Administered Prices

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ADMINISTERED PRICES INCLUDING MSP AND PROCUREMENT PRICES

Historical context

  • The emergence of agricultural Price Policy in India was in the backdrop of food scarcity and price fluctuations provoked by drought, floods and international prices for exports and imports. This policy in general was directed towards ensuring reasonable food prices for consumers by providing food grains through Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield by providing a price support mechanism through Minimum Support Price (MSP) system.
  • In recognition of the importance of assuring reasonable produce prices to the farmers, motivating them to adopt improved technology and to promote investment by them in farm enterprises, the Agricultural Prices Commission (renamed as the Commission for Agricultural Costs and Prices in 1985) was established in 1965 for advising the Government on agricultural prices policy on a continuing basis.
  • The thrust of the policy in 1965 was to evolve a balanced and integrated structure to meet the overall needs of the economy and with due regard to the interests of the producers and the consumers. The first Commission was headed by Prof M L Dantwala and in its final report the Commission suggested the Minimum Support Prices for Paddy.

 

Minimum Support Price (MSP):- is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.

  • The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). 
  • MSP is price fixed by Government of India to protect the producer – farmers – against excessive fall in price during bumper production years.
  •  The minimum support prices are a guarantee price for their produce from the Government that this will be the minimum price at which their product will fetch.
  • If the market price is above, MSP, the farmer can obviously sell it at the market prices. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

     The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. 

    As of 2015-16, Minimum support prices are currently announced for 24 commodities, which includes food grains like Wheat, paddy etc and non-food crops like raw cotton, raw jute etc.

  • A pilot project under the Direct Payment Deficiency System (DPDS) for paying MSP guarantee for the cotton farmers has been initiated at Hinganghat taluka of Maharashtra in 2015. Under this system, the farmers will directly get the amount which is the difference between the Minimum Support Price (MSP) and the market price, should the market price fall below the MSP. For availing of the benefit, farmers would have to present proof of cotton sold at Agriculture Produce Market Committee yards, plus other papers such as ownership document, yield estimation and other details. If the pilot is successful, the DPDS would be rolled out in all cotton growing regions, as per the present decision. DPDS is essentially a mode of direct benefit transfer to cotton farmers.

    Then there is this concept of PROCUREMENT PRICE, which is the price at which government procures food grains for buffer stocking and PDS purposes through FCI.

  • Consider the situation where, in the wake of an imminent food shortage that may occur, the traders are willing to procure food grains in advance, driving up the market price.

 

  • When the market prices are much higher than the MSP, the farmer will obviously be willing to sell it in the market.
  • But the government, still, needs to procure food grains on its own to meet its distribution commitments in PDS at subsidised rates (issue price) and to create the buffer stock, necessary to intervene from supply side in case there is food deficiency and high food inflation.
  •  Therefore the government so as to fulfil these commitments, declares a Procurement price which is > or = to the MSP.

    The major difference between MSP and PP is that while PP is for food grains only, MSP is for 24 crops which includes both food grains and non-food grains.

 

Method of Calculation

  • In formulating the recommendations in respect of the level of minimum support prices and other non-price measures, the CACP takes into account a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities.
  • Other Factors include cost of production, changes in input prices, input-output price parity, trends in market prices, demand and supply, inter-crop price parity, effect on industrial cost structure, effect on cost of living, effect on general price level, international price situation, parity between prices paid and prices received by the farmers and effect on issue prices and implications for subsidy.
  •  The Commission makes use of both micro-level data and aggregates at the level of district, state and the country.

Supply related information – area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry, cost of processing of agricultural products, cost of marketing – storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; etc. are also factored in.

Report of National Commission for Farmers (NCF) had recommended that MSP should be at least 50% more than the weighted average cost of production. However, this had not been accepted by the Government.


Procurement at MSP

  • Farmers are made aware of the procurement operations by way of advertisements like displaying banners, pamphlets, announcement for procurement and specification in print and electronic media.
  • Some States have taken steps to pre-register farmers for ensuring procurement from them through a software system.
  • Keeping in view the procurement potential areas, procurement centres for MSP operations are opened by Government agencies, both Food Corporation of India (FCI) and State Government, after mutual consultations.
  • Procurement centres are opened by respective State Govt. Agencies/ FCI taking into account the production, marketable surplus, convenience of farmers and availability of other logistics / infrastructure such as storage and transportation etc. Large number of temporary purchase centres in addition to the existing mandis and depots/godowns are also established at key points for the convenience of the farmers.
  • The Govt. agencies also engage Co-operative Societies and Self Help Group which work as aggregators of produce from farmers and bring the produce to purchase centres being operated in particular locations/areas and increase outreach of MSP operations to small and marginal farmers. These Co-operative Societies are in addition to the direct purchases from farmers.
  • Co-operative societies/Self Help Groups are engaged in many States like Bihar, Chhattisgarh, Odisha, Maharashtra, Karnataka, Jharkhand and Rajasthan. Whereas, in some states like Punjab and Haryana, the Government of India has permitted the State Governments to engage locals for procurement of food grains from the farmers on payment of commission. These steps have been taken by Government of India so that Govt. agencies can procure maximum food grains directly from farmers by expanding out- reach of MSP benefit to farmers.
  • Food Corporation of India (FCI) is the designated central nodal agency for price support operations for cereals, pulses and oilseeds.