Mentor’s comment

Very good and technical question and covers a topic specifically mentioned in the syllabus. If you are unaware of price deficiency payments then you will lose the question.

Price deficiency payment system is a system where a subsidy is provided on targeted produce in case the price falls below a pre-specified threshold. It is suggested as an alternative to the Minimum support prices based system where the government is involved in the procurement at a pre-decided price.

 

Model answer:

MSP is a form of market intervention by Central Government to insure agricultural producers against any sharp fall in farm prices, by guaranteeing minimum prices for their produce. There is an ongoing debate on whether minimum support prices for various agricultural commodities can be replaced by a system of price deficiency payments to farmers. The main objective of the Price Deficiency Payment is to make a shift in the improvement in farmers’ incomes as well as a reduction in farm subsidies.

What are the Current Challenges with MSP for agricultural commodities?

• Restricted to a few crops – While the Government announces MSP for 24 crops, the official procurement at the MSP is disproportionately focused on wheat, rice and sugarcane, which has led to:
  • Imbalanced cropping pattern at the expense of other crops such as pulses, oilseed & coarse grains.
  • Depletion of water resources, soil degradation and persistence of monocultures due to focus on input intensive crops (wheat, rice & sugarcane)
  • Distortion of rational/sustainable farm practices as farmers tend to grow more remunerative wheat and rice, irrespective of their agro climatic suitability
• Fueling inflation
• Poor price realization in market with rise in  MSPs and  open ended procurement by FC has led to Increase in buffer stocks of food grains above the required norms & decrease in the supply in the open market with diversion of food grains from consumption to storage ultimately rising inflation
• MSP forms a ‘floor’ for market prices of crops. A persistent increase in MSP pushes up prices in the market, adversely impacting consumers, including farmers
• MSP’s exclusive focus on a few crops reduces the supply of other food grains (e.g. pulses, oilseeds etc.), thereby inducing inflation
• Impact on Fiscal Marksmanship – Rapidly expanding food subsidy bill due to rising MSP, food grain storage, handling & carrying cost, thus, exerting pressure on fiscal deficit.
• Lack of awareness among farmers – Even for paddy and wheat where active procurement occurs, less than 50% farmers report awareness of MSP.

How Price Deficiency Payments will provide benefits

• The key benefit from the price deficiency payment is that it will reduce the need for the government to actually procure food crops, transport and store them and then dispose of them under PDS.
• The farmers can sell their produce in the APMC yard through a transparent auction process
• The compensation can be transferred via DBT into an Aadhar-linked account of the beneficiary  prevents leakage of benefits
• The difference between the support and market prices can instead simply be paid in cash to the farmer. Price deficiency payment can also keep India’s bill on food subsidies under check.
• India’s food subsidy schemes have frequently come under the WTO scanner. There were questions raised on the minimum support price programmes for wheat, sugarcane and pulses, by the US, EU and Australia. These countries see India’s procurement subsidies as trade-distorting. In recent years, the government has been seeing the accumulation of large food grain stocks in its godowns over and above the buffer requirement. This entails storage and wastage costs that add on to the subsidy bill.
• It could be more effective than MSPs in ensuring that cropping patterns in India respond to consumer needs and those farmers who actually benefit from price support.

Still Issues over Price Deficiency Payments

• Unless the centre adopts a more liberal financing pattern for the implementation of its proposed schemes, Price Deficiency Payment System may strain financial resources of State Government concerned
• Agriculture, being a state subject, implementation of MSP models will depend on the willingness of the respective states to usher in reforms
• The success of this scheme will remain severely restricted unless comprehensive agriculture reforms are carried out, i.e. e-NAM, contract farming, implementation of APMC act, linking farmers with market, improving supply chain and processing capacities and Agri startups
• Even if the MSP schemes are successfully implemented, there remains a problem of inflation and fiscal constraints (annual expenditure of more than Rs 30,000 crore) arising out of honouring the twin budgetary promises of fixing MSP of crops at cost plus 50% and ensuring MSP to farmers for all crops
• Digital connectivity and Aadhar-linked bank accounts are pre-requisites, putting remote regions to disadvantage.
• Primary agricultural co-operative societies need to be upgraded to handle the registration process.
• Farmers need to upload the details of crops and yield; this may become disadvantageous for small and marginal farmers as they would have to depend on others for this.

Way forward

• Deficiency payment introduced in Madhya Pradesh is struggling to achieve its goal.
• This same scenario might happen to the central government scheme also. There might be a dramatic increase in market arrivals since the government has assured a high price relative to the market. The marketable surpluses that the government had to procure at the MSP used to be quite small, if this new scheme implemented it will be very large. Due to this there will be high fiscal burden to the government, which is estimated to be 80,000 crore.
• Thus the Centre instead of this scheme can distribute cash to farmers based on the size of their landholdings which will ensure that middlemen don’t corner the benefits meant for farmers.