Tackling agriculture price and income volatility: Ensure remunerative prices to farmers in coming harvest season

August 31, 2020 2:30 AM

Private procurement & stockist scheme, part of PM-AASHA, can enhance market efficiency, is cost effective, and help raise farmers’ incomes.

The bigger challenge is MSP translating to real gains for farmers.

By A Amarender Reddy

As per the Department of Administrative Reforms and Public Grievances’ (DARPG) latest report related to agriculture ministry, 46% grievances pertained to low crop prices received by farmers. Over the last two decades India’s agricultural produce has been surplus—the root cause of low prices. Agriculture grew even during Covid-19, with kharif net sown area increasing by 21% in 2020 compared to last year. It’s time to ensure remunerative prices to farmers in the coming harvest season—it will not only enhance farmers’ incomes, but also provide demand push for rural economy.

The government has announced minimum support prices (MSP) to cover at least 1.5 times the cost of production, and procure at the announced MSP if prices fall below MSP. The government announces MSP for 25 major agricultural commodities each year in both the crop seasons after taking into account recommendations of the Commission for Agricultural Costs and Prices (CACP). But during harvest period, the market price was 6-13% less than MSP of soybean and 20-40% less than MSP of groundnut in most of the markets.

The bigger challenge is MSP translating to real gains for farmers. It needs huge budget allocations, support from state and local marketing boards to evolve locally-feasible, economically and politically practical solutions, given that the state capabilities are limited in terms of budgets, logistics and storage capabilities. Different states have different levels of capabilities; some like Punjab and Haryana have historically been in a better position to procure major crops (paddy and wheat), while others like Bihar, Odisha and states in the east have limited capabilities to procure. Because of this Punjab and Haryana farmers receive higher prices than farmers in states like Bihar.

Also, except paddy and wheat, there has been no proper procurement mechanism for pulses, oilseeds and other crops ever since the Green Revolution. This discriminatory policy hugely disincentivised growing of these crops by farmers, resulted in huge deficits and high import dependency. For example, India imports 70% domestic consumption of edible oils each year, incurring a cost to the exchequer to the extent of Rs 70,000 crore.

To correct the policy bias in procurement, the government started the Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) in 2018, to ensure that farmers growing pulses and oilseeds get MSP as promised. It also takes care of differences in crops, state capabilities and local preferences and feasibilities, and gives flexibility to state governments to choose from different operational modalities to ensure MSP for each crop. PM-AASHA has three sub-schemes—price support scheme (PSS), price deficiency payment scheme (PDPS) and pilot of private procurement & stockist scheme (PPSS).

PSS is actual procurement by the state/central government procurement agencies at MSP from farmers during harvest. PSS, a direct procurement scheme, may be adopted where there is sizeable concentration of production, which gives scale economies to procurement agencies in handling procurement operations. Under PSS, the Centre will compensate states for any losses up to 25% of production. Although PSS is in existence for over three decades for paddy and wheat, its implementation is poor for procuring pulses and oilseeds.

Under PM-AASHA, PSS is implemented for procurement of pulses, oilseeds and copra at MSP. Past experience shows that implementation of PSS is hindered by lack of awareness about MSP, procurement operations, lack of working capital with procurement agencies, arrangement of gunny bags, transportation facility, delayed payments to farmers, logistic arrangements (godowns), processing mills in procuring areas, disposal of procured stocks, and open market operations and reimbursement of losses.

Under PDPS, farmers are paid the difference between MSP and the modal price of the market, without actual procurement. It is an efficient method, as it eliminates all logistics costs relating to procurement, storage and offloading. It is advisable to implement PDPS in crops with scattered and thinly distributed production, like oilseeds.

Under PPSS, private players can procure oilseeds at the state-mandated MSP during the notified period in select districts or APMC markets, for which they would be paid a service charge not exceeding 15% of the notified support price.

States are free to choose amongst PSS, PDPS and PPSS for oilseeds. However, the most suitable mechanism for oilseeds is PDPS as they don’t require physical procurement by government agencies and depend on market signals and market players for buying at the ongoing market price. Historically, oilseed prices are mostly determined by free play of market participants, both domestic and international, with almost zero import tariff rates with negligible government intervention by its MSP procurement. With India importing 70% of its domestic consumption each year, Indian edible oilseed prices are more aligned with global prices rather than influenced by domestic market imperfections.

As the price mechanism of oilseeds is determined by free market forces, it is important the government policy does not intervene in already perfectly working free market forces of oilseeds and price deficiency payment through direct money transfer by using the already existing JAM (JanDhan-Aadhaar-mobile) trinity.

Actual procurement at MSP cannot reach more than 20% of peasantry even with augmented procurement of pulses and oilseeds through PSS and PPSS, so it cannot help raise farmers’ incomes. Actual procurement reached only 5% of market arrivals for pulses and oilseeds in the 2019 crop season. PPSS is a non-starter in many states due to the limit imposed on service charges to be paid by the government to private procurement agencies, as 15% is uneconomical in procuring from scattered and thinly distributed oilseed production areas. In the long run, the only alternative is PDPS as it doesn’t require physical procurement and avoids logistics and storage expenditure; it is free from operational inefficiency and corruption, and 100% benefits reach the farmers.

PDPS can take advantage of huge procurement, storage and distribution networks of private players like HUL in procuring, transporting, storing and disposing of oilseeds coupled with price deficiency payment to farmers using JAM. This also reduces the burden on the government, enhances market efficiency and is cost effective.

The author is agricultural economist, ICAR-Central Research Institute for Dryland Agriculture. Views are personal.

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