back option for average farmers in drought years
  3. The increasing pressure as a result of shrinking average holding size (NAFIS estimates it at 1.1 hectares) is presumably forcing farmers to work as labourers to meet their needs
  4. This is very different from what the Dalwai Committee assumes when it says that by 2022-23, 69 to 80 per cent of farmers’ incomes will accrue from farming and animal rearing

Way Forward

  1. To achieve PM Modi’s dream of doubling farmers’ incomes by 2022-23, the Dalwai Committee points out that farmers’ real incomes need to grow at 10.4 per annum, that is, 2.8 times the growth rate achieved historically (3.7 per cent)
  2. This sounds like a challenge of raising country’s GDP growth from 7.2 per cent to 20 per cent
  3. It can possibly be done by 2030 unless the government undertakes drastic steps to augment farmers’ incomes at a faster pace
Jul, 21, 2018

[pib] Inter-Ministerial committee for “Doubling the income of Farmers”

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Various schemes related to farmers

Mains level: The newscard enlists various initiatives at a glance, by the government for doubling farmer’s income


 News

Expert Committee

  1. The Government has constituted an Inter-Ministerial Committee under the Chairmanship of Chief Executive Officer, National Rainfed Area Authority, Department of Agriculture, Cooperation and Farmers Welfare.
  2. It aims to examine issues relating to the doubling of farmers’ income and recommend a strategy to achieve doubling of farmers’ income in real terms by the year 2022.

Building strategy for doubling of farmers’ income by 2022

  1. The Government has set a target of doubling of farmers’ income by the year 2022.
  2. In order to realise net positive returns for the farmer, schemes as follows, are being promoted and implemented in a major way through the States/UTs viz:-
  • Soil Health Card (SHC) scheme;
  • Neem Coated Urea (NCU);
  • Pradhan Mantri Krishi Sinchayee Yojana (PMKSY);
  • Paramparagat Krishi Vikas Yojana (PKVY);
  • National Agriculture Market scheme (e-NAM);
  • Pradhan Mantri Fasal Bima Yojana (PMFBY);
  • National Food Security Mission (NFSM);
  • Mission for Integrated Development of Horticulture (MIDH);
  • National Mission on Oilseeds & Oilpalm (NMOOP);
  • National Mission for Sustainable Agriculture (NMSA);
  • National Mission on Agricultural Extension & Technology (NMAET) and
  • Rashtriya Krishi Vikas Yojana (RKVY)
  1. In addition, schemes relating to tree plantation (Har Medh Par Ped), Bee Keeping, Dairy and Fisheries are also implemented.
  2. All these schemes are implemented to enhance production and productivity of agriculture and thereby enhance income of farmers.

Minimum Support Price (MSP)

  1. MSP is notified for both Kharif & Rabi crops based on the recommendations of the Commission on Agriculture Costs & Prices (CACP).
  2. The Commission collects & analyses data on the cost of cultivation and recommends MSP.
  3. Giving a major boost for the farmers’ income, the Government has increased the Minimum Support Prices (MSPs) of all kharif crops for 2018-19 Season.
  4. This decision of the Government is a historic one as it redeems the promise of the pre-determined principle of fixing the MSPs at a level of at least 150 per cent of the cost of production announced by the Union Budget for 2018-19.

Farmer’s income is yet to be surveyed

  1. National Sample Survey Office (NSSO) has not conducted any survey during the last one year for collecting data on the present income of country’s farmers and animal rearers residing in various parts of the country.
  2. However, NSSO conducted a Situation Assessment Survey (SAS) of Agricultural households during its 70th round (January 2013- December 2013) in the rural areas of the country with reference to the agricultural year July 2012- June 2013.
  3. The survey collected the details of income generated by the agricultural households during the agricultural year from July 2012-June 2013 from different economic activities.
Jul, 20, 2018

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

Note4students

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


Context

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
Jul, 10, 2018

[op-ed snap] Rich farmers will gain the most from MSP hikes

Note4students

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

From UPSC perspective, the following things are important:

Prelims level:  NSSO stats on Farmers Income

Mains level: The newscard highlights very important issues with MSP and its associated beneficiaries. It broadly fails to benefit the marginal farmers, agricultural and urban labourers who are far outnumbered.


