Price deficiency payment is best

Under PDPS, farmers are paid the difference between MSP and the model price of the market, without actual procurement

By Author A Amarender Reddy   |   Published: 24th Dec 2020   12:53 am

The agitating farmers are mainly demanding guarantee of Minimum Support Price (MSP), although the new farm laws are not related to MSP in any way. The government too is repeatedly saying that procurement under the MSP will continue. With the opening up of trade outside APMC markets, formalisation of contract sales between farmers and private companies and removal of stock limits for traders, farmers are apprehensive about the continuation of MSP through public agencies. Most of their grievances (46%) are related to low crop prices, as per the Department of Administrative Reforms and Public Grievances, and were made even before the new farm laws came into force.

Under the new laws, farmers will be more exposed to free market forces. The new laws will increase competition from buyers for farmers’ produce, hence logically increase prices. But farmers fear that a few corporates will monopolise the entire market operations, leading to the weakening of both Agricultural Produce Market Committee (APMC) markets and MSP, thereby reducing government’s capacity to procure at MSP. Though the fears are exaggerated, there is some truth in these apprehensions of price volatility.

Fears of Free Market

The intent of the farm laws is to provide more options for farmers to sell their produce at higher prices than the APMC markets. With the entry of private players, investors will develop local markets, cold chains, warehouses and aggregation centres to directly buy from farmers, which in turn, will increase the price of their produce and income too. However, free market alone does not guarantee higher prices. There is a need for introducing price insurance schemes to safeguard farmers against low prices. Although there are crop insurance schemes like the Prime Minister Fasal Bhima Yojana, it covers only production risk and not price risk.

The only tool available with the government to guarantee price is procurement at MSP. To cover all the 23 crops under the MSP is a gigantic task, needs huge budget allocations, support from States and local marketing boards to evolve economically and politically feasible solutions given that the States’ capabilities are limited and vary. Some States like Punjab have historically been in a better position to procure their major crops — paddy and wheat, while others like Bihar and Odisha have limited capabilities. Because of this, Punjab and Haryana farmers received higher prices than farmers in the eastern parts like Bihar over several decades.

Biased MSP

Except for paddy and wheat, there is no proper procurement mechanism for the remaining 21 crops for which MSP is announced. Although under the decentralised procurement system, some States are procuring pulses and oilseeds, they cover less than 5% of the production.

India cannot achieve the target of doubling farmers’ incomes just by procuring paddy and wheat, that too only from a handful of States. The current MSP policy is hugely discriminatory against rainfed farmers who grow pulses, oilseeds, fruits and vegetables, These farmers constitute over 70% of the 12 crore farm families in India. The prices of oilseeds were less by 10-30% in most of the markets during the recent kharif season. The biased policy contributes to huge import of edible oils costing the exchequer up to Rs 70,000 crore each year. Fruits and vegetable are entirely out of the MSP procurement policy.

Three Sub-Schemes

To correct the policy bias in MSP operations, the government of India introduced the PM-AASHA (Pradhan Mantri-Annadata Aay SanraksHan Abhiyan) in 2018 to ensure MSP for all the 23 crops. PM-AASHA has three sub-schemes, ie, Price Support Scheme (PSS), Price Deficiency Payment Scheme (PDPS) and pilot of Private Procurement & Stockist Scheme (PPSS).

The PSS is actual procurement by the government at MSP from farmers during the harvest period. This is nothing but the existing procurement operations for paddy and wheat. For only two commodities, the government spends about Rs 2 lakh crore every year on food subsidy. To expand it to all the 23 crops is beyond the capacity of both Central and State governments, in terms of finances and also logistics.

PDPS Model

Under the PDPS, farmers are paid the difference between MSP and the model price of the market, without actual procurement. (See infographics) Private players can procure farm produce at the state-mandated MSP during the notified period in select markets, for which they would be paid a service charge. It is the most efficient method, as it eliminates all logistics costs relating to procurement, storage and offloading. It is neutral to crops and geography. It can be operational for any crop anywhere, even in remotest parts.

The States are free to choose among the three sub-schemes. However, the most suitable mechanism under the open and free market scenario is the PDPS as it doesn’t intervene in free market operations of market players. Historically, most of the commodity (except paddy and wheat) prices are determined by free play of market participants with negligible government intervention. Hence, it is important that the government policy should not intervene in the already perfectly working free market forces.

The implementation of the PDPS is easy and feasible across the country, as all the necessary information for direct transfer of price deficiency payment like farmers identification, land records, bank accounts is collected under the already fully functional PM-KISAN scheme. The model price of all the APMC markets is available under Agmarknet. The only additional information needed is the quantity sold by each farmer, which can be estimated based on acreage data collected by the State department of agriculture at the beginning of the season or during actual submission of sale receipts.

Even under ideal situations, the actual procurement at MSP cannot reach more than 20% of farmers, hence it cannot help increase farmers’ incomes. The actual procurement was less than 5% of market arrivals for pulses and oilseeds and 20-30% in the case of paddy and wheat in the 2019 crop season. Hence, in the long-run the only alternative is PDPS as its benefits can reach all farmers. This scheme is not dependent on the capacity of the government to procure through APMCs or any other agency, hence farmers’ fear of neglecting the APMC markets under the new laws will also be eased.

(The author is Principal Economist, ICAR-Central Research Institute for Dryland Agriculture, Hyderabad. Views are personal)


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