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