Agricultural Price Policy - 2 | Agriculture Optional Notes for UPSC PDF Download

Determination of Minimum Support Prices (MSP)

When formulating recommendations for Minimum Support Prices and other non-price measures, the Commission considers various factors. These factors encompass a comprehensive assessment of the economic structure of a specific commodity or group of commodities.
The factors include:

• Cost of Production: The expenses associated with production.
• Changes in Input Prices: Variations in the costs of inputs.
• Input-Output Price Parity: The balance between input and output prices.
• Trends in Market Prices: Price trends in the market.
• Demand and Supply: The interplay of demand and supply.
• Inter-Crop Price Parity: Price parity among different crops.
• Effect on Industrial Cost Structure: Impact on industrial costs.
• Effect on Cost of Living: Influence on the cost of living.
• Effect on General Price Level: Impact on the overall price level.
• International Price Situation: The situation of prices in the international market.
• Parity between Prices Paid and Received by Farmers: Fairness in the prices paid to farmers in comparison to what they receive.
• Effect on Issue Prices and Subsidy Implications: Implications for the prices at which commodities are provided and their effects on subsidies.

The estimates of the Cost of Cultivation/Cost of Production, crucial for establishing MSP recommendations, are provided to the Commission through the Comprehensive Scheme for Studying the Cost of Cultivation of Principal Crops. This scheme is managed by the Directorate of Economics and Statistics under the Department of Agriculture and Cooperation, Ministry of Agriculture, Government of India. These estimates encompass the real production factors and include all actual expenses incurred by farmers in cash and kind. They consider expenses such as land lease payments, the imputed value of family labor, interest value of owned capital assets (excluding land), rental value of owned land (net of land revenue), depreciation on farm equipment and buildings, and other miscellaneous costs.

Impact of Minimum Support Price Increase on Wholesale Price Index

The Minimum Support Price, which is announced prior to each crop season, is determined based on the cost of cultivation as calculated by CACP. While the MSP is adjusted upwards every year, the degree of this increase can vary and, at times, can vary significantly.

Impact of Minimum Support Price Increase on Wholesale Price Index

There was a substantial hike in the Minimum Support Price (MSP) of wheat, with a 15.38% increase in 2006-07 and a 33% increase in 2007-08. However, during these periods, the Wholesale Price Index for wheat only increased by 19.05% and 7.2%, respectively. The MSP of wheat saw an increase of over 97% between 2005-06 (Rs. 650) and 2011-12 (Rs. 1,285), while the Wholesale Price Index increased by approximately 60% during the same period. In the case of rice, the MSP rose from Rs. 570 in 2005-06 to Rs. 1,080 in 2011-12, a growth of 89.47%, while the Wholesale Price Index for rice during the same period increased by 63.81%.

The data in Table I shows that MSP increases generally align with rises in their respective Wholesale Price Indexes. However, there was an exception when the Wholesale Price Index for wheat decreased by 1.75% between 2010-11 and 2011-12, despite a 9.83% increase in the MSP.

There are varying opinions on the relationship between Minimum Support Prices and inflation in food articles. According to the Monetary Policy Statement 2012-13 of the Reserve Bank of India, the increase in MSP remains a significant risk to inflation as it tends to result in higher market prices for most commodities.

According to Ms. Somya Kanti Ghose, a Senior Fellow at the International Council for Research on International Economic Relations (ICRIER), besides the direct impact of MSP increases on the Wholesale Price Index, there is also an indirect impact. The MSP increase serves as a floor for Wholesale Price Inflation, contributing to the expectation of a widespread rise in food prices.

Market Intervention Scheme (MIS)

The Department of Agriculture & Cooperation administers the Market Intervention Scheme (MIS) to purchase perishable horticultural commodities that are not covered by the Price Support Scheme. The primary goal of this intervention is to safeguard the producers of these commodities from being forced to sell their produce at distressingly low prices, especially during times of abundant harvest when market prices fall below sustainable levels and production costs. One of the conditions for implementing MIS is that there must either be a minimum 10% increase in production or a 10% decrease in prevailing market prices compared to the previous normal year.

The Market Intervention Scheme (MIS) is put into action at the request of a State or Union Territory (UT) Government willing to share 50% of any losses incurred in its execution (25% in the case of North-Eastern States). The total amount of loss to be shared equally between the Central Government and the State Government is capped at 25% of the total procurement value. This value includes the cost of the procured commodity along with permitted overhead expenses.

Under the Scheme, following MIS guidelines, a predetermined quantity is procured at a fixed Market Intervention Price (MIP) by the National Agricultural Cooperative Marketing Federation (NAFED) acting as the Central agency, as well as by agencies designated by the State Government. This procurement is carried out for a specified period or until prices stabilize above the MIP, whichever comes first. The scope of operation is limited to the respective state where the intervention is initiated.

Price Support Scheme (PSS)

The Government of India enforces the Price Support Scheme (PSS) to guarantee that farmers receive a Minimum Support Price for their produce. Various agencies, including the Food Corporation of India (FCI), NAFED, Central Warehousing Corporation (CWC), Small Farmers’ Agri-business Consortium (SFAC), and others, have been designated by the government for this purpose.

The Department of Agriculture and Cooperation is responsible for implementing the PSS, with the objective of procuring oilseeds, pulses, and cotton at the Minimum Support Price (MSP) declared by the government. NAFED, acting as the Central Nodal Agency, manages the procurement of these commodities under the PSS when their prices fall below the MSP. The procurement operations continue under the PSS until prices stabilize at or above the MSP. Any losses incurred by NAFED during MSP operations are reimbursed by the Central Government. Profits, if any, earned from MSP operations are credited to the Central Government.