Agricultural Price Policy PDF - India - Textbook

Okay, here is the converted text from the images into a structured markdown format. # 15 AGRICULTURAL PRICE POLICY **15.1** Features of Agricultural Prices in India **15.2** Need for Agricultural Price Policy **15.3** Price Policy and Its Implementation **15.4** Evaluation of Agricultural Price Pol...

Okay, here is the converted text from the images into a structured markdown format. # 15 AGRICULTURAL PRICE POLICY **15.1** Features of Agricultural Prices in India **15.2** Need for Agricultural Price Policy **15.3** Price Policy and Its Implementation **15.4** Evaluation of Agricultural Price Policy Human beings are essentially selfish and therefore as propounded by the Hedonistic philosophy try to maximise pleasure (income) and minimise pain (work). More work will be put in if returns are commensurate to the efforts. Farmers in India consider agriculture as a way of life but are not insensitive to better incentives in the form of higher prices and hence higher income. Some of the characteristics of Indian agriculture such as backwardness, poor technology, quantitative and qualitative deficiency in inputs resulting in poor productivity are the result of low and fluctuating prices. ## 15.1 FEATURES OF AGRICULTURAL PRICES IN INDIA Remunerative price is essential to have better income. Higher income provides the necessary incentive to put in hard work, apply better inputs, produce more and earn more income. Agricultural prices are determined like any other prices by demand and supply. Demand for these products by and large is almost inelastic. It is therefore the supply that plays an important role in determining agricultural price. It is observed that a good harvest with more supply brings less income than a bad harvest. Agricultural market is subject to seasonal and frequent fluctuations. Uncertainty about the prices discourages farmers from introducing any innovations in cultivation and also from taking risks. A comparatively stable price will provide the confidence to improve the cultivation and produce more. Government intervention in agricultural market becomes essential to minimise the fluctuation and stabilise price. For this it is necessary to have a price policy. Agricultural price policy aims at determining two sets of prices by the government that is (1) procurement prices at which the government purchases agricultural commodities, mainly foodgrains from the farmers to provide and ensure better incomes to farmers (ii) issue prices at which the government sells agricultural goods through fair price shops to poor consumers to ensure their minimum livelihood. ## 15.2 NEED FOR AGRICULTURAL PRICE POLICY An official price policy in India has become essential: (i) To provide remunerative prices to the farmers so that they not only cover the cost but earn enough income to improve agriculture and also their living standard. (ii) To provide incentives to farmers so that they will take enough interest in improving agriculture. (iii) To promote capital formation through farmers' savings and investment in irrigation equipment and other essential supporting services. This is possible only if the farmers will have good prices for their products hence surplus income to save and invest. (iv) To have better terms of trade between agricultural and non-agricultural sector. It is usually argued that agriculturists suffer from adverse terms of trade though there is no conclusive evidence for the same. Yet a better price will help the farmers enjoy more income. (v) To reduce income inequality between primary and non-primary sectors. Changes in agricultural prices effect a transfer of income between agricultural and non-agricultural sectors of the economy. Stable agricultural prices would prevent and possibly reduce inequality of income between the sectors. (vi) To prevent inbuilt fluctuations in agricultural prices due to (i) Seasonal nature of agriculture (ii) Low price (iii) Low elasticity of demand and (iv) Biological nature of agricultural products. (vii) To encourage rational utilisation of land and other inputs through an appropriate price policy for agricultural products. Keeping the above factors in mind the government of India since 1964-65 evolved a price policy. It aims to strike a balance between different forces - agriculturist consumers and industrial sector - since agricultural prices have its ramifications throughout the economy. ## 15.3 PRICE POLICY AND ITS IMPLEMENTATION The Government of India, keeping in mind the need for a price policy set up a committee under the chairmanship of Prof. Jha in 1964-65. The Jha Committee recommended the prices for agricultural commodities for the year 1964-65. The committee further recommended setting up Agricultural Price Commission. Accordingly Agricultural Price Commission was set up in 1965. Currently the commission is called Commission For Agricultural Costs and Prices (CACP). The committee is expected to determine and announce administered prices on a yearly basis. **(A) DETERMINATION OF APPROPRIATE LEVEL OF PRICE** The CACP while determining an appropriate level of price is expected to consider following factors: (i) the cost of production (ii) changes in input prices (iii) market prices (iv) demand and supply (v) risk factors (vi) effect on industrial cost (vii) effect on cost jiving (viii) effect on general price level (ix) international price situation (x) parity between price of different crops, parity between input and output prices and also parity between price received by the farmers and paid by the consumers and (xi) trend of price level in the past. **(B) ANNOUNCEMENT OF ADMINISTERED PRICES** Government announces three types of administered prices, namely, minimum support prices, procurement prices and statutory minimum support prices. 