A CRITICAL ANALYSIS OF WORKING OF MINIMUM SUPPORT PRICE

SCHEME IN INDIA

By

Rohan Ahluwalia and Swastika Raushni

Roll no. - 2014094, 2014128

5 Year Integrated B.A.LL.B. (Hons.) Course

LAW ND AGRICULTURE

Under the supervision of

Dr. K. Sudha

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA, SABBAVARAM, VISAKHAPATNAM-531035
ANDHRA PRADESH, INDIA

01.11.2018
 CERTIFICATE

This is to certify that the dissertation entitled A Critical Analysis of Working of Minimum
Support Price in India for the Seminar Paper Law and Agriculture to Damodaram
Sanjivayya National Law University, Visakhapatnam is a record of original work done by
Mr./Ms. Rohan Ahluwalia and Swastika Raushni under my supervision and guidance to
my satisfaction.

SIGNATURE OF THE GUIDE

Visakhapatnam

Date: 01.11.2018

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 ACKNOWLEDGEMENT

We have taken efforts in this project. However, it would not have been possible without the
kind support and help of many individuals and organisations. We would like to extend our
sincere thanks to Damodaram Sanjivayya National Law University, Vishakhapatnam for
providing us such an opportunity.

We are highly indebted to our Law and Agriculture faculty, Dr. K. Sudha for her guidance
and constant supervision as well as for providing necessary information regarding the
project and also for their support in completion of this project.

We would like to express our gratitude towards our parents for their kind co-operation and
encouragement which helped us in completion of this project.

Ours thanks and appreciations also go to our colleagues in developing the project and
people who have willingly helped us out with their abilities.

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 CONTENTS

CERTIFICATE........................................................................................................................ 2
ACKNOWLEDGEMENT ....................................................................................................... 3
CHAPTER-1............................................................................................................................ 5
I. INTRODUCTION .................................................................................................... 5

II. NEED FOR THE STUDY ........................................................................................ 7

III. AIMS AND OBJECTIVES OF THE STUDY ......................................................... 7

IV. SCOPE OF THE STUDY ......................................................................................... 7

V. RESEARCH METHODOLOGY ............................................................................. 7

VI. REVIEW OF LITRETURE ...................................................................................... 7

VII. HYPOTHESIS .......................................................................................................... 9

CHAPTER 2: CONTEMPORRY AGRARIAN CRISIS: THE PROBLEM OF PLENTY .. 10

CHAPTER 3: UNDERSTANDING MSP............................................................................. 16
3.1. THE THREE COSTS ................................................................................................. 17

3.2. CROP SPECIFIC IMPLEMENTATION AND PROCUREMENT .......................... 20

3.3. PERTINENT CRITICISMS OF MSP ........................................................................ 23

CHAPTER 4: LOOKING BEYOND MSP ........................................................................... 29

4.1 TOWARDS PRICE DEFICIENCY PAYMENTS (PDP) (BHAVANTAR
BHUGTAN YOJANA (BBY)) ......................................................................................... 34

4.2 DIRECT INCOME (INVESTMENT) SUPPORT BASED SCHEMES ................ 40

CONCLUSION AND SUGGESTIONS ............................................................................... 46

BIBLIOGRAPHY ................................................................................................................. 48

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 CHAPTER-1
I. INTRODUCTION

Lal Bahadur Shastri once famously proclaimed, “Jai Jawan, Jai Kisan”. Today, even as we
hold our jawan, the soldier, in high esteem, the condition of the farmer in India is
deplorable. Agriculture may today contribute to only 15.5% of GDP (as of 2017) compared
to 41.8% it did in 1960, but it is the primary source of livelihood for about 58% of India’s
population. India is among the top 15 exporters of agricultural products in the world and the
total agricultural exports from India stand at a whopping $38.21 billion in the fiscal year
2018. The Indian food and grocery market is the world’s sixth largest, while the Indian food
processing industry accounts for 32% of the country’s total food market. As per the Union
Budget (2018-19), Rs. 57,600 crore was allocated to the Agriculture Ministry. With such
great figures, one would expect agriculture would be given priority and would therefore be
doing quite well in most places in India.1

During the 2017-18 crop year, rice and wheat production in the country is estimated at
111.52 million tonnes and 98.61 million tonnes respectively, as per third advance estimates,
while food grain production is estimated at 279.51 million tonnes in the same period.2 India
is also the second largest fruit producer in the world, while the production of horticulture
crops is estimated at a record 307.16 million tonnes in 2017-18 as per second advance
estimates.3 India is the largest producer, consumer and exporter of spices and their products,
with spice-exports from India reaching $3.1 billion in 2017-18. Tea exports from India have
reached a 36-year high of 240.68 million kilograms while coffee exports reached a record
3,95,000 tonnes in 2017-18.4

1
Mrittunjoy Guha Majumdar, Indian Agriculture Sector: What Is Wrong And How It Can Be Made Better,
Youth ki Awaaz. https://www.youthkiawaaz.com/2018/09/the-farmers-lament-realities-of-agriculture-in-india/
2
Agricultural Statistics Division Third Advance Estimates of Production of Foodgrains for 2017-18 (Jul 2018)
http://agricoop.gov.in/sites/default/files/3rd_advance_eng_2018.pdf
3
Release of 2017-18 (Second Advance Estimates) of Area and Production of various Horticulture Crops,
Press Information Bureau, (May 2018) http://pib.nic.in/newsite/PrintRelease.aspx?relid=179593
4
Supra Note 3.

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However, if all had been fine, then what was the need for the farmers to go marching? Why
are Indian farmers perpetually in revolt? The question has been raised by many after the
recent farmers’ march to Mumbai5 and Delhi6 and the large scale economic protests by
farmers of Madhya Pradesh,7 Tamil Nadu8 and other states seething in discontent.

No doubt, agriculture is one segment of the economy on which vote-conscious governments

haven’t skimped on outlays. Over the years, Central governments have allocated ever-rising
sums towards procurement, input subsidies and rural employment schemes, while States
have periodically announced loan waivers. But that farmer protests have persisted, and even
intensified, perhaps shows that many of these schemes aren’t addressing the right set of
problems. The reasons for agricultural distress have changed quite dramatically in recent
years.

5
Alok Deshpande Why are farmers of Maharashtra on Strike, The Hindu, (Jun 2018)
https://www.thehindu.com/news/cities/mumbai/why-are-farmers-of-maharashtra-on-
strike/article18956218.ece
6
Kisan rally: Nearly 20,000 farmers march to Delhi with 15 demands, city borders barricaded,
Hindustantimes, ( Oct 2018) https://www.hindustantimes.com/india-news/kisan-rally-thousands-of-farmers-to-
approach-delhi-with-15-point-agenda-police-barricade-borders/story-p9sWPhYzBFX512XzJtj9RK.html
7
Madhya Pradesh farmers’ protest, day 1 Highlights: Markets shut as farmers stay away in MP, Punjab;
vegetables, milk supply to be hit, Financial Express, (Jun 2018) https://www.financialexpress.com/india-
news/madhya-pradesh-farmers-strike-live-updates-shivraj-singh-chauhan-conp-congress-bharat-bandh-june-
10/1189316/
8
M.Mahalingam, The Forgotten Farmers Of Tamil Nadu: 107 Days of Protest in Delhi and Still Counting,
The Citizen, (Sep 2018)
https://www.thecitizen.in/index.php/en/NewsDetail/index/1/11766/The-Forgotten-Farmers-Of-Tamil-Nadu-
107-Days-of-Protest-in-Delhi-and-Still-Counting-

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II. NEED FOR THE STUDY

The present research is an effort to analyze the present status of agriculture in India. The
present study is important in the context that Minimum Support Price (MSP) Policy has
been one of the supportive mechanisms which was put in place during the wee years of
formation of the Agricultural Price Policy. The four decades experience is significant
enough to have a close review of the policy and this study is an effort to analyise the
effectiveness of the scheme in past few years and the issues relating to the same.

III. AIMS AND OBJECTIVES OF THE STUDY

 To understand the concept and determination of Minimum Support Price

scheme.
 To highlight the present situation of agriculture in light of the scheme.
 To identify the problems and issues in the implementation of the scheme.
 To suggest suitable measures and/or alternatives to the present structure of the
scheme.
IV. SCOPE OF THE STUDY

The Researchers have limit the scope of the study to the implementation and working of the
MSP in Indian Agriculture. The study shall be limited to the study of status and schemes
related to Indian farmers and problems due to defective procurement processes by
government.

V. RESEARCH METHODOLOGY

The study is based on Primary as well as secondary data sources. The information and data
relied upon has been either directly taken from primary governmental resources, websites
and reports or has been derived from the works of eminent authors, scholars and researchers
in various journals.

VI. REVIEW OF LITRETURE

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Before embarking upon the research study author made an attempt to review the literature
on the subject. The various studies conducted by social and political scientist have discussed
various micro and macro issues and problems related to women empowerment.

Bhaskar Majunder (2000) of the National Commission of Agriculture (1976) argued

that ‘since the minimum support price is expected to take into account changes in input
prices, widespread use of input subsidy as incentive to increase production should, by and
large, be avoided except in case of small and marginal farmers and difficult areas’ (Gol,
1976, part - II, P.84). The skewed distribution of landholdings gives misconceptions about
many ofthe problems that come up in the agricultural sector. For example, the price rise
even in a year of scarcity may not occur due to lack of demand of the landless labourers and
small and marginal farmers. At the same time- offtake of foodgrains from the Fair Price
Shops (FPSs) may be low reflecting preferences of a section of the consumers covered for a
free market. Sale of agricultural commodities at remunerative prices can be ensured by the
government through marketing facilities including provisions for transport and storage.
Indian agriculture has to be liberalised by an extension ofthe growth frontier by the majority
of the cultivators. The task is to target the small and marginal farmers on a priority basis
especially the probable producers-cum-sellers of foodgrains. The task is to ensure national
food security first and then global food security rather than making national food need a
dependent function of global food production. These tasks are to be performed by the
government even in a liberalised regime.9

The National Council for Applied Economic Research (1974) in a study on credit
requirements for agriculture found that the small farmers used to obtain 49 per cent oftheir
loans from the moneylender-trader group at interest rates ranging from 18-24 per cent and
that about 17 per cent ofloans were taken at interest rates as high as 80 per cent. In
comparison, the rates charged by Cooperatives, Commercial banks and other Government
agencies were much lower. Interest rates charged by them varied according to size of
cultivators. For small size cultivators the rate was 6 per cent and for others it varied from 8
to 10 per cent.10

9
Bhaskar Majunder (2000) “Liberalization of Indian Agriculture : Implications for the Home Market for Food
grains”, Edited by R.C. Choudhury, R.P. Singh ‘Rural Prosperity and Agriculture Policies and Strategies,
Economic Reforms and Agriculture’, Foundation Day Series, National Institute ofRural Development,
Rajendra Nagar, Hyderabad, P.P. 133- 165.
10
National Council for Applied Economic Research 1974 All India Rural Household Survey - Saving Income
and Investment New Delhi - 2, P.P. 96-100.