Context

  1. The common narrative about the hike in minimum support prices (MSPs) for farm produce is that farmers will benefit.
  2. Farmers in Punjab and Haryana are different from their brethren in Bihar and West Bengal or the north-east.
  3. We have small farmers, marginal farmers, peasants and kulaks and landlords. And its Target beneficiaries are not the needy. Let’s see how.

A 2013 NSSO Report has some clue

  1. A National Sample Survey Office (NSSO) report that mapped the income, expenditure and indebtedness of agricultural households in India in 2013 provides some clues.
  2. For households owning farms of less than 0.4 hectares, who are a 1/3rd of all agricultural households, net receipts from cultivation account for less than 1/6th of income.
  3. They will certainly not benefit from higher MSPs as their sole bread and butter is not only cultivation.
  4. For those holding between 0.4 and 1 hectare, net receipts from cultivation are around 2/5th of their earnings. This class constitutes another 1/3rd of all farming households.

Broad inference from this Report

  1. Taken together, farmers owning up to 1 hectare of land constitute 69.4% of total agricultural households.
  2. The report finds their monthly consumption expenditure is higher than their earnings from all sources, which means they are chronically in debt.
  3. Many rely on moneylenders, rich farmers and landlords to advance them the money needed for cultivation and they are often forced to sell their produce to these financiers at lower than market prices.
  4. In short, almost 70% of farming households are unlikely to be beneficiaries of the MSP hike.

Small and Big Farmers to get benefits

  1. Those having more than 4 hectares of land, a mere 4.1% of the farming population, get more than three quarters of their net income from cultivation.
  2. It is the rural rich, rural India’s ruling class, who pay no income taxes, who gain the maximum benefit from farm loan waivers, who will reap the bonanza from higher MSPs.

What Shanta Kumar Committee Report has to say?

  1. The revelations of the Shanta Kumar Committee report underscored that fact. It found that a mere 5.8% of agricultural households in India had sold paddy or wheat to any procurement agency.
  2. Even these households sold only a part of their total sales, ranging from 14-35% for different crops, at MSP.
  3. The upshot of this entire evidence is that the direct benefits of procurement operations in wheat and rice, with which FCI (Food Corporation of India) is primarily entrusted, goes to a minuscule of agricultural households in the country.
  4. Obviously then, much of the procurement that government agencies undertake comes from larger farmers, and in a few selected states (Punjab, Haryana, Andhra Pradesh and lately from Madhya Pradesh and Chhattisgarh).

Who are the losers from the government’s move?

  1. Economists’ estimates of the impact on inflation as a result of higher MSPs vary, but all agree that inflation will go up significantly, particularly if the government steps up its procurement.
  2. An IMF working paper said the disinflation in 2014-16 owed much to the government’s rationalization of MSPs. If that is correct, conversely, the sharp rise in MSPs now will fuel inflation.

Who loses the most from high inflation?

  1. The urban poor will be badly affected, of course, but also agricultural labourers, the most vulnerable class.
  2. Agricultural labourers now outnumber cultivators. Further, the marginal farmers may also not produce enough food for their requirements and have to buy from the market.

Benefiting the rural rich at the expense of the masses

  1. And that’s not even counting the price the economy will have to pay due to higher interest rates, uncompetitive agricultural prices, a bloated fiscal deficit and skewed incentives.
  2. That is why it is very likely that only lip service will be paid to the MSP hikes and it will be business as usual.

