Farm Subsidies, Minimum Support price MSP and Procurement

Criticisms of procurement policy 

• Increase in food subsidy: higher the subsidy higher economic cost finally which leads to increase in food subsidy
• Increase in market price of food grains higher than MSP lower will be the availability of grains in open market, but majority of population will go to open market but there will be food inflation
• Distorted cropping patterns where farmers will cultivate only those crops which have a higher MSP from the government giving rise to lower price crops not been produced adequately also farmers want to take into consideration the geographical factors before growing crops suitable for their areas or crops which have higher MSP
• Wastage of food grains due to multiple reasons like MSP, open procurement, poor storage with FCI
• Poor targeting of MSP benefited mostly developed states in terms of agriculture while backward states have remained relatively out of the purview of MSP. Large farmers in these agriculturally developed states have benefited more than small farmers.
  
  

Reforms in MSP Policy 

• Increase In MSP of other crops example pulses and oilseeds so as to ensure a fair policy by the government
• Adequate procurement operations for example presence of procurement agencies which will reduce exploitation of farmers by middlemen
• The centralised procurement by state governments followed by many states, as a result state governments will have to bear the burden when central government will give no subsidies. It will reduce the pressure on FCI for storage capacity and will lower down the transportation cost as the centralised requirement is much more localised and FCI. It will allow the states to have food security according to food habits of the people
• Shanta Kumar committee recommended storage related improvement by increasing capacity use of private sector help. Modern techniques for storage for the government, future role of FCI should be in those states where the centralised requirement is not there specially in eastern and north-eastern states
• Swaminathan committee recommended MSP to be 50% higher than cost of prodn 

Subsidy is a transfer payments made by government to consumers and producers, two types consumption subsidy if it is given to a consumer for example public distribution system and production subsidy is given to produce search for example input subsidy is given to farmers like fertilisers seeds electricity et cetera

Justification for subsidies

• Subsidies given to poor consumer and producer poor consumers need subsidies to afford some basic items like food. Poor producer may not afford purchasing seeds fertilisers and other necessary items in order to expand their income so government need to support them it is broadly not for them but for food security.

Classification

• Direct subsidy
• Pradhan Mantri Kisan Samman Nidhi:Nvulnerable landholding farmer families, having cultivable land upto 2 hectares, will be provided direct income support at the rate of Rs. 6,000 per year. This income support will be transferred directly into the bank accounts of beneficiary farmers, in three equal installments of Rs. 2,000 each.The complete expenditure of Rs 75000 crore for the scheme will borne by the Union Government in 2019-20.
• Bhavantar Bhugtan Yojana in Madhya Pradesh relief to farmers by providing the differential between MSPs and market prices.
• The Rythu Bandhu scheme of the Telangana ₹4,000 per acre for every season to all the farmers of the state. Similar initiatives in Jharkhand and Odisha.
• Krushak Assistance for Livelihood and Income augmentation (KALIA) of Odisha commits to give Rs 5,000 per SMF, twice a year, that is Rs 10,000 a year.
• Indirect subsidy: in kind subsidy eg product provided at lower than market price eg PDS 
• Problems with indirect subsidy 
• Poor targeting leaves more room for corruption.
• Incentive at every stage of tedious to sell the product at higher rates in open market gives rise to black marketing that is selling subsidised grain at higher prices less in case of direct subsidy as there are inter bank transfers
• Leads to higher government burden as it will increase the fiscal deficit, higher administrative costs, additional supervision costs, transportation costs, storage costs which is lower in case of direct subsidy
• Less freedom of choice to the beneficiaries on how to avail their subsidies

Challenges of insurance schemes

• Delayed compensation of subsidy premiums by state govt  thus delay by insurance companies for claim payments
• High premium charged by private companies
• Inadequate data collection leading to high claim ration in certain states
• Poor capacity to deliver no investment by insurance companies
• Problems with internal func of insurance companies
• Declining farmer enrolments  
• Pradhan Mantri Faisal Bima Yojana out of 1400 cr for NE states only 8 cr spent till now Arunachal, Nagaland, Manipur, Mizoram not covered under the scheme at all . It aims to provide insurance coverage and financial support to farmers in events of natural calamities pests and diseases

