Agriculture Price Policy and Its Objectives
The history of food price policy can be traced back to the Bengal famine of 1943. Before this, there was no set principle of food price policy; there was only an ad-hoc arrangement of providing food relief during a crisis. Although the MSP has helped stabilize prices and provide income security since the Bengal famine, many farmers are still in hardship. Compelled sales, rising input costs, and declining real incomes are the causes of this distress. Problems like delayed MSP announcements, inefficient procurement systems, and sluggish payment procedures compromise the overall efficacy of the policy. The Government established the Foodgrains Policy Committee under the Chairmanship of Sir George Gregory. Due to food shortages, India began importing wheat from the United States under PL-480 in 1956. The Food Grain Enquiry Committee 1957, headed by Asoka Mehta, further suggested the maintenance of buffer stocks and the setting up of the foodgrains stabilization organization to undertake purchase and sale operations of foodgrains. On the recommendation of the Committee, the Food Corporation of India (FCI) was set up in 1965 to procure and facilitate the Public Distribution System PDS). The Foodgrains Price Committee, under the chairmanship of L.K. Jha (famously known as the Jha committee) in 1964, recommended the setting up the Agriculture Price Commission to build a balanced and integrated price structure for the country. Accordingly, the Agriculture Price Commission was established by the Government in 1965, which was later renamed as the Commission for Agriculture and Prices (CACP) in 1985. Since its inception, the commission has announced the minimum support price (MSP)/procurement price for different agricultural commodities. The objectives, thrust, and instruments of agricultural price policy have undergone noticeable shifts during the past 50 years. Up to the mid-1960s, when agricultural production was low, the principal instruments of price policy were controls/restrictions on foodgrain sales, food imports, and the distribution of foodgrains at subsidized prices. After the mid-1960s, especially after the introduction of the green revolution, price policy was assigned a positive role in augmenting food grain availability by increasing domestic production. Thus, the policy emphasized achieving remunerative prices for the farmers and providing reasonably priced foodgrains to the consumers. However, the broader objectives of the agriculture price policy of the Government are:
- to protect or insure the farmer through guaranteed MSP.
- to induce the desired output of different crops per growth targets.
- to provide general stability to the agriculture sector and farmers' income.
- to induce farmers to part with a large proportion of foodgrains production as a marketed surplus; and
- to protect the consumer against excessive rise in prices.
Instruments of Agriculture Price Policy
Minimum Support Price (MSP)
MSP is the guaranteed price at which the Government purchases foodgrains from the farmers if market prices fall below it. The Government announces MSP for around 23 crops, and in the case of wheat and rice, there is an open-ended policy, that is, there is no limit on the government purchase. On the other hand, procurement is the price at which the Government procures food from the farmers to carry out its PDS operations. Technically, it must be higher than MSP as the procurement price is not the minimum guaranteed price. In India, the Government procures plentiful food grain through the MSP policy, and there is no need to execute a procurement price policy separately. Hence, the MSP and procurement price policies are the same in India. The MSP is announced by the Government of India (GOI) at the beginning of the sowing season for certain crops based on the recommendations of the CACP. CACP recommends MSPs of 23 commodities comprising seven cereals, five pulses, seven oilseeds, and four commercial crops.2 To facilitate the procurement of foodgrains, FCI and various State Agencies, in consultation with the State Government, establish many purchase centers at various mandis and key points.
Buffer Stock
Buffer stock is a commodity reserve to offset price fluctuations and unforeseen emergencies. Buffer stocks serve as shock absorbers in the economy and provide a defense mechanism against widely fluctuating price levels. For example, the Government builds stocks of food, agricultural goods, and other essential commodities either through direct purchase from the domestic market or through imports from outside and releases these stocks for sale in the domestic market in case market prices go up. The concept of buffer stock in India was started during the 4th five-year plan.
Issue Price
It is the price at which foodgrains are sold to the public through fair price shops (FPS)/ration depots. The GOI has been fixing the Central Issue Prices of wheat and rice from time to time, which are uniform throughout the country.
Advantages of MSP Policy
The Minimum Support Price is an important policy tool utilized by the Indian Government to stabilize agricultural markets and shield farmers from exploitation by intermediaries and fluctuating prices.MSP ensures farmers receive a basic return by setting a minimum price for major crops yearly. A study by Niti Aayog showed that MSP helps keep market prices below the guaranteed levels for key food grains like paddy and wheat, pulses, spices, oilseeds, sugarcane, jute, and cotton. Over 90% of farmers surveyed in different states strongly supported the continuation of MSP, acknowledging its value in protecting them from challenging market conditions.
The SPs introduced in the mid-1960s served as a motivation to use high-yielding variety (HYV) seeds, which notably increased grain production. In addition to stabilizing prices, MSP promotes modern farming technologies and investments in cost-saving innovations. The policy has played a key role in eliminating food shortages in India and achieving self-sufficiency in food grains by encouraging farmers to grow specific crops with the promise of decent returns. This approach has resulted in greater food grain production and larger government buffer stocks, which support various welfare programs like the Public Distribution System, Integrated Child Development Services, and the Mid-Day Meal scheme. Given that farmers' incomes can be unstable due to low input use, dependence on rainfed agriculture, and uneven access to HYV seeds, MSP offers essential stability and certainty to a vulnerable agricultural sector. This helps protect both farmers and consumers from the adverse effects of changing production and prices.
Problems with the Agriculture Price Policy
The MSP policy in India has received both praise and criticism. The National Commission on Farmers recommended setting the MSP at least 50% above the weighted average cost of production. However, the Government opted for a lower benchmark, which sparked debates over its adequacy. Critics like M.S. Swaminathan advocated for MSP based on higher cost measures and adequate food security and procurement policies. On the other hand, economists like Ash K. Gulati suggested focusing on farmers' incomes instead of prices. They warned that a high MSP could hurt exports and lead to stockpiling.
Also, higher MSPs caused by increased production and international prices contribute to inflation, negatively affecting consumers and making it harder to reduce poverty.
The benefits of MSP are not shared equally. They often concentrate in surplus states like Punjab and Haryana, benefiting large farmers more than small and marginal ones. MSPs' encouragement of rice and wheat production has inadvertently impeded crop diversification. Because of this, there are now fewer vital crops and a higher dependence on imports, such as pulses and edible oils. Food security and farmer incomes have benefited from MSP, but its implementation has been challenging and has had unintended consequences.