1) **Minimum Support Prices (MSP):** The minimum support prices announced each year by the CACP takes into account the above mentioned factors. Special consideration is given to the cost factor. The cost concept covers all items of expenses of cultivation including the imputed value of inputs owned by farmers. The important cost concepts used by CACP are the $C_2$ and $C_3$ costs. $C_2$ cost includes all actual expenses in cash and kind incurred in production by actual owner plus rent paid for leased land plus imputed value of family labour plus interest on value of owned capital assets plus rental value of owned land net of land revenue. $C_3$ cost is equal to $C_2$ + 10 percent of cost to account for managerial remuneration to the farmer. Thus the formula for Minimum Support Price (MSP) can be expressed as $MSP = C_3 = (C_2 + C_3)$ Table 15.1: Minimum Support Prices (MSP) (As on 29-10-2014) (per quintal) | Commodity | MSP 2014-15 (crop year) | Commodity | MSP 2014-15 (crop year) | | --------------- | ----------------------- | ------------------- | ----------------------- | | **Kharif crops** | | **Rabi crops** | | | Paddy (common) | 1,360 | Wheat | 1,450 | | Paddy (Gr. A) | 1,400 | Gram | 3,175 | | Jowar (Hybrid) | 1,530 | Masur (lentil) | 3,075 | | Jowar (Maldandi) | 1,550 | Rapeseed / mustard | 3,000 | | Maize | 1,310 | Barley | 1,150 | | Arhar (Tur) | 4,350 | Sunflower seed | 3,750 | | Moong | 4,600 | Safflower | 3,050 | | Urad | 4,350 | Sugarcane | 220 | | Groundnut in shell| 4,000 | Cotton | 3,750 | | | | Jute | 2,400 | | | | Groundnut (in shell) | 4,000 | Source: Ministry of Agriculture, Government of India. The minimum support prices fixed by the government are in the nature of a long term guarantee to enable the producer pursue his efforts with the assurance that the prices of his produce would not be allowed to fall below the level fixed by the government even in the event of a glut in the market arising out of excess production or the lack of purchasing power of the poor. It served as a floor price and guaranteed income to the farmers. 24 major crops are covered under this scheme. In 2014-15, price of most of the commodities shown in table 15.1 have increased. ii) Statutory Minimum Support Price: Earlier in the case of two commodities namely jute and sugarcane the minimum support prices had been assigned a statutory status. This makes it illegal for anybody to purchase the commodity at less than its minimum support price. In the case of sugarcane, no factory can pay a price lower than the statutory minimum. In case of jute, the market infrastructure continues to remain weak. Hence the enforcement of minimum support price. Inspite of its statutory basis, the implementation of statutory minimum price remains unsatisfactory. Thus limitations of the law to deal with the economic phenomena are to be recognised. This scheme could be extended to any commodity, if necessary. iii) Procurement Price: Procurement price is the price at which the government procures foodgrains from producers. Normally, the procurement price is lower than the open market price but higher than the minimum price. iv) Issue Prices: They are prices at which the government supplies foodgrains at fair price shops. They are lower than the procurement prices to protect consumer's (BPL) interests. The difference between the MSP and issue price is met by the government through subsidy. For Antyodaya Anna Yojana (AAY) scheme the issue price was ₹300 per quintal. Since 2002-03 the issue price for AAY categories have remained unchanged. The MSP for these items was much higher than issue price. **(C) IMPLEMENTATION OF ADMINISTERED PRICES** For implementing administered price the following measures are taken by the government i) Entrusting the Task to Different Agencies: The Food Corporation of India (FCI) undertakes prices support operations for most foodgrains. The National Agricultural Cooperative Marketing Federation (NAFED) undertakes such operations for coarse cereals, pulses and oilseeds. The Cotton and Jute Corporations of India are entrusted with the price support operations for cotton and jute respectively. In the case of sugarcane, sugar mills are required to pay atleast the minimum price to the producers. For tobacco, the responsibility for implementing the price policy decisions rests on Tobacco Board. Similar specialised Commodity Boards exist for rubber, coffee, tea, spices, coconut, oil-seeds and vegetable oils, horticulture etc. ii) Establishment of National Crop Forecasting Centre (NCFC): It was established by the Government in January 1999 to keep a careful watch on the prices of primary products which include wage goods and other items of common man's consumption and recommend vigorous intervention if necessary by the government in the market. NCFC will put an advanced warning system that signals likely supply shortfalls. This was found necessary till now in the case of onions, pulses, and edible oil. iii) Setting up of High Powered Price Monitoring Board : It was set up in 1999 for monitoring the essential commodity prices and anticipating the need for government intervention in the market. iv) Fair price shops (FPS) are intended to meet the minimum requirements of vulnerable sections of the society. The total number of FPS at present are about 5 lakh. This was to protect poor consumer's interest. This system is perhaps the largest distribution network of its type in the world. v) Buffer Stocks : Buffer stocks are stocks build up by the government to stabilize prices. Food corporation of India and NAFED build-up buffer stocks of essential grains which are utilized when there is shortage of output. Since 1992 onwards buffer stocks have gone up continuously. Currently we have enough buffer stocks of essential grains. vi) Warehousing: Government has made arrangements to set up warehouses including warehouses of FCI. Such warehouses help farmers store the farm products till they are demanded in the market. vii) Regulated markets: Most of the states have regulated markets which have helped stabilise agricultural prices. Regulated markets fix