INTRODUCTION #
The Minimum Support Price (MSP) Scheme is a scheme of the Government of India (GOI) to safeguard the interests of the farmers. Under this Scheme the GOI declares the minimum support Prices of various agricultural produces and assures the farmers that their agricultural produce (of FAQ) will be purchased at the MSP, thereby preventing its distress sale. The Food Corporation of India (FCI) acts as the Nodal Agency of the GOI.
The following factors are considered are helping in determine the MSP:
- Cost of production.
- Changes in input prices.
- Input-output price parity.
- Trends in market prices.
- Demand and supply.
- Inter-crop price parity.
- Effect on industrial cost structure.
- Effect on cost of living.
- Effect on general price level.
- International price situation.
- Parity between prices paid and prices received by the farmers.
- Effect on issue prices and implications for subsidy.
Domestic agricultural policies Price and income support policy #
India implements various mechanisms to safe- guard the interests of its farmers from rapid market
fluctuations. The most important ones are: the Min- imum Support Price (MSP) for key products, the Market Intervention Price (MIP) and Buffer Stocks Operations. In addition, at the state level, there are regulations which limit free movement of grains across state borders, so called “zoning”.
Under the Price Support Scheme (PSS), the Commission for Agricultural Costs & Prices (CACP) recommends the Minimum Support Prices, currently for 26 commodities: paddy, maize, coarse cereals (jowar and bajra), pulses (arhar, moong, urad, gram, and masur), cotton, groundnuts, sesamum, niger seed, wheat, barley, rapeseed/mustard, safflower, sunflower seed, soybean, toria, copra, de-husked coconut (newly added), jute, sugar cane and tobacco. The Commission considers the cost of production including the cost of paid-out inputs, imputed value of family labour and land rental. The MSPs are normally announced before the commencement of sowing operations of the particular crop and have usually been remunerative and significantly higher than the cost. The MSP, by definition, becomes the floor price and farmers are assured of getting that price. Intervention takes place when market prices of the relevant commodities fall below the MSP, resulting in procurement at the MSP by the Food Corporation of India (FCI) for cereals, the National Agricultural Cooperative and Marketing Federation of India (NAFED) for pulses and oilseeds, the Cot- ton Corporation of India and NAFED for cotton and Jute Corporation of India for jute.
The MSPs were revised substantially in 2007/08 with the MSP for wheat price rising by one- third compared to the preceding season. For other com-
modities, the increase ranged from 0-1% (tobacco and sugar cane) to 15% (barley). Newly announced prices for the 2008/09 season suggest much more significant changes. For the commodities for which the MSPs were announced in September 2008, the increase ranges between 29% and 94%. Only for copra and sugar cane, the MSPs are to remain at about the previous season level.
For commodities not covered by the MSPs, the government arranges for market intervention upon specific request from the states for a specific quantity at a mutually agreed Market Intervention Price (MIP). The losses, if any, are borne by the national government and the states on a 50:50 basis. Horticultural and other perishable agricultural com- modities can be procured at the MIP. Interventions are carried out by NAFED and agencies designated by the state governments concerned.
Buffer stocks of food grains are under the responsibility of the FCI. Seasonally-adjusted buffer stock requirements (buffer norms) constitute the basis for FCI action to accelerate procurement, turn to imports or allow for food grain exports. Between mid-2005 and early 2008, actual food grain stocks were consistently below buffer norms, thus turning India to large imports of wheat, in particular in 2006. In January 2008, buffer norms were at 20 million tonnes, which was 9.1% of India’s food grain production in 2007/08, and actual stocks were at
19.2 million tonnes, including 7.7 million tonnes of wheat and 11.5 million tonnes of rice (GOI, 2008). As India’s procurement of rice and wheat in 2008 exceeded the buffer norms, India will be in a fairly comfortable position with respect to availability of grains for the TPDS and even for resuming grain exports in 2008/09.
