Pricing of agriculture produce in India is both state-controlled and market-driven, a paradox that sometimes threatens to derail the entire system of appropriate pricing and generates conflict between government, farmers, and agriculture-based industries.
For most foodgrains, pulses, oilseeds and coarse cereals, the government determines the minimum support price (MSP). The MSPs of as many as 26 commodities is determined by the Commission of Agriculture Costs and Prices (CACP), which, after taking into account all aspects of cost of production, comes out with a model price. However, for years, MSPs have become the base price at which the government purchases commodities, largely foodgrains and sometimes oilseeds. With the state purchasing more than 80% of the grains produced in the country, determining and calculating MSP is no longer just meant to ensure due price for a grower; it has become a big political tool through which various lobbies are satisfied.
Invariably, during elections, MSPs are hiked sharply, not only by the central government, but by states as well, who announce bonus on top of the Centre-fixed MSP to placate growers. Between 2004-05 and 2010-2011, MSP of paddy (de-husked rice) has been raised by 78.6%, that of wheat by 75% and of pulses by 124.8%.
Agreed, the hikes have served their purpose and resulted in strong upward swing in production of foodgrain and availability, but they have played their part in distorting the market. The whole question of market-driven prices is questionable, given the active state intervention in setting the price for some. ?Price of agriculture commodities should be based on demand and supply and government should not distort price signals. However, it has to do so sometimes to ensure appropriate returns to growers and also to avoid a collusion between millers and processors to deprive farmers their due,? says Ramesh Chand, director, National Centre for Agricultural Economics and Policy Research.
Take the case of sugarcane, where the Centre fixes the statutory minimum price (now changed to fair and remunerative price), while the states fix their own advised price (SAP). The whole dual pricing mechanism generates conflicts between growers and processors, with one wanting to follow the Centre-fixed price, as it is generally lower than the abnormal prices fixed by the states. Being in the concurrent list, both Centre and states control agriculture. Sugarcane FRP was worked out by the Centre to end the logjam over SAP and SMP between it and the states, but, the issue has been complicated further. In 2010-11 crop marketing season, Uttar Pradesh fixed a SAP of Rs 205 per quintal for sugarcane, almost 46% more than the price fixed for cane for the same year. A market-driven pricing mechanism is needed to smoothen such distortions.
The same applies to fruits and vegetables, where the gap between what growers get and what households pay in cities is in some cases almost 100%?a gap that needs to be bridged in the interest of the farmers.