Agricultural Price Policy and the Minimum Support Price

Agri­cul­tural Price Pol­icy - Overview#

At the time of inde­pen­dence, Agri­cul­tural Price Pol­icy was heav­ily influ­enced by the mul­ti­plic­ity of reg­u­la­tions imple­mented dur­ing WWII. It com­prised strict con­trols on agri­cul­tural move­ment between states, pro­cure­ment of food grains through com­pul­sory levies on grow­ers, mar­ket pur­chases, and quo­tas in almost all states. Over time the pol­icy evolved, as fol­lows.

• The Gov­ern­ment of India started exper­i­ment­ing with State buy­ing and sell­ing of food grains in April 1959, fol­low­ing the sug­ges­tions of the Food Grains Enquiry Com­mit­tee of 1957.
• This com­mit­tee called for State con­trol over the whole­sale trade in food grains, which the National Devel­op­ment Coun­cil approved in Novem­ber 1958.
• State com­merce was to be lim­ited to two key com­modi­ties: wheat and rice. How­ever, the idea ran into prob­lems since it was imple­mented hap­haz­ardly and with­out con­sid­er­a­tion for eco­nomic dynam­ics.
• Keep­ing this in mind, every year the gov­ern­ment declares Min­i­mum Sup­port Prices (MSP) for main agri­cul­tural prod­ucts as part of their Agri­cul­tural Price Pol­icy.
• Through ration shops, the gov­ern­ment sup­plies food grains to BPL fam­i­lies. The sup­port prices are set after con­sid­er­ing the rec­om­men­da­tions of the Com­mis­sion for Agri­cul­tural Costs and Prices.

Agri­cul­tural Price Pol­icy in India - Objec­tives#

India’s Agri­cul­tural Price Pol­icy is aimed at pro­tect­ing the inter­ests of Indian farm­ers by guar­an­tee­ing the Min­i­mum Sup­port Price for their agri­cul­tural prod­ucts. Here are some of the other objec­tives of this pol­icy -

• Pro­tect­ing farm­ers' inter­ests: the pol­icy reduces farm­ers' depen­dence on inter­me­di­aries by set­ting up insti­tu­tions that buy directly from them and sup­port them.
• Main­tain­ing a rea­son­able price for agri­cul­tural prod­ucts: Another objec­tive of the Agri­cul­tural Price Pol­icy is to ensure that food is sold and pur­chased at a price that the farm­ers and con­sumers both ben­e­fit from.
• Increas­ing agri­cul­tural pro­duc­tion: When farm­ers ben­e­fit from their sea­sonal pro­duce, they are more likely to con­tinue invest­ing in agri­cul­tural ser­vices. The Agri­cul­tural Price Pol­icy aims to make sure that farm­ers actu­ally receive the Min­i­mum Sup­port Prices.

Fac­tors Affect­ing Agri­cul­tural Price Pol­icy#

The Com­mis­sion on Agri­cul­tural Costs and Prices (CACP) takes cru­cial fac­tors into account when rec­om­mend­ing pric­ing as per the Agri­cul­tural Price Pol­icy. Given below are some fac­tors that deter­mine the Agri­cul­tural Price Pol­icy in India -

1. Pro­duc­tion costs
2. Input price changes
3. Price Par­ity Between Inputs and Out­puts
4. Mar­ket Price Trends
5. Price Par­ity Between Crops
6. The Sup­ply and Demand Sit­u­a­tion
7. Impact on Indus­trial Cost Struc­ture
8. Gen­eral price level effects
9. Cost of liv­ing effects
10. Par­ity between prices paid and prices received by farm­ers (terms of trade)

Agri­cul­tural Price Pol­icy in India - Advan­tages#

The Gov­ern­ment of India intro­duced the Agri­cul­tural Price Pol­icy to offer farm­ers the sup­port that they require to con­tinue pro­duc­ing impor­tant crops. This pol­icy sup­ports the farm­ers by offer­ing them cer­tain incen­tives. Here are some of the advan­tages of the Agri­cul­tural Price Pol­icy in India -

• This pol­icy helps avoid a price drop in the event of excess pro­duc­tion.
• It pro­tects the farm­ers' inter­ests by guar­an­tee­ing them a min­i­mum price for their prod­ucts in the event of a mar­ket price drop.
• It addresses the need for domes­tic con­sump­tion.
• It helps main­tain agri­cul­tural prod­uct price sta­bil­ity.
• It helps elim­i­nate price dis­par­i­ties between two regions or across the entire coun­try.
• It increases agri­cul­tural prod­uct out­put and exports.

Agri­cul­tural Price Pol­icy - Dis­ad­van­tages#

The pri­mary goal of the Agri­cul­tural Price Pol­icy in India is to pro­tect the inter­ests both of farm­ers and con­sumers. Food grain prices should be set with great care so that nei­ther farm­ers nor cus­tomers suf­fer. Here are some of the dis­ad­van­tages of the Agri­cul­tural Price Pol­icy -

• To raise farm­ers' income, the poor in the coun­try may have to pay more for food, which wors­ens the mis­al­lo­ca­tion of resources.
• Sup­port­ing farm­ers via higher prices is inef­fi­cient because it penal­izes con­sumers by increas­ing costs. It also means that large grow­ers will reap the great­est ben­e­fits. Large farm­ers may gain more than they need while small farm­ers con­tinue to strug­gle.
• Farm­ers employ a large amount of fer­til­izer to improve their pro­duc­tion, but this causes prob­lems for those who do not ben­e­fit from the increased pro­duc­tion.

