Summary Notes on Instrument of Price Support for Agriculture

Summary Notes on Instrument of Price Support for Agriculture (Reference: India’s Agricultural Development under the New Economic Regime: Policy Perspective and Strategy for the 12th Five Year Plan Vijay Paul Sharma, W.P. No. 2011-11-01, IIM(A), November 2011.)

Agricultural price policy, which is considered integral to the strategy for agricultural

development, played an important role in achieving self-sufficiency in food grains, consumer welfare, improvement in the economic access to food and, through affecting the domestic terms of trade, important influence on growth, employment and income distribution in the economy. The section provides an overview of trends in minimum support price (MSP)/Procurement Price (PP) and recent policy changes in price policy.

The trends in MSP/PP show that increase in rice and wheat prices were higher during the

decade of 1990s as compared to the 2000s. In the 1990s, rate of increase in

MSP/PP of wheat was higher (156.4%) than that of paddy (150.7%).In case of pulses, the rate of increase in MSP/PP was higher during the 2000s compared with 1990s. The rate of increase was the highest in case of moong and lowest in gram. The prices of tur, moong and urad have more than doubled between 1990s and 2000s.

Dev and Rao (2010) reported that actual price realized by farmers was higher than MSP/PP during the last three decades. It was also observed that price realization was much lower in states like Orissa, Bihar, Assam, West Bengal and Uttar Pradesh compared to Punjab, Haryana, and Madhya Pradesh. The price policy has a limited role in increasing agricultural production as it mainly influences acreage allocation but not crop productivity. It is important to note that non-price factors such as technology, public investment agricultural research and development, extension services, irrigation, rural infrastructure, etc. play more important role in influencing productivity and production than pricing policy. Therefore, more emphasis on non-price interventions needs to be given to accelerate growth in agricultural sector.

The decentralized procurement policy (DCP) under which foodgrains are procured and

distributed by the State Governments was introduced in 1997. The main objective of

decentralized system of procurement was to increase coverage of more farmers and crops

under MSP operations, improve efficiency of the PDS, providing more variety of foodgrains suited to local tastes and preferences and reduce transportation costs. in the case of rice, States under DCP operations have witnessed a significant increase in their share in procurement. For example, the share of Orissa has increased from 4.5 percent in 1997-98 to 7.9 percent in TE 2009-10 while in case of West Bengal the share has increased from 1.3 percent to 4.8 percent during the same period. The share of traditional states like Punjab and Haryana has declined significantly in post-DCP period.

During 2009-10, rice procurement in DCP States was about 11.9 million tonnes. However, in the case of wheat, procurement in DCP States has not increased except for Madhya Pradesh where it has increased from 3.8 percent in 1999 to 11.2 percent in TE 2010-11.

Under the decentralized system of procurement, the procurement of wheat has increased from less than 2 million tonnes in early 2000s to about 6.1 million tonnes in 2009-10. In 2010-11, the wheat procurement in DCP states has gone down primarily due to Uttar Pradesh withdrawing from the DCP scheme. there has been an increase in procurement by DCP states except in 2006- 07 and 2007-08 for wheat mainly due to aggressive purchases by private companies on expectation of higher market prices and proximity to consumption markets. Therefore, there is a need to increase the scope and scale of DCP in high potential areas like Bihar, Orissa, Chhattisgarh, Assam, West Bengal, Madhya Pradesh, Rajasthan, eastern Uttar Pradesh, Gujarat, etc. However, most of these states have poor market infrastructure as well as less developed private sector trade. Efforts are required to create marketing infrastructure in these regions and also to expand scope of coverage of crops like coarse cereals.

Another problem with agricultural price policy is mixing up the concepts of minimum support price (MSP) and procurement price (PP) but these policy instruments were introduced to serve different purposes. At present first one is not used though it was considered by the official policy during mid-1960s to mid-1970s. The purpose of MSP was to protect farmers against falling prices below a floor price and was determined based on the variable cost of production.

The system of MSP must be restored as it is required to ensure farmers remain in business as long as their variable costs are covered. It will also incentivize farmers to adopt technical change. The government should announce MSP before the sowing season as it would help in area allocation decisions. The procurement price (PP) which is determined based on both the variable cost and the fixed cost of production, should be used to procure foodgrains needed for public distribution system (PDS), welfare schemes and buffer stocks required for food security purpose.