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The National Commission on Agriculture (1976) suggested a new strategy for
agricultural development, for increasing production, better marketing, transport and
processing of agricultural commodities. The Commission observed that the share of
commercial banks increased from the level of 8.8 per cent (1974) to 15 per cent in 1998.
Commercial banks should give more preference to small farmers in providing loans to
modernise agriculture.11

The National Commission on Farmer’s headed by Dr M S Swaminathan highlighted

that the main reasons of agrarian agony in India were non implementation of land reforms,
water scarcity, lack of irrigation, technology exhaustion, inadequate access and availability
of institutional source of finance, dependence on money lenders, weak market
infrastructure, lack of opportunities for assured and remunerative marketing, low investment
in research and development, low levels of education and skill, and lack of employability of
surplus workforce outside agriculture.

The Swaminathan commission had recommended serval path-breaking measure to resolve

agrarian distress in India. These recommendations are of a more vital nature and in all
likelihood will provide a long-term solution to the agrarian crisis and farmers’ distress. The
National Commission on Farmer’s recommendations are mainly in the domain of land
reforms, irrigation, productivity, credit, insurance, food security, bio-resources, and public
investment in agriculture, human development, and the rural nonfarm sector. The
Swaminathan commission has thus provided solutions to the agrarian crisis and farmers’
distress both in the domain of the agriculture sector as well as outside agriculture sector.12

VII. HYPOTHESIS

The contemporary agrarian crisis and the problem of plenty arise majorly from flawed
market intervention such as poor conceptual understanding, implementation and political
misuse of minimum support price scheme.

11
Report ofthe National Commission on Agriculture (1976), Government of India, New Delhi.
12
The National Commission on Farmers (NCF) was constituted on November 18, 2004 under the
chairmanship of Professor M.S. Swaminathan. The NCF submitted four reports in December 2004, August
2005, December 2005 and April 2006 respectively. The fifth and final report was submitted on October 4,
2006

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 CHAPTER 2: CONTEMPORRY AGRARIAN CRISIS: THE PROBLEM OF
PLENTY

A few years ago, farmers seeking to register their protest used to do so beside wilted crops
and parched farmlands. But in the last couple of years, farmers from Mandsaur to Salem
have given vent to their angst by dumping vast quantities of unsold produce — tomatoes,
grapes, onions and milk — on lakebeds and national highways.13

Historically, agricultural distress in India has been linked to truant monsoons, input
shortages and lacklustre yields which frequently put growers on the road to penury. In
recent years though, it is surplus output and unremunerative prices that have decimated farm
incomes more often.

Trends in India’s agricultural output over the last twenty years present an eye-opener to this
problem of plenty. For an extended period from 1998-99 to 2009-10, India’s rice output
stayed stuck at 85 million tonnes to 95 million tonnes, with drought years such as 2002 and
2004 seeing sharp downward blips. As consumption hovered at 80 to 90 million tonnes in
this period, shortages were more frequent than surpluses.

But after climbing to 105 million tonnes in 2011-12, India’s rice production has stayed well
above the 100 million-tonne mark for the last six years, even scaling110 million tonnes in
2016-17. With offtake still stuck at about 90 million tonnes, there’s been persisting excess
stock in the market.

As a result, in the last five years, wholesale prices of paddy have crept up at a 2.4% annual
rate.

The wheat story is similar. From a yearly average of about 75 million tonnes in the decade
to 2010-11, wheat output leapfrogged to average 94 million tonnes in the last six years.
Output, now at 97-98 million tonnes, is now neck-and-neck with domestic demand (about
100 million tonnes) and it may only be a matter of time before it overshoots it. With rising
supplies, wholesale wheat prices have inched up at a 2% yearly rate in the last five years.

13
In U.P. potato farmers dump their produce as prices crash, the Hindu, (January 2018)
https://www.thehindu.com/news/national/other-states/in-up-potato-farmers-dump-their-produce-as-prices-
crash/article22437470.ece

10 | P a g e
Not too long ago, India was facing a severe shortage of pulses, with output struggling to
keep up with the rising protein intake of the masses. But farmers have dramatically ramped
up pulses production too. From an annual average of 14 million tonnes in the decade to
2010-11, it has averaged 18 lakh tonnes in the last six years. India harvested a record pulses
crop of 23 million tonnes in 2017, matching the official demand estimate, thus dampening
once-high market prices for a range of dals. This script of galloping surpluses dampening
prices has played out in commercial crops such as sugarcane and tea too.

If unremunerative prices have dogged other crops, fruit and vegetable farmers have been up
against the high perishability of their produce. In the last fifteen years, India has doubled its
potato output, trebled its tomato harvest and managed a fourfold increase in onion output.14

If there is one thing that has changed in Indian agriculture in recent times, it is supply
response — the ability of farmers to increase production when prices go up. Traditionally,
the supply curve in most crops was near vertical: No matter the price, the quantity harvested
and sold remained virtually the same. Take pulses. Through the 1980s and till the 2000s, the
country’s output averaged just over 13 million tonnes (mt), falling to 11-12 mt in droughts
and short of 15 mt even in the best years.15

In 2010-11, pulses production, for the first time, crossed not 15 mt, but 18 mt. Even in
2014-15 and 2015-16, both drought years, it stayed within 16-17 mt. And as farmers
ramped up plantings in response to the high prices of 2015 and 2016, output soared to 23.13

14
why do farmers go marching, The Hindu (Mar 2018) https://www.thehindu.com/business/agri-
business/why-do-farmers-go-marching/article23349948.ece
15
Kanhaiya lal, Growth and Trends of Pulse Production in India,
https://www.researchgate.net/publication/281620011_Growth_and_Trends_of_Pulse_Production_in_India

11 | P a g e
mt in 2016-17 and 24.51 mt in 2017-18. The new crop year from July will open with more
than four mt of domestically procured pulses stocks in government warehouses —
something never seen before.16

It isn’t only pulses. In the past, sugar production typically took two years to recover from a
drought. But 2017-18 will see output rebound to a record 32 mt-plus, from a seven-year-low
of 20.26 mt last season. Thus, the old “sugar cycle”, where three bumper years were
followed by two lows, is dead. Now, we have only one-in-five bad years.

The same goes for vegetables. Last year, after drought in Karnataka drove up onion prices
from July — they went past Rs 30 per kg in Maharashtra’s Lasalgaon market by October —
farmers sowed aggressively during the rabi winter season. The result: Average rates crashed
to Rs 6-7 this April-May. Farmers did something similar when tomatoes scaled Rs 60-80/kg
levels in Kolar (Karnataka) and Madanapalle (Andhra Pradesh) last July. Prices again
plunged, to Rs 3-5/kg towards February, and haven’t really looked up even in peak summer
this time.17

So, what has happened to elicit such supply response? Better seeds and faster diffusion of
technology have made a difference. HD-2967, a blockbuster wheat variety released in 2011,
could cover 10 million hectares area in a single season within five years. Along with HD-
3086, a newer variety more resistant to yellow rust fungus, it has ensured that the Green
Revolution’s yield gains haven’t plateaued yet: The average Punjab wheat farmer harvested
5.12 tonnes per hectare in 2017-18, as against 3.73 tonnes in 1990-91 and 2.24 tonnes in
1970-71. No less impactful has been Co-0238, a cane variety that not only yields more crop
per hectare, but also more sugar from every tonne crushed. First planted in 2013-14, it now
accounts for well over half of the cane area in North India, while singularly responsible for
UP’s sugar output spiraling from 7.5 mt in 2012-13 to 12 mt this season.

But the story of yield increases isn’t limited to publicly-bred open-pollinated varieties
(OPV). The 50 quintals/acre yields that farmers in Bihar’s Kosi-Seemanchal belt today
realise from rabi corn is comparable to Midwest US levels. With planting of hybrids, as
opposed to OPVs, paddy yields have gone up from 15 quintals to 25 quintals per acre even
in the Adivasi areas of Jharkhand, Chhattisgarh and Odisha. Kolar farmers, likewise, grow
three crops of tomato annually, while Maharashtra’s Jalgaon district would be the world’s

16
Ibid.
17
Soutik Biswas, why a problem of plenty is hurting the Indian farmers, (Jun 2018)
https://www.bbc.com/news/world-asia-india-40184788

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seventh largest banana producer, were it a country. The technologies in all these — be it
hybrid seeds, high-density cultivation using tissue-cultured plants, or drip irrigation — have
been supplied by the likes of DuPont, Monsanto, Bayer, Syngenta and Jain Irrigation.

Advances in plant breeding and genetics aren’t the sole reason, though, for improved supply
response from farmers. The Operation Flood programme helped boost India’s milk
production from 22 mt in 1970-71 to 66.2 mt in 1995-96. Less appreciated is the subsequent
jump — to 165.4 mt in 2016-17. That has come about as much from crossbreeding and
more scientific dairying husbandry practices as investments in infrastructure — especially
rural roads and electricity — which have enabled milk to be procured from the interiors and
chilled at village collection centres.

In short, the farm supply curve has been flattened, both by better seed technology and
improved roads, electricity, irrigation and communication infrastructure. Farmers are also
more aware about prices and the latest hybrids/varieties, crop protection chemicals,
machinery and agronomic practices — from laser levelling and raised-bed planting to seed
treatment — than, say, 20 years ago. As a result, they take far less time to respond to high
prices.

The flip side of a more elastic supply curve, however, is that it makes gluts commonplace
and shortages temporary. We have, indeed, entered a regime of “permanent surpluses” in
most crops — a reality our policymakers are unable to grasp, stuck as they are in the era of
the Essential Commodities Act.

The moment prices now go up, the immediate reaction is to impose stock-holding limits,
allow duty-free imports, restrict exports and inter-state movement of produce, and even let
loose income tax sleuths on alleged hoarders. These so-called supply-side management
measures have acquired legitimacy with the policy of “inflation targeting”, whose success
— given the 45.86 per cent weight of food items in the consumer price index — rests
disproportionately on reining in farm produce prices. And adding the impact of
demonetisation on the predominantly cash-based produce trade — the liquidity crunch in
rural areas is far from over — the Great Depression moment in Indian agriculture has truly
arrived.

