[Economic Survey] Ch8: Agriculture Minimum Support prices (MSP), Sugar pricing, FCI, Decentralized Procurement, OMSS

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Pavan Kumar
  1. Prologue
  2. [Act 1] Minimum support prices (MSP)
    1. What is Open Ended Procurement?
    2. How is MSP determined?
  3. [Act 2] Sugar pricing problem
    1. SEFESU-2014
    2. C.Rangarajan on Sugar pricing
  4. [Act 3] Food Corporation of India (FCI)
    1. FCI: procurement problems
    2. Open Market Sale Scheme (OMSS)
    3. Decentralized Procurement Scheme (DCP)
    4. Storage expansion schemes
      1. #1: Private Entrepreneurs Guarantee (PEG) Scheme.
      2. #2: Grameen Bhandaran Yojana
      3. #3: other initiatives
    5. Budget 2014: Procurement Reforms
  5. [Act 4] Subsidies + MSP = Food inflation + Resource misallocation
  6. Appendix: MSP price for 2014-15

Prologue

  1. Fertilizer subsidy & schemes, Budget-2014 announcement
  2. Minimum support pricing (you’re here)
  3. National food security act (NFSA)
  4. WTO Bali Summit
  5. APMC reforms, National market for agriculture, NSEL crisis
  6. El Nino and its impact on Indian monsoon

[Act1] Minimum support prices (MSP)

Minimum Support price
  • @which Government will buy.
  • This is meant to serve as “floor” price, below which Government will not allow prices to fall, EVEN If there was bumper crop.
Procurement price
  • @which FCI will purchase foodgrain for PDS distribution system
  • Procurement prices >>higher than MSP

What is Open Ended Procurement?

Wheat and Rice
  • FCI conducts “Open ended procurement”
  • Means Government will buy AT MSP, from any farmer who comes forward to sell. (even if market prices are running higher than MSP)
other crops
  • NOT open ended.
  • Means, Government will buy ONLY when their prices fall below MSP in open market.

How is MSP determined?

  • Commission for Agricultural Costs and Prices (CACP) since ’85
  • Under Agriculture ministry (and NOT consumer affairs ministry).
  • CACP Has two non-official members from farming community.
  • CACP recommends minimum support prices (MSP) based on certain economic criteria.
  • Subsequently, the center announces MSPs for 24 major agricultural commodities, including sugarcane, before each season.
  • MSP announced for both RABI and Kharif SEASONS.
Cropping seasons in India calendar

NCERT, Cropping season in Northern India

SeasonNorth IndiaSouth India
Kharif: June to SeptRice, Cotton, Bajra, Maize, Jowar, TurRice, Maize, Ragi, Jowar, Groundnut
Rabi: Oct to MarchWheat, Gram, Rapeseeds and Mustard, BarleyRice, Maize, Ragi, Groundnut, Jowar
Zaid: April-JuneVegetables, Fruits, FodderRice, Vegetables, Fodder
  • Sugarcane is a kharif crop. (says Hindu)
  • 60% of India’s foodgrain and oilseeds grown in Kharif Season. (says Economic Survey)

[Act 2] Sugar pricing problem

India Sugar pricing issue

Sugar pricing: Ranga recommends all states to follow National FRP regime

Sugar pricing coverned under Essential Commodities (EC) Act 1955 => Sugarcane (Control) Order 1966

MSPCACP recommends this price.
FRP
  • Fair and remunerative price (FRP) Rs. 220 per quintal.
  • dept. of food and public distribution decides
  • It is price which sugar factories pay to farmers.
  • FRP takes into account the cost of production of sugarcane, recovery rates, and pricing of sugar and its by-products
  • Important byproducts: molasses, bagasse, and press mud.
SAP
  • State administered price.
  • State governments decide. Rs. 280 in UP.
  • Higher than Union’s FRP
  • In recent years, good production of sugarcane + previous stock of sugars = retail price of sugar has declined.
  • Then State government should reduce the SAP as well- otherwise sugarmill owner’s profit margin will decline.
  • But state governments not doing this, to keep farmer votebank happy.
  • But state governments have not reduced the SAP.
  • Result: UP Mill owners have ~6000 crore rupees payment pending to farmers.

SEFESU-2014

  • To give interest-free bank loans to sugar mills. So they can clear arrears to farmers.
  • By Department of food and public distribution, under consumer affairs ministry.
  • full name: Scheme for Extending Financial assistance to Sugar Undertakings (SEFASU-2014)
  • although instead of SEFESU, a more apt name would have beeen “राजीव गाँधी मिल मालिको की तिजोरी साफ़ होने से बचा लो योजना.”

