PRICE SUPPORT IN AGRICULTURE

Price Support: It is a hedge or protection against price uctuations in the market.

Causes of price uctuations:

a. Inadeqaute information on demand and supply: The main signal farmers have to rely on in the

agricultural market is prices which is an ex-post signal.

b. Similarly, farmers also have inadequate information on market supply, hence there is a high chance

of demand-supply imbalances that hurt the optimal price discovery.

c. Externalities: Shoratage of rainfalls, disasters, pest attacks, changes in consumer preferences, etc.

d. Free trade policies: When the price increases excessively the government may allow free imports

and correspondingly may also ban exports.

All of these can result in a situation where price realization falls below even the cost of production.

Not only does this price failure a ect the income of the farmers but also a ects the food security of

the nation.

Hence, there is a need for price support which essentially is a oor price that will get triggered in the

event of price failure at which the government will procure.

Hence it is an emergency mechanism.

PRICE SUPPORT IN INDIA: (01:50:00 PM)

Need for Price Support:

It acts as a safeguard to the farmers against unpredictable price uctuations.

Providing stable price support encourages farmers to make higher investments and adopt modern

agricultural technologies.
It serves as a tool for promoting crop diversi cation.

It plays a crucial role in simulating surplus generation thereby contributing to overall food security.

Minimum Support Price(MSP):

The MSP is a crucial component of price support mechanisms.

It o ers guaranteed producers concerning preventing prices from falling below the guaranteed levels.

It functions as a oor price.

Initially, it was designed to serve as a hedge against market failure risks, now it has evolved to

become a benchmark price for the market.

Initially, the government used to announce the procurement price which was xed higher than hte

MPS but lower than the market price.

Over time the procurement price has been aligned with the MSP.

MSP facts:

MSP is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).

CACP is an attached o ce of the Ministry of Agriculture and Farmers Welfare. It came into existence

in January 1965.

The Cabinet Committee on Economic A airs (CCEA) chaired by the Prime Minister of India makes

the nal decision on the level of MSPs.

MSP is announced for 22 crops including wheat, rice, etc.

Also, there is Fair Remunerative Prices (FRP) are announced for Sugarcane.
COMPUTATION OF MSP

The factors considered by CACP for xing MSP include:

Cost of production, domestic and international prices,

Demand-supply conditions,

Inter-crop price parity, and terms of trade between agricultural and non-agricultural sectors, etc.

The CACP considers the following production costs:

A2, A2+FL, and C2.

A2 covers direct costs incurred by farmers, including expenses on seeds, fertilizers, pesticides, labor,

and more.

A2+FL includes A2 costs and the value of unpaid family labor.

C2 is a more comprehensive cost that also considers rentals and forgone interest on owned land and

capital assets, on top of A2+FL.

Since 2018-19 the government has announced an MSP of a minimum of 150% of input cost where

input costs are A2+FL.

Whereas the farmers demand 150% of C2.

C2= A2+FL+Rent on own land+ Interest on own capital excluding land.

PROCUREMENT MECHANISMS:

Food Corporation of India (FCI) operations for Central Pool:

FCI has to stock food grains for food security and other exigent requirements.

This stocking is governed by norms called "Stocking Norms" - The level of stock required in the

central pool su cient to meet:

b. Exigencies(Shortfall in production, calamities, etc.) - Bu er reserves.

There are two procurement systems which are followed:

1. Centralised Procurement System:

Under this, the procurement is done by the FCI directly or the State government on behalf of the FCI,

which then hands over the stock to the FCI for storage and subsequent issues.

The cost of food grains procured by the states is reimbursed by the FCI as soon as the stocks are

delivered to it.

2. Decentralized Procurement:

This scheme was introduced in 1997-98.

This was done to:

a. Enhance the e ciency of the PDS.

b. Encourage local procurements and extend the bene ts of MSP to the local farmers.

c. Enable procurements of food grains more suited to the local tastes.

Under this mechanism, the State government itself undertakes direct purchases, stores, and

distributes food grains under the NFSA and OWS(Other Welfare Schemes).