There is practically no agri-commodity today that isn’t a victim of “permanent surpluses”.

Two years ago, garlic fetched an average Rs 60 per kg rate in Rajasthan’s Kota mandi.

13 | P a g e
Enthused by it, farmers in the Hadoti region planted more area, only to see prices halve last
May, thanks to demonetisation. This May, rates at Kota further halved to Rs 14/kg.18

This is further enhanced by the flawed agri-trade policy of India in the International market:
India is swiftly changing its policy of self-reliance in food production. Despite claiming a
bumper production in recent years, the government has encouraged import of agricultural
produces. More importantly, it has allowed import of cereals like wheat, maize and non-
basmati rice. The volume of import of these grains increased by 110 times between 2014
and 2017. Farmers who produce them are at the centre of the current crisis because they are
the worst hit by the fall in the prices caused by the import.

The unprecedented situation is result of numerous policy decisions that have made the
domestic market less remunerative for farmers. Traders now find it cheaper to import from
Australia than to procure local produces. The change in policies has caused a huge spike in
India’s agro food import bill. The spending on the import of cereals, which include wheat,
maize and non-basmati rice, increased from Rs 134 crore in 2014-15 to Rs 9,009 crore in
2016-17 – a rise of 6,623%. India also imported Rs 5,897 crore worth of fruit and
vegetables in 2016-17 while the figure in 2014-15 was Rs 5,414 crore. On one hand, the
government is spending on imports while on the other hand, it has put restrictions on
exports. In 2014-15, India’s agrarian exports were to the tune of Rs 1.31 lakh crore but fell
to Rs 1.08 lakh crore in 2015-16.19

India’s import-promoting policies have had another side-effect. They have made the country
a major importer of food oil and pulses. In 1993-94, only 3% of oil consumed in India was
imported. The figure today is nearly 70% and India spends around Rs 70,000 crore annually
on its import. The domestic market is flooded with cheap imported palm oil and soybean
oil.

18
Harish Damodaran, The Age of Surplus, Indian Express, (Jun 2018)
https://indianexpress.com/article/opinion/columns/agrarian-crisis-farmer-protests-rural-distress-surplus-
production-crop-procurement-the-age-of-surplus-5213499/
19
Rs 1,402,680,000,000 – India's Agrarian Import Bill for 2015-16, The Wire,(Jul 2017)
https://thewire.in/agriculture/india-agrarian-import-bill-2015-2016-farmers

14 | P a g e
In 2015-16, India had a bumper crop of oilseeds. But right before the harvest the
government reduced the import duty on crude and refined palm oil by 5%. As a result,
peanuts and soybean in the country started being sold below MSP. With such policies, how
can the farmer be expected to increase production? While the import of edible oil has seen a
threefold rise in the past decade, oilseed production has gone down by 10%.

As far as pulses are concerned, the government has gone a step further and started
outsourcing their production. When the price of pulses was sky-high last year, India signed
MoUs with Mozambique to get pulses cultivated in that country. In the next five years,
India will import about 0.3 million tonnes of pulses from Mozambique. The government is
also trying to find ways to import pulses from countries like Brazil and Myanmar.

Just like edible oil, the government encouraged import of pulses to check food inflation.
India today imports 25% of its pulses, spending around Rs 20,000 crore annually. The
import of pulses has also risen threefold in the last decade.20 Despite having a bumper yield
in the last kharif season, the government imported 5.9 million tones of pulses worth over Rs
25,600 crore in 2016-17. As a result, when pulses reached the markets, the prices had fallen
and they were sold below MSP.21

20
Pricilla Jebaraj, Centre allows pulses import despite overflowing godowns, (Jun 2018)
https://www.thehindu.com/business/agri-business/centre-allows-pulses-import-despite-overflowing-
godowns/article24174961.ece
21
Ibid

15 | P a g e
 CHAPTER 3: UNDERSTANDING MSP

The agricultural price support system of India has been a Government of India initiative,
since 1965,22 to protect the interests of the farmers/producers against any sharp decline in
agricultural prices. The price support system was expected to help the farmers after the
harvesting period, which is associated with high probability of the agricultural prices
crashing due to surplus stock in the market. For situations like this, the government
guarantees a MSP to farmers, which is expected to cover the cost of production as well as
ensures certain profit margin to farmers. MSP is fixed and announced every year by the
Central Government on the recommendations of the Commission for Agricultural Cost and
Prices (CACP).

In addition to the MSP announced by Central Government, the State Governments also
declared a bonus, over and above the declared MSP so as to promote agriculture practices in
the states. The quantum of this bonus varies from state-to-state and from crop-to-crop.

The Agricultural Price Commission (APC) was established in 196523 to advise the
Government in following a balanced price structure for agricultural products in India. The
price policy was, as a result, revised in 1980 which shifted the focus from maximisation of
production to maintaining a balance between the demand and supply of food grains. This
was further reflected in the updated Terms of Reference (ToR) for the working of APC. In
March 1985, APC‟s name was officially changed to CACP. The revised objectives tried to
synchronise the pattern of production with the need of national economy.

CACP recommends MSP for 28 agricultural crops24 in India, which includes paddy, wheat,
cotton, oilseeds, pulses et al. However, MSP framework, since its inception, has always
been accused by experts of favouring foodgrain surplus states, such as Punjab and
Haryana.25 Both of these states are major contributors to the procurement of food grains,
under Public Distribution System (PDS). Since foodgrains represent a major part of

22
The Commission of Agricultural Costs & Prices Website, http://cacp.dacnet.nic.in/content.aspx?pid=32
23
Ibid.
24
Minimum Support Prices Recommended by CACP and Fixed by Government(Crop Year),
http://cacp.dacnet.nic.in/ViewContents.aspx?Input=1&PageId=36&KeyId=0
25
Ali, Shayequa Z, Sidhu, R S and Vatta, Kamal (2012), “Effectiveness of Minimum Support Price Policy for
Paddy in India with a Case Study of Punjab”, Agricultural Economics Research Review, Vol. 25(No.2) July-
December 2012 pp 231-242

16 | P a g e
procurement for PDS, the MSP policy seems to favour food crops as compared to other
crops.

As a result throughout India, large land areas shifted from the cultivation of pulses, oilseeds
and other commercial crops to paddy and wheat in anticipation of sure profit. This created
an imbalance in the demand and supply of other crops, such as pulses and oilseeds. Also,
the MSP is ineffective in states where wheat is in deficit whereas, for the wheat surplus
States, MSP is found to be more effective.26 For the wheat deficit states, market prices are
lower during post-harvest period and rise in the lean period, which is not the case with the
wheat surplus states.

In the past few years, MSP framework of India has drawn criticism by farmers and
advocates of free trade. Though, farmers have always demanded a substantial hike in MSP
but the supporters of free trade feel that domestic prices are not in line with the international
price as well as domestic demand and supply scenario. This price differential has brought
distortions and inefficiencies in the production pattern. It has been argued that agricultural
price policy has widened the income inequality among farmers. It has also been argued that
MSP has lost its original purpose, which was supposed to stabilise the economic standing of
farmers and making them less dependent on market fluctuations. It was an economic tool to
protect the wider section of farmers in various states but now is increasingly being used as a
political tool by the politicians.27

3.1. THE THREE COSTS

The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture
recommends MSPs for 23 crops. These include 14 grown during the kharif/post-monsoon
season (see table) and six in rabi/winter (wheat, barley, chana, masur, mustard and
safflower), apart from sugarcane, jute and copra. The CACP is supposed to consider various
factors while recommending the MSP for a commodity, including cost of cultivation.

It also takes into account the supply and demand situation for the commodity; market price
trends (domestic and global) and parity vis-à-vis other crops; and implications for
consumers (inflation), environment (soil and water use) and terms of trade between
agriculture and non-agriculture sectors.

26
Ibid.
27
Jagadish Shettigar, Agriculture crisis: It's high time for govt to re-look at MSP as a tool to rescue farmers,
(Jun 2018) https://www.firstpost.com/business/agriculture-crisis-its-high-time-for-govt-to-re-look-at-msp-as-
a-tool-to-rescue-farmers-3734895.html

17 | P a g e
The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1½ times of the
production costs for crops as a “pre-determined principle”. Simply put, the CACP’s job will
be only to estimate production costs for a season and recommend the MSPs by applying the
1.5-times formula. Thus, the all-India average production cost for paddy in 2018-19 has
been projected at Rs 1,166 per quintal, 1.5 times of which is Rs 1,749 — rounded off to an
MSP of Rs 1,750 per quintal.

The CACP does not do any field-based cost estimates itself. It merely makes projections
using state-wise, crop-specific production cost estimates provided by the Directorate of
Economics & Statistics in the Agriculture Ministry. The latter are, however, generally
available with a three-year lag. For the 2018-19 season, the CACP has used the directorate’s
state-wise cost estimates for the latest three years, from 2013-14 to 2015-16. These have
been projected for 2018-19 by assessing likely changes in input costs based on the latest
price data from other sources such as the Labour Bureau (for wages) and Office of the
Economic Adviser (which compiles wholesale prices).

The CACP further projects three kinds of production cost for every crop, both at state and
all-India average levels. ‘A2’ covers all paid-out costs directly incurred by the farmer — in
cash and kind — on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel,
irrigation, etc. ‘A2+FL’ includes A2 plus an imputed value of unpaid family labour. ‘C2’ is
a more comprehensive cost that factors in rentals and interest forgone on owned land and
fixed capital assets, on top of A2+FL.28

28
Harish Damodaran, How the 1.5- times formula Works out MSP, The Hindu (Jul 2018)
https://indianexpress.com/article/explained/how-the-1-5-times-formula-works-out-msp-5247688/

18 | P a g e
Finance Minister Arun Jaitley’s Budget speech did not specify the cost on which the 1.5-
times formula was to be computed.29 But the CACP’s ‘Price Policy for Kharif Crops: The
Marketing Season 2018-19’ report states that its MSP recommendation is based on 1.5
times the A2+FL costs. From the accompanying table, it can be seen the MSPs for 2018-19
derived from this formula are substantially higher than last year’s. The increases work out
to more than 10% for 11 out of the 14 kharif crops.

As per the A2 method, MSP is set 50% higher than the amount farmer spends on farming
including spending on seeds, fertilisers, pesticides, and labour.

C2 method, on the other hand, makes the calculation by including a wider range of inputs.
This includes besides factors used to calculate A2, the economic value of the efforts of
family members working on the farm and the value of other spending including rent and
other assets. After calculating these, MSP is set at 50% above the derived amount.