appropriate prices in the interests of farmers. viii) Credit Facility: The government has made efforts to provide finance to farmers at low interest rates to enable them stock their produce and sell later when prices are better. This brings about stability in agricultural prices. ## 15.4 EVALUATION OF AGRICULTURAL PRICE POLICY The working of agricultural price policy has certain limitations. They are: (1) Difficulty in Deciding 'Fair' Prices: Prices fixed by the government have attracted a great deal of attention in the recent past following farmers agitations for 'remunerative prices'. With reference to administered pricing, the most controversial issue has been what constitutes a 'fair' level of support and procurement price. It may be said that the price fixed be regarded as 'fair' if it were above the cost of production even though it were much below the free market price. In case of monopoly procurement it was not easy to determine the 'fairness' of the administered price. Here the price movements of competing crops could be taken into consideration to avoid a distortion of the cropping pattern. (2) No Integration between Different Criteria: In determining the procurement price, the Agricultural Prices Commission considers various criteria. However, according to Raj Krishna and Roychaudhuri, "the various criteria listed by APC, were applied and emphasized in an unco-ordinated way. Some of them were stressed and used for some decisions and others on other occasions. They were never integrated into an objective model to compute the price to be recommended". (3) Benefit to Large Farmers: Given the significant differences- intersize, inter-class, interregional, and intercrop in the levels of marketability, the question arises as to 'who' and 'which' region benefits from remunerative prices. Given the high degree of inequality in the distribution of marketable surplus among different size-groups, the chief beneficiaries of 'high' agricultural prices will continue to be the large farmers. Since public distribution system is almost non-existent in rural areas, the rural poor who are mostly unorganised will be chief victims of 'high' prices. It is likely that disparity between (rich) producers and (poor) consumers and sub-marginal producers who purchase substantial quantity of foodgrains for consumption would widen. (4) Mounting Fiscal Deficits - Huge Food Subsidies: Implementation of agricultural price policy involves the expenditure on procurement of foodgrains, warehousing storage and distribution via the PDS through fair price shops. This expenditure known as food subsidies have risen enormously in recent years. (5) Increase in issue prices and decline in offtake through PDS: Along with the increase in procurement price, the Central government has also increased the issue price of foodgrains through PDS. Consequently, the price differential between the open market and PDS issue price has narrowed down, particularly in recent years. This could be a major reason for the decline in the off take of foodgrains through the PDS in recent years. (6) Excessive buffer stocks: The increase in the procurement levels and the decline in off take have together resulted in the piling up of huge buffer stocks with the government adding to the cost and problem of food management. (7) Seasonal and Sharp Rise in Vegetable Prices: There is very little effort toward developing market infrastructure for bulk sale of fruits and vegetables. Frequent fluctuations in vegetable prices testify to the imperfection of market mechanisms and absence of timely market intervention by the government in case of perishable agricultural commodities. It clearly showed that there is no advance warning system that signals the likely supply short-falls. (8) Flaws in public Distribution System (PDS) : a) It is restricted to wheat and rice only and generally inferior grains are ignored b) It is limited mostly to urban areas. c) PDS supplies are inadequate. d) PDS has so far been expensive (high administrative cost) (9) Contribution to inflationary trend: CACP has been increasing procurement price year after year. Calculations by CACP is questioned by economists. The increase in price has nothing to do with the cost of production. Large farmers hoard foodgrains and force the government to increase prices. (10) Impact on rural poor: The Government assumes that increase in agricultural prices leads to higher returns to farmers, which in turn leads to higher wages to agricultural labour. However, the trickle down of wages is hardly a fraction of the increase. Benefit of higher prices hardly accrue to the poor farmers as they do not supply much marketable surplus and on the contrary depend mostly on the market for meeting their consumption requirements. Thus, the bulk of rural population has suffered on account of high and increasing food grain prices. (11) Bias in favour of low cost states: The current practice of CACP is to fix a uniform purchase price for the country as a whole on the basis of costs of production in a low cost state. As a result of this policy the farmers in low cost regions enjoy substantial differential rents. (12) Not all commodities covered: Wheat and rice are usually covered under the policy. Many other essential commodities are left-out resulting in exploitation of producers as well as consumers. Under W.T.O. agricultural trade has become more liberal. India like all other countries will have to face more competitive market both at home and international level. Agricultural prices therefore will be influenced more by market forces. So new seed, resource allocation and different crop pattern in tune with changing market forces, government support. It is necessary for the Indian farmers to increase efficiency and reduce cost so that the competitive market price becomes remunerative price. The Government, however, should not abandon their responsibility of providing a minimum level of support to the agriculturists.