Benefits of direct cash transfers:

• Immediate impact on reducing hunger and rural poverty.
• Help households to overcome credit constraints and manage risk.
• increase productive investment, increase access to markets and stimulate local economies.
• Income support to make a repayment or at least activate a bank account which can then receive a loan.
• Increase investment in agricultural inputs, including farm implements and livestock.
• complement to a broader rural development agenda, including a pro-poor growth strategy focusing on agriculture.

Challenges with cash transfers-

• not greatly superior in terms of leakages compared to other schemes of in-kind transfer like PDS
• seeks to absolve the state of its responsibility in providing basic services such as health, education, nutrition and livelihood.
• cannot be substituted for subsidies and other institutional support systems such as the National Food Security Act-powered public distribution system. 
• neither a substitute for the structural reforms needed in agriculture, nor does it adequately compensate the farmer for the risks and uncertainty of crop cultivation.
• It is no substitute for the lack of investment in agriculture, which has declined at 2.3% per annum in real terms.

Urea subsidy

• India is second largest consumer of urea fertilizers after China & ranks second in the production of nitrogenous fertilizers and third in phosphatic fertilizers whereas the requirement of potash is met through imports.
• It is one of the eight core industries.
• There are three fertilizer are classified as Primary, Secondary and Micronutrients
• Primary fertilizers on the type of nutrients they supply to soil such as nitrogenous (urea), phosphatic (di-ammonium phosphate (DAP)) and potassic (muriate of potash (MOP)) fertilizers.
• Secondary fertilizer includes calcium, magnesium and sulphur while micronutrients include iron, zinc, boron, chloride etc.
• Fertiliser subsidy is estimated to be Rs 79,996 crore (Rs 53,629 crore for urea and Rs 26,367 crore for nutrient-based subsidy) for FY20.
• Nutrient Based Subsidy scheme  
• government announces a fixed rate of subsidy (in Rs. per Kg basis), on each nutrient of subsidized P&K fertilizers, namely Nitrogen (N), Phosphate (P), Potash (K) and Sulphur (S),
• It is applicable to 22 fertilizers (other than Urea) for which MRP will be decided taking into account the international and domestic prices of P&K fertilizers, exchange rate, and inventory level in the country.
• Centre has drawn up a plan to ease the controls on the retail prices of urea & to make the release of the ever-rising subsidy on urea far more targeted than now.
• DBT of urea subsidy to the beneficiary farmers’ bank accounts instead of DBT to firms based on point of sale, to the farmer’s e-wallet which is available with the Rupay Kisan Card.
• The farmer will pay the market price at the time of purchase of urea and promptly receive the subsidy amount in his/her Aadhaar-linked bank account.
• This move will reduce the leakage of fertiliser subsidy and black marketing.
• Ceiling might be put on the subsidised fertiliser so that the alleged overuse of the nitrogenous fertiliser could be curbed.
• mandatory neem-coated urea production to slow down the dissolution of nitrogen into soil, resulting into less nutrient requirement.
• Fertilizer was critical to India’s Green Revolution- Fertilizer Control Order, 1957 to regulate the sale, pricing, and quality of fertilizer. Movement Control Order, 1973 to regulate the distribution of fertilizer as well.
• No subsidy was paid on fertilizer before 1977. The oil crisis in 1973 increased the price of fertilizer leading to a decline in consumption and an increase in food prices.  
• In 1977, government intervened by subsidizing manufacturers. 1991 Government decontrolled the import of complex fertilizers such as di-ammonium phosphate (DAP) and muriate of potash (MOP) in 1992. But, urea imports continue to be restricted and canalized.