While the National Commission on Farmers (NCF) headed by MS Swaminathan opted for
this method to calculate MSP, it was not the one that was finally chosen.

The present MSP has been calculated based on the A2+FL method. The method is a middle
ground between the other methods were the MSP is set 50% higher than the amount that

29
Speech of Arun Jaitley Minister of Finance February 1, 2018
http://pibphoto.nic.in/documents/rlink/2018/feb/p20182104.pdf

19 | P a g e
derives from adding the amount farmer spend on farming including spending on seeds,
fertilisers, pesticides, and labour and the value of labour provided by the family members
for agriculture.30

3.2. CROP SPECIFIC IMPLEMENTATION AND PROCUREMENT

There are 24 commodities for which MSPs are announced by the Government of India. For
the purpose of analyzing effective implementation, it is pertinent to divide these into two
groups of crops. Wheat and paddy (rice) need to be discussed separately from rest of the
crops.

3.2.1. WHEAT AND PADDY (RICE)

Assurance of MSP is critical for this group because 70 per cent of the population is covered
under PDS, which assures rice and wheat at a rate of ` 2 or 3 per kg to the consumers,
impacting the market price level for these grains. Further, every year around 50 to 60
million tonnes are purchased at MSP giving a general impression that MSP is very effective
for these grains. But effectiveness is questionable in these crops also. There are three clear
instances to prove this point. One, after the decentralized procurement scheme (DPS) was
launched in the country, the quantity of price support purchases in states like Madhya
Pradesh, Chhatisgarh, Jharkhand and Odisha went up considerably, showing that prior to
the launch of this scheme, the paddy or wheat growers in these states were not getting even
the MSPs. Two, in the current rabi marketing season, when new Uttar Pradesh government
made extra efforts, the MSP purchases of wheat aggregated to more than three million
tones, showing that in the absence of these efforts many wheat growers of the state would
not have received the MSP for their wheat produce. And three, it was not uncommon to
observe that several lots of wheat were being auctioned in the market yards at below the
MSP, by the side of MSP purchase centres.31

This situation is mainly because of a mix-up in understanding of distinction between MSP

purchases and public procurement at operational levels. The origin of this mix-up can be
traced to a regime of two sets of prices for wheat and paddy, viz. MSP and separate
procurement price, with distinctly different objectives, for six years from 1965 to 1971. This
was followed by a period of 20 years from 1971 to 1991 when procurement price was
30
Explainer: How is MSP calculated in India,CNBCTV18 (Jul 2018)
https://www.cnbctv18.com/agriculture/how-msp-is-calculated-in-india-254871.htm
31
S.S. Acharya, Effective Implementation of Agricultural Price and Marketing Policy for Doubling Farmers
Incomes: Doable Priority Actions, Agricultural Economics Research Review, Vol. 30 (Conference Number)
2017 pp 1-12

20 | P a g e
treated as MSP for these crops. During this period of procurement price (20 years), farmers
suffered because as soon as the so-called procurement targets were fulfilled, the agencies
shut the operations even when market prices continued to rule below MSP. Realizing this
misuse of procurement word, in 1991, the CACP recommended and government accepted
that since the kharif season crops of 1991, there shall be no procurement prices (and no
associated procurement targets) and instead there shall be minimum support prices also for
paddy and wheat (for all other crops, there were only MSPs). The implications of this
change were/are quite serious.32

As MSP is a price guarantee, MSP operations are required to be carried out

(a) in all the markets where prices dip below MSP; and

(b) throughout the marketing season till farmers continue to offer their produce at MSP
to the purchase agencies.

It is inherent in MSP operations that in some years, we end up with purchases much higher
than that needed for meeting PDS and buffer stocking requirements, while in others, MSP
purchases may be far lower than these requirements (OMSS and imports are the instruments
to complement MSP operations). The purchase targets fixed in MSP operations are only to
help agencies to plan and prepare in advance for logistics (purchase centres, gunny bags,
money for disbursement to farmers, etc.). Even after 26 years of this change, the price
support agencies and their functionaries at lower levels are not able to distinguish between
targets of procurement and intention of price guarantee. As a consequence, the farmers
suffer who are either not aware of this distinction or are not able to exert their right to get
the MSP for their produce.33 A clear case of this confusion was observed during the support
operations for wheat in the current rabi marketing season. While purchase agencies shut
their shops as soon as purchase targets were achieved, the farmers continued to suffer and
had to sell their produce below MSPs. As the farmers have now awakened, their resentment
and anguish is obvious. Every year, almost all reports of CACP have expressed concerns
and cited several cases of ineffective MSP operations in many states. The main reason is
the slackness and apathy on the part of quite a few state governments. It is not uncommon to

32
Ibid.
33
K.S. Aditya S.P. Subash K.V. Praveen, M.L. Nithyashree N. Bhuvana Akriti Sharma, Awareness about
Minimum Support Price and Its Impact on Diversification Decision of Farmers in India, Asia & the Pacific
Policy Studies, vol. 4, no. 3, pp. 514–526. (Hereinafter ‘Asia & the Pacific Policy Studies’)

21 | P a g e
hear Agriculture Ministers of some state governments saying that this is the purview of the
central government and the nodal agencies (FCI).34

3.2.2. OTHER CROPS UNDER MSP REGIME

For raw cotton, raw jute and copra, owing to the pro-active role of concerned states, nodal
agencies, related industry & trade organizations and also farmers collectives, the situation is
relatively better. For sugarcane, there is no commitment of government purchases, hence
the issue is different.

For coarse cereals, pulses and oilseeds, MSP purchase operations were/are traditionally not
needed every year. That is one of the reasons that whenever there is bumper production in
some areas, the MSP purchase system is neither in place nor active. Further, oilseeds and
pulses are not a part of PDS. Even in the case of coarse cereals, which are covered under
PDS, usually the responsibility of disposal of purchased quantities has to be taken by the
concerned state. As a consequence, the state governments are not pro-active in undertaking
the MSP purchase operations of these commodities. This year, when GOI decided to build
the buffer stock of pulses, the purchase operations were undertaken but the mix-up of
procurement targets and price support operation was clearly visible. While the Ministry of
Food and Procurement took pride in fulfilling the procurement targets of pulses, little
concern was shown to a large number of pulse growers who were denied MSP for their
produce.35

There are two other practices being adopted by the purchase agencies which is, in effect,
denying the MSP to many farmers. This holds true for all the crops covered under MSP.
These practices are:

(a) A cap on quantity to be accepted from the seller; and

(b) Accepting the produce at the purchase centre only from the farmer.36

These both have no rationale in MSP regime. A quantity cap (even if linked to area under
the crop) is based on some average productivity. The average is average and is meant for
only generating an advance estimate of likely MSP purchases and no more. If a farmer
produces more than this average, denying him MSP is in a sense disincentive to a more
efficient producer-farmer. Limiting the purchase only from the farmers is also against the
34
Ibid.
35
Supra note 30.
36
Asia & the Pacific Policy Studies , Supra note 32.

22 | P a g e
principle of price guarantee inherent in MSP. Take a case of farmer who has small surplus
of say five quintals and located some 15/20 km away from the purchase centre. Traveling
with small surplus may require ` 70 per quintal of transport and handling and half day of
foregoing the farm work or wages (say about ` 130). If another larger farmer takes his
produce to the purchase centre and it is accepted for purchase at MSP, effectively the
system will ensure MSP to the small farmer who cannot travel to the purchase centre. In
both cases, small farmer’s net realization is MSP minus ` 200. But if the system does not
accept the produce from another farmer, this small farmer will be paid less than MSP minus
` 200 by the larger farmer. The same logic applies to village trader/aggregator, who usually
collects the produce from small farmers in remotely located villages. Therefore, if MSP is to
be ensured to even small farmers of remote areas, all the produce offered by the farmers
(small or large) or by village traders/aggregators should be accepted at MSP purchase
centres. There is a need to do away with the cap on quantity and farmers Id with proof of
area under the crop.

By and large, where the state governments and their agencies are pro-active in advance, the
situation is better. However, much more needs to be done to solve the problem of denial of
even MSP to the farmers, for which the farmers have now awakened and protesting. The
state government of Madhya Pradesh has recently launched a differential price scheme for
farmers in the current kharif season. The registered farmers will be paid the difference of
MSP and actual price received by them (model price in the designated markets for specified
period). Till the third week of October, around 16 lakh farmers have reportedly registered
under the scheme. This is a good initiative that needs to be observed and up-scaled for
obvious reasons.37

3.3. PERTINENT CRITICISMS OF MSP

 MSP as a barrier to fiscal consolidation
Market prices of twelve among the 14 kharif crops for which the minimum support prices
(MSPs) were announced by the government earlier this month for 2018-19 were below their
respective MSPs between June 15-July 15, 2018, an analysis by FE of key markets showed.
The gap was above 20% in case of ten crops, and higher than 40% in case of three of them
(see chart). The scenario confirms the fears that the implementation of the new policy of
fixing for crops at 1.5 times the A2+FL costs or higher and assured MSPs would prove to be

37
Ibid.

23 | P a g e
prohibitively expensive for the Centre and states and upset their fiscal consolidation
processes.

FE had earlier estimated that if price to the farmer at the mandis is lower than the MSPs by
20%, the new policy’s implementation would cost Rs 1.75 lakh crore (excluding cotton and
sugarcane), as it would drive the farmers to bring all their produce to the markets

While the marketable surplus is seen to be over 80%, Icrier has estimated that if the new
policy’s benefit is extended to all produces that is marketed and excluding government
procurement of wheat and paddy at MSP and sugarcane sold to sugar mills at FRP/SAP, the
cost could be Rs 1,13,035 crore, if market prices are lower than the MSP by 20%. If the
prevailing market prices are to be used, the cost could indeed rise further.