India’s marketing policies for grains used to be based on the “zoning” provision whereby sale of food grains outside a zone was prohibited. The purpose was to “bottle up” the grain surplus regions and facilitate state purchase of grains at a previously announced procurement price. In effect, zoning led to “balkanization” of the domestic grain market. Recent reforms include the abolition of zones, partly through the adoption of the Agricultural Produce Marketing Committee Act (APMC) of 2003.
The Ministry of Agriculture circulated a model
APMC Act to states and suggested amendments to the State APMC Acts so as to promote investment in marketing infrastructure, motivating the corporate sector to undertake direct marketing and to facil- itate a nationally-integrated market. The Ministry requested that states complete the process of modi- fication of the state-level APMC Acts by 2007/08. However, the progress made by states in reforming their agricultural markets varies considerably.
For instance, in Maharashtra and Uttar Pradesh, channeling of produce through the regulated markets is still strictly enforced and the number of products for which prior permission has to be sought before they can be traded across states (so called notified commodities) is still large at 593 in Maharashtra and 347 in Uttar Pradesh. By contrast, in Tamil Nadu, except for 15 commodities, there is no restriction on where and to whom farmers can sell their products.
In addition, in 2006, the Food and Safety Stand- ards Act was approved by parliament, rationalizing the complex and overlapping web of regulations governing the processing of food products. The gov- ernment also repealed the Cess Act, thus eliminating the 0.5% cess on agricultural and plantation exports. Further, the Department of Food and Public Distri- bution is promoting the development of a negotiable warehouse receipt system to increase liquidity in rural areas. To provide the legal framework for the warehouse receipt system, the Warehousing (Devel- opment and Regulation) Bill has been enacted in 2008. The Forward Contracts (Regulation) Amend- ment Bill was also submitted to parliament in 2006 but not yet approved. Its main objective is to permit and regulate financial instruments that would enable the buyers and sellers of commodities to effectively manage the risks of price fluctuation.
Input subsidies #
Input subsidies for farmers are provided pri- marily through subsidizing fertilizers, electricity, irrigation water and, occasionally, seeds. In addi- tion, commercial banks, co-operatives and regional banks are required to provide credit to agricultural producers for input purchases at interest rates below the market rate.
Fertilizer subsidies are usually the most impor- tant component of budgetary support for agricultural
inputs. To encourage the use of fertilizers and to make them available to farmers at affordable prices, prices at which fertilizers are sold to farmers are controlled by the government. As they are lower than the cost of production, the difference is com- pensated to fertilizer producers. While there were plans to disburse the fertilizer subsidy directly to farmers, this has not been implemented due to practical difficulties.
Under the so-called New Pricing Scheme, flat rates of subsidy are determined for various groups of fertilizer manufacturers, depending on production methods and age of manufacturing plants. An extra freight subsidy is paid to cover the transportation costs. Some amounts are also budgeted each year to cover the difference between the price of imported urea and retails prices (WTO, 2007). In 2005/06, fertilizer subsidies amounted to USD 4.1 billion and accounted for 35% of the total allocation for agri- cultural input subsidies. Within an overall package to support agriculture in the 2008/09 budget, the amount foreseen for fertilizer subsidies increased to INR 309.9 billion (USD 7.8 billion), but in view of some policy announcements, the actual amount spent might be significantly larger at perhaps INR 1 250 billion (USD 27.5 billion), which would be INR 200 billion more than India’s defence budget (GAIN-IN8111).
Electricity subsidies are paid from state budgets to the providers of electricity and result from the difference in the cost of electricity provision and fixed charges paid by farmers. In most states these charges are just lump sums based on the declared horse power of irrigation pumps. These charges do not recover cost, encourage overuse of electricity and lead to overexploitation of ground water. In 2005/06, the electricity subsidy amounted to USD
4.5 billion and accounted for 38% of the input sub- sidies in that period. However, it then increased to USD 7.1 billion in 2007/08. The amount foreseen for 2008/09 is at around USD 7.6 billion.
Irrigation water subsidies are the third largest and amounted to USD 3.2 billion in 2005/06, 27% of total amount allocated for input subsidies. The subsidy covers losses incurred by the government irrigation systems resulting from the excess of oper- ating costs over the gross revenue.