C.Rangarajan on Sugar pricing

  • State Government should stop this SAP mechism.
  • State Government should  adopt the the already existing national FRP system.
  • Sugarcane prices should be linked with market price of sugar after crushing. (meaning if retail sugar price goes up then increase FRP, when it goes down then decrease FRP.)
  • Not all states accept Rangarajan.

Enough of MSP. Moving to the next topic

[Act 3] Food Corporation of India (FCI)

  • open-ended procurement of food grains
  • Storage of foodgrains.
  • Distribution of foodgrains.

 

Who procures what?
Wheat & riceFCI
Coarse grainState Governments
Oil seed & Pulses
  • by NAFED & other Central agencies
  • under the Price Support Scheme (PSS) when the market rates of these commodities fall below MSP.

FCI: procurement problems

  1. procurement successful mainly rice and wheat
  2. That too only in a few states like Punjab, Haryana, Andhra Pradesh, and Madhya Pradesh.
  3. Government keeps raising MSP but traders unwilling to pay that much to farmers. Ultimately, FCI has to procure.
  4. This higher procurement leads to exceeding stocks than the quantity necessary as buffer stock (to fight drought/worst case scenario).
  5. So, FCI has to carry forward this buffer stock to next year. But godowns capacity insufficient.
  6. Result? Rotten grain.

Open Market Sale Scheme (OMSS)

  • FCI can E-auction of Rice and Wheat.
  • August 2014: FCI began selling wheat to flour millers, traders and food companies under this scheme.

But Why?

  • FCI has large (unmanageable) buffer stock of wheat=> better sell them away.
  • Since last year, (retail) wheat price increased from 16 to 19 / kg.=> if FCI sells in open market=> supply will increased => retail price should decrease.
  • Therefore Government wants to hit two birds with one stone through OMSS.
Data not important except for FCI- Management trainee interviews
FCIbidder has to pay
old wheat stockRs.1500 + transport cost
new wheat stock
  • 1.05 x (Rs.1500 + transport cost)
  • (meaning 5% premium)

Decentralized Procurement Scheme (DCP)

  • Launched after mid-90s.
  • Under this scheme, the State Government directly purchase of paddy and on behalf of FCI (the Union Government).
  • State Governments also store and distribute these foodgrains under TPDS and other welfare schemes.

Benefits of Decentralized procurement:

  • Reduces transport costs, transit losses, leakages.
  • Reduce food prices in the open market. (Because less leakage and transit losses)
  • Increase food availability.

Economic survey observes

  1. Only few states implemented this Decentralized procurement scheme – And that too only for rice procurement
  2. Survey recommends all states should adopt this scheme, for both rice & wheat.

Storage expansion schemes

Since FCI’s godown capacity is insufficient, they’ve taken following initiatives

#1: Private Entrepreneurs Guarantee (PEG) Scheme.

  • Minister of Consumer Affairs, Food and Public Distribution
  • Objective: To increase grain storage capacity through private entrepreneurs.
  • Under the scheme FCI guarantees to hire private godowns for 10 years.

#2: Grameen Bhandaran Yojana

  • by NABARD
  • Funds given for construction and renovation of godowns in rural areas
  • Private companies, entrepreneurs, NGO and self-help groups eligible.

#3: other initiatives

  • 100% FDI allowed in warehouse construction.
  • 150% Income tax deduction allowed, for construction of warehouses.
  • Government has setup a statutory body: Warehousing Development and Regulatory Authority (WDRA) for supervision of warehouses across India.
  • Warehouse receipts are made fully negotiable i.e. can be used for taking loans from banks and trading at commodity exchange.

Budget 2014: on Public procurement reforms

  • We’ll restructure FCI
  • to reduce losses in transportation and distribution losses
  • We’ll enhance the PDS efficacy. (Efficacy = Capacity or power to produce a desired effect)
  • Even if there is inadequate rainfall (to due EL NINO), we’ll still provide wheat and rice at reasonable prices to poors.
  • If and when required, we’ll sell FCI’s foodgrains in open market to keep prices under control (for the middle class)

[Act 4] Subsidies+ MSP = Food inflation + Resource misallocation

Food inflation by subsidies and Minimum support prices
Economic survey blame subsidies and MSP for the food inflation.

