Agricultural Prices & Price Policy

Agriculture Price Policy and Its Objectives

• The history of food price policy can be taken back to the Bengal Famine of
1943.
• After the Bengal famine, the Government established Foodgrains Policy
Committee under the Chairmanship of Sir George Gregory.
• Due to the emergence of food shortage, India began to import wheat from the
United States under Public Law (PL)-480 in the year 1956.
• The Foodgrain Enquiry Committee (1957) headed by Asoka Mehta,
suggested the maintenance of buffer stocks, and setting up of the foodgrains
stabilization organization to undertake purchase and sale operation of
foodgrains.
• On the recommendation of Committee, the Food Corporation of India (FCI)
was set up in 1965 to procure and facilitate the Public Distribution System
(PDS).
• The Foodgrains Price Committee under the chairmanship of L.K. Jha
(1964) recommended setting up of Agriculture Price Commission to build
a balanced and integrated price structure of the country as a whole.
• Accordingly, Agriculture Price Commission was established by the Government
• CACP is announcing the Minimum Support Price (MSP)/procurement price
for different agriculture commodities.
• Price policy shifts in India
• Up to mid 1960s
• Agricultural production was low
• main instruments of price policy were
• controls/restrictions on foodgrain sales,
• food imports, and
• distribution of foodgrains at subsidized price.
• After the mid 1960s
• price policy was assigned a positive role of augmenting the availability of
foodgrains by increasing domestic production.
• Thus, the emphasis of the policy was to achieve remunerative prices for the farmers
and providing foodgrains to the consumers at reasonable prices.
• The broader objectives of agriculture price policy of the Government are:
1. To protect or insure the farmer through guaranteed MSP;
2. To induce the desired output of different crops as per growth targets;
3. To provide stability to the agriculture sector in general and farmers’ income in
particular;
4. To induce farmers to part with a large proportion of foodgrains production as a
marketed surplus; and
5. to protect the consumer against excessive rise in prices.
Instruments of Agriculture Price Policy