The central government meets the entire expenditure incurred by the states on procurement

operations as per the approved costing agreements.

Price Support Scheme(PSS):

It applies to only MSP-noti ed crops other than rice and wheat.

It is an intervention by the central government that is initiated at the request of the state government
when the market prices fall below the MSP.

This scheme will be initiated conditional upon the state government agreeing to abide by the PSS

guidelines.

The procurement has been limited to 25% of the state production estimates, however this can be

revised by the central government.

Procurement agencies will include FCI, NAFED, etc.

MARKET INTERVENTION SCHEME(MIS)

To support commodities for which the MSP is not noti ed the central government initiates the

MIS(especially for the perishable).

The market intervention will be made if:

a. The prevailing market prices are at least 10% less than the previous normal year's prices or,

b. the production is at least 10% more than the previous normal year's production.

This scheme is initiated at the request t of the state government subject to them agreeing to bear

50% of the procurement costs.

The procurement will be done at a price called Market Intervention Price which will be decided by a

technical committee.

Disposal will be the responsibility of the State government and pro ts if any shall be retained by the

state government.

PRICE STABILIZATION FUND:

It is the scheme owned and operated by the Department of Consumer A airs under the Ministry of
Consumer A airs, Food & Public Distribution.

It aims at building a bu er stock of agricultural commodities in the event of domestic prices rising

excessively.

This Bu er stock is released into the markets at discounted prices in such situations.

Under this, even imports are allowed.

Issues/Problems with MSP

• It was supposed to be a support system but has now become a regular feature with the

procurement of rice and wheat

• It has led to the distortion of cropping patterns e ectively making India a rice and wheat system

• The open-ended procurement system for rice and wheat coupled with a lack of storage, has led to

a huge waste of food grains

• MSP linked procurement system is biased towards some states and bene ts some rich and

in uential farmers

• Revision of MSP upwards also puts upward pressure on market prices

• Ecological imbalance- Distortion of cropping pattern meant that farmers would produce crops with

higher MSPs and assured procurement, in the process ignoring the agro-ecological conditions of

their regions

• The MSP regime has increased the nancial burden on the government

SOLUTIONS TO PROBLEMS OF MSP

Price De ciency Payment Scheme (PDPS): Farmers shall sell their produce in the open market and
if the MPs fall below the noti ed MSP, the govt will pay the di erential amount(MSP-MP). It is a

hassle-free process since the disposal and distribution remain in the hands of the market placing no

responsibility on the govt to create excess storage. It will also help the MSP bene ts reach out to

regions where they are not currently. It shall also help certain crops for which MSP is noti ed but

procurement doesn't happen. However there are problems-

-There is scope for collusion among traders and/or farmers to keep market prices de cient

deliberately

To address this, market infrastructure would have to be strengthened (data records of past sales)

-It does not assure that all the surplus production will be lifted

Market Assurance System- In India, there is no auto trigger for procurement of crops other than

rice and wheat. For these crops, market intervention gets triggered only at the request of the state

government and after approval from the central govt

The time lag creates a huge opportunity for traders to make windfall gains,

Hence, there is a need for a rapid response mechanism where intervention happens as soon as

prices start dipping

It is possible only if the decision-making and procuring authority are the same(state govt)

Hence these powers should be delegated to the state after the creation of a joint fund(Ashok Dalwai

Committee)

Private Procurement/Stockist scheme: According to the Dalwai committee only about 35%, 25%,

8 % and 0.66% of the total production of rice, wheat, pulses, and oilseeds are procured on avg
Hence the need to engage private players also to procure at MSP and relax stocking norms under

ECA

Problems- market manipulation

Reserve Price- while the govt is guided by MSP, there is no minimum buying price for private trade

Hence we need to conduct regulated auctions with pre-determined reserve prices acting as the oor

price

Drawback- disincentivises open trade

PM-AASHA: A scheme of the GOI to ensure fair prices for farmers which includes the following

components

• PSS

• MIS

• PSF

• PDPS