Urea policy India

• Urea is the source of nitrogenous fertilizer and it is heavily subsidized by Government. Today urea is the only fertilizer which remains controlled.  
• Urea Subsidy is a part of Central Sector Scheme of Department of Fertilizers
• includes freight subsidy for movement of urea across the country.  
• The New Urea Policy-2015 (NUP-2015) by Department of Fertilizers in 2015, extended till 2019-2020, objective of maximizing indigenous urea production, promoting energy efficiency in urea production and rationalizing subsidy burden on the government.It is applicable to the existing 25 gas based units.
• Urea Subsidy Scheme till 2020 will ensure the timely payment of subsidy to the urea manufacturers resulting in timely availability of urea to farmers. Subsidy on production costs is provided when their production is beyond a certain production capacity as notified.

Urea production and pricing mechanism

• available to farmers at statutorily controlled price (exclusive of the Central/State Tax & other charges towards neem coating).  
• The difference between the delivered cost of fertilizers at farm gate and MRP payable by the farmer is given as subsidy to the fertilizer manufacturer/importer by the Government of India.  
• 31 urea manufacturing units, out of which 28 urea units use Natural Gas (using domestic gas/LNG/CBM) as feedstock/ fuel and remaining 3 urea units use Naphtha as feedstock/ fuel.

Issues involved

• Availability: Inaccurate estimation of demand of urea had led to large shortages in the market. 
• Delays in imports led to unavailability of fertilizer around planting seasons
• Over usage/misuse of urea due to pricing difference: since 2010, the ratio of consumption has worsened to 8:3:1 leading to diminishing crop yields and increased soil toxicity.
• Inefficient Fertiliser Manufacturers: subsidy a firm receives is based on its cost of production, As a consequence, inefficient firms with high production costs survive and the incentive to lower costs is blunted.
• Over regulation: black market that burdens small farmers disproportionately; incentivises production inefficiency; and leads to over-use, depleting soil quality and damaging human health.
• Almost 36% of the subsidy is lost through leakage to industry or smuggled across borders.
• Fiscal burden: largest subsidy in absolute terms after food. Urea makes up almost 70% of the fertilizer subsidy allocation.

Way forward

• Decanalising urea imports: would increase the number of importers and allow greater freedom in import decision.
• Gas Price Pooling: all urea plants get gas at a uniform price.
• Under NBS scheme: would allow domestic producers to continue receiving fixed subsidies based on the nutritional content of their fertiliser, while deregulating the market would allow domestic producers to charge market prices.encourage fertiliser manufacturers to be efficient, as they could then earn greater profits by reducing costs and improving urea quality. 
• Digitisation of land records to ensure timely reach of subsidy to farmers. Without setting right the land records, it will be impossible to transfer the subsidy to beneficiaries.

Agriculture pricing policy and MSP 

• Under it government determines the certain prices either for farmers or for the consumers of food grains examples central issue price(CIP), (MSP) minimum support price-guaranteed price of some selected crops generally higher than the market price
• Higher than MSP more is likely to be the availability of foodgrains farmers will produce more and so there will be more grain 
• Central issue price: in public distribution system the price at which Centre or central government sells food grains to the states for maintaining public distribution system. It’s on the lower side of market price compare to the market linked to affordability aspect of food security
• Food Corporation of India purchases grains from farmers on behalf of central government it is a procurement agency
• Issue prices and central issue places maybe the same at some time And not at other. Direct passing a central subsidy to the consumer When the issue prices equals to the central issue price. But additional subsidy by state over and above the centre then the issue prices less than the central issue price.
• Many states prefer to give prices higher than MSP to the farmers and charge prices lower than CIP from consumers. But then they themselves have to bear the burden
• Food subsidy is the maximum amount of money by central government spent on this. It is the subsidy given by Centre to maintain the food security same.
• Food subsidy= eco cost of food - central issue price 
• Economic cost for central govt till grains reach storage = MSP+ transportation + storage cost + misc cost 
• Subsidy to farmers higher than market price, subsidy to consumer lower than market price. Higher the MSP lower the CIP more is the food subsidy.
• Subsidy to farmers = MSP- market price 
• Subsidy to consumers= market price - CIP 
• Mostly MSP > market price not always 
• MSP decided before cropping season government knows roughly what will be the production and based on weather forecast therefore it decides the MSP before
• CIP<market price always 
• MSP calculated by commission on agricultural costs and prices agency on the basis of cost of production every effort to include all possible because that might be incurred by the farmers sometimes include things for which farmers may not have spent on like imputed rent for example pump set owned by former CACP includes imputed rent if farmer did not have the pump set.
• Till 1997 whatever recommended MSP by CACP was accepted by the central government but this changed after 1997. For selected crops actual MSP for for wheat rice et cetera was higher than what was suggested by CACP. 