Currently, the prices of the three main kharif pulses — urad, tur and moong — are lower
than the 2018-19 MSPs by 42%, 37% and 34%, respectively. The market prices may not
increase much once the new arrivals hit the market. Nafed already has more than 3 million
tonne of pulses stocks and the sowing area for kharif 2018-19 is down 18% as of now, from
the year-ago period.38

 MSP as a key factor in distorting market

The increased MSPs of 14 kharif crops to at least 50% above paid out costs of farmers
including imputed cost of family labour (cost A2+FL). There is no economic rationality in
38
MSP hike an expensive policy? Market prices way below new minimum support price,
Financial Express, (Jul 2018) https://www.financialexpress.com/economy/msp-hike-an-expensive-policy-
market-prices-way-below-new-minimum-support-price/1254336/

24 | P a g e
fixing MSPs at 50% plus cost A2+FL. It is purely a ‘political price’, keeping in mind the
coming elections. On a lighter note, soybean MSP at Rs 3399/qtl and ragi at Rs 2897/qtl
bring back memories of Bata shoe-prices

What is surprising is that a professional advisory body, namely the Commission for
Agricultural Costs and Prices (CACP), has towed the government line as its mouthpiece. It
has bypassed its own Terms of Reference (ToR) that requires it to look at demand and
supply, domestic and international prices, costs, and inter-crop price parity while
recommending MSPs. Many a times, the government of the day overrules CACP’s
recommendations and announces a ‘political price’. It is routinely done in case of
sugarcane, where CACP recommends a Fair and Remunerative Price (FRP), but states like
Uttar Pradesh announce a much higher state advised price, and we reap the results of such
misadventures in terms of mounting cane arrears, in turn making the sugar industry
vulnerable.
States like Madhya Pradesh and Chhattisgarh just announced ‘political MSPs’ of wheat and
paddy with hefty bonuses of Rs 265/qtl for wheat in MP and Rs 300/qtl for paddy in
Chhattisgarh for the 2018-19 season as both states are headed for elections! But when
professional bodies start recommending what the government of the day wants, bypassing
their own ToR, two things happen: first, the credibility of the institution takes a hit pushing
it to its eventual burial; and second, the government never gets the right professional advice,
and in political cacophony, it can make economic blunders. The case of kharif MSPs is
somewhat similar for the reasons explained below. But, let us first see which political
regime—UPA-1 or UPA-2 or Modi government—has given the maximum MSP increases.
The attached figures show that despite this so called historic decision, the average annual
increases in MSPs have been the lowest (except ragi) during Modi government.

25 | P a g e
Next question is whether these MSPs can be effectively implemented. The attached figures
show that market prices of most kharif crops are well below announced MSPs. Ensuring
that farmers really get these MSPs will require a major coordination between the Centre and
states, a point highlighted by Arun Jaitley earlier. Our take on this is that no matter how
hard the government tries, it cannot procure even 25% of production of various kharif crops,
except in paddy and cotton, as a robust procurement system does not exist for other crops.
Third is the issue of the cost of this scheme. In case of paddy alone, the government will
incur an extra food subsidy bill of Rs 12,000-15,000 crore due to increased procurement,
which we expect to be anywhere between 38-40 MMT. The grain stocks are already
brimming with Food Corporation of India saddled with 65 MMT as on July 1, 2018, which
is 58% higher than the current buffer stock norms. It is widely recognised now that higher
MSPs are likely to make our rice exports globally uncompetitive, leading to further
accumulation of stocks at home, and greater economic inefficiency. For other crops, the
costs will depend upon how much the government procures.

It is worth recalling that setting procurement prices higher than global prices is not new in
world history. European Economic Community (EEC) did it earlier, leading to mountains of
butter and lakes of milk. Lately, China also raised MSPs of wheat, rice and corn
substantially above world prices, leading to piling up of grain stocks touching 300 MMT in
2016-17. But China is learning from its mistakes and since 2014, it has been reducing its
MSPs for rice and wheat and has removed corn from price support. On input subsidies, it
has moved towards direct income support on a per hectare basis. Does India want to burn its

26 | P a g e
own fingers first and then learn? Wisdom lies in learning from others’ mistakes and leap-
frogging.
India needs to recognise that redressing farmers’ woes through procurement prices has a
limit imposed by global prices, especially in surplus situations. The moment one crosses
that limit, domestic stocks will start accumulating. Time has come for India to devise an
income policy (DBT) for farmers. In that context, Telangana’s Rythu Bandhu scheme with
direct investment support is interesting. It can certainly be refined and made WTO
compatible.39
 MSP only on paper
Farmers have already started bringing their freshly-harvested kharif crops of moong (green
gram), urad (black gram), bajra (pigeon-pea) and short-duration paddy varieties, besides
early pickings of cotton, into the mandis. Peak arrivals will happen, though, only after the
middle of this month. But even before that, almost all kharif crops are selling at well below
their declared MSPs.

Take, for instance, bajra. This coarse grain is quoting in major markets across poll-bound
Rajasthan at Rs 1,250-1,350 per quintal, as against the MSP of Rs 1,950 announced by the
Modi government. Jowar, likewise, is trading in Jalgaon, Latur, Sholapur and other centres
of Maharashtra at Rs 1,200-1,400 per quintal. Its MSP was handsomely raised from Rs
1,700 per quintal in 2017-18 to Rs 2,430 for this season, just as that of bajra was, from Rs
1,425 to Rs 1,950.

Even more revealing is ragi or finger-millet. This crop’s MSP was hiked by 52.5 per cent —
from Rs 1,900 to Rs 2,897 per quintal. But its current average modal price at Davangere and
the Nagamangala market of Karnataka’s Mandya district — according to data from the
Union Agriculture Ministry’s own agmarknet.in portal — is in the Rs 2,100-2,200 range. In
the case of kharif pulses — arhar (pigeon-pea), moong and urad — the ruling market rates
are below not only their latest, but even the 2017-18 and 2016-17 MSPs of Rs 5,450 and Rs
5,050/quintal, Rs 5,575 and Rs 5,225/quintal, and Rs 5,400 and Rs 5,000/quintal,
respectively (see accompanying table).

“The negotiations are going on between the two governments to ease quarantine restrictions
(relating to about 12 pests and diseases) imposed by China on Indian soyabean and meal.

39
Ashok Gulati & Tirtha Chatterjee, the MSP and Procurement conundrum,
https://www.financialexpress.com/opinion/the-msp-and-procurement-conundrum/1254318/ Visited: Sep 23,
2018.

27 | P a g e
But there has been no breakthrough so far and nor have Chinese buyers visited any of the
solvent extraction-cum-processing plants here,” said an official from the Indore-based
Soyabean Processors Association of India. In event of the Chinese market not opening up
soon, the ultimate loser would be the soyabean grower in MP, Maharashtra and Rajasthan.

The other significant crop that has been arriving in the mandis of Haryana and Punjab is
Pusa-1509, a short-duration basmati paddy variety. About 10 days back, it was being traded
at Rs 2,650-2,700 per quintal, but has since fallen to Rs 2,300-2,400 levels. The main
triggers for this have been grain quality issues on account of crop damage from unseasonal
rains last week — and also uncertainty over Iranian purchases, post the recent US trade
sanctions against the Islamic Republic.

Prices of par-boiled rice from the new Pusa-1509 crop have come down in the last 10 days,
from Rs 5,100-5,200 to around Rs 4,700 per quintal. There has been a decline even for
white steamed rice from Rs 6,300-6,400 to Rs 5,900-6,000. This will naturally reflect in the
prices paid for paddy as well.

What all this simply translates into is the fact that while announcing MSPs for crops and
fixing these at over 1.5 times their estimated production costs – the so-called Swaminathan
formula — is easy, actual implementation on the ground isn’t at all so. The only two crops
where the MSPs seem realistically implementable are paddy and cotton. In paddy, because
there is assured government procurement: Out of India’s estimated 112.91 million tonnes
rice production in 2017-18, as much as 38.18 million tonnes was bought by the Food
Corporation of India and state agencies. In the case of cotton, farmers are likely to get MSPs
this time only because of the market, not the government. But in all other crops — including
the likes of ragi, sesamum, nigerseed and sunflower — the MSPs will probably remain just
on paper.40

40
Harish Damodaram, Bearish Signals: When Minimum Support Price is only on paper,
https://indianexpress.com/article/india/bearish-signals-when-minimum-support-price-is-only-on-paper-
5385448/ Last visited: 24th September 2018

28 | P a g e
 CHAPTER 4: LOOKING BEYOND MSP

The non-availability of remunerative prices to farmers on agricultural produce is a vexed

issue and emerges as the prime issue in various research studies wherein farmers are asked
to rank production constraints. Will a rise in the minimum support price (MSP) solve the
problem? Some critics argue that a rise in the MSP will lead to increase in food inflation,41
while others that it will augment farmers’ income. Both arguments rest on the mistaken
notion that the MSP is a remunerative price. It is actually an insurance price, a floor price of
sorts. Besides, a vast majority of the farming population is unaware of its existence.

Since 2004, successive governments claimed to have increased institutional credit flow to
the agricultural sector through increased budgetary allocation on crop loans. According to
NSS data, over 40% of farmers still rely on non-institutional lenders, who mostly happen to
be moneylenders-cum-traders and input dealers. Further, analysis of credit disbursement
data from the Reserve Bank of India reveals that out of total advances to agriculture, the
share of indirect finance has increased substantially over time, while that of direct finance to
farmers has declined. This means that at the macro level, it would appear that there is an
increase in credit flow to the agricultural sector but this has actually accrued to agro-
business firms/corporations and not directly to the farmers. Consequently, marginal and
small farmers continue to rely on traders and input dealers. Unless the fundamental
problems of crop and regional bias of MSP policy, government procurement and access to
institutional credit are addressed, mere increase in MSP will not benefit most farmers in the
country.

Further, the response of various State governments to a glut in the market appears to be
muted. There exist intervention schemes to undertake the procurement of commodities
whose market prices go below the MSP, but on most occasions the marketing season of
bumper crops gets over by the time a bureaucratic decision on procurement is taken.
Ultimately, the farmers are left at the mercy of unscrupulous traders to sell at whatever price
they offer, with resultant repercussions such as the burning of the entire crop or throwing
the harvested produce on roads in protest.

41
R. Sree Ram and Harsha Jethmalani, Modi govt’s MSP hike : Long on Objective, Short on details
https://www.livemint.com/Money/lF0LE0xRi8t5cSa2ZYB4DI/Modi-govts-MSP-hike-Long-on-objective-
short-on-details.html Last Visited: 24th September 2018

29 | P a g e
Various studies show an increasing divergence between agricultural and non-agricultural
income. And the rising aspirations among rural youth to emulate urban lifestyles put
enormous pressure on them to find ways to increase income through various agricultural
activities. Unfortunately, income from crop cultivation, which is a major segment of
agriculture, is not growing enough to meet the expected level. On the contrary, the
increasing market orientation and reforms in the input sector have resulted in a substantial
rise in input costs.

Analysis of data from the Ministry of Agriculture and Farmers Welfare reveal that income
from cultivation of many cereals and pulses has declined between 2004-05 and 2013-14
despite a considerable increase in MSP during this period. In the case of paddy, out of 18
major rice-growing States, net income has declined in five, and it is negative in six States.
In seven States, it has increased only marginally. Income from the cultivation of even
horticultural crops is uncertain due to the heavy investment involved and the high volatility
in market prices. Most acute is the rise in prices of fertilisers: between 1991-92 and 2013-
14, while the price of urea increased by 69%, that of DAP (diammonium phosphate) and
potash rose by 300% and 600%, respectively.