India’s institutional agricultural credit system includes an extensive network of co-operative, pub- lic sector and commercial banks, but still a large percentage of farmers, most often small landholders, remain dependent on traditional moneylenders or other non-institutional sources of credit. According to government data, 49% of farm households are indebted, with 58% of outstanding loans sourced from institutional channels (including government) and 42% from private informal moneylenders. While there is a wide range of reasons for so called agrar- ian distress, high debts are among most important factors leading to large numbers of farmers’ suicides in recent years.
To improve credit flows to the agriculture sector, the government initiated a number of policy meas- ures. One of them was the Kisan (Farmer) Credit Card (KCC) Scheme launched in 1998/99. Under this scheme, credit cards were distributed to about
70.8 million farmers by November 2007. Currently the scheme is being extended to include a wider scope of credits and clients.
In 2006, the Government announced a package for the revival of the Short-Term Rural Cooperative Credit Structure involving financial assistance of INR 135 billion (USD 3.23 billion). The National Bank for Agriculture and Rural Development (NAB- ARD) has been designated as the implementing agency for the purpose. States are required to sign a Memorandum of Understanding with NABARD committing to implement the legal, institutional and other reforms as envisaged in the revival package. In the crop season 2006/07, farmers were eligible for short-term crop loans up to a principal amount of INR 300 000 (USD 7 150) at the preferential interest rate of 7%.
The government provided an interest subsidy of 2% to NABARD and other banks. This policy was continued in 2007/08 and the amount of INR
16.8 billion (USD 400 million) was allocated for this purpose from the 2007/08 budget. In the 2008/09 fiscal year, the subsidy amount is to remain roughly at the previous year level and the preferential interest rate is to remain at 7% per annum. The target for the agricultural credit disbursement through formal agencies (banks and co-operative credit agencies) has been set at INR 2.8 trillion (USD 70.1 billion) for 2008/09.
To address the issue of farm indebtedness, at the end of February 2008, Finance Minister announced a massive Scheme of Debt Waiver and Debt Relief for farmers. The budgetary cost was initially foreseen at INR 600 billion (USD 14.3 billion). In line with the announced scheme, all loans disbursed by sched- uled commercial banks, regional rural banks, and co-operative credit institutions to small and marginal farmers (farms below two hectares) up to 31 March 2007, which were overdue as of 31 December 2007 and remained unpaid as of 29 February 2008, were to be completely waived. This measure was to cost the government INR 500 billion.
For medium and large farmers (farms above two hectares), there would be a one-time settlement programme for all loans that were overdue for the above period by paying 75% of the amount, thus providing a 25% rebate. This would cost the excheq- uer another INR 100 billion. However, in May 2008 the government further expanded the coverage of the scheme to include plantations, horticulture, dairy and poultry farming as well as other agricultural loans such as taken under the Kisan Credit Card scheme and within self-help and joint-liability groups. Therefore, the original total of INR 600 billion was to be increased to INR 716 billion (USD 17 billion).
The implementation of the debt-relief scheme was planned to be completed by 30 June 2008 and all bank branches would be given instructions to prepare a list of beneficiaries for display at their respective premises. The central government would take over the debts and reimburse the banks. The Finance Minister assured bankers that the govern- ment would take care of banks’ liquidity.
Farmers benefiting from the relief would be entitled to new agricultural loans from banks in accordance with normal rules. It is expected that the scheme would cover institutional debts of all small and marginal farmers and 60%-65% of large farmers. As the loan waiver is confined only to loans taken from formal institutional channels, the scheme does not address the issue of farmers’ indebtedness to informal lenders.
The loan waiver scheme launched a debate in India with many observers concluding that it may end up crippling the agricultural credit system, as happened with a similar loan waiver of 1990. The
co-operative credit sector has still not fully recovered from that move and even the commercial banking sector became wary of disbursing crop loans for a long time after the previous waiver. It is argued that the current scheme will destroy the discipline of any functioning credit system. Moreover, the scheme may end up compounding, rather than alleviating, the woes of defaulters and heavily indebted farmers, by making them eligible for fresh credit despite their being unable to earn enough to repay their existing loans (Kaur, 2008).
