Why a price insurance policy makes sense: The Tribune India


An Amarender Reddy

There is a growing demand from some of the farmers’ organizations for a guaranteed Minimum Support Price (MSP). The central government has agreed to form a committee to look into the matter. It is now up to the committee to find an amicable solution for all stakeholders – the farmers as well as the central and state governments. As the proposal will have huge logistical and fiscal implications (estimated costs varying between Rs 1.5 lakh crore and Rs 2.5 lakh crore), which can only be sustainable if central and state governments share the burden. Agriculture is a matter of state and the whole agricultural extension mechanism is in the hands of states, which can advise farmers on the right choice of crop rotation, use of the right amount of inputs, irrigation water supply and especially the APMC (Agricultural Commodity Market Committee) markets.

Over the past two decades, since the introduction of the 2003 APMC Model Law, there has been progress in reforming agricultural markets, albeit uneven and slow, in terms of creating new private markets, setting in place of direct farmers’ markets, encouragement of farming contracts and ensuring timely payments to farmers.


The fears of farmers about price volatility are real. For example, with the exception of paddy and wheat, where the supply is large and exceeds 50% of production, prices fluctuate widely in many states. In some years, farmers get good profits, while the losses are unbearable when prices fall. That is why they demand a guaranteed MSP for their products.

In any developing country, including India, pricing policies are always in favor of consumers, especially in the case of food grains. The Union government began purchasing rice and wheat in the 1960s to prevent large-scale famines, maintain buffer stocks, and distribute food grains through the public distribution system (PDS). However, over the years, due to excess production and political pressure, purchases have increased to three times buffer stock standards. Although the MSP policy has insured rice and wheat producers against the vagaries of the market and guaranteed them fair prices, it has neglected other crops such as pulses, oilseeds, fruits and vegetables, which has resulted in little incentive to cultivate these crops and low production and supply, resulting in low consumption and mass undernourishment among children and women.

A major problem here is that there is no proper supply mechanism except for paddy and wheat; in states like Bihar and Jharkhand, even paddy supply is largely absent. The purchase of the remaining 21 crops for which PSM is advertised has always been in limbo. Although some states purchase pulses and oilseeds through a decentralized supply system, they cover less than 5% of production.

India cannot meet the goal of doubling farmers’ incomes simply by guaranteeing PSM. The average monthly income from different sources per agricultural household (from July 2018 to June 2019) amounts to only Rs 10,218, according to the recent survey by the ONSS. Of the total income, only 37% comes from cultivation / net receipts from crop production, while wages, animal husbandry and non-farm activities together contribute around 61% of the income. It indicates that in order to increase the incomes of farmers, the rejuvenation of the rural economy is more important so that the demand for these related activities increases and has a positive impact on their incomes. Therefore, the Guaranteed PSM should not be treated as a guaranteed income policy. It can be used as a price insurance tool for a wide variety of crops.

The MSP is a pricing policy, not an income policy. The basic aim of the policy should be to protect farmers from high volatility and low prices, whatever crops they grow. Although crop insurance schemes like Pradhan Mantri Fasal Bima Yojana (PMFBY) are in place, they only cover production risk, neglecting price risk.

The goal of protecting farmers from price risk through a guaranteed MSP policy can be achieved through a budget of Rs.1.5-2.5 lakh crore, depending on price levels in national and international markets. It also does not require the purchase of all of the farmers’ products.

The quantity to be purchased for paddy and wheat should be limited to buffer stock standards as well as public distribution requirements in order to minimize logistics costs and waste. The Compensatory Payment Scheme (PDPS) is to be adopted for the rest of the wheat and paddy products and the 21 other crops.

The existing price support regime (PSS) for paddy and wheat must move from an indefinite practice to a restrictive closed regime emphasizing decentralized supply with more accountability on state government agencies, cooperatives and enterprises of agricultural producers. In this way, the government can meet buffer stock and PDS requirements and reduce logistics costs and wastage in warehouses.

The remaining rice and wheat and the other 21 crops for which the MSP is announced each year must be covered by the PDPS, in which farmers receive the difference between the MSP and the average wholesale price in designated local markets if the price big average is lower than the MSP. Farmers can sell on the open market. This is the most efficient method as it eliminates all logistics costs associated with supply, storage and unloading. It can be implemented even in the most remote parts of India, as now all farmers have bank accounts under Jan Dhan Yojana which are linked to land registers, making it easier to transfer money directly to farmers.

Deployment of the PDPS is easy for all products and across the country as all the information necessary for the direct transfer of the compensation payment is already available. The PDPS was implemented in Madhya Pradesh and Haryana under Bhavantar Yojana.

Overall, while examining the guaranteed PSM, the proposed committee should consider logistics costs, tax burden, product-specific characteristics, role of private actors, new institutional structure required, and methods of calculating the price. insufficient pricing to reflect stakeholder views.

The author is Senior Scientist, ICAR-Central Research Institute for Drylands Agriculture, Hyderabad. Views are personal


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