Way Forward

  1. If the objective is alleviation of rural distress, the Telangana government’s programme of income transfers looks far more promising.
  2. But in the long run, there is no alternative to creating enough jobs outside agriculture to absorb the disguised unemployment in farming.
Jul, 09, 2018

[op-ed snap] Resolving the farmer-consumer binary

Note4students

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


Context

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
Jul, 09, 2018

[op-ed snap] MSP Hike is a big blunder. Farmers are producers not objects of charity

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Minimum support prices (MSPs), European Economic Community

Mains level: Relation between farm sector and poverty alleviation and how DBT can help


Context

The recent hike in MSP

  1. The big jump in minimum support prices (MSPs) for kharif crops announced by the government could be its biggest economic blunder
  2. It gives farmers a fixed margin of 50% over their input costs and imputed labour cost, ignoring demand, supply and international competitiveness
  3. This makes no economic sense for any activity, let alone farming

What will be the impact of such incentives?

  1. Incentives that are being provided will worsen over-production
  2. The 50% margin over costs will raise prices above even their current uncompetitive levels, making exports even more difficult
  3. A fixed mark-up over costs will encourage even greater use of purchased inputs and labour, which in turn will send MSPs even higher in a vicious circle
  4. Higher food prices will worsen inflation
  5. The RBI will seek to curb this by raising interest rates, hurting industry and exports
  6. This will dent India’s long-term GDP growth and prosperity

Correlation between farm distress & poverty

  1. Farm distress is a reality but does not mean growing poverty
  2. A recent Brookings paper shows that 44 Indians per minute are rising above the poverty line, and extreme poverty will soon fall to almost nothing
  3. The farm problem is not poverty or scarcity but excess production of several crops
  4. The resulting glut has depressed farm prices, often below old MSP rate

Europe’s example

  1. The European Economic Community once tried something similar, offering prices to farmers well above global rates to make Europe self-sufficient in food, to provide food security in the event of war with the USSR
  2. High prices created unsold mountains of butter and meat and lakes of milk and wine
  3. These ultimately had to be disposed of by selling them at a throwaway price to the USSR, the supposed enemy
  4. Learning from this folly, Europe shifted its subsidies from crops to farmers
  5. Direct cash transfers to farmers replaced high prices for crops
  6. This finally brought supply and demand back in balance, eliminated huge surpluses, and still alleviated farm distress

What can India do?

  1. India needs to learn from the EEC’s mistakes, not replicate them
  2. Indian experience shows that subsidising goods (food, fertiliser, electricity, LPG) leads to large leakages to the undeserving and to middlemen
  3. Experts estimate that three rupees of spending are needed to get one rupee through to beneficiaries
  4. Direct benefit transfers to bank accounts work only if good financial and telecom infrastructure exist
  5. A possible national strategy would start with preparatory efforts for good land records and financial infrastructure
  6. Next should be phased moves to a cash grant of Rs 4,000 per acre per year, up to a limit of five acres per holding

Way Forward

  1. DBT will avoid the evils of cost-plus pricing and encouraging overproduction
  2. It will limit the cost of farm rescues while benefiting small farmers most
  3. It will curb gluts that depress prices

 

Jul, 06, 2018

[op-ed snap] The price is right

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: MSP system

Mains level: Government intervention in the agricultural sector and their overall impact


Context

Hike in MSP

  1. The cabinet has approved MSPs for Kharif crops for the year 2018-19
  2. The MSPs are not only 50 percent higher than the cost, in some cases, they are far greater
  3. Since the beginning of the economic reforms in the early 1990s, the focus of agricultural policy has shifted towards prices
  4. Farmers are losing faith in the market and seeking direct intervention by the government, mainly at the Centre
  5. The situation has been aggravated by unanticipated increases in the domestic production of some crops like pulses and the low global prices of agricultural commodities exerting downward pressure on domestic prices

History of MSP system

  1. India started the system of MSPs in the mid-1960s for wheat
  2. It gradually brought all major cereals, oilseeds, pulses, cotton, jute and sugarcane into its ambit

