Balancing Procurement and Distribution - MSP and PDS
iasparliament
August 13, 2019
What is the issue?
Farmers are dissatisfied with government's Minimum Support Prices (MSPs) programme.
Procurement (MSP) and distribution (PDS) of commodities must be studied in tandem to determine the actual benefits to farmers.
What is the concern?
Minimum Support Price is the price at which government purchases crops for the farmers, to safeguard the interests of the farmers.
It is fixed to set a floor below which market prices cannot fall.
In case the market price for a commodity falls below the announced MSP, the government purchases it from the farmers at the MSP.
However, government’s procurement of key grains under its MSP is not being able to lift the open market prices of those commodities and benefit the farmers.
The policymakers and economists fail to recognise that MSP procurement is not an end in itself.
It has to be understood holistically, taking into consideration the distribution of such procurement under Public Distribution System (PDS) as well as how it works at cross- purposes.
What is the effect of procurement?
It is generally assumed or hoped that once the MSPs are increased, the open market prices will also rise.
But in reality, such procurements hardly create incremental demand.
Any procurement by government agencies at any price leads to a twist in the normal demand scenario.
Due to the government’s initial extra demand, the total demand increases.
But eventually, once the government supplies the same through the PDS, the effect is neutralised.
In effect, the market price will settle at a point which is way lower than the MSP.
So it is fundamentally wrong to think that hiking the MSPs from the current levels will result in higher open market prices.
What effect does PDS create?
The crops procured under the MSP are used in supplying them at cheaper (than free market prices) cost through the PDS to end-consumers.
This has the effect of changing the supply scenario.
It lowers the open market price, which may even settle at levels lower than the initial free market price.
As a result of these operations, the total quantities bought and sold expand.
This is because production will increase due to price support and so will consumption as lower PDS prices make it affordable to many.
The difference between procurement and PDS supplies will be addition to/reduction from buffer stocks.
What is the way out?
The quantities procured should be increased year-on-year to make a beneficial impact on open market prices; mere yearly MSP increases will have nil or negligible impact on open market prices.
It is to be noted that the production of agri-commodities has been surplus to requirements for several years running.
The buffer stocks with the FCI are far more than norms.
One way would be to export the surpluses and not supply the same back in home markets through the PDS.
Another way is to sell it to private sector for food processing.
Alternatively, it can allow food processors and exporters to procure crops at the MSPs and reimburse the difference between market price and the MSPs to them.
This way, at least the handling/storage loss for the government can be reduced.
Simultaneously, the government should reduce the size of the PDS physical distribution.
It should instead reimburse the consumers through Direct Benefit Transfers, even if the consumers buy through the open market.
In all, both the MSP and the PDS implementation should be rationalised to balance the effects, and benefit farmers at all levels equally.