Recent policy pronouncements have added to the woes of already beleaguered farmers. The
promotion of traditional farming at this juncture of agricultural development will take the
sector to where it was decades ago. Most existing modern crop varieties will not respond to
these practices in the medium term; consequently, yield and income will decline. Further,
facilities to produce adequate organic inputs have not been developed either. Animal
husbandry has been practised as a supplementary activity since time immemorial. Livestock
acts as a cushion against crop loss during times of drought. The new rules on animal
markets will put poor farmers and landless labourers in a fix. These developments do not
augur well for rural youth whose interest in farming is already dwindling. While other
developing countries are moving towards modernization of agriculture which would reduce
dependence of labour force and enable a rise in productivity, Indian agriculture is clueless
plodding ahead.42

During Kharif 2017-18, market prices of several major Kharif crops fell way below
announced Minimum Support Prices. This happened despite several schemes of

42
Elumalai Kannan, Why a Price increase alone won’t help farmers
https://www.thehindu.com/opinion/op-ed/more-to-it-than-msp/article18966926.ece Last Visited: 24th
September 2018.

30 | P a g e
Government of India like procurement at MSP, Market Interventions Schemes, Price
Support Scheme and Price Stabilization Fund to mitigate price risk.

So the first question to ask is: what is responsible for these lower prices in the last couple of
years? And in the light of this, what is the best package for farmers that can protect their
meager incomes. We dig a little deeper to understand the plausible factors driving the
depression in agri-prices. First, we look at the domestic production availability of pulses
and oilseeds which were the most affected crops in the last two years. Production of total
pulses rose considerably from 17 and 16 Million Metric Tonnes (MMT) respectively in
2014-15 and 2015-16 respectively to 23 and 24 MMT respectively in 2016-17 and 2017-18.
This is almost a 44 percent jump. Similarly, oilseed production was also higher at 31 and 30
MMT in 2016- 17 and 2017-18 respectively compared to 28 MMT and 25 MMT in 2014-15
and 2015-16, which was a 24 percent increase in production in 2016-17 over 2015-16.43

Despite significantly high domestic production of pulses and oilseeds, there were no efforts
to reduce the flow of imports of pulses and edible oils well in time. For example, 2016-17
saw record production of pulses (23 MMT) and record imports (6.6 MMT) at zero import
duty. This is what led to a collapse in domestic market prices of pulses. Situation did not
improve much in kharif 2017-18. Lower international prices acted as a catalyst leading to
influx in imports. It was only in November, 2017 when import duty on yellow peas was
raised from zero to 50 percent, and in December, 2017 import duties on chana and masoor
were raised from zero to 30 percent. Similarly, it was only in November 2017 that import
duty on crude palm oil was raised from 15 percent to 30 percent, and refined palm oil from
25 to 40 percent, and refined soya oil from 20 to 35 percent. These restrictions on imports in
the form of high import duties came too late, as massive imports had already taken place by
then, and as a result, farmers had to face rapidly declining prices of pulses and oilseeds.
What all this implies is that the trade policies have to be effectively dovetailed with
domestic MSP policy ensuring that large scale imports are not coming into country at prices
way below MSP.

Another reason which seems to be driving the decline in prices is the stocking limits
imposed

43
Ashok Gulati Tirtha Chatterjee Siraj Hussain, Working Paper No. 357 Supporting Indian Farmers: Price
Support or Direct Income/Investment Support? (April 2018) http://icrier.org/pdf/Working_Paper_357.pdf
visited: September Sep 9, 2018.

31 | P a g e
and the uncertainty surrounding that. Traders and other stakeholders are not comfortable
holding stocks because of this uncertainty of stocking limits. GST and demonetization in
July 2017 and November 2016 made the situation worse for agri-trade transactions, which
are generally cash based but the new rules don’t permit large scale cash transactions. So
traders are wary to enter markets in a big way, leaving a larger glut in the market. Against
this background, in this paper we evaluate the schemes implemented to compensate the
farmers for price loss when market prices dip below MSP. Bhavantar Bhugtan Yojana
(BBY) was launched by GoMP in Kharif 2017. This is a PDP based scheme which covered
eight Kharif crops, namely, maize, tur, urad, moong, soybean, groundnut, sesamum, and
nigerseed. The difference between MSP and the Average Sale Price (ASP) is supposed to be
given to the farmer, where ASP was calculated by taking the average modal prices in
mandis in MP and two other reference states. We discuss the scheme in detail in Section 2.

It is interesting to note that agricultural growth has made rapid strides in MP. Gulati et al
(2017) 44find that agriculture growth in Madhya Pradesh (MP) during the decade of 2005-06
to 2014-15 was around 9.7 percent per annum, which is the highest growth rate registered in
agriculture by any major state of India over a ten year period. They find that the last five
years have been even more spectacular when agricultural GDP grew at 14.2 percent per
annum. The study finds that among several measures taken by the state government to make
rapid strides in agriculture, three interventions stand out – road infrastructure, expanded
irrigation and a strong procurement system put in place for wheat along with bonus over
MSP for wheat.

Despite such high growth in agricultural production, the state has not been able to protect its
farmers from price risks. In 2017-18 mandi prices of several crops have been below their
respective MSPs announced by the Central Government. For example, average modal price
in Madhya Pradesh for soybean was Rs 2594 per quintal between 16th October and 31st
December which was approximately 15 percent lower than the announced MSP of Rs 3050
per quintal; for urad, the prevailing mandi modal price was Rs 2601 per quintal between
16th October and 22nd December in Madhya Pradesh which was 52 percent lower than the
announced MSP of Rs 5400 per quintal. And so on. What this presumably points out to is
the mismatch in the outcomes of production augmenting policies and agri-marketing

44
Gulati, A, Rajkhowa, P. and Sharma, P, (2017) Making Rapid Strides- Agriculture In Madhya Pradesh:
Sources, Drivers And Policy Lessons, ICRIER Working Paper- 339

32 | P a g e
policies. Unprecedented increases in production led to market crash and tumbling prices as
storage and processing facilities were not commensurably augmented.45

We evaluate BBY in MP in terms of its impact on market arrivals, mandi prices, its
coverage and reach among farmers and share of produce covered by the scheme. Our review
shows that the scheme had at best limited coverage and less than a quarter of the entire
produce of the state was compensated. We also study the impact of the scheme if it is
launched at the national level. We compute costs for three scenarios- one, market prices are
10 percent below MSP, two, when prices are 20 percent below MSP and three, when prices
are 30 percent below MSPs and find that it will cost Rs 56518 crore in the first, Rs 1.13
lakh crore in the second and Rs 1.69 lakh crore in the third scenario.

Our review shows that PDP, rather than correcting the market, might distort it further. The
higher cost plus pricing (1.5 times A2+FL costs) model for MSP which ignores demand
side will lead to large scale distortions in the system with high efficiency losses. In contrast,
the GoT and GoK plan to launch Direct Income/Investment Support (DIS), either as input
support scheme or income support on per ha basis for both the seasons of Kharif and Rabi
in 2018-19.

It is interesting to note that DIS has been in practice in China which gives an aggregate
input support to the farmer on a per acre basis. DIS based schemes do not distort markets as
would be experienced in case of price deficiency schemes. Such a scheme will be more
equitable, inclusive, will not involve unnecessary paperwork, reduce the role of
intermediaries, and will not distort the market by artificially depressing prices. There are a
few steps which can make it beneficial for tenant farmers also. For this the tenancy laws
have to be revamped, plots have to be digitized and farmer’s Aadhaar number linked for
easy payment. If these steps are taken, direct benefit transfer through a DIS type scheme
seems to be the way forward.

Since, the objective is to stabilize their incomes and reach them at the earliest possible time
and in the most efficient manner, a DIS based approach would be more preferable. As
recommended by CACP in 2014-15 Kharif report, a review of the number of crops under
the commission’s mandate is urgently required. Since, procurement infrastructure is not
developed for most commodities other than rice and wheat, announcing high MSPs is

45
Ibid.

33 | P a g e
unlikely to yield any positive impact in the current scenario.46 The paper recommends that
in due course, like China, comprehensive DIS based schemes should replace other schemes.

4.1 TOWARDS PRICE DEFICIENCY PAYMENTS (PDP) (BHAVANTAR

BHUGTAN YOJANA (BBY))
Bhavatar Bhugtan Yojana (BBY), introduced by GoMP in September 2017 covered eight
Kharif crops (Table 1). As per the scheme, the farmer selling his produce in the notified
APMC yard will be directly paid the difference between the MSP and the average sale price
(ASP) where ASP is the average of the prevailing modal mandi prices in MP and two other
states (Table 1).

The scheme also includes a warehouse storage incentive (WSI) for a registered farmer who
does not sell his produce during the notified period and instead decides to keep his produce
in a registered warehouse. The warehouse has to be registered with MP Warehousing &
Logistics Corporation (MPWLC). The WSI has been declared at the rate of Rs 9.90 per
quintal per month. Since the time window available to the farmers for the BBY scheme is
limited and the farmers might want to hold their stock during the initial months in
anticipation of better prices later, this initiative, if efficiently implemented, will somewhat
shield farmers from lower prices.

Determination of Average Sale Price- ASP was calculated for the specified crops in the
following manner- (1) Weighted Modal wholesale price for the crops in the APMCs of

46
Supra note 44.

34 | P a g e
Madhya Pradesh are collected from the agmarknet portal. (2) Weighted Modal wholesale
prices of the same crops as appeared in agmarknet portal for other two states and (3) ASP is
average of the above three modal (wholesale) prices. MSP and the announced ASP for the
selected crops during the different time periods during the BBY scheme are given in Table
2.

This price deficiency payment mechanism comes into action only if ASP is below MSP. No
payments are to be done in case ASP is at par or more than MSP. The price deficiency
payment would be made to the farmer’s bank account for the quantity traded in the APMC
which is up to the maximum limit of his expected production. The expected production is
calculated on the basis of sown area given by farmer at the time of registration (verified by
the revenue department) and average productivity of the district of that crop. The average
productivity of a crop was calculated for best three years out of 5 preceding years as per
Crop Cutting Experiments (CCEs) carried out by the Revenue Department. In any agro-
climatic zone, best figure of a district compared to others in that agro-climatic zone were
considered as average productivity for all other districts falling in the same agro-climatic
zone

The payments in the farmers bank accounts through Direct Benefit Transfer would be done
by headquarter APMC after verification and confirmation by a committee headed by the
District Collector as per following formula:-

 If the sale price of the produce at the APMC >= MSP, no benefit would be paid
 If ASP < the sale price of agriculture produce at the APMC < MSP, benefit = MSP-
sale price of the farmer.
 If the sale price of agriculture produce sold in the APMC < ASP<MSP, benefit =
MSP -ASP.

