Income vs Price support: price deficiency payment option for MSP

Income vs Price support: price deficiency payment option for MSP

Context: Here, we discuss what is the right scheme of payment for the farmers to help them get the right price for their produce.

Status in India:
• Market conditions in India favor buyers over sellers, also mean farmers are price takers, not price makers.
• Lacking the market power to influence the prices of their produce — or to even set the MRP (maximum retail price), as firms in most industries do — they sell at prevailing supply-and-demand-determined rates.

Price vs Income support – What is the right approach?
• Most economists, are opposed to government-fixed MSPs based on cost-plus pricing, with no consideration to market demand.
• Cost-plus MSPs that are oblivious to demand conditions will distort farmers’ production decisions, resulting in the oversupply of some crops and an undersupply of others.
• Economists largely believe that it is better to give farmers “income”, instead of “price”, support. That would mean transferring a fixed sum of money annually into their bank accounts, whether on a per-farmer (as in the Centre’s PM-Kisan Samman Nidhi) or per-acre (the Telangana government’s Rythu Bandhu) basis.

What are concerns with direct income support schemes?
• Here, everyone is being paid the same money leaves us to question that where does this leave the real producing farmer, who invests more resources, time, and effort in the field?
• Given that they, more than other businessmen, are exposed to both price and production risks (from weather, pests, and diseases), MSP guarantee is probably not an unreasonable demand.
• Thus, price support can be a useful tool for promoting crop diversification.

How can MSP be guaranteed?
• The first is to force buyers to pay MSP.
• The second is for government agencies to buy the entire marketable produce of farmers offered at MSP.
• The third option is price deficiency payments (PDP). It entails the government not physically purchasing or stocking any crop, and simply paying farmers the difference between the market price and MSP, if the former is lower. Such payment would be on the quantity of crop they sell to the private trade.

PDP in MP:
• PDP was tried out first in Madhya Pradesh through a Bhavantar Bhugtan Yojana.
• Under this scheme, the market price for a crop was its average modal (most-quoted) rate in the Agricultural Produce Market Committee (APMC) mandis of Madhya Pradesh as well as two other growing states during the particular month of sale.
• The price difference vis-à-vis the MSP was payable on the actual quantity sold by the farmer. The scheme was implemented in 2017- 18, it was fairly successful however, the scheme couldn’t be continued for lack of Central support.
• Similar scheme was adopted in Haryana as well.

What is the road ahead?
• Both Madhya Pradesh and Haryana have demonstrated the feasibility of delivering MSP to farmers .
• One reason they have been able to do this is because of the already-created APMC mandi infrastructure and systems for farmer registration in these states. This makes it possible to record each transaction.
• If a nationwide PDP scheme with 50% Central funding were to be implemented, it can perhaps incentivise other states to follow