Supporting farmers, the middle way

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Context:

  • Under a limited procurement system, government would procure excess farm produce and leave rest to be cleared at market price. For it to work, MSP must not be at a level to which market price will not rise.

Strategies for raising farm output:

  • Recently, there has been an active discussion on the strategies for raising farm output by providing remunerative prices to agricultural products.
  • Over the years, between the price and non-price factors, on balance, the latter has been seen as more effective.
  • However, our experience also shows that the price environment cannot be ignored.

Various mechanisms of farmer support

  • The effectiveness of a price support mechanism such as the Minimum Support Price (MSP) for addressing price decline would depend on how effective the system is for managing the supply-demand imbalances
  • The scheme of “price deficiency compensation”, which amounts to paying the difference between the market price and MSP, has gained acceptance in states such as Madhya Pradesh, Rajasthan and Haryana
  • At the other extreme is the “open procurement system”, that has been in vogue quite effectively in the case of rice and wheat, where procurement is open-ended at the MSP.

The “price deficiency” scheme:

  • The “price deficiency” scheme may compensate the farmers when prices decrease below a certain specified level
  • However, the market prices may continue to fall as the supply exceeds the “normal demand”
  • Nearly all the produce may become eligible for the “deficiency payments” in theory as the prices, in general, would have fallen for all the producers
  • An alternative is the limited procurement scheme. Under this scheme, the government will procure the “excess”, leaving the normal production level to clear the market at a remunerative price
  • Thus, procurement will continue until the market price rises to touch the MSP

Factors for limited procurement system:

  • The timing and speed with which the procurement is implemented are critical. It is important to determine the excess supply, which will indicate how much is to be procured
  • Equally important is the quick assessment of price trends, particularly in the period immediately after the harvest begins, to arrive in the key markets
  • In any case, the idea is not to absorb all the output but a quantity that would keep the supply-demand balance at the trend level
  • The suggested “limited procurement system” will not work if the MSP is fixed at a level to which the market price will never rise
  • A limited procurement option is necessary only in times of a sharp increase in production

Source:IE