Raising minimum support prices to 1.5 times the cost of production could severely distort agricultural markets, suggests a new report from the Indian Council for Research on International Economic Relations. The report takes a look at government schemes to bolster the crop procurement process.
The Centre offers minimum support prices for 23 crops grown in the kharif (monsoon) and rabi (winter) agricultural seasons. This price, which is supposed to be set at the cost of production, represents a promise from the government to farmers that should market prices fall, usually due to high supply, the government will purchase those crops and protect them from heavy losses. In practice, neither the Centre nor the states have the capacity to procure most of these crops and they end up procuring only wheat and rice, and occasionally pulses, under this scheme.
While the minimum support price is set to the cost of production, this cost can be defined in three different ways. The lowest base, A2, the one at which the minimum support price of most crops is at now, calculates only the cost of inputs for the farmer. The second base, A2+FL, includes the imputed cost of unpaid family labour. C2 is the highest base, which includes all of this and the imputed value of fixed capital assets and rental value.
The Bharatiya Janata Party had promised in the run up to the 2014 Lok Sabha elections that it would increase the minimum support price to 1.5 times the cost of production, a promise that Finance Minister Arun Jaitley reiterated would be implemented in his budget speech this year. However, while Jaitley’s promised increase would take minimum support prices to 1.5 times of A2+FL, farmer groups have been demanding that the prices be increased to 1.5 times of C2.
All this would be somewhat theoretical given the Centre’s lack of interest in procuring anything but wheat and rice if it were not for the Centre also mulling implementing two new schemes that would make minimum support prices a reality.
One is the Price Deficiency Payments Scheme, a pilot of which was implemented under the name “Bhavantar Bhugtan Yojana” by the Madhya Pradesh government in 2017, but rolled back by the start of the rabi season. Under the scheme in Madhya Pradesh, the state did not buy farm produce from farmers but said it would pay them the difference between the market price and the minimum support price. For instance, if the minimum support price for maize is Rs 1,425 per quintal, but the average market price is just Rs 1,225, the government would pay the farmer the remaining Rs 200.
The other is the Market Assurance Scheme, which promises to devolve decisions over procurement to state governments.
Market distortion likely
The Indian Council for Research on International Economic Relations working paper by Ashok Gulati, Tirtha Chatterjee and Siraj Hussain examines the potential impact of the Price Deficiency Payments Scheme in light of the promised higher minimum support prices, and finds that this is likely to distort the agricultural market further by ignoring the demand side entirely.
“The resulting efficiency losses may far exceed the support that government is intending to extend to farmers,” the report says. “Therefore, wisdom lies in thinking rationally now, and support farmers through less distortionary policies.”
The authors give the example of jowar in seeing the possible distortion that might ensue with higher minimum support prices. The minimum support price of jowar is likely to increase by 42% to 44% with minimum support prices calculated at the rate of 1.5 times A2+FL. In this scenario, farmers might find it profitable to grow more jowar, which will increase its supply but without matching demand, the report says. Market prices might then fall well below the minimum support prices, which would then require the government to procure jowar at a large scale or pay large amounts through the price deficiency payments scheme. Neither would be economically rational, the report says.
The report suggests alternatives such as heavy investing in “marketing infrastructure, storage and food processing”, allowing direct purchases from farmer producer organisations instead of requiring farmers to sell their produce at registered markets.
Crucially, it recommends a direct income support on the basis of cultivated acreage, as in a scheme recently announced by Telangana and Karnataka. In this scheme, farmers receive Rs 8,000 per acre (or Rs 10,000 per hectare) no matter what crop they grow or to whom they sell.
The report says: “Direct income transfer at all India level may not be cheaper but direct income transfer will not accentuate market distortions and its associated efficiency losses, and it would be much more inclusive and equitable, as well as transparent.” However, for this, land records will need to be digitised and linked to Aadhaar, the report recommends.
The cost of rolling out a direct income support scheme at the national level is likely to be slightly more than a full and sincere implementation of the price deficiency payments scheme, but without the drawbacks of distorting the market artificially, the authors say.
Across the country, if average prices fall to around 30% below the minimum support prices, the government would stand to compensate farmers around Rs 1.69 lakh crore. The estimated cost of a direct income support scheme could be around Rs 1.97 lakh crore at the rate of Rs 10,000 per hectare.
Yet this estimated cost for the price deficiency scheme assumes that it is implemented sincerely. Despite extensive publicity, Madhya Pradesh’s Bhavantar Bhugtan Yojana benefited less than 25% of the total produce of the state. It managed to compensate only 32% of urad produced in the kharif season of 2017, even though average sales prices for urad, calculated across mandis in other states, had plummeted at least 42% below the minimum support price during that period, indicating that despite a great need from farmers and its own promises, the state was unable to effectively intervene.