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Mainstream, VOL LIX No 40, New Delhi, Sept 18, 2021

Minimum Support Price for Agriculture in India: Policy Implications | Pavittarbir Singh Saggu

Friday 17 September 2021

by Pavittarbir Singh Saggu *

Abstract

The influence of the Minimum Support Price (MSP) on agricultural technology adoption and boosting output and buffer stocks of cereals, pulses, and oilseeds in India is discussed in this paper. The results imply that food policy should strike a compromise between the interests of farmers in increasing their profits and consumers in ensuring nutrition security within a sustainable budget.

Keywords: Food Grain, Agricultural Policy, Procurement Policies, Minimum Support Price (MSP)

In the crop year 2020-21, India’s foodgrain output is expected to hit a new high of 305.43 million tonnes, due to higher rice and wheat output. Agriculture and associated products exports increased by 17.34% to $41.25 billion. 129.8 million tonnes of paddy and wheat were purchased, setting a new record (Reddy 2021). Despite this beautiful picture, farmers’ incomes are not rising as quickly as projected, and widespread hardship exists. Except for paddy and wheat, procurement in other crops is limited notwithstanding MSP announcements for 23 commodities. In 2020-21, just 9.8 lakh tonnes of pulses were procured, which is not enough to support prices above the minimum support price (MSP) for farmers or to distribute through the Public Distribution System (PDS) to the poorest of the poor customers. Oilseeds such as groundnut and sunflower are rarely purchased (Reddy 2021). Experience has shown that a free market alone does not lead to increased farm income. Small and marginal farmers are often exposed to high price volatility as a result of this.

It is not uncommon for farmers to sell their produce below 20-30 percent of the MSP year after year due to market fluctuations. India has been importing about 70% of its domestic edible oil use for the past 20 years, at a cost of around Rs. 70,000 crores per year. Consumers are being harmed by retail costs of edible oils that are hovering around Rs.200/kg. Farmers of fruits and vegetables are more susceptible to price fluctuations, therefore, some vegetable growers don’t harvest tomatoes and onions because market prices don’t cover picking and transport costs, but at the same time, prices in urban centers are higher, with most of the profit going to market intermediaries rather than farmers. Additionally, farmers’ anguish is exacerbated by a lack of labor, rising production costs, insufficient investments inland expansion, and low productivity. Farmers are unable to benefit from increased world prices because of ad hoc trade policies, such as the frequent on and off of export bans and the implementation of stock limits. Farmers will be vulnerable to only price drops but will be unable to sell in overseas markets at better prices. Onions, pulses, and edible oils were all affected in this way. These decisions are generally labeled as "consumer-friendly" rather than "farmer-friendly" to provide vital food items to customers at lower prices, resulting in lower farm income. Because the government spends a lot of money on maintaining buffer inventories of paddy and wheat that are 2-3 times the standards, there aren’t enough funds left to buy other crops like pulses and oilseeds, causing the food economy to suffer. When it comes to procurement of paddy and wheat, the government is allocating roughly Rs.2.5 lakh crore, however, the price stabilization fund is only allocated Rs. 2,700 crores in 2021-22, which is utilized to procure onions and pulses. This inequity must be rectified in some way. In the case of paddy and wheat, there is strong evidence that MSP combined with procurement increases technological adoption, irrigated area, and crop yields. For pulses and oilseeds, especially in aspirational districts, it is imperative to raise yields through MSP procurement operations, not only to increase the output of these crops but also to increase farmers’ incomes to balance the procurement of rice, wheat, pulses, and oilseeds, the budget allocation needs to be rationalized. Farmers are often risk-averse individuals. As a result of a lack of private investment in high-return crops like fruits and vegetables, Punjab state has been stuck in low-return-no-risk commodities like paddy and wheat for the previous two decades. Some states, including Kerala, Andhra Pradesh, and Karnataka, have diversified their cropping patterns to include high-value plantation crops and are reaping 2-3 times the returns per hectare as compared to Punjab mono-cropping practices.

