Raising farm output by providing remunerative prices to agricultural products is a suggestion that is widely popular.
But over the years, between the price and non-price factors, the latter has been seen as more effective.
What are some suggested ways to address farm distress?
When output increases well beyond the market demand, market prices decline.
In the absence of effective price support policy, farmers are faced with a loss of income, depending on how much the price decline is.
The “farm distress” in recent years has been partly on account of this situation, as the loss of income is beyond the ability of the small farmers to absorb.
Schemes - A few schemes have been suggested to address the problem of managing declining output prices when output increases significantly.
The effectiveness of Minimum Support Price (MSP) program in addressing price decline would depend on its effective implementation.
“Price Deficiency Compensation Scheme”, for paying the difference between the market price and MSP, has gained acceptance in some states now.
Another extreme is the “open procurement system” at MSP that has been in vogue quite effectively in the case of rice and wheat.
This scheme, however, poses the challenge of managing the distribution of the procured grain, which currently causes huge wastages.
What is the recent crisis in the market for pulses?
The experience of 2016-17 in the case of pulses points to the huge impact on prices when the output grows significantly and suddenly.
Notably, in 2016-17, output increased by nearly 90% over the previous year, resulting in the fall of prices sharply.
When the output of kharif crops reached the markets in December, arhar dal prices fell by about 20% in 2017 over the previous year.
The price decline was not limited to just one year and it further fell by another 35% in 2017-18 even though output actually dropped in 2017-18.
One contributing factor to the continued decline in prices in 2017-18 may have been the high level of imports during 2016-17, besides the surge in output.
Imports perhaps were planned keeping in view the general deficit in supplies relative to demand, but the unexpected output increase created strain.
What is the suggested way out from future pulse gluts?
The “price deficiency” scheme may compensate the farmers when prices decrease below a certain specified level.
However, market prices may continue to fall as the supply exceeds the “normal demand” and hence this won’t be a sustainable option.
Nearly, all the produce may become eligible for the “deficiency payments” in theory as the prices, in general, would have fallen for all the producers.
An alternative to this is the limited procurement scheme, under which the government will procure the “excess” until market prices reach MSP level.
This is in contrast to the open procurement scheme for rice/wheat, as it will commence only when there is a significant market glut.
If implemented effectively with proper situational assessment, this will leave the normal production levels to clear the market at a remunerative price.
The timing and speed with which the procurement is implemented are critical and determining the quantity of excess and price levels is also vital.
In any case, the idea is not to absorb all the output but a quantity that would keep the supply-demand balance at the trend level.
What are the challenges involved?
The effectiveness of “limited procurement scheme” would also depend on how “distribution” of the procured pulse/grain is managed.
Selling the procured produce back in the market in the same season would clearly defeat the purpose as it would deter price recovery.
Therefore, storage facility for managing the excessive produce that is procured is essential as it would help in creating buffer stocks.
Further, year-to-year fluctuations in production would aid the distribution of the stored produce without impacting the market prices significantly.
It is to be noted that the suggested “limited procurement system” will not work if the MSP is fixed at a level to which the market price will never rise.