35 | P a g e
 Registration of farmers and payment mechanism-To get benefit of the scheme, a farmer
has to register on the BBY portal specifically developed for this purpose within the
stipulated time at registration centers run by 3,500 PACS and 257 APMCs. The farmers
were required to compulsorily furnish Aadhaar Number, Bank account details and
mobile number on portal at the time of registration. Every farmer was allotted a unique
registration number (URN). Farmers were also informed of the URN through SMS on
their registered mobile number. The registration data pertaining to sown area is to be
verified by the revenue officials in the field. It is mandatory for farmers to trade
agriculture produce in the notified APMC campus within the time period declared for
sale. The payment of BBY is to be done directly into beneficiary farmers bank accounts.

Total Cost incurred –

According to the GoMP, total expected expenditure incurred under the BBY scheme during
the entire phase was Rs 1944 crore. This includes compensation for soybean, groundnut,
maize, moong, urad and expected compensations for tur in February, 2018. But if we
compute cost of the scheme if the entire produce was registered and brought to the market
for sale. The expenses equal the product of the difference between the ASP and the MSP

36 | P a g e
and production registered under the scheme. Table 3 shows that the total cost of
compensation would have been Rs 8478 crore, and not Rs 1944 crore, if the Government
had compensated entire production which was sold at the price lower than the MSP.

Thus, the value of compensation actually paid by the GoMP was less than 25 percent of the
total compensation that would have been paid if the scheme covered all the produce
marketed below MSP. It is clear that a large number of farmers did not register themselves
on the portal and they therefore had to sell their produce at prices which were lower than
that of the announced MSPs. Figure 1 below presents the percentage of the produce covered
and compensation made together. It shows that despite high differences between ASP and
MSP, only a small share of the total produce was registered and hence compensated under
the scheme. For example, despite ASPs being 42 percent lower than that of the announced
MSP, only 32 percent of the total urad produced was compensated. We find that difference
between MSP and ASP for soybean was 12 percent but only 18.5 percent was compensated.

Deductions: What all this indicates is that the BBY scheme for kharif 2017-18 had a very
limited reach. Given that the features of the scheme are extremely attractive and farmers are
assured that they will receive the announced MSP irrespective of the prevailing mandi
prices, it was expected that all produce in the state would be registered under the scheme.
But obviously that did not happen. This low level of participation only goes to show that
there are several obstacles which might have come on the way of a farmer registering
himself. For example, extensive paper work was required on the part of the farmer in terms
of registration, submission of documents etc. All these are mandatory for him to avail the
benefits of the scheme.

It is also conceivable that market prices were more depressed than the counterfactual
scenario with no scheme in place. This could have been because of the small window when
it was mandatory for all the produce to be sold in the mandis and also because of
manipulative practices of traders and lower level bureaucracy. Therefore, it is plausible that
losses borne by the farmer who did not register for the scheme were more than the
counterfactual scenario because of both depressed prices and lack of compensation. It must
have been difficult, confusing, time consuming and expensive for the farmer. At the time of
sowing, the small and marginal farmers would have found it too cumbersome to register.
Also, the short time window of the scheme might not have given him enough time to
register himself.

37 | P a g e
Implementation of BBY at national level:

The 3 year action agenda formulated by Niti Aayog in August 2017 recommends price
deficiency payment (PDP) to mitigate price risk.47 It suggests that PDP schemes will be
beneficial as it would not require procurement and therefore prevent accumulation of
unwanted stocks. If the scheme is scaled at an all India level, it will cover all crops which
are brought to the mandi for sale and do not receive MSPs announced by the Central
Government. In this section, we estimate the cost which the exchequer will have to bear if
the scheme is launched at the national level. Two possible scenarios can be expected- First,
half-baked implementation of the scheme. Here, the scheme will not cost a lot, on papers,
one can say that the scheme was offered but nothing much will change on ground.
However, this will also not address the farm distress. Second, where the scheme is well
targeted and efficiently implemented. The costs computed here are for the second scenario.
These costs can be assumed to be somewhat conservative as they are based on previous
years’ marketed surplus estimates. However with implementation of BBY for a narrow
period of say 2-3 months, market arrivals are likely to increase more than usual, and
therefore the market prices may get depressed even further. Traders are likely to take full
advantage of that situation, widening the gap between market prices and MSP. Thus, in
reality, if the scheme is fully implemented, it won’t be a surprise if the costs even cross the
estimates being presented here.

The study includes all crops for which MSPs are announced by the Government of India.
They are paddy, wheat, jowar, bajra, barley, ragi among cereals, gram, masur, tur, moong
and urad among pulses and groundnut, soybean, sesamum, nigerseed, sunflower, rape and
mustard seed and safflower among oilseeds. Besides these, we also have cash crops like
cotton (kapas). The current estimates of costs have been computed by multiplying net
available quantity with the price difference between projected MSP and projected sale
prices.

We first project MSP for 2018-19. The A2+FL costs published by Commission for
Agricultural Costs and Prices for Kharif crops are collected from Kharif reports for
marketing year 2017-18. For Rabi crops, same are taken from Rabi reports for marketing
year 2018-19. We first project A2+FL costs for 2018-19 by increasing the A2+FL costs for
2017-18 by 5 percent. We believe that this will cover annual increase in cost of inputs like

47
India Action Plan, NITI Ayog, http://niti.gov.in/writereaddata/files/coop/IndiaActionPlan.pdf (Page 28)

38 | P a g e
seed, diesel, pesticides, labour etc. As announced by Finance Minister in his budget speech
on 1st February 2018, the projected MSPs for 2018-19 are calculated by increasing the
projected A2+FL costs by 50 percent.

The expected increase in MSPs in 2018-19 over 2017-18 is given in Figure 2. Along with
A2+FL costs, we also present MSPs projected on the basis of C2 cost plus pricing in Figure
2. We find that this A2+FL cost plus pricing of MSPs will mean that present MSPs will
have to raised by more than 40 percent for jowar, nigerseed and ragi, between 15 and 35
percent for maize, cotton, safflower, sesamum, moong, and sunflower and between 10 to 15
percent for paddy, groundnut and soybean.

For some crops like wheat, barley, tur, urad, gram, lentil and rape mustard seed and
sugarcane, we find that current MSPs are already on the higher side and projected MSPs
based on cost plus pricing are lower than the currently announced MSPs. For all these
commodities except wheat, it is assumed that the prevailing MSPs will remain same in
2018-19. This is because MSPs for these crops have been substantially raised in the last four
years and mandi prices are lower than the announced MSPs for these crops (except
sugarcane which is purchased by sugar mills at FRP or SAP). For wheat, it is assumed that
the projected MSPs will be 5 percent higher than the prevailing MSP because wheat is a

39 | P a g e
major crops and if paddy MSP is raised in Kharif 2018 by 10 to 15 percent, we feel that the
Government will be under tremendous pressure and it may have to raise MSP of wheat by at
least 5 percent even though it is already higher than 50 percent over A2+FL.48

Since large scale procurement at MSP is generally limited to paddy and wheat (though
procurement of pulses, cotton and some oilseeds is taken up sporadically), for all other
commodities, we assume that the entire marketable surplus would be the net availability.
The analysis has been done using data on net availability for 2017-18. Given that the entire
price difference between MSP and mandi sale price will be compensated under a PDP type
scheme, it is likely that marketable surplus will be higher than that used in the analysis and
almost entire produce may be brought by the farmers to the market. So, as discussed earlier,
the current analysis may be seen as a conservative estimate of the total cost incurred by the
exchequer for the scheme.

Three scenarios have been constructed for calculation of total compensation-

a) When average sale prices are 10 percent below projected MSP for 2018-19
b) When average sale prices are 20 percent below projected MSP for 2018-19
c) When average sale prices are 30 percent below projected MSP for 2018-19

We compute the difference between the MSPs and the average sale prices in the three
scenarios. This will be the compensation for each quintal of the produce brought to the
market. As reported in Table-4, we find that in the first scenario, when mandi prices are
assumed to be 10 percent lower than MSP, the total cost which the centre will have to bear
will be Rs 56,518 crore while in the second scenario, when the MSP has been assumed to be
20 percent lower, the total cost will touch Rs1,13,035 crore. In the third scenario, when
market prices are assumed to be 30 percent lower than MSPs, the costs are Rs1,69,553
crore.

4.2 DIRECT INCOME (INVESTMENT) SUPPORT BASED SCHEMES

Given the distortions that PDP schemes can create, we discuss here an alternate scheme
which is based on Direct Income (Investment) Support (DIS).49 The State Government of
Telangana and Karnataka plan to launch such a scheme for both the seasons of Kharif and
Rabi in 2018-19. The State Government of Telangana has announced that the proposed

48
Report on the Regulation of Sugar Sector in India: The Way Forward, 2012, (Chairperson: C. Rangarajan),
Government of India.
49
Saini, S. and Gulati, A. (2017) Price Distortions in Indian Agriculture (ICRIER and The World Bank).

40 | P a g e
scheme, called Direct Investment Support (Rythu Bandhu) will support investment at Rs
4000 per acre (about Rs 10,000/ha) per farmer, per season, for purchase of inputs like (1)
Seeds, (2) Fertilizers, (3) Pesticides & (4) Other investments in the field operations, of
farmers’ choice, for the crop season. Broadly, it is supposed to take care of the initial
investment needs of every farmer

If the farmer cultivates the land during both seasons, he is eligible for Rs 8000 per acre
(about Rs 20,000/ha). Prior to the implementation of the scheme in Kharif-2018, the
revenue department of GoT has updated data on land records by conducting the Land
Records Updation Program (LRUP). The data collected from the LRUP will be used for the
implementation of the DIS. The amount will be paid to the farmers account, before
beginning of the season, i.e., in the month of May for Kharif and October in Rabi season.
Bank account number, IFSC code, Aadhaar numbers of individual farmers have being
collected during the Survey carried out across the state by the State Government. The
required budget has been calculated based on area under each crop. It has been decided that
the amount will be disbursed in the form of Order Cheques. It shall be the obligation of the
bank to confirm the identity of the farmer before disbursement of funds to him. These
cheques will be payable at par in all the branches of the designated bank in the state. To
prevent confusion and chaos among farmers, it has been decided by the GoT that the
process of distribution of cheques to farmers will start in the months of April and May.