Motives (advan­tages) behind the announce­ment of Min­i­mum Sup­port Price (MSP)#

• To secure the inter­ests of the farm­ers as also the need of self-reliance, the gov­ern­ment announces min­i­mum sup­port prices for 22 major crops, along with a fair and remu­ner­a­tive price for sug­ar­cane. The main objec­tives of the MSP are:

I. To pre­vent fall in the price in the sit­u­a­tion of over pro­duc­tion. II. To pro­tect the inter­ests of the farm­ers by ensur­ing them a min­i­mum price for their crops in the sit­u­a­tion of a price fall in the mar­ket. III. To meet the domes­tic con­sump­tion require­ment IV. To pro­vide price sta­bil­ity in the agri­cul­tural prod­uct V. To ensure a rea­son­able rela­tion­ship between prices of agri­cul­tural com­modi­ties and man­u­fac­tured goods VI. To remove the price dif­fer­ence between two regions or the whole coun­try. VII. To increase the pro­duc­tion and exports of agri­cul­tural pro­duce. VIII. To pro­vide raw mate­ri­als to the dif­fer­ent indus­tries at rea­son­able prices in the whole coun­try.

Dis­ad­van­tages of the Min­i­mum Sup­port Price#

• To increase the income of the farm­ers, the poor of the coun­try have to pay more. This prac­tice will cre­ate the prob­lem to allo­cate inef­fi­ciency in the coun­try.
• Sub­si­diz­ing farm­ers through higher prod­uct prices is an inef­fi­cient method because it penal­izes the con­sumer with higher prices. Also, it means large farm­ers will ben­e­fit the most. They have received more than they need but small farm­ers are still strug­gling.
• Farm­ers use fer­til­iz­ers in huge quan­ti­ties to increase their pro­duc­tion but it cre­ates prob­lems for those peo­ple who do not get ben­e­fits from this incre­ment in pro­duc­tion.

Pro­cure­ment Pric­ing#

The fun­da­men­tal dif­fer­ence between Pro­cure­ment Price and MSP is that MSP is announced before sow­ing, whereas PP is announced after har­vest. Since 1968-69 the gov­ern­ment has not declared a sep­a­rate pro­cure­ment price, and MSP is fre­quently used instead.

The pro­cure­ment price for an agri­cul­tural com­mod­ity is the min­i­mum price in which the gov­ern­ment is ready to buy. Agri­cul­tural com­modi­ties are sta­ple crops and live­stock that are grown or cul­ti­vated on farms or plan­ta­tions. Grain, live­stock, and dairy are all agri­cul­tural com­modi­ties that sup­ply nour­ish­ment for peo­ple and ani­mals all over the world.

The pro­cure­ment price of a com­mod­ity refers to the price at which the gov­ern­ment pro­cures the com­mod­ity from pro­duc­ers for main­tain­ing the buffer stock or the pub­lic dis­tri­b­u­tion sys­tem. The Min­i­mum Sup­port Prices become the pro­cure­ment price as the gov­ern­ment pur­chases crops from the farm­ers at MSPs.

Key terms#

Mar­ket Price Sup­port (MPS)

Mar­ket price sup­port is an indi­ca­tor, devel­oped by the OECD, used in the cal­cu­la­tion of Pro­ducer and Con­sumer Sub­sidy Equiv­a­lents.

Com­mis­sion on Agri­cul­tural Costs and Prices (CACP)

The Com­mis­sion for Agri­cul­tural Costs and Prices, set up in 1965 as the Agri­cul­tural Prices Com­mis­sion, is an attached office of the Min­istry of Agri­cul­ture. It is an expert body that rec­om­mends the Min­i­mum Sup­port Prices by tak­ing into con­sid­er­a­tion var­i­ous fac­tors.

Gen­eral Ser­vices Sup­port Esti­mate (GSSE)

The Gen­eral Ser­vices Sup­port Esti­mate is an Orga­ni­za­tion for Eco­nomic Co-oper­a­tion and Devel­op­ment indi­ca­tor of the annual mon­e­tary value of gross trans­fers of gen­eral ser­vices pro­vided to agri­cul­ture col­lec­tively, aris­ing from pol­icy mea­sures that sup­port agri­cul­ture, regard­less of their nature, objec­tives and impacts on farm pro­duc­tion, income, or con­sump­tion of farm prod­ucts.

Com­mon ques­tions#

What is the dif­fer­ence between the Min­i­mum Sup­port Price and Issue Price?#

Min­i­mum Sup­port Price (MSP) is promised by the gov­ern­ment for any agri­cul­tural crop whereas the issue price is the price at which the gov­ern­ment sells the grain it holds, for exam­ple through ration shops.

Who decides the Min­i­mum Sup­port Price?#

The Gov­ern­ment of India declares Min­i­mum Sup­port Prices for 22 crops before their sow­ing sea­sons, based on the rec­om­men­da­tions of the Com­mis­sion for Agri­cul­tural Costs and Prices.

Is the MSP same for the entire coun­try?#

Yes. There is no regional MSP; the same MSP applies to each crop across the coun­try.