MSP economics

  1. The Union government has decided to keep MSPs at least 50 per cent above the sum of cost of production (A2) and imputed wages for the time spent by the farmer and his/her family (FL) in crop production
  2. A2 is a comprehensive cost and includes paid or imputed costs of all purchased or own inputs like seed, fertilizer, manure, bullock labour and machine labour, interest on working capital, irrigation expenses, depreciation, rent paid for the leased-in land, costs of repair and miscellaneous expenses

Using C2 cost instead of A2 will not be good

  1. Cost C2 is arrived at by adding the rental value of owned land and interest on fixed capital to cost A2 plus FL
  2. On average, around 40 percent of Cost C2 (imputed rent for own land and imputed value of family labour used in crop production) is not a cost but income to the farmer
  3. If MSP is just equal to cost C2, it includes 40 percent as a net return for the farmers
  4. No principle of economics tells us to award a margin on those costs which are not actually incurred
  5. Keeping MSP at 50 percent above cost C2 involves an increase in the current MSP by 27-89 percent for kharif and up to 45 percent for rabi crops
  6. Such a price entails a 50-100 percent increase in the existing farm-level prices of some crops at one go

Impact of using the C2 methodology

  1. Demand-side factors at present do not support such a sharp increase in prices
  2. In such a situation, the private trade will not have any incentive to operate in the market
  3. The entire onus of procuring the marketable surplus will come on the government, which in turn will be required to heavily subsidize the procured produce in order to dispose of it
  4. This will make domestic prices much higher than global prices, which will strongly hit exports and make India attractive for imports
  5. It will also leave little incentive for efficiency and diversification in the crop sector
  6. Such a move involves keeping prices artificially high and cannot be sustained fiscally

Why should market intervention in terms of prices be minimum?

  1. Excessive intervention in prices can have serious implications for the functioning of the market, fiscal resources and imports and exports
  2. The best prices for farm produce can be realised from a competitive market

What can be done to ensure fair prices?

  1. Regulatory reforms
  2. Institutional changes
  3. The development of appropriate infrastructure to promote the evolution of the agricultural market system

Way forward

  1. The new MSPs announced by the government for kharif crops meet the spirit the Swaminathan Committee recommendation of 50 per cent net return over Cost C2
  2. The stakeholders now need to differentiate areas for action by the Centre and the states
  3. There is a particular need to put pressure on the states to undertake the required reforms to make agricultural markets more efficient, competitive and responsive to the needs of producers and consumers
Apr, 02, 2018

[op-ed snap] From Plate to Plough: The right agri-support

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: MSP, FRP, Bhavantar Bhugtan Yojana

Mains level: Farm subsidies in India and related issues


Context

Falling prices of agro commodities

  1. Farm prices of several commodities fell way below their minimum support prices (MSPs) in 2016-17 and 2017-18
  2. Although the Centre regularly announces MSPs for 23 commodities (including Fair and Remunerative Price (FRP) for sugarcane), its implementation remains a distant dream
  3. Except for paddy, wheat, and sugarcane in major procuring states, the announcement of MSPs remains largely indicative in nature

Bhavantar Bhugtan Yojana (BBY)

  1. The Madhya Pradesh government tried to help farmers through the Bhavantar Bhugtan Yojana (BBY)
  2. It is a price deficiency payment (PDP) scheme, in Kharif 2017
  3. But it gave up abruptly in the rabi marketing season as the scheme could not cover even 25 per cent of the harvest, even though prices of most crops were way below their MSPs

Potential costs of scaling up the BBY/PDP scheme

  1. Scaling up BBY/PDP scheme requires reaching all farmers, registering their market arrivals, and paying them the difference between the MSP and market prices
  2. Cost plus pricing, which ignores demand side, will lead to major distortions in the system
  3. For example, farmers will find jowar relatively more attractive and increase its production
  4. Higher supply without any change in demand will create a glut and thus depress market prices, requiring either large-scale procurement by the government at enhanced MSP or a huge PDP
  5. Higher cotton and paddy MSPs will make India less competitive in global markets, adversely impacting their exports

