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Notice (8): Undefined variable: urlPrefix [APP/Template/Layout/printlayout.ctp, line 8]latest-news-updates/farm-support-prices-come-with-hidden-costs-ashima-goyal-4684994.html"/> LATEST NEWS UPDATES | Farm support prices come with hidden costs -Ashima Goyal | Im4change.org
Resource centre on India's rural distress
 
 

Farm support prices come with hidden costs -Ashima Goyal
-The Hindu Business Line

In view of the distortions arising out of excessive price support, direct income transfers to farmers is a better option

The domestic debate has tended to conclude that the rise in MSP announced in the Budget is an essential part of achieving the government’s objective of doubling farm incomes. But MSP stands for minimum support prices and is an instrument designed for reducing income volatility, not for raising incomes. Therefore conceptually it should only cover variable costs — A2 plus FL (variable input cost plus family labour), not the comprehensive cost the Swaminathan committee wanted.

The distortions

Giving prices unrelated to demand leads to distortions such as over-production of foodgrains for which procurement is effective and costly excess stocks with the government. Even so limits on procurement and stocking implying cobweb cycles, of sharp rise and then collapse in market prices, still occur. For example, price incentives given for pulses led to over-production price-collapse and the current farmer distress.

Higher procurement prices were set in the 1970s, with the onset of the green revolution, as incentives for farmers to adopt new techniques. The distinction between the procurement and support price was lost. The support price, at which farmers could make assured sales, became closer to the market price.

In the 1990s, support prices overtook the procurement price, although in the 1980s the price increase was kept low to share productivity gains with consumers. As productivity growth slowed in the 1990s, more rapid price increases were given. Double devaluation of the exchange rate contributed to upward pressures by widening the gap between domestic and border prices. The steady increase in government stocks indicated prices were set too high. Average stocks rose from 10.1 million tonnes (mt) in the 1970s to 13.8 mt in the 1980s, 17.4 mt in the 1990s, 29.7 mt in the 2000s and 48.9 mt in the 2010s. This was far in excess of buffer stock norms for smoothing prices.

In 2001-02, stocks peaked at 51 mt then fell as the increase in procurement prices was a modest 2.25 per cent per annum over 2000-05. A new peak of 59.7 mt was reached in 2012-13, after a price rise of 11.9 per cent per annum over 2006-13, following a rise in world prices. Stocks fell again as the rate of MSP increase slowed to 4.44 per cent over 2014-18. But prices were now so high in relation to demand that food stocks remained at 57.8 mt in 2017-18 despite slower price growth.

Ballooning food stocks create inefficiencies, such as high storage costs, leakage and wastage of grain. For example, in 2010 the government emerged as the biggest hoarder, carrying 32 mt of wheat stocks that it was unable to release even as food inflation was in double digits.

The subsidy factor

Food subsidies rose from ?9,200 crore in 1999-00 to ?1,36,901 crore in 2017-18. As diets diversify national food security should partly be based on coupons, not on excessive food stocks.

Input subsidies compound distortions. Free electricity with procurement of water-intensive crops such as rice has led to over-extraction of ground water, flooding, leaching of arsenic and a high incidence of cancer in Punjab. This is one of many possible cases where well-meaning measures impose enormous indirect human costs.

Farmer distress

Farmer suicides are another enormous human cost. Farmers have agitated for more relief, which is required. But imposing more distortions will not provide sustainable relief. Can this be communicated to them?

A major misunderstanding fuelling farmer grievance is that the government is not delivering on the promises made. But doubling farmer incomes is not possible unless the number of farmers reduces even as sources of their incomes diversify and become more shock proof. All this takes time. The government has been working steadily towards this agenda.

Since agriculture is also a State subject States have a major role to play. Granular market-facilitating changes are required. For example, good quality grading and sorting is essential for integrating e-markets; improved land records and tenancy laws for overcoming fragmentation in production. There is substantial progress in building cold storages, roads, water bodies, enabling diversification to horticulture, aquaculture etc. But the improvements are, however, uneven across States.

Rural roads have been growing steadily since 2001 at an average per annum growth of 1.9 per cent for total roads and 8.5 per cent for surfaced roads. Over 2014-15 States that posted above average growth in surfaced roads were Rajasthan, Chhattisgarh, Goa, Haryana, HP, J&K, Jharkhand, MP, Manipur, Sikkim, TN, UP, and Uttarakhand.

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