There are number of commodity-specific pro- grammes within which the government provides support for inputs and general services. The most important one is the National Horticultural Mis- sion launched in 2005/06 to stimulate horticultural production through research, adoption of improved technologies, improved post harvest management and marketing, export promotion, and adding value through processing. In 2008/09, the programme is to cover 340 districts in 18 states and two Union Territories at the budget cost of INR 11 billion (USD 262 million).
CROP INSURANCE #
The National Agricultural Insurance Scheme (NAIS) covers small-scale crop producing farm- ers who can benefit from a 10% subsidy on their premium payments. The total amount of subsidy foreseen for this scheme in the 2008/09 budget is INR 6.4 billion (USD 144 million). In addition, the Weather-Based Crop Insurance Scheme (WBCIS) has been implemented in the selected areas of Kar- nataka on a pilot basis.
WBCIS intends to provide insurance protection to farmers against adverse incidents, such as deficit or excess rainfall. It has the advantage of settling claims within the shortest possible time.
The WBCIS is based on actuarial premium rates but to make the scheme attractive, the premium actually charged to farmers has been restricted to “at par” with NAIS. WBCIS is planned to be implemented in 2008/09 on a larger scale in selected areas of five states and the total subsidy is planned at INR 0.5 billion (USD 12 million).
Consumer measures #
Distribution of subsidized food to poor consum- ers is at the core of India’s food security system. It
is operated through the Indian Targeted Public Dis- tribution System (TPDS) and managed by the Food Corporation of India (FCI), which is also responsible for procurement and buffer stocks (see above). With a network of around 478 000 Fair Price Shops distributing food to about 160 million families, the TPDS is the largest distribution network of its kind in the world. Major commodities distributed include wheat, rice, coarse grains, sugar and kerosene.
The key instruments applied by the FCI for food management are the Minimum Support Prices (MSPs) for procurement and the Central Issue Prices (CIPs), the rates at which the FCI disperses food grains to states and union territories for distribution under TPDC. The difference between the economic cost of procured commodities (in addition to the MSP, this includes state taxes, levies, market fees, commissions, transportation and storage charges) and the issue price is reimbursed to FCI.
The level of subsidized prices at which wheat and rice are sold to consumers is differentiated depending on the income of the family: highest for families above the poverty line (APL), lower for families below the poverty line (BPL) and lowest for the poorest-of-the-poor (antyodaya anna yojana – AAY). As the MSPs have kept increasing (see above) and the issue prices have been kept unchanged since 2002, food subsidies increased from INR 240 billion (USD 5.8 billion) in 2006/07 to INR 315 billion (USD 7.6 billion) in 2007/08, and to a budgeted INR 327 billion (USD 8.2 billion) in 2008/09 (GAIN-IN8020, 2008).
One additional way of supporting consumers is the relatively low VAT rate on food, typically at 4% as compared to 12.5% for other commodities. Moreover, essential commodities, such as grains, are exempt from VAT.
INFRASTRUCTURE #
To make India’s growth more inclusive and equitable, improvement of rural infrastructure has been given a high priority. The most important programme in this respect is Bharat Nirman which is a time-bound business plan for action in rural infrastructure over the four year period (2005-09). The total cost of INR 1 740 billion (USD 41 billion) is to be covered by the central government, states,
external aid and market borrowing. Specific targets include:
- Irrigation – to create 10 million hectares of additional irrigation capacity.
- Rural roads – to connect all remaining habi- tations with population above 1 000 (500 in hilly and tribal areas) with all weather roads.
- Rural housing – to construct 6 million houses for rural poor.
- Rural drinking water – to provide potable water to all uncovered habitations and to pro- vide safe water to all water-quality-affected habitations.
- Rural electrification – to provide electricity to all un-electrified villages and to connect 23 million households below the poverty line.
- Rural telephony – to connect all remaining villages with a public telephone system.
