Mentors Comment:

• Neither price support alone nor income support alone and both price and income support for farmers are the keywords in the question. Meaning, both interventions should work alongside each other rather than running separately through a watertight division. This will be beneficial for farmers.
• Start with describing various modes of income support as well as price support mechanisms that governments are providing like MSP, MIS, PCS, DIS, and AIS, etc. But despite this, farmers are still not getting proper remuneration for their farm products and the rural economy is in distress.
• Then take the discussion on different policies like MSPs, PCS, and AIS for scrutiny and briefly discuss their loopholes. These three schemes are important because of their unique characters and relevance right now. Show their coverage of farmers, commodities as well as fiscal stress that they give while implementing. What will be implications of PCS and AIS when implemented on the national level. 
• Then jump to the main discussion and provide analysis on how to mix these schemes for various crops and seasons to get better support for farmers. By hybrid, they will be cheaper, cover more area and farmers, won’t raise inflation and protect farmers from sharp fluctuations in the market.

Answer:

For encouraging agriculture production and attaining self-sufficiency, the government provides various incentives together with price supporting schemes. They come in the form of income and price supports like Minimum Support Price (MSP), Market Intervention Scheme (MIS), Price Stabilization Fund (PSF), Agriculture Investment Support (AIS), Price Compensation Scheme (PCS), Direct Income Support (DIS) schemes, Buffer Stocks, etc. 

But even after direct and indirect interventions by the governments of states as well as the central government, there is continued rural/agriculture distress. Right now, the focus of expert discussion is on MSP, PCS and AIS schemes across states. There are concerns regarding their working as well as fiscal health and inflation from these interventions. Neither price support alone nor income support alone will alleviate the problems being faced by Indian Farmers. 

MSPs:

• It is the price at which the government offers to procure farmers’ produce during the season.
• The purpose is to provide a fair return to efficient farmers and to protect the interests of consumers by keeping the prices of food and other agriculture commodities at reasonable levels. 
• The government has announced that MSP for the majority of Kharif crops and rabi crops, will be fixed at 1.5 times the cost of production. This is based on A2+FL cost (actual paid out cost plus imputed value of family labor) 
• This increment in MSP by 1.5 times could impact consumer price index (CPI) inflation.
• If the government settles on 1.5x C2 cost (comprehensive cost including imputed rent and interest on owned land and capital), the inflationary impact could be significantly large, which could even breach the RBI’s CPI target (5%) by more than 200 bps.

Price compensation scheme (PCS)

• MSP is only limited to certain crops, hence, the government has announced to develop an institutional mechanism to compensate the price difference where the market price is less than MSP, such as the Bhavantar Bhugtan Yojana (BBY) adopted in Madhya Pradesh.
• One of the positives under BBY is the price support to farmers. 
• The total arrival of soybean at MP mandis increased by 150% but the price declined by only 10%.
• But on the hand, BBY scheme in MP could benefit only 23% of production, 
• Hence there is doubt on how it will benefit the majority of farmers at an all-India level. 
• The financial costs of ramping up BBY/PCS at the national level were estimated to be at levels ranging from Rs 56,518 crore to Rs 1.69 trillion annually depending upon the price.
• There is a manipulation by traders and lower level mandi officials to depress both prices and inflate production figures.

Agriculture Investment Support scheme

• The Telangana government has already implemented this scheme in the form of the Rythu Bandhu scheme to support farmers’ investment for two crops a year. 
• The government is providing farmers Rs 4,000 per acre per season to support farm investment twice a year, for the Rabi and Kharif seasons. 
• Experts have estimated that the cost of this scheme would be Rs1.97 trillion if the government implemented it at an all-India level, assuming a payout of Rs10,000 per hectare per year.
• If the incentive is provided on cultivated land (net sown area + fallow land in the current year), the cost could even touch Rs3 trillion. 
• Hence, the adoption of this at an all-India level would impact fiscal health considerably.
• It ignores tenant farmers and as the incentive is based on land ownership, implementation could raise the land price for both cultivated and uncultivated land. 

Way Forward:

• In the short term. instead of either price or income working in isolation, India needs both price and income support to work together for farmers.
• A hybrid of two schemes viz. 1.5 times MSP and PCS will be better. 
• For cereals, largely procured by both Central and state governments, we should continue to procure at MSP that is 1.5 times the cost of production.
• The impact on inflation and the fiscal situation will be minimal through this. 
• Crops like groundnut, sesamum, niger-seed, and soybean should also be covered under the 1.5 times MSP scheme
• They are procured to a limited extent which less than 10% of total production, which varies from state to state. 
• For pulses and sunflower seed, PCS must be implemented, as an adoption under this scheme will have very little impact on inflation and fiscal cost will be Rs13,110 crore. 
• The agriculture investment support scheme, though very easy to implement and without leakages, should be avoided given that it would be a huge fiscal burden.
• The long-term solution to farmer distress would be improving the supply chain, establishing agro-processing zones and creating a better agri-logistic platform.

The resulting efficiency losses may far exceed the price or income support that the government is intending to extend to farmers. Therefore, we should think rationally now, and support farmers through less distortionary policies by intermixing both practices which will go a long way in bringing back the rural economy from the distress.