Price support for farmers: Even with caps, package to cost up to Rs 1.1 lakh crore

New Delhi | Published: March 28, 2018 5:32:39 AM

A third scheme where the private sector will be encouraged to procure crops at MSP with assorted incentives — states will be nudged to adopt this scheme through a financial aid — would help reduce the cost to the exchequer by two-thirds, the think tank said.

price support for farmers, MSP, NITI AayogAn official estimate on the cost to the exchequer of implementing 150%-of-cost minimum support prices (MSPs) and price-deficiency support schemes promised to farmers in the recent Budget has confirmed fears that it would be prohibitively large. (PTI)

An official estimate on the cost to the exchequer of implementing 150%-of-cost minimum support prices (MSPs) and price-deficiency support schemes promised to farmers in the recent Budget has confirmed fears that it would be prohibitively large. Even after limiting the bounty to 40% of the marketable surplus of crops (roughly a third of production) and imposing a cap of 25% on the “price loss” to be borne by the government — a NITI Aayog paper reviewed by FE has recommended these ceilings, in a major dilution of the Budget announcement — the Centre and states, between them, will have to shell out a whopping Rs 1,11,000 crore if all crops, including rice and wheat, are covered under a “market assurance scheme (MAS)”.

If rice and wheat are excluded, and assuming only some states will adopt MAS (which involves procurement and remitting MSP into farmers’ bank accounts), and others choose a price-deficiency payment scheme or PDPS (under which farmers are paid the difference between MSP and sale price at mandis sans procurement), the financial burden on the exchequer could be lower, but still a considerable Rs 45,000 crore, according to NITI Aayog. A third scheme where the private sector will be encouraged to procure crops at MSP with assorted incentives — states will be nudged to adopt this scheme through a financial aid — would help reduce the cost to the exchequer by two-thirds, the think tank said. The financial support for states under the schemes should be linked to agriculture marketing reforms, it added.

Meanwhile, after marathon discussions over two consecutive days, a group of six ministers headed by home minister Rajnath Singh on Tuesday approved all three price-support schemes for agricultural crops formulated by NITI Aayog. The move is in sync with a Budget announcement and the Narendra Modi government’s stated objective to double farmers’ incomes. A sub-group of three of the ministers — Singh, transport minister Nitin Gadkari and agriculture minister Radha Mohan Singh — would fine-tune the schemes’ parameters on Wednesday and the proposals would be taken to the fuller Cabinet as early as next week, official sources told FE. A key question that is to be addressed, sources said, was whether the 25% price loss ceiling proposed should be enhanced. Recently, the prices of some key pulses plunged more than a quarter below the MSP in some key markets.

The NITI Aayog paper, “Ensuring MSP Benefit to Farmers”, lays a substantially larger part of the financial burden related to the scheme at the Centre’s doorstep. As for MAS, which is the costliest, it is suggested by the think tank that the Centre bears 100% of the cost of administration (capped at 15% of MSP) and full cost of price-loss (difference between farm harvest price (FHP) and MSP) up to 15% and half the cost of price loss between 15% and 25%. In the case of PDPS, which is modelled on Madhya Pradesh’s Bhavantar Bhugtan Yojana, the Centre is expected to meet the administrative cost of 2% of MSP, besides 100% of price-loss cost up to 15% and half that cost between 15% and 25%. The cost of the incentives for the private-sector MSP operators — which ranges from set-off of loss in a year in another year in a block period to a 5% commission — is also to be largely borne by the Centre.

This means the states meet only half the price cost between 15% and 25% under both the schemes. Additionally, the Centre would give them working capital support as an initial one-time grant for implementing MAS. The idea is to enable the states to meet procurement incidentals, set up warehousing and storage facilities, etc. According to the think tank, the combined impact of the Budget announcements — MSP at 50% above A2+FL cost and raising FHP to the level of MSP — on farm-level prices would be 15%. Given the elasticity of farm income against the price of produce of 1.6, the moves would raise farmer’s income by a solid 24%.

Warning that transmission of this increase (in farm-level prices) to wholesale and retail level will have very strong implications for inflation and consumers, it called for “compressing the price spread between farms and the end consumers”. Even as it proposed that only 40% of the marketable surplus would be eligible for the price-support package, NITI Aayog has acknowledged that the “the proportion of produce eligible for MSP support is going to increase over time. Therefore, it may be critical to implement measures for promoting agriculture exports in the coming years. This will also create buoyancy in domestic markets.”

By: Prabhudatta Mishra

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