Progress in implementation of the programme is regularly posted on the website for the programme. In the first two years of implementation (2005-07) performance was rather mixed with a rather good progress in meeting housing targets but an important shortfall was noted in assisting the water-quality-af- fected habitations erstwhile (Planning Commission, 2008).
There are several programmes focused on the provision of water for agriculture, some of them components of Bharat Nirman. The most important one is the Accelerated Irrigation Benefit Programme with an allocation of INR 200 billion (USD 4.8 billion) in the 2008/09 budget. Within the Micro Irrigation Programme 0.4 million hectares is to be covered and an outlay of INR 5 billion (USD 119 million) is foreseen in the 2008/09 budget. A Rain Area Development Programme aims at developing agriculture in the non-irrigated areas with a budget- ary allocation of INR 3.5 billion (USD 83 million). In addition, India implements a number of so called flagship programmes targeting rural areas.
Among them, the National Rural Employment Guarantee Programme (NREGP) is most important. The NREGS, launched in 2005, guarantees 100 days of employment in a financial year to any rural household whose adult members are willing to do
unskilled manual work. The programme has succes- sively been expanded and in 2008/09 is to cover all 596 districts in the country compared to 330 in 2007/08. The financial outlay budgeted for 2008/09 is INR 160 billion (USD 3.7 billion).
LAND POLICIES #
Indian agriculture is dominated by a large number of small-scale farms that are predominantly occupied by their owners. The number of farms con- tinues to increase due to the fast growing population in the country, limited possibilities to move out of agriculture, and the law of inheritance under which all sons and daughters are equally entitled to a share in the ancestral property. Thus even large agricul- tural estates get divided and sub-divided with every generation. In addition, existing legislation imposes ceilings on land holdings. They are differentiated across states and range between 10 and 18 hectares for irrigated land with two crops, 10 and 30 hectares for irrigated land with one crop, and 15 and 70 hectares for dry land.
Ceilings are of two kinds: for existing holdings, land above the limit is declared surplus and taken over by government on payment of compensation; for future acquisitions, the upper limit constraints the amount of land that an individual or a family may acquire with a view to enlarging existing holdings.
The surplus land is distributed among small farmers, tenants, land labourers or handed over to village committees or co-operative farming societies. Within this framework, the average size of farm holdings declined from 1.4 hectares in 1995-96 to
1.3 hectares in 2000/01 (the latest available data) and the average ranged from 7.3 hectares in Nagaland to just 0.2 hectares in Kerala. Moreover, while the share of land operated by so called marginal farms (below 1 hectare) and small farms (1-2 hectares) tended to increase, the share of land operated by larger farms (above 10 hectares) tended to decline. These trends clearly indicate that fragmentation of the land use pattern in India is progressing.
Although marginal and small holdings up to 4 hectares account for more than 90% of the total number of holdings, the area operated by them is about 60% of the total. This underlines the fact that bulk of the peasantry subsists on marginal holdings
and unless the marginal farmers are provided alterna- tive non-agricultural employment or are employed in medium and large farms, the chances of addressing poverty in rural India will remain bleak.
As male-dominated outmigration from rural areas and feminization of agriculture continue, there is a need for further land reforms to make tenancy legal and to give well defined rights to tenants and to women farmers. Measures to facilitate the leasing of land for cultivation could help to prevent culti- vated land from turning fallow due to migration of owners to urban areas. Lack of recognized tenancy rights makes it difficult for de facto tenants to get credit from formal sources and discourages them from investing in the land. Similarly, a woman without property title is unable to get credit when male family members are away. Over the past few years, the policy of promoting Special Economic Zones (SEZs) has been strongly supported by the government. The zones are expected to give a strong push to exports, employment and investment.
However, their creation raised the issues of dis- placement of farmers due to land acquisition moves and losses of fertile agricultural land to development. Concerns over land acquisition and displacement of farmers led to extreme violence at Nandigram (a village in West Bengal) in March 2007. Some consider that monetary compensation for the land is not a sufficient solution and that more general social impacts must also be taken into account and addressed adequately.
