The government price policy was started to check the exploitation of farmers and consumers by traders and to stabilize prices in a food scarce economy.
To meet these ends, the government controls agricultural prices through direct and indirect methods, such as:
1. Regulatory measures.
2. Market infrastructure and institutions.
3. Agricultural price policy.
The government procures grain from the farmers at an MSP, which is decided by the Central government on the recommendations of the CACP. The CACP advises the government on the price policy of food crops and other commodities, on which the government fixes the MSP of various agricultural crops, which are supplied to consumers through the PDS at controlled prices and at market prices in the open market. Traders meet the unmet demand of ration cardholders as well as the total demand of non-ration cardholders.
The CACP recommends the minimum support prices for 23 crops. The FCI and state agencies undertake procurement operations in the case of major crops such as wheat, rice and sugarcane. The NAFED provides price support for oilseeds and pulses, the Cotton Corporation of India (CCI) for cotton and the Jute Corporation of India (JCI) for jute, whenever the need arises. In reality, even for paddy and wheat, market prices often go below MSPs in several markets because of weak procurement machinery.
Controlled price policy has achieved some ends but has created many distortions as well. On the positive side, it ensures availability of food across the country and prices have remained relatively stable without many sharp price spikes.
The policy has been successful in achieving the following:
1. Some producers have been able to get assured prices through the administered MSPs.
2. Price stability has been maintained in some crops.
3. Food-grains have been made available at reasonable prices through PDS and open market operations.
4. Buffer stocks have been maintained to achieve food security.
However, the price policy has mainly benefited only a limited number of crops and farmers. In food-grains, it has helped wheat and rice farmers and, among other crops, it has helped sugarcane and cotton crop growers. As a consequence, there has been a shift of land and resources away from pulses, oilseeds and coarse grains to wheat and paddy, which has created serious imbalances in the demand and supply of these commodities.
Grave environmental problems, such as depletion of groundwater, have resulted in many parts of the country. At the same time, there have been large shortages of pulses and edible oils and the country has to resort to imports for these commodities.
The price policy has failed to address supply side imbalances and ignored the demand side. This has created distortions in the supply of food crops. On the one hand, the government is running out of storage capacity for wheat and rice, while, on the other hand, the production of pulses and oilseeds has been limited, creating a crisis like situation in 2015. The per capita availability of pulses in India in 2010 was 31.6 gram per day, compared to 65.5 gram per day in 1960, showing a 52 percent decline over five decades. As a result, the country’s imports of pulses and oilseeds have been rising even as wheat stocks rot in government go-downs.
The MSP has not been effectively implemented. Roy and Joshi (2015) cite NSSO data to show that only 6 percent and mainly large farmers for wheat and rice utilize the MSP while the vast majority does not even know about it. A Planning Commission report (2007) says that the prices received by farmers are often below the MSP in large parts of India. Ramesh Chand (2012) has analyzed the price of paddy received by farmers in Uttar Pradesh and West Bengal from 1995-96 to 1999-2000.
He shows that the average Farm Harvest Price (FHP) in West Bengal received by farmers has remained lower than the MSP in all the years, with the gap widening in recent years. In Uttar Pradesh, wheat farmers received a price higher than the MSP in only two out of 13 years—the years the private sector was in the wheat market in a big way—while for the rest of the years, the selling price has been lower than the MSP.
He further shows that in the case of arhar in Maharashtra, the benefit of price increases has been captured by middlemen without any benefit to farmers. The price spread between the FHP of arhar (whole grain) in Maharashtra and the WSP of arhar dal (split and polished grain) in the Mumbai market increased from 25 percent to more than 70 percent between 2000 and 2009, showing that in 10 years, the middlemen margin recorded a threefold increase in the state.
In the same period, the price received by producers for arhar increased by less than 5 percent per year, whereas wholesale and retail prices increased by more than 10 percent per year. Furthermore, he also shows that the change in MSP of arhar announced by the Central government, relative to the change in the WSP at the beginning of the last decade, was more than 50 percent of the WSP of arhar dal in the Mumbai market. The level of support declined steadily to one-third by 2009-10. Thus, an increase in the MSP of arhar, even though notional, did not keep pace with the increase in market price in this period.
The distortions in the present market system cause declining competitiveness, while the increases in prices at the consumer level of crops are not passed on to farmers. The poor spend more than 50 percent of their income buying food for mere subsistence, while the government-procured grain is either spoilt or finds its way into the hands of corrupt officials, middlemen and grain traders.
Reforming Agricultural Price Policy:
The many distortions in agricultural markets point to a system crying for reform. Till now, the price guarantee offered by the MSP has worked only in selected states and markets. Price guarantees also lead to price distortions. New mechanisms thus have to be devised to protect farmers from the prices crashing. It is time that instead of focusing on support prices, the government focuses on demand.
Working on scientific demand forecasts, the total area under each crop must be worked out and farmers are advised about which crops to plant. Such a system would prevent overproduction and help stabilize prices in the market. There is also a need to open agricultural markets to the private sector. In recent years, some direct marketing initiatives have taken place which have helped farmers.