• There are three major instruments of agriculture price policy of the government.
1. MSP/procurement price as assured prices,
2. maintaining buffer stocks, and
3. distributing foodgrains at issue prices through the public distribution system.
• Minimum Support Price (MSP)
• MSP is the guaranteed price at which government purchases foodgrains from the
farmers in case market prices fall below it.
• The government announces MSP for around 23 crops and in case of wheat and rice
there is open-ended policy, that is, there is no limit on the government purchase
• Procurement price on the other hand is the price at which government procures
foodgrains from the farmers to carry out its PDS operations.
• Technically it must be higher than MSP as procurement price is not the minimum
guaranteed price.
• In India, government procures plentiful foodgrains through MSP policy and there is no
need to separately execute procurement price policy.
• The MSP is announced by the Government of India (GOI) at the beginning of
the sowing season for certain crops on the basis of the recommendations of
the CACP
• CACP recommends MSPs of 23 commodities, which comprise seven cereals,
five pulses, seven oilseeds, and four commercial crops.
• How is MSP Determined by CACP?
• CACP determines MSP by taking into consideration cost of production, changes
in input prices, trends in market prices etc.
• The CACP’s methodology has two major advantages:
• First, it ensures that producers do not suffer any loss and also get
commensurate price on selling their produce.
• Second, the cost of production also captures the market trend to the
extent that it reflects the changes in the wage rate and input prices and
current international price situation.
• There are three main cost concepts that the CACP considers while
recommending MSP of crops:
1. A2 = These are the costs that the farmer incurs for buying various inputs
such as seeds, fertilizers, hired/owned labor, hired/owned machinery, and
rent paid for leased land.
2. A2 + FL =A2 + imputed value of family labor in producing a crop (i.e., the
opportunity cost of working on the field).
3. C2 =A2 + FL + interest on value of owned capital assets + rental value of
owned land.
• A2 + FL cost measure accounts for only the variable cost of farming, while
C2 includes both variable and fixed cost. Therefore, C2 can be labeled as
most comprehensive measure and approximates full production cost.
• Buffer Stock
• Buffer stock refers to a reserve of a commodity that is used to offset price fluctuations
and unforeseen emergencies.
• Buffer stocks serve as shock absorbers in the economy and provide a defence
mechanism against widely fluctuating price levels.
• The concept of buffer stock in India was started during the 4th five-year plan
• Issue Price
• It is the price at which foodgrains are sold to general public through Fair Price
Shops (FPS)/ration depots. The GOI has been fixing Central Issue Prices of Wheat
and Rice from time to time, which is uniform throughout the country
• Advantages of MSP Policy
• Stabilizing Market Prices of Agriculture Products
• The MSP is an important policy of the Union Government to determine floor price of
major agricultural produces every year for protecting the farmers from the
middlemen and fluctuating market conditions
• Technology Incentive
• Since its introduction, MSP has been playing a critical role in stabilizing market
prices in addition to helping the beneficiaries in adoption of modern technologies in
farming and by inducing investment in cost-reducing technology.
• Food Security
• MSP policy has been instrumental in elimination the food shortage in the country
and ensuring the self-reliance in foodgrains. By announcing MSP for around 23 crops
every year, the Government encourages the farmers to produce certain crops while
assuring remunerative returns.
• Providing Certainty to Farmers’ Income
• The farmers’ income is highly unstable because of many exogenous factors
that affect production and productivity.
• MSP policy thus provides stability to farmers’ income and gives an element of
certainty to vulnerable farm sector.
• Problems with Agriculture Price Policy
• The MSP Controversy
• The National Commission on Farmers headed by Prof. M.S.
Swaminathan in its report submitted in October 2006 recommended fixing
MSP at levels “at least 50% more than the weighted average cost of
production.”
• The government announced 50% over A2 + FL as a new benchmark for
calculating MSP. But according to M.S. Swaminathan, MSP announced was
higher in absolute terms but below the recommended level and the
Government should have announced MSP, 50% above C2 costs.
• But according to eminent agriculture economist Ashok Gulati, the right policy
instrument would have been income policy that focuses on the income of the
farmers.
• MSP and the Farmers’ Distress
• Agriculture price policy has been largely successful in playing a major role in
providing reason- able margin levels over production costs to farmers of both
wheat and paddy.
• The margin over the costs and net income of farmers had declined
considerably during post-reform period thus causing distress among farmers
of wheat and paddy.
• The decline in profitability has discouraged farmers from increasing their
spending on yield-augmenting technology, resulting in poor yield growth rates
and in a decline in production growth rates.
• Late Announcement of MSP
• Farmers coming to know about the MSP after they have sown their farms.
• The study conducted by Niti Aayog has revealed few shocking facts. For
example, in Bihar farmers knew about MSP but the awareness about the time
of their announcement was very low. In Gujarat 33% of farmers were aware of
MSP at the time of their declaration.
• Problems at the Procurement End
• Poor infrastructure facilities such as lack of covered storage/godowns facility for
temporary storage of produce make MSP policy unworkable.
• In many states, it has been found that the procurement centers are quite far away
from the farmlands resulting in heavy transportation costs.
• The lack of electronic weighing equipment in some places also discourages farmers.
• Contribution to Inflationary Trend
• There have been two major reasons of an increase in MSP in the recent past: one,
increases in production cost and second, an increase in international prices of
agricultural goods.
• When the international market prices of agriculture commodities increase due to
supply shock, domestic prices of the respective commodities also undergo an increase
more than the existing MSP.
• Farmers instead of selling their produce to the Government get diverted to the
international market. This forces the government to offer higher MSP to the farmers.
• The sharp rise in MSP pushes up the price level in the economy as the general price
level is very much sensitive to changes in foodgrains’ prices.
• Bias in Favor of Surplus States and Rich Farmers
• In India around 20 states grow wheat but the three states of Punjab, Haryana, and
Madhya Pradesh account for approximately 85% of wheat procurement with FCI and
other state agencies.
• In the case of rice, Punjab and Haryana accounted for 90% of country’s procurement.
• Consequently, the benefits of MSP accrue to only selected states of the country.
• most of the benefits have been cornered by the large farmers who were able to
implement the new agriculture strategy and obtain credit and other inputs easily.
• The research has revealed that through MSP the average income transfer to large
farmers is approximately 10 or more times greater than those received by marginal
farmers.
• Blow to Agricultural Diversification
• The Government offers MSP for 23 crops but exercises open-ended policies for only
wheat and rice.
• The open-ended policy has incentivized farmers not to go out of the comfort zone and
remain stick to the vicious circle of wheat and rice.
• There is shortage of other agriculture items that causes the nation to depend upon
food imports.