Biofuels #
India has spent about INR 410 million (USD 9.5 million) on research and development of alternative fuels during the last three years. The Ministry of New and Renewable Energy has been given the responsibility for preparing the national policy on bio-fuels and setting up of a National Biofuel Development Board.
The draft policy aims at promoting the culti- vation, production and use of biofuels to partially replace petrol and diesel for transport. The general government policy is to base the biofuel production on waste lands and not divert land from the tradi- tional cultivation for biofuels. India has around 35 million hectares of waste land that can be used for production of feedstock.
NITI AAYOG REPORT ON MSP #
Aims of MSP #
- The idea behind MSP is to give guaranteed price and assured market to the farmers and protect them from the price fluctuations and market imperfections.
- Protect farmers in the era of globalization resulting in freer agricultural trade.
- To encourage higher investment and produc- tion of agricultural commodities.
Problems noticed in the implementation of MSP #
Distance: The procurement centers being far away resulting into heavy transportation cost.
Operational #
- Non-opening of Procurement centers timely.
- The authorities insisting for revenue records.
- Infra
- Lack of covered storage/godowns facility for temporary storage of produces.
- Lack of electronic weighing equipment in some places, delays in payments.
Observations #
- Generation of Annual Income: Very few farm- ers in Assam, Bihar, Gujarat, West Bengal, Uttar Pradesh, Uttarakhand and Odisha sold their produce at MSP in the reference period. So their income was not impacted by MSP.
- Awareness about MSP: The 81% of the cul- tivators are aware of MSP fixed for different crops. This awareness varies from 45% to 100% in the different sample States.
- Medium of Awareness: Medium of awareness about MSP include self-efforts, newspapers, state officials, FCI officials, village headmen, gram sevaks, teachers, traders etc. Only 7% of the farmers came to know about MSP through the State officials.
- Mode of Receipt of Payments: It was found that 32.13%, 40.29% and 27.4% of the farm- ers received their MSP payments in cash,
Cheques or in the shape of Bank deposits respectively. In majority of the States, like Bihar, Gujarat, MP, Odisha, and Rajasthan, no cash payment has been made to the farmers.
- Time Taken in getting Payments: 20%, 7%, 8%, 51% and 14% of the farmers of the sam- ple States received their MSP payments on the spot/same day, within 2 to 3 days of sales, after 3 days but within one week of sales, after a week but within one month of sales and after a period of one month respectively.
- Medium used for Sales: 67% of the farm- ers sold their produces through their own arrangement whereas 21% of them sold through Brokers. The shares of sales through the private and Government agencies were 8% and 4% respectively.
- Improvement in Farming Practices: It was found that 78% of the farmers adopted improved methods of farming such as: high yielding varieties of seeds, organic manure, chemical fertilizer, pesticides and improved methods of harvesting, etc. for increasing the production as a result to the MSP declared by the Government.
- Effectiveness of MSP: It was found that 21% of the farmers of the sample States expressed their satisfaction to the MSP declared by the Government. While 79% of them showed their dissatisfaction to MSP due to the various reasons, almost all of them (94%) wanted MSP to continue.
Recommendations #
- Increase awareness among the farmers.
- Delays in MSP payments have negative effects on the farmers which need to be corrected.
- MSP should be announced well in advance of the sowing season so as to enable the farmers to plan their cropping.
- Infra: Improved facilities at procurement centres, such as drying yards, weighing bridges, toilets, etc. should be provided to the farmers. More godowns should be set up and maintained properly for better storage and reduction of wastage.
- Consultative: There should be meaningful consultations with the State Government, both on the methodology of computation of MSP as well as on the implementation.
- The criteria of fixing MSP should be current year’s data and based on more meaningful criteria rather than the historical costs.
- The Procurement Centers should be in the village itself to avoid transportation costs.
- The MSP scheme requires a complete overhaul in those States where the impact of the scheme ranges from ‘nil’ to ‘at-best marginal’ to ensure that MSP continue to as an important instrument of the Government’s agricultural price policy.