Why price of onion has increased?

• Seasonal Phenomenon: Onion price rise in September every year due to seasonality, and is further accelerated every alternate year due to storage and supply related constrains.This is because stocks of rabi onion are low and kharif onion is yet to arrive in the market. 
• Natural Factor: Huge agricultural dependency on Monsoon, changing pattern of climate and Weather-induced harvest losses lead to demand-supply mismatch in Agri-products, which further distorts the price mechanism in Agri-market. e.g. supply of onions mainly dropped owing to a drought-like situation in parts of Maharashtra and later on flood hampered distribution chain.  
• Cobweb phenomenon: wherein production responds to prices with a lag, causing a recurring cycle of rise and fall in output and prices. This reflects the behaviour of farmers who base their sowing decisions on the prices observed in the previous period, and accordingly over- or under-produce crops, triggering price cyclicality.

Price fluctuations of agricultural produce

Reasons

• Distorted price support system: Price Forecasting Mechanism for MSP has been inadequate which leads to suboptimal production of agricultural products (bumper or poor production), further leads to volatility in price of products. Moreover, any increase in price support system (MSP and Procurement Price) may lead to rise in price of food products.
• Global Trade: Advancement of agricultural trade liberalisation lead to transmission of international price volatility into domestic markets.
• Cascading Effect: Multiple Intermediators in production chain of agri-product and various levy charges by agricultural market (Mandis) along the supply chain
• Inadequate infrastructure: High transportation cost (rising oil price, poor road connectivity), lack of cold storage facilities, high storage cost, inadequate food processing infrastructure especially for perishable Agri-products make them prone to price fluctuation.

Ways to deal with price fluctuation

• Rationalise the price stabilisation system e.g. NAFED (entrusted with price stabilisation), should procure at least 2-3 lakh tonnes at the rabi harvest time (April-May).
• Price Deficiency Payment System - Bhawanter Bhugtan Yojana of Mahdhya Pradesh and Telangana’s Input support scheme should be implemented on pan country scale.  
• Technology Driven price forecasting for agriculture products 
• Food Processing: promote the use of dehydrated onions, tomato and potatoes (flakes, powder, granules) among domestic households.
• Draft National Food Processing Policy 2017 stressed the need of reduction of wastage, improving value addition, promoting crop diversification for better returns to farmers.
• Infrastructure-generates large multiplier effects in agriculture, thus, Investment in agri-logistics (to minimise the wastage) and reform in the storage infrastructure as mooted by Shanta Kumar committee 
• Cluster approach: near production areas must be promoted and value addition units at strategic places would stabilise the Agri-product demand-supply equation, vis-à-vis its prices.
• Future Trading: Effective utilisation in agricultural market is imperative for price hedging. However, there should be mechanism to ensure that agricultural futures markets do not threaten food security and it is based on global standard market practices.  
• Agri-Export Policy-2018 reforms in APMC Act and streamlining of Mandi fee. Moreover, simplification or uniformity of mandi/agricultural fee across states will create a transparent supply chain that will empower the farmer, and indirectly stabilised food inflation.

Effects of agri-products price volatility  

• On Farmer: Since farmers have low propensity to save and poor access to efficient saving instruments, price volatility would further act as a disincentive to carry farming activities.  
• On Government: complicate budgetary planning, increase farmer unrest, etc.
• On Exporter: Increase cash-flow variability and reduce collateral value of inventories and increase borrowing.
• On consumer: impact the personal disposable income as well as household budget.  

