As Budget day nears, that too in a year leading up to the general elections expected in 2019, all eyes are on Finance Minister Arun Jaitley. With rural discontent becoming apparent in voting behaviour during December’s Gujarat elections and with farmers across the country protesting for crop prices and freedom from debt, many believe the Budget will include an announcement for farmers. There is speculation that the Centre could scale up Madhya Pradesh’s Mukhya Mantri Bhavantar Bhugtan Yojana or price deficit compensation scheme launched in October and take it national.

Thus far, to buffer farmers against sudden price slumps, states have been buying some produce at a minimum support price. Under the Bhavantar Bhugtan Yojna, the Madhya Pradesh government isn’t buying produce but paying farmers the difference between the market price and the minimum support price.

As anyone familiar with the rural economy knows, the minimum support price programme does not operate optimally. While the minimum support price is announced for around 23 commodities, the state actually only buys paddy and wheat from the farmers. Even for these two crops, only around a third of the produce is procured. For other crops brought to market, the minimum support price has no real meaning.

Since state governments do little to stop the prices of farm commodities from falling (for instance, when they do not procure produce to help prop up falling prices as part of a Market Intervention Scheme), the price deficit compensation scheme is attractive. The concept centres around allowing prices to be determined by the forces of supply and demand. The price deficit payment mechanism then makes good any shortfall between the realised price and minimum support price, making the latter a de facto entitlement of all farmers.

Such a system is a win-win for both producers and consumers. The consumer price continues to be based on price realisation by farmers in the market, plus margins that other players garner all along the supply chain until the retail point. For producers, the minimum support price – which is theoretically supposed to cover the cost of production – is assured. Meanwhile, government agencies need not physically procure produce and later dispose of it, as happens in a Market Intervention Scheme.

Of course, the price deficit compensation scheme should not be seen as a substitute for the government’s procurement operations, and as an excuse to dismantle current systems of food security. In fact, there is a strong case for expanding the food schemes to include other commodities as well as larger quantities.

As the country continues to face agrarian distress and farmers' protests, the Union Budget on February 1 is expected to have something for cultivators. (Credit: Kamal Singh / PTI)

The Madhya Pradesh experience

Despite the theoretical benefits of such a programme, the Madhya Pradesh government seems to have faltered in meaningfully executing the bhavantar bhugtan or price deficit compensation programme. The scheme was announced in the middle of the kharif (summer) season last year for eight commodities – maize, soybean, groundnut, sesamum, mung (green gram), urad (black gram), arhar (pigeon pea) and ramtil (niger).

To begin with, the scheme did not anticipate collusion by traders, who reportedly pulled down prices drastically, telling farmers they need not worry as they would be compensated by the government.

In addition, many conditions without sound rationale were imposed. For instance, farmers were initially given just a month to register for the scheme, that too through an online portal, with 3,500 primary agricultural cooperatives providing this facility.

Another perplexing condition was the time window within which sales were to take place – which was two months for seven of the commodities. This meant that even those with the ability to retain their produce would have to rush to the market. With arrivals shooting up, prices were affected. Would it not have been more prudent to allow the scheme to run through the year, when price deficits might not be so sharp, bringing down the public financing burden? If this condition was imposed to prevent traders (or farmers colluding with traders) from recycling the produce, the solution lies in a better verification system to ensure the scheme benefits only genuine farmers once, rather than fixing a narrow time window.

Yet another condition was that registered farmers could sell only in their corresponding, designated markets. This again meant limiting the play of demand and supply to the extent that farmers could not make rational choices about where to sell.

Furthermore, a ceiling was fixed on how much a farmer could sell under the scheme. This ceiling was based on information on average yields of a given commodity from crop cutting experiments in earlier years, in addition to cultivation records maintained by the revenue department, to be further verified by the district collector. While placing such limits is understandable, the accuracy of both yield data and cultivation records has for long been under question across states, with much manipulation possible.

While a warehouse storage grant of Rs 9 per quintal was announced to encourage the retention of produce by farmers who could do so, it is unclear why this was not combined with a negotiable warehouse receipt, for the farmer to receive an advance for the stored produce.

All in all, the conditionalities on time windows, registration requirements, limitations on market yards, and the fixing of an average modal price at which the beneficiaries would be compensated disappointed farmers. Prices crashed while arrivals shot up. A scheme that was proffered as a solution against boiling farmer unrest did not satisfy farmers.

The implementation of Madhya Pradesh's price deficit compensation scheme has been hobbled by conditions that lack rationale.

Improving on the idea

Considering the experience in Madhya Pradesh, several improvements are possible to operate a price deficit compensation scheme effectively. A simple solution might be to make the scheme applicable to all licensed traders (and not farmers) and to fix a benchmark price for them to calculate deficits, if any. This can be the average price of the commodity in the past few years, for the time window in which it is sold in a given market. With this approach, traders would have to pay at least the minimum support price to the farmer-seller, and auctions would have to begin with the minimum support price as the floor price. This would take care of traders wilfully bringing down prices to the detriment of cultivators.

Also, a simple verification procedure of farmers by traders for each transaction can be laid down – as is happening with fertiliser sales at the retail end, for subsidies to be transferred to the industry, based on such sales data. This would require traders to make daily entries online. Prior to this, each farmer should be assigned a unique ID, which would throw up details such as his or her address and cultivation details among others. These unique IDs can, in fact, be used to create data systems across various schemes.

Traders should be mandated to pay farmers immediately by cheque. The government can then pay the traders the difference, if any, between the average market price for the same period in earlier years and the minimum support price. In such a system, there should be no time limit on registrations or on when a farmer can sell to a trader.

The recycling of sold material can be avoided by fixing farmer-wise limits based on yield data and properly-maintained cultivation records. Take the case of Andhra Pradesh, where the agriculture department maintains its own cultivation records. With the help of over 6,000 “multi-purpose extension officers”, all young science graduates armed with electronic tablets, it has an “e-crop booking” system. Here, details of the crop sown (after germination) and the cultivator are uploaded. All this information is available on the chief minister’s dashboard in real time and with geo-tagging. When the state attempted a price deficit scheme for its chilli crop last year, “certificate of cultivation reports” were readily available online.

A detailed analysis of Madhya Pradesh’s Bhavantar Bhugtan Yojana, its design and its implementation is essential to improve on the idea. The idea itself is one that could save farmers from being priced out in the market, provided there is political will to truly support them and to regulate traders.

Kedar Sirohi leads the Aam Kisan Union in Madhya Pradesh.
Kavitha Kuruganti is a co-convenor of ASHA – Alliance for Sustainable & Holistic Agriculture.