Punjab’s farm growth has fallen to 1.9 percent each year since 2005-06, compared to the country’s overall 3.5 percent growth rate during the same timeframe. It is more important to boost price stabilization funds for pulses, oilseeds, and onions than to allocate higher budgets under MSP operations for paddy or wheat. However, even though pulses, oilseeds, and other commercial commodities provide excellent returns, farmers are currently exposed to increasing risks, both yield and price issues (Roy et al., 2017). It’s possible to improve yields and incomes if the government lowers the price risk. This will have a significant impact on expanding supply and lowering prices for consumers. Most years up to 2006, the MSP for pulses was always higher than market pricing, but after that, pulses output grew, notably with the adoption of high-yielding varieties of chickpeas backed by higher MSP. When the government launched the Technology Mission on Oilseeds (TMO) in 1986, paired with price assistance, oilseed production skyrocketed, and India became self-sufficient in oilseed production. India became a big importer after the 1990s due to WTO agreements when price support was removed (Reddy and Bantilan, 2012). For any crop, MSP without procurement is ineffective. Superior quality paddy types varieties from Telangana sold for less than MSP in recent years as compared to common paddy varieties, because the latter is acquired at MSP while the former is not. Bajra and Ragi are only procured in Haryana and Odisha, respectively whereas Millets are procured only in one or two states. A major impact on technology adoption, yields, and open market prices can be expected when the government purchases in sufficient quantities, say 20-30 percent every year. Paddy prices in Punjab and Haryana have historically been higher than those in Bihar and Odisha because the former states procure more than 70% of market arrivals at MSP constantly, but the latter states do not procure as much (Chand, 2019). Pulses and edible oils have been a consistent cause of food inflation over the last two decades, and it can only be remedied if we can enhance domestic production with low cost by promoting technological adoption, expanding irrigation areas, and adopting superior varieties. Pulses inflation is 10 percent, while oils and fats inflation is 34.78 percent, according to the government’s most recent inflation report. Although food grain stocks are at an all-time high, this high food inflation still exists.

According to government statistics, the estimated economic cost (including logistic and storage costs) of wheat was Rs 29.93, while the MSP is only 19.25 per kg in 2020-21, which suggests that roughly one-third of the cost paid is spent on handling charges and does not go to farmers or consumers. This expenditure must be decreased by lowering the surplus acquisition of food grains and redirecting funds to the procurement of other high-value crops. India’s foodgrain stocks with FCI are increasing, and it’s becoming more expensive. 129.8 million metric tonnes of food grains were procured this year, a record amount. Although some will be sent to the PDS system, the government is unable to dispose of excess food grains. As a result of a record crop in 2020-21, the agriculture minister complimented the farmers. Assured buying at MSP contributed to the successful expansion in wheat and rice production. In addition to Bt cotton technology, Cotton Corporation of India’s acquisition of cotton is credited with the growth in cotton production. In the case of maize, bajra, and chickpeas, the success is credited to scientific improvements, although increasing market prices also played a part. Improvements to some crops such as basmati rice (PB 1121) led to greater pricing on the export market (Singh et al., 2018). In general, price incentives play a stronger role in increasing the production of paddy and wheat, given that they are in surplus supply. Now that rice and wheat have been successful, it’s time to promote other crops, such as pulses and oilseeds, through the MSP procurement program.

References

Chand, R. (2019), ‘Transforming Agriculture for Challenges of 21st Century’, Indian Economic Journal.
Narayan, S., & Saha, S. (2020), ‘One step behind: the government of India and agricultural policy during the covid-19 lockdown’, Review of Agrarian Studies, 10.
Reddy, A. A. (2021), ‘Boost price stabilization fund for pulses, oilseeds, The Tribune, 19th July 2021
Reddy, A. A. (2021), ‘Assuring Farmers Income in the Context of New Farm Laws: Issues and the Way Forward’ (March 23, 2021). Available at SSRN http://dx.doi.org/10.2139/ssrn.3810479
Reddy, A. A., & Bantilan, M. C. S. (2012), ‘Competitiveness and technical efficiency: Determinants in the groundnut oil sector of India’, Food Policy, 37(3), 255-263.
Roy, D., Joshi, P. K., & Chandra, R. (Eds.). (2017), ‘Pulses for nutrition in India: Changing patterns from farm to fork’, International Food Policy Research Institute.
Singh, V., Singh, A. K., Mohapatra, T., & Ellur, R. K. (2018), ‘Pusa Basmati 1121–a rice variety with exceptional kernel elongation and volume expansion after cooking’, Rice, 11(1), 1-10.

* (Author: Pavittarbir Singh Saggu, Research Scholar, Panjab University, Chandigarh)

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