The National Informatics Center (NIC) of the state of Telangana has been designated as the
nodal agency for the development of MIS portal for the scheme. The cheques will be
handed over to the farmers in the villages during the meeting of Gram Sabhas. It has been
decided that the benefit under the scheme will be given to the extent of agriculture land fit
for cultivation only. From survey conducted by State Government of Telangana, 14.2
million acres was found to be suitable for the scheme. The projected budget for the Kharif-
2018 season is Rs 5685 crore50 and state will have to spend around Rs 3130 crore in the rabi
season.51 It will be ensured that the NIC portal has the facility of updating the daily cheque
disbursements.

The State Government of Telangana has also decided to establish a new corporation called
Telangana Rashtra Rythu Samanvaya Samithi which would plan for the welfare of the

50
State Government of Telangana
51
Farm subsidies in cash: Telangana to give Rs 8,000/acre http://www.financialexpress.com/economy/farm-
subsidies-in-cash-telangana-to-give-rs-8000acre/1021043/ Last Visited: 25th September 2018.

41 | P a g e
farming community by increasing production and productivity of various crops and
ensuring better prices to farmers. The authorized share capital shall be a minimum of Rs
200 crore with Rs 20 crore share of Rs 10 each. The objective of the corporation is to ensure
MSP/ remunerative prices to farmers by intervening as and when necessary, to take up post-
harvest interventions, to aim at export of produce, to promote grading, processing and value
addition, to organize FPOs and to help in market led extension services. To ensure accuracy
of the disbursement of cheques, audit will be conducted. The teams will verify the cheques
and other relevant documents and audit will take place in accordance with the norms
prescribed by RBI/NABARD/CAG. The banks are obliged to furnish the evidence of
transactions whenever sought by the Government. There will also be a suitable monitoring
and grievance redressal mechanism established by the district collectors at mandal and
every complaint has to be responded within 30 days

We find that there are certain shortcomings in the scheme which have to be addressed to
ensure its success. For example, the design of the scheme requires distribution of cheques
among the farmers. This is likely to make the scheme messy and chaotic since very large
number of cheques will have to be written, issued and distributed by state Government
officials. This will also increase work load of banks. A simpler and more efficient way
would be to directly transfer the amount to the bank accounts of the farmers. Along with
this there are a few other steps which have to be taken for the scheme to be a success like
plots have to be digitized and linked to Aadhar numbers and bank accounts of farmers to
avoid duplication in payments

On similar lines, State Government of Karnataka also plans to implement DBT of Rs 5000
Rs per ha for dry land farmers in Kharif 2018. Details of the scheme are still awaited.

It is interesting to note that Direct Income transfer has been in practice in China since 2004.
China gives an aggregate input support to the farmer on a per acre basis. In addition to
direct payments, two more schemes, viz. agricultural input comprehensive subsidies and
seed variety subsidies were launched in 2006 which also were based on the principles of
Direct Income Support and were paid on the basis of area under cultivation.52

In 2015, Chinese Government combined the three above mentioned area based payments
(direct payments for grain producers, comprehensive subsidy on agricultural inputs and seed

52
OECD (2017), "China", in Agricultural Policy Monitoring and Evaluation 2017, OECD Publishing, Paris.
http://dx.doi.org/10.1787/agr_pol-2017-10-en

42 | P a g e
variety subsidy) and implemented a pilot of the single payment scheme called “agricultural
support and protection subsidy”. Funds are allocated to protect arable land fertility and to
preserve grain production capacity, support large scale production within so-called “new-
style” farms who rent land from neighbours, family farms, cooperative farms and farms run
by agribusiness companies through developing credit programs and support services. The
government decided to extend this single payment scheme to the whole country in 2016. At
CNY 140.5 billion (USD 21.1 billion) in 2016, this scheme remains the most important
budgetary support program for Chinese agriculture (OECD, 2017). Figure 4 gives the
expense incurred on the scheme since 2004.

They also have a price deficiency scheme which is called “Target Price Payments” since
2014. Against this scheme, direct payments were made to producers of cotton and soybean
in order to “compensate farmers for the difference between a target price fixed by the
government in advance and a lower price in the actual market”. However, as Figure 4
shows, it only covers two crops, soybean and cotton, and total expenses are approximately
one- third of the expenses incurred in the “agricultural support and protection subsidy”. It is
interesting to observe that China had maize also under this PDP scheme earlier, but given
that it causes lot of distortions, it has moved it out of this scheme.53 The lessons from
Chinese experience are twofold: (1) put all input support in one lump sum support on per
hectare basis; and (2) keep PDP to minimal, say one or two crops. Else, the market
distortions and the consequent efficiency losses may outweigh the support government
wants to extend to farmers.

53
Ibid.

43 | P a g e
So, in the Indian case, if the Direct Income Support scheme is scaled at the national level,
say at Rs 10,000 per ha, and payments are based on gross cropped area which was 1978
lakh ha in TE- 2014-15, the total payment will be Rs 1.97 lakh crore. If the DIS is only Rs
5000/ha, which seems doable, the cost of the scheme will be just below Rs 1 lakh crore.
Thus, the scheme by itself may not be much cheaper but DIS based schemes are less prone
to market distortions compared to BBY scheme. It is crop neutral as it does not incentivize
producers to produce any particular crop. It involves lower intervention from market
participants at the lowest level and thus the benefits can be directly targeted to the real
beneficiaries i.e. the farmers rather than the middlemen who might extract most of the deal
in case of the price deficiency scheme.54

It must be noted that the objective of all these schemes, whether they are PDP based, DBT
based or loan waivers, is to stabilize income of farmers. The idea is to reach farmers quickly
and efficiently. As discussed earlier, in terms of penetration and reach, even BBY scheme
undertaken by MP was not very successful. The scheme could not reach even 25 percent of
the total produce. Only 32 percent of urad production was compensated, when ASP was 42
percent below the announced MSPs, mandi prices even lower than the ASPs. Therefore,

54
Supra note 44.

44 | P a g e
both these schemes which target both positive and negative supply shocks in the market
have been found to be relatively unsuccessful in terms of reach and timely intervention and
farmers have not benefitted from either of these schemes

Majority of farmers who are small and marginal do not bring their produce directly to the
market. It is the traders who bring the produce and all the price compensation which the
farmers get are therefore indirect. The easiest and most direct and fastest way to reach the
farmer is through Direct Benefit Transfer related schemes. This will work irrespective of the
shocks that the farmer receives, be it supply or price. As discussed earlier, there are steps
which have to be taken to make it fool proof like digitization of plots, linking it with Aadhar
numbers and bank accounts to avoid duplication of farmer identities. We believe that once
these reforms are undertaken, DIS related schemes should be a substitute of PDP based
schemes and procurement at MSPs. Rather, we should reduce the number of crops for
which MSPs are announced. This limited set of commodities should be those for which
procurement machinery is robust and efficient.

45 | P a g e
 CONCLUSION AND SUGGESTIONS

The non-availability of remunerative prices to farmers on agricultural produce is a vexed

issue and emerges as the prime issue in various research studies wherein farmers are asked
to rank production constraints. Will a rise in the minimum support price (MSP) solve the
problem? Some critics argue that a rise in the MSP will lead to increase in food inflation,
while others that it will augment farmers’ income. Both arguments rest on the mistaken
notion that the MSP is a remunerative price. It is actually an insurance price, a floor price of
sorts. Besides, a vast majority of the farming population is unaware of its existence.

The Government of India has an MSP for 24 crops, but official procurement at the MSP is
effectively limited to rice and wheat, and that too concentrated in a few States only.
Awareness about the MSP is limited to States such as Punjab, Haryana and Andhra Pradesh
where such procurement takes place.55 According to the National Sample Survey’s (NSS)
Situation Assessment Survey of Agricultural Households 2013, even for paddy and wheat,
less than one-third of farmers were aware of the MSP; for other crops, such awareness was
negligible. Further, a substantial proportion of crops are sold to local private traders and
input dealers to whom the resource-poor marginal and small landholders are obligated to
sell their crops due to tie-up with credit.

The objective of this paper was to draw attention to some doable action points in the realm
of implementation of agricultural prices with a view to enhancing the incomes of farm
families. For this, the researchers argue that in order to facilitate better economic condition
of farmers, mere hike in minimum support prices is not enough but effective
implementation of the same is needed. For MSP to be successful and beneficial to both, the
farmers and the government, (a) MSP purchases should be delinked from procurement
targets; (b) advance arrangements should be made in terms of adequate number of purchase
centres, handling logistics and timely payment to the farmers/sellers; (c) purchase
operations should continue till sellers offer their produce at MSP; (d) there should be no
quantity cap on the seller; (e) with a view to reaching the benefit of MSP even to small
farmers of remote areas, large farmers working as aggregators or village assembling traders

55
Gulati, A., Roy, R. and Hussain, S.(2017), Getting Punjab Agriculture Back on High Growth Path: Sources,
Drivers and Policy Lessons

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should be encouraged to offer the produce at MSP purchase centres; and (f) it should be
enjoined on state governments to be pro-active in MSP policy implementation.

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 BIBLIOGRAPHY

ARTICLES

 Gulati, A., Roy, R. and Hussain, S.(2017), Getting Punjab Agriculture Back on High
Growth Path: Sources, Drivers and Policy Lessons
 Report on the Regulation of Sugar Sector in India: The Way Forward, 2012,
(Chairperson: C. Rangarajan), Government of India.
 Saini, S. and Gulati, A. (2017) Price Distortions in Indian Agriculture (ICRIER and
The World Bank
 Gulati, A, Rajkhowa, P. and Sharma, P, (2017) Making Rapid Strides- Agriculture
In Madhya Pradesh: Sources, Drivers And Policy Lessons, ICRIER Working Paper-
339
 S.S. Acharya, Effective Implementation of Agricultural Price and Marketing Policy
for Doubling Farmers Incomes: Doable Priority Actions, Agricultural Economics
Research Review, Vol. 30 (Conference Number) 2017
 K.S. Aditya S.P. Subash K.V. Praveen, M.L. Nithyashree N. Bhuvana Akriti
Sharma, Awareness about Minimum Support Price and Its Impact on Diversification
Decision of Farmers in India, Asia & the Pacific Policy Studies, vol. 4

WEBSITES

 Indian Council for Research on International Economic Relations- http://icrier.org

 The Hindu Businessline- https://www.thehindubusinessline.com
 Indian Express- https://indianexpress.com/
 The Frontline- http://Frontline.in
 DowntoEarth- http://downtoearth.org.in
 Organization for Economic Cooperation and Development- https://www.oecd.org/

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