Minimum Support Price

(Probable Question: Market intervention in the form of ‘Minimum Support Prices’ have not yielded intended results. Discuss. Suggest reforms.)

Minimum Support Prices (MSPs) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. However, there are several problems associated with the MSPs explained as follows:

  • MSP has distorted cropping patterns, with excessive focus on the cultivation of wheat, rice and sugarcane in the procurement states at the expense of other crops such as pulses, oilseed and coarse grains.
  • Providing incentive in the form of MSP for only water-intensive crops which has also resulted in depletion of water resources, soil degradation and deterioration in water quality in some states, especially in the north-western region.
  • MSPs have not been inclusive as procurement at the MSP is minimal or non-existent in the eastern states.

One measure that can help remove distortion in the MSP system to some degree is the system of “Price Deficiency Payment”. While MSP may still be used for need-based procurement, under the deficiency payments system, a subsidy would be provided on other targeted produce in case the price falls below an MSP-linked threshold.

Advantages of Price Deficiency Payment:

  • This approach would not require procurement and thereby preventing the accumulation of unwanted stocks.
  • It would spread price incentives to producers in all the regions and all the crops considered important for providing price support. Each farmer would register her crop and acreage sown with the nearest APMC mandi. If the market price then falls below the floor price, the farmer would be entitled to the difference up to a maximum of, say, 10% of the MSP-linked price that could be paid via Direct Benefit Transfer (DBT) into an Aadhaar-linked bank account.
  • This system would keep the quantum of the subsidy in some check and also meet the restrictions on the subsidy imposed by the World Trade Organization (WTO). 

Source: NITI AAYOG Three Year Action Agenda, 2017-18 to 2019-20.