Assessing Agri-Pricing Policies

What is the issue?

• Excess supply, depressed market prices and mounting farmer losses are more a consequence of shortfalls in agri-pricing policies.
• It calls for providing income support to at least the most vulnerable farmers.

What is the existing scenario?

• Good rains, excessive sowing and bumper harvest last year produced excess supply in the market.
• It resulted in a decrease in the prices of many crops and thus in farm incomes too.
• Market prices for major kharif crops fell below the Minimum Support Prices (MSP).
• The current farm crisis is largely due to the shortcomings in the pricing policies.

What is the policy shortfall?

• Agri-prices, and therefore farm incomes, are not free-market driven.
• They are kept artificially low, through use of pricing policy instruments.
• This is done so that inflation does not erode the rest of the population’s purchasing power.
• The economic tools for protecting farm incomes were not employed to the best advantage.
• These include -
  1. 1. the price support scheme
     2. price stabilisation fund
     3. market intervention scheme
• Appropriate adjustments to the export and import rules could have arrested the price fall.
• It would have diverted the excess supplies to overseas markets.
• But imports were allowed as usual, which worsened the price situation.

What is the policy on MSP?

• The Budget promised that Minimum Support Prices (MSPs) would be at least 150% of production costs.
• Even if market prices fall below MSP, government will procure the produce on MSP.
• If it does not procure, it will provide a mechanism to ensure payments reach farmers.
• That would be equal to the gap between the MSP and the market price.
• Assuring 50% profit margin over the cost of production is to make farming remunerative.

What are the concerns with MSP?

• Farmer groups and government differ on the formula for calculating production costs for plugging into the MSP formula.
• But besides this, simply announcing higher MSPs will not raise farmer incomes.
• As, the system is not geared for scaling up procurement in the first place.
• MSPs are announced for more than 20 crops.
• But, noteworthy procurement is conducted just for three - paddy, wheat and sugarcane.
• For several crops, last year, the quantities procured were small portions of the total produce.
• Further, procurement frequently takes places at prices below the MSP, according to reports.
• Also, small and vulnerable farmers usually do not get paid MSPs at all.
• This is because they sell their produce to aggregators, not directly in mandis.

What is the demand-supply mismatch?

• MSP of Paddy for the 2018-19 kharif season will have to be raised 11-14%, cotton 19-28%, and jowar 42-44%.
• These are the projections if the MSP pricing formula of 1.5 times the cost is employed.
• A rational response of farmers would be to sow more jowar in the next season.
• But there is no reason that the demand for jowar would also rise.
• A demand-supply mismatch would be inevitable in this case.
• It would send the market prices for jowar way below the announced MSP.
• It would in turn call for significantly expanded jowar procurement at MSP.
• Thus, clearly, pricing policies distort market prices of crops.
• It sends the wrong signal to farmers on what to produce and how much.
• The policy system fails to correct such situations, which then goes out of control.

What should be done?

• If the problem is volatile incomes, the solution must target incomes, and not prices.
• Income support payments, paid on a per hectare basis through direct transfers should be considered.
• It would offer an administratively neater, economically far less distortionary and politically more attractive solution.
• E.g. Telangana has announced such payments for farmers at the rate of Rs. 10,000/ha (Rs. 4,000/acre) per season.
• The cost projections for scaling up this model at national level are roughly same as the estimated bill for price differential payments.
• This is excluding the procurement of sugarcane, wheat and paddy, and non-MSP crops.
• Fiscal space must be found for providing income support this year to the most vulnerable farmers at least.
• Over the longer term, deep reforms in pricing policy would be the alternative.

Source: The Hindu