Government steps to stabilizes the price  

• Agricultural Produce Marketing Acts: provides a mechanism of open auction for the set-up of agro-Prices in agricultural market/Mandi.  
• Price stabilization Fund: to help regulate the price volatility of Agri-horticultural commodities through strategic buffer, discourage hoarding and speculation, promotes direct purchase from farmers/ at farm gate/Mandi and provides financial assistances to States.
• Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act 2018: help farmers in getting an assured price for the produce, which will act as a buffer against price volatility and market fluctuation.
• SAMPADA (Scheme for Agro-Marine Processing and Development of Agro-Processing Clusters) – incorporates Mega Food Parks, Integrated Cold Chain and Value Addition Infrastructure. Infrastructure for Agro-processing Clusters, Creation of Backward and Forward Linkages, Creation/Expansion of Food Processing & Preservation Capacities etc.
• Operation Greens: For enhancing production & reducing price volatility of fruits & vegetables (initially for tomatoes, onions and potatoes). It will also promote Farmer Producers Organisations (FPOs), agri-logistics, processing facilities, thus to achieve the aim of doubling the farmer Income 2022.
• Budget 2018-19: Linking Minimum support price with cost of production, Income-tax concession to FPOs for five years and Connecting 470 APMC promoted markets to the e-nam market platform, and development of 22,000 Gramin agriculture markets.
• Price Monitoring: The price of Onion along with other 21 food commodities has been monitored by consumer affairs department in order to make effective intervention.

Procurement regime in India 

The procurement mechanism in India functions as an assured market for farmers and plays a role to guide the cropping patterns and incentivize production. To enable procurement Government has instituted a floor price for agricultural produce, namely Minimum Support Price (MSP). MSP serves as a Procurement Price and is used as a market price benchmark. Government notifies MSPs annually for 23 commodities inclusive of 14 kharif, 7 rabi and 2 calendar year season crops. In addition to these 23 crops, Government also notifies Fair and Remunerative Prices (FRP) for sugarcane and jute. The Government notifies MSPs based on the recommendations of an independent body, called Commission for Agricultural Costs and Prices (CACP). 

A2 vs. C2 debate

CACP determines the MSP based on the expenses incurred by the farmer. It is determined in following manner:

• Expenses incurred (A2) is estimated by considering cost of production, changes in input price, trends in market prices, demand and supply situation, inter-crop price parity, effect on general price level, effect on cost of living, international market price situation, etc.
• final MSP is determined as a function of expenses incurred (A2) and the imputed value of family labour (FL).  There have been demands for considering a different costing method (C2).
• Adopting C2 will entail following changes:
• include the rent paid for any leased-in land, the imputed rent for the owned land, the interest on owned fixed capital, and imputed value of wages to family labour, in addition to the Cost A2.
• 50 per cent of Cost C2 should be added as the profit component, for determining the MSP.

existing procurement mechanisms by the government are implemented under:

• Price Support Scheme (PSS): Applicable in case of MSP notified crops.
• Market Intervention Scheme (MIS): To support commodities, for which MSPs are not notified - fruits/vegetables/other horticultural products.
• Price Stabilization Fund (PSF): to protect consumers from rising prices.
• Food Corporation of India operations for Central Pool: Wheat and Paddy is procured to meet buffer norms and for meeting targets of the public distribution system.
• PM-AASHA - An umbrella scheme to further ensure remunerative prices to the farmers for their produce, namely Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA). Following are the key components of the Scheme:
• Price Support Scheme (PSS): physical procurement of pulses, oilseeds and Copra by Central Nodal Agencies with proactive role of State governments
• Price Deficiency Payment Scheme (PDPS): direct payment of the difference between the MSP and the selling/modal price will be made to pre-registered farmers selling his produce in the notified market yard through a transparent auction process. All payment will be done directly into registered bank account of the farmer. This scheme does not involve any physical procurement of crops.
• Private Procurement & Stockist Scheme (PPPS): for oilseeds by states on pilot basis in selected district/APMC(s) of district involving the participation of private stockist. 