Pricing methodologies

  1. A2+FL is the cost which includes paid out costs plus the imputed value of family labour
  2. C2 is comprehensive cost including the imputed rental value of owned land and imputed interest on owned capital
  3. The government is in a dilemma on which way to choose for MSP reforms

Way forward

  1. There is no shortcut to long overdue agri-market reforms
  2. Synchronising trade and tariff policy with the MSP policy has to be done
  3. Knee-jerk reactions in terms of loan waivers or some income support will only make the state of agriculture worse than bringing improvement
Mar, 10, 2018

NITI Aayog to work on mechanism for MSP implementation

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Minimum Support Price, NITI Aayog, Market assurance scheme, Price deficiency procurement scheme, Private procurement and stockist scheme

Mains level: Issues related to crop prices and MSP


News

A mechanism for implementation of the Minimum Support Price (MSP)

  1. Government think-tank NITI Aayog said it will work out a mechanism for implementation of the Minimum Support Price (MSP) for different crops in the country
  2. The Aayog noted that the procurement by central and state agencies is limited to rice and wheat and some amount of coarse cereals

Three concepts discussed

  1. The first option related to market assurance scheme, which proposes procurement by states and compensation of losses up to a certain extent of MSP after the procurement and price realization out of the sale of the procured produce
  2. Second option related to price deficiency procurement scheme
  3. Under this scheme, if the sale price is below a modal price then the farmers may be compensated to the difference between MSP and actual price subject to a ceiling which may not exceed 25 percent of the MSP
  4. No compensation would be due if the modal price in neighboring states is above the MSP
  5. Third option related to private procurement and stockist scheme
  6. It relates to procurement by private entrepreneurs at MSP and government providing some policy and tax incentives and a commission to such private entities

Better prospects via private procurement

  1. The option of private procurement and stockist scheme offered great promise as it reduces the fiscal implications for the government, involves private entities as partners in agriculture marketing and improves the competition in the market
  2. The government’s liabilities for storage and post-procurement management and disposal are also avoided
Oct, 18, 2017

[op-ed snap] Retrench India’s farm economy to sustain it

Image source

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: National Agriculture Market (eNAM), Pradhan Mantri Krishi Sinchayee Yojana

Mains level: Long pending agricultural reforms in India


Context

  1. In 2007-08, Madhya Pradesh government announced a bonus of Rs 150 above the minimum support price (MSP) per quintal of wheat
  2. Predictably, a large segment of farmers in the state shifted to the crop
  3. The bonus was stopped in 2014
  4. Farmers who had shifted production were not pleased
  5. It fed into the resentment that would eventually erupt in widespread farmer agitations in the state this year

Artificial incentives for agriculture

  1. The Indian state has often played the same role in the agricultural sector
  2. Its policies have created artificial incentives that are unsustainable, an inefficient drain on public funds, or both

Another such scheme by MP government

  1. The Bhavantar Bhugtan Yojana will replace government procurement with compensatory payments
  2. This will be when market prices are below the MSP
  3. It is being implemented as a pilot scheme for eight crops

Hope from the scheme

  1. The hope is that this will sidestep the implementation shortcomings of the procurement system
  2. These extend from the lack of government storage facilities and supply chain logistics
  3. Also, the fact that despite the government declaring MSPs for 25 crops, it largely procures only rice and wheat
  4. It will be less distortionary, freeing up space for the market to set rates

Reality check

  1. The knowledge that the government will make up the shortfall will incentivize traders to set rates well below the MSP
  2. The scheme has a two-month window, which means that the rush to sell in that period will also push prices down

Need for government intervention

  1. The agricultural sector is one of the handful where inelastic demand for the products, the deleterious public effects of supply shocks and inherent risks for suppliers mandate a government role

Agricultural reforms: What is needed?

