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Why India’s price support programme has become irrelevant

price support programme, agricultural price support programme, GDP, Green Revolution technology, India price support policy, MSP, e-NWR, NABARD

By V Shunmugam & Tulsi Lingareddy

India s agricultural price support programme has lost its relevance without providing any significant benefit to the farming community, and only adding to the fiscal burden as the cost of procurement and storage of crop produce stood close to 1% of GDP for FY20 while covering select economically significant crops in selected geography. Despite the existence of floor-price-based support for over four decades, farm distress has not declined but has increased, as more and more farmers are becoming debt-ridden and are unable to get remunerative prices for their produce. Also, there have been increasing loan waivers by various state governments in recent years, adding to the fiscal burden without addressing the problem of lower incomes associated with distress sale of crops. So, there is a need for finding a strategic solution to ensure remunerative prices for farmers without distorting markets and disturbing India s fiscal math.

Agricultural support policies are common in developing as well as developed countries, to enable growers to overcome the distress arising from natural calamities and market failures. India s price support policy was introduced in the mid-1970s, with an objective to encourage adoption of Green Revolution technology, and achieving self-sufficiency in foodgrains (rice and wheat) production. The policy was extended to 24 major crops by announcing MSP, but not fully supported by procurement, causing distortion of production and marketing system.

The policy has now lost its relevance as procurement was largely limited to rice and wheat confined to a few states. Support prices for other crops without the necessary infrastructure and logistics made it neither practically-feasible nor fiscally-viable to procure. Also, with increasing global integration of Indian markets and in view of the commitments under the WTO, it is time for Indian agri production and marketing practices to align with global best practices.

Some states have attempted to devise alternate methods to support farmers. The Bhavantar Bhugtan Yojana in MP and Rythu Bandhu in Telangana, though have some merit, are constrained by implementation issues such as estimation of price deficiency, exclusion of tenants from income support, etc, apart from contributing to fiscal burden. So, it is essential to devise an alternate strategy that can be centrally implemented across all major crops in the country in an effective manner while containing fiscal burden.

Our analysis of price trends for six economically significant crops rice, wheat, chana, tur, soybean and mustard (covering two markets in their major production areas) indicates that prices gained a minimum of 10% in the first 3-4 months from their levels compared with the harvesting season in the past five years, except a few years. Occasionally, we witnessed prices in the harvesting period remaining relatively higher due to deficit production, due to drought, floods, pest attacks, etc. So, a practical solution appears to be seamless enablement of storage of crop produce for 3-4 months till the prices reach remunerative levels. Meanwhile, farmers in need of money shall be connected to commodity finance using electronic negotiable warehouse receipts (e-NWRs). The cost-benefit analysis, i.e. juxtaposing the costs of storage, handling and the cost of carry against the benefit from the average price gain during the past five years, indicated benefits exceeding costs.

The most practical alternate strategy with the least market interference can be connecting institutions in existence for provision of warehousing, issuance of e-NWRs and those providing commodity or e-NWR financing services either independently or under PPP. Support from the government to farmers can be in the form of supporting warehousing costs, enhancing availability of regulated warehouses, and underwriting any losses that may occur to financiers under pre-decided scenarios. Another option shall be to connect e-NWRs issued to farmers to their Kisan Credit Cards. With this model, the subsidy burden can be contained, while covering most of the crops grown in the country, as it can reduce the costs of direct procurement, storage and handling of stocks, apart from reducing fiscal burden arising out of market interventions. The historic price trends and cost-benefit analysis suggest that the model can be successfully implemented with certain prerequisites.

First, the creation of adequate logistical support in the form of storage spaces and infrastructure facilities for assaying, handling, quality standardisation, etc. Third-party agencies such as FPOs can create storage spaces and infrastructure facilities. One such recent PPP initiative has been to create infrastructure for storage of soybean and pulses in Latur, Maharashtra, by MAHA-FPC in partnership with the Maharashtra Industrial Development Corporation. Towards this, NABARD has been providing support through financial schemes. It is also essential to connect them to the Warehousing Development and Regulatory Authority and hence electronic commodity repositories to connect farmers with finance.

Another requirement is the establishment of an efficient agricultural market information system, which can provide reliable and timely information on demand, supply and prices of agricultural commodities that can be disseminated at the ground level. While technological advancements have enabled timely forecasting of crop output estimates, a reliable system for providing timely demand estimates for all major crops is essential not only for tracking price behaviour, but also for making crucial crop production decisions. This will enable farmers to grow crops that are economic and cost-effective.

Another reason farmers are not getting remunerative prices is the lack of awareness and poor agronomic practices affecting the quality standards of their produce. Suboptimal quality standards weigh down Indian agricultural exports in case there is an economic opportunity at times of glut.

In this regard, derivatives markets can play a major role not only by connecting institutions and agencies providing services like storage, quality standardisation, logistics and finance, but also by disseminating real-time price information, bringing transparency to the agricultural marketing system. Policymakers have taken a number of initiatives bearing substantial fiscal burden to raise farmers incomes. It s time to take strategic measures to amalgamate the farm support policy with institutional partnerships to reach out to all the farmers without disrupting the crop production and marketing system. The income support already provided by the government may be mandated to be used as investment for diversification through allied activates like apiculture, sericulture, livestock rearing, etc, thus helping achieve the objective of doubling farmers incomes.