What are the prevalent issues with the procurement framework in India?

• Limited reach of procurement: For example, in case of wheat, of the average of 33 per cent of marketed surplus procured, 90 percent procurement only from Punjab, Haryana and Madhya Pradesh.
• Largely benefited wheat and paddy farmers: The procurement of other MSP notified commodities has not been very encouraging. For instance, procurement of oilseeds remained at abysmally low 0.66 percent of the total production.
• Poor operation of the Price Support Scheme with total procurement of pulses being at only 10 percent of the marketed surplus
• Procurement of perishables under MIS is still negligible.
• Delayed action by Government: in distress situation benefits the intermediaries more than the farmers.
• Shift in production and consumption patterns: The price and procurement-based intervention led to higher supply and a supply driven shift towards rice-wheat consumption and cropping. The unseen consequence of this has been nutritional deficiency. 

What can be done to overcome these issues and strengthen the procurement system in India?

Report Committee on Doubling Farmer’s Income (chaired by Ashok Dalwai):

• Adopting a more robust system of procurement: to enhance the support and its reach across the country & across crops, besides improving speed of response and effectiveness of procurement, in cases where prices may drop below MSP
• Timely market interventions: triggered by price linked eventualities. The extent and time of any market intervention should aim also at normalizing the fluctuations in market prices and more importantly the downslide of prices due to temporal post-harvest gluts.
• Increasing diversification in procurement interventions: revisit the strategy on demand and supply, including PDS system, for balancing the nutritional security of the population. Such interventions should therefore have differentiated outcomes and appropriate sunset clauses.

Minor Forest Produce & MSP

• Centre revised the minimum support price (MSP) for minor forest produce, offering much-needed support to tribal gatherers in view of the "exceptional and very difficult" circumstances prevailing in the country due to the coronavirus pandemic 
• Mechanism for marketing of Minor Forest Produce (MFP) through Minimum Support Price (MSP) and development of value chain for MFP
• Launched in 2014
• as a social safety net for improvement of livelihood of MFP gatherers by providing them fair price for the MFPs they collect and ensure sustainable harvesting of MFPs
• These tribals then sell the MFPs in village marketplaces
• If the market prices fall below MSP, the state government agencies move in to procure the produce.
• Ministry of Tribal Affairs is the nodal ministry
• Ministry of Tribal Affairs increased the MSP of 49 products which are collected by tribals under a Centrally Sponsored scheme known as “Mechanism for marketing of MFP through MSP and development of value chain for MFP” as a measure of social safety for MFP gatherers.  
• TRIFED is the nodal agency for the scheme, had recommended the increase to ensure more disposable income for tribals.
• MSP for MFPs is revised once in every 3 years by Pricing Cell constituted under the Ministry of Tribal Affairs.

What is Minor Forest Produce (MFP)?

• MFP is defined under The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 also known as the Forests Rights Act (FRA)
• Minor Forest Produce (MFP) includes all non-timber forest produce of plant origin and includes bamboo, canes, fodder, leaves, gums, waxes, dyes, resins and many forms of food including nuts, wild fruits, Honey, Lac, Tusser etc.
• The definition of MFP includes bamboo and cane, thereby changing the categorization of bamboo and cane as “trees” under the Indian Forest Act 1927.
• PESA, 1996 and Recognition of Forest Rights Act, 2006 conferred ownership of MFP to forest dwellers.
• Forest Rights Act also recognizes and vests individual forest-dwellers with forest rights to own and dispose minor forest products from forests where they had traditional access.

Significance of MFP in India

• Around 100 million forest dwellers depend on Minor Forest Produces for food, shelter, medicines and cash income. (Report of the National Committee on Forest Rights Act, 2011)
• Tribals derive 20-40% of their annual income from Minor Forest Produce on which they spend major portion of their time.
• Haque Committee Report, May 2011, the procurement value of 14 major MFPs is estimated Rs 1900 Crores (including tendu & bamboo)
• This activity has strong linkage to women’s financial empowerment as most of the Minor Forest Produces are collected and used/sold by women.