Truly transformative agricultural reforms will require work on three levels

  1. The first level is mandi system
  • With the 2003 and 2017 versions of the model Agricultural Produce Market Committee (APMC) Act, governments have attempted to liberalize this system, providing for private markets and integrated state markets
  • This was a step towards a national market facilitated by the National Agriculture Market (eNAM)
  • The problem with this is that it still operates within the mandi system
  • Solution: Government needs to get out of the business altogether—and that is only possible with a switch from the public distribution system to direct benefit transfers

2. The second level of reforms should be aimed at inputs

  • The Pradhan Mantri Krishi Sinchayee Yojana aims to extend irrigation cover to all forms and maximize water-use efficiency over a period of five years
  • In a water-stressed yet groundwater-dependent country like India, this is only possible with comprehensive rural electrification, allowing for techniques such as drip irrigation
  • The other major reform needed here is access to formal credit
  • The current dependence on informal credit leaves farmers beholden to middlemen and traders who are often the credit suppliers, thus undercutting the former’s bargaining power

3.  The third level of reforms should be reduction in number of people participating in Agriculture

  • As per the last Agriculture Census, the average farm holding in India is a minuscule 1.15 hectares
  • Their number has been on the rise since the 1970s and is expected to touch 91% by 2030
  • There is no feasible way to make such a fragmented agricultural economy workable
  • For a sustainably healthy agricultural economy, the number of people participating in it must be drastically reduced
  • Measures such as enabling large-scale contract farming and corporate farming will help here—but the only genuine solution is job creation in non-agricultural sectors
Jun, 22, 2015

[op-ed snap] Fixing the MSP policy

 


Key Points:

  1. The hikes in minimum support prices (MSP) have been the highest for pulses.
  2. While it is the combination of higher MSPs and procurement that makes farmers grow more of a crop,
  3. getting FCI or other state agencies to step up procurement may not always be possible.
  4. And these are the 2 main reasons which incentivise the farmer. But how do you fix the math behind the MSP policy?

    Above all, most important thing – India needs to produce more pulses since pulse inflation is very high.

Jun, 22, 2015

[op-ed snap] For rich farmers

It is hard to understand the logic of raising the minimum support price for rice when the government is sitting on a mountain of foodgrain.

  1. In April, the Food Corporation of India & states held close to 52 million tonnes of wheat and rice, which is more than sufficient for all subsidized consumption needs during the year.
  2. Still, the government’s desire to show that it was doing something for farmers has outweighed economic rationale.

For example, it is understandable that support price for pulses has been raised. Most farmers growing lentils are poor and live in rain-fed areas. Wheat and rice farmers, in contrast, have access to irrigation.

Jun, 13, 2015

[op-ed snap] When a higher MSP is not the solution

  1. The govt. decided to go in for large-scale imports instead of raising the minimum support price (MSP) for pulses.
  2. On paper, the government could have boosted pulses output by increasing the MSP.
  3. In reality, pulses are one crop that has proved relatively impervious to price signals.
  4. A higher MSP will only translate into higher prices, hurting the poor in both rural and urban areas.
Apr, 19, 2015

[cd explains] How does MSP work?

  1. Government fixes MSPs of various kharif & rabi crops every year. Commission for Agricultural Costs & Prices (CACP) takes care of this.
  2. Procurement under MSP is undertaken by the designated Central and State Government agencies and Cooperatives.
  3. Producers have the option to sell their produce to Government agencies or in the open market as is advantageous to them.
  4.  States/UTs have been advised to amend their respective State APMC Acts on the lines of Model Act, 2003.

The Model Act provides for direct marketing, contract farming, farmers/consumer markets, setting up of markets in private and cooperative sectors, e-trading etc.

  • Subscribe

    Do not miss important study material