  • With rising incomes, Junta shifting away from wheat, rice and staples towards more superior food like vegetables, fruits, eggs, milk, and meat.
  • In a market economy, supply side resources get reallocated as per purchase pattern from demand side.
  • For example, if people buy more tomatoes, some farmers shift from wheat farming, and put their land-labor-capital for tomato cultivation.
  • But because of the fertilizer-diesel-electricity subsidy on one side and MSP regime on the other, the farmers are continuing to stay in wheat cultivation instead of growing something else.
  • This has resulted in high level inflation in non-cereal food viz. vegetables, fruits, edible oil.
  • + hidden cost of leakages, inefficiency, and illegality that flourish alongside the public system
  • Market-based economies often provide income support, food stamps, and cash transfers to farmers and producers for protecting them but without distorting the resource allocation.
  • India needs to adopt the same system.
minimum support prices MSP in recent years

Economic Survey blames this steep rise in MSP for food inflation

Survey reforms

  • Large food stock, yet high food inflation. Because government becoming the single largest buyer.
  • Emphasis on rice+wheat procurement but consumer preference changing.
  • %Cereal Expenditure declined over the years. People spending more on  protein-rich food.
  • Therefore, instead of giving rice / wheat to juntaa, Government should give them food stamps or DBT. Let’em decide which food item they want to buy.
  • This’ll also reduce subsidy leakage and fiscal deficit.
  • This will motivate farmers to shift from rice-wheat to other crops.

Appendix: MSP price for 2014-15

CAPF 2014 did ask a question from these figures. Altogather cost : benefit bad. Anyways, here goes the data from the official site of CACP

CommercialRabi Crops
Jute (TD5)2400Wheat1400
Sugarcane220Barley1100
Copra (Milling)5250Gram3100
Copra (Ball)5500Lentil (Masur)2950
Rapeseed/ mustard3050
Safflower3000

Kharif Crops

Paddy Common1360Urad4350
Paddy Grade “A”1400Groundnut4000
Jowar-Hybrid1530Sunflower Seed3750
Jowar-Maldandi1550Soyabean Black2500
Bajra1250Soyabean Yellow2560
Ragi1550Sesamum4600
Maize1310Nigerseed3600
Tur (Arhar)4350Medium Staple Cotton3750
Moong4600Long Staple Cotton ^^4050

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
  2. Indian Polity M.Laxmikanth (Hindi | English)
  3. Spectrum: Modern History (Hindi | English)
  4. Maths: Quantam CAT Sarvesh Kumar
  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha

46 Comments on “[Economic Survey] Ch8: Agriculture Minimum Support prices (MSP), Sugar pricing, FCI, Decentralized Procurement, OMSS”

  1. ssc cgl tier 1 results are out!!!

  2. Sir I love ur website n , I m fan of ur editorial which u post o sote and it helps me lot being ias aspirant

  3. Ssc cgl 2013 re-exam tier 1 result is out

    1. I have my reg no, can I anyhow get my roll number through it?

      1. Open the result pdf… Press ctrl+F………Type your name, as in your admit card……. If your are qualified, your name will be displayed……

        1. dude there are 4 Nikhil Sharma out there :P…:(… my question paper and admit card is not with me right now…I guess will have to wait 4 it

          1. Type your complete name as it is mentioned in your certificates…. I mean, including surname… If not, I don’t know…

          2. u can match with first 4 digit which represent centre code for e.g. 1601 for chandigarh

          3. do any one know the code of delhi?

          4. @rajesh delhi’s code is 2201 and among those 4 only one’s roll no has that code and categeroy is general too….. stil not fully confirm though :D…newys thanks for the info , will get sure once i get my admit card..:)

    2. It was conducted in april as well as july. So is the combined result out for both the phases?Can u plz provide the link?

      1. Yes, it is the combined result.. You can check the result on official website…

        1. Can u please provide the link . Its not there in their official website

    3. ssc website is hung. any kind soul got alternate link/ can upload somewhere for the rest of us?

        1. thanks a lot, friend! i have qualified! :)

          others who helped with the links, thank you too :D

          1. congrts a lot , yr if you find any way to find out roll number thru reg number then do tell me, my admit card and question paper are at my delhi residence and right now m in lucknow and no body is there in delhi :( ….. and the list have 4 ppl of my name :( :(

          2. Hi
            My name is on 20th page ,last one
            1402002471
            But i dun know whethe i hav qualified or not
            Plz if somebody can sort it out

        1. What does it mean by “qualify for p3” and what are these cat 1 n all?

          1. @Aanya
            “qualify for p3” means that one has qualified for paper 3 that is statistics paper and its exam is held the next day of tier 2 papers but one is free to either give or not give it.

            Cat 1, cat2 may be it relates to someone’s category whether general or OBC , SC, ST

  4. kudos to you sir…!!!!!

  5. