Why a price insurance policy makes sense

A Amarender Reddy

There is a growing demand from a section of farmers’ organisations for guaranteed Minimum Support Price (MSP). The Central government has agreed to constitute a committee to consider the issue. Now the onus is on the committee to come out with a solution amicable to all stakeholders — farmers as well as Central and state governments. As the proposal will have huge logistic and fiscal implications (estimated costs varying between Rs 1.5 lakh crore and Rs 2.5 lakh crore), which can be sustainable only if both Central and state governments share the burden. Agriculture is a state subject and the entire agricultural extension machinery is in the hands of states, which can advise farmers on the correct choice of crop rotation, the use of right quantity of inputs, supply of irrigation water and most importantly APMC (Agricultural Produce Market Committee) markets.

Over the past two decades, since the introduction of the Model APMC Act of 2003, there has been some progress in agricultural market reforms, although uneven and sluggish, in terms of creating new private markets, setting up of farmers’ direct markets, encouraging contract farming and ensuring timely payments to farmers.

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Farmers’ apprehensions about price volatility are real. For example, except paddy and wheat, where procurement is in a significant quantity and above 50% of the production, prices fluctuate widely in many states. During some years, farmers get good profits, while the losses are unbearable for them when the prices plummet. That’s why they demand guaranteed MSP for their produce.

In any developing country, including India, price policies are always in favour of consumers, especially in the case of foodgrains. The Union government started the procurement of rice and wheat in the 1960s to avoid large-scale famines and maintain buffer stocks and distribute foodgrains through the Public Distribution System (PDS). However, over the years, because of surplus production and political pressures, procurement increased to three times the buffer stock norms. Though the MSP policy insured paddy and wheat farmers against the vagaries of the market and assured them just prices, it neglected other crops such as pulses, oilseeds, fruits and vegetables, resulting in little incentive to grow these crops and low production and supply, resulting in low consumption and mass undernourishment among children and women.

A major problem here is that there is no proper procurement mechanism except for paddy and wheat; in states such as Bihar and Jharkhand, even procurement of paddy is not taking place to a large extent. The procurement of the remaining 21 crops for which MSP is announced has always been in limbo. Although some states are procuring pulses and oilseeds under a decentralised procurement system, they cover less than 5% of the production.

India cannot achieve the target of doubling farmers’ income just by guaranteeing MSP. The average monthly income from different sources per agricultural household (July 2018 to June 2019) comes to only Rs 10,218, as per the recent NSSO survey. Of the total income, only 37% is coming from cultivation/net receipt from crop production, while wages, animal-rearing and non-farm business together contribute about 61% of the income. It indicates that to increase farmers’ income, rejuvenating rural economy is more important so that the demand for these allied activities will increase and have a positive impact on their income. Hence, guaranteed MSP should not be treated as a guaranteed income policy. It can be used as an instrument of price insurance for a broad set of crops.

The MSP is a price policy and not an income policy. The basic objective of the policy should be to safeguard the farmers from high volatility and low prices irrespective of the crops they grow. Although crop insurance schemes like Pradhan Mantri Fasal Bima Yojana (PMFBY) are in operation, they cover only the production risk, neglecting the price risk.

The objective of shielding farmers from the price risk through a guaranteed MSP policy can be achieved through a budget of Rs.1.5-2.5 lakh crore, depending on the price levels in domestic and international markets. It also doesn’t require procurement of the farmers’ entire produce.

The quantity to be procured for paddy and wheat should be restricted to buffer stock norms and also public distribution requirements to minimise the logistic costs and wastages. The price deficiency payment scheme (PDPS) needs to be adopted for the remaining wheat and paddy produce and the 21 other crops.

The existing price support scheme (PSS) for paddy and wheat needs to be changed from an open-ended practice to a restrictive closed scheme with emphasis on decentralised procurement with more responsibility on state government agencies, cooperatives and farmer producer companies. In this way, the government can meet buffer stock and PDS requirements and reduce logistic costs and wastages in warehouses.

The remaining paddy and wheat and the 21 other crops for which MSP is announced every year need to be covered under the PDPS, wherein farmers are paid the difference between MSP and the average wholesale price in the designated local markets if the average wholesale price is lower than the MSP. The farmers can sell in the open market. This is the most efficient method as it eliminates all logistic costs relating to procurement, storage and offloading. It can be implemented even in the remotest parts of India, given that now all farmers have bank accounts under Jan Dhan Yojana which are linked to land records, facilitating direct money transfer to farmers.

Rolling out of the PDPS is easy for all commodities and across the country as all necessary information for direct transfer of the price deficiency payment is already available. The PDPS was implemented in Madhya Pradesh and Haryana under the Bhavantar Yojana.

Overall, while examining guaranteed MSP, the proposed committee needs to examine the logistic costs, fiscal burden, commodity-specific characteristics, the role of private players, new institutional structure required and methods to calculate price deficiency to accommodate opinions of the stakeholders.

The article Why a price insurance policy makes sense first appeared in The Tribune India

About the Author

A Amarender Reddy

A Amarender Reddy, Principal Scientist, ICAR-Central Research Institute for Dryland Agriculture, Hyderabad. Views are personal



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