A failing safety net?

India’s minimum support price for agricultural crops

K.S. Aditya
S.P. Subash
K.V. Praveen
M.L. Nithyashree
N. Bhuvana
Akriti Sharma

Economics and finance, Government and governance, Food & water | Asia, South Asia

13 November 2017

Poor awareness and limited government procurement are denying India’s farmers vital income support, K.S. Aditya, S.P. Subash, K.V. Praveen, M.L. Nithyashree, N. Bhuvana and A. Sharma write.

The Minimum Support Price (MSP) has been the central component of the Agricultural Price Policy of India. It aims to ensure a remunerative price for farmers as well as an affordable price for consumers through the Public Distribution System (PDS). The policy is designed to meet the twin objectives of safeguarding farmers against price shock and maintaining a buffer stock of foodgrains, which stabilises their prices in the retail market while protecting consumer interests.

However, in recent years the operation of the policy has fallen far short of its objectives, leaving many farmers outside this important redistributive mechanism. New investment in procurement infrastructure and community awareness is urgently needed.

The price support system was conceptualised during the pre-Green Revolution period as an institutional mechanism for incentivising farmers to adopt new technologies. Eventually, the Agricultural Prices Commission was established in 1965, based on a recommendation of the Jha Committee, to set support prices for crops after taking the cost of cultivation into account.

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During the Green Revolution, a period of the 1960s that saw a dramatic leap in India’s agricultural productivity, support prices complemented the new technologies being developed and helped the country to increase food production. The MSP also enabled procurement of food grains from surplus states for distribution through the PDS and ensured a buffer stock was maintained, thus bridging the demand-supply gap.

To this day, the MSPs for crops are declared by the government before the sowing season based on recommendations by the Commission for Agricultural Costs and Prices. The commission provides price policy reports to the government for crops grown in the Kharif (rainy) and Rabi (dry) seasons and for other crops such as sugarcane, raw jute and copra.

Though the cost of production is a key factor in determining MSPs, other factors such as demand and supply, price trends (domestic and international), inter-crop price parity, terms of trade between the agricultural and non-agricultural sectors, and the implications for consumers are also considered. By announcing the MSP, the government ensures that in cases where the market price falls below this benchmark, its agencies will enter the market and procure the product at a price equal to the MSP.

In doing so, the MSP theoretically sets the floor price for a set of 24 agricultural commodities and is available to all farmers who are growing crops for which it has been announced. From this perspective, the MSP is viewed as a safety net for farmers.

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However, while agriculture in India has undergone a sea change since the Green Revolution, the Agricultural Price Policy has remained more or less the same.

Food surpluses are now produced by many states, while government procurement remains largely confined to Haryana, Punjab and Andhra Pradesh due to limitations imposed by storage capacity and other infrastructure. Many scholarly works have pointed out that the MSP is leading to regional disparities as it is effective only in the few states where it is backed by procurement. The MSP is also said to have favoured crop specialisation in rice and wheat at the cost of pulses and oilseeds.

Procurement of foodgrains is currently restricted to only a few states. However, technically the policy can benefit farmers even in places where procurement is absent. In such places, a farmer can refuse to settle for a price below the MSP if he is aware of the support price for the crops. If he is not even aware of this price, traders and middlemen can turn exploitative and offer a price less than the MSP.

In our study published in Asia & the Pacific Policy Studies, we considered awareness of the MSP for particular crops among farmers as the bare minimum condition to have an impact on their welfare. Awareness about the MSP was considered an effective proxy for the impact of support prices.

We used a nationally representative data sample and, surprisingly, found that more than 75 per cent of Indian households are not aware of MSP for crops grown by them. Awareness was high only in cases of rice and wheat, and for those too only in a few states like Punjab, Haryana and Chhattisgarh. In these states, food grains are procured by designated agencies to maintain the buffer stock or for the PDS.

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Awareness of the MSP for pulse crops was even lower – less than 10 per cent for most of the crops – which is a cause for concern. Of the few farmers who were aware of the MSP, nearly 25 per cent reported not selling their produce to procurement agencies. Major reasons reported for this included the lack of agencies and local purchasers. As might be expected, we found that the probability of a farmer being aware of the MSP for a crop is higher in areas where procurement is active.

Clearly, with a poor government procurement network limited to a few states and crops, as a safety net, the MSP is in danger of becoming obsolete.

Decentralised procurement agencies with a visible local presence, coupled with increased storage capacity, could extend the benefits of support prices to a larger segment of the farming community. Another effective policy could be a system of deficiency payments to farmers which cover the difference between the MSP and the market price to bypass the need for procurement altogether.

The procurement basket also needs to be widened to include crops other than rice and wheat. Finally, community outreach and publicity campaigns will also have to play a vital role in creating awareness among India’s farmers about the MSP for its many crops.

This piece is based on the authors’ article for Asia & the Pacific Policy Studies, Awareness about Minimum Support Price and its impact on diversification decision of farmers in India. Asia & the Pacific Policy Studies is an open access journal where full articles are free to read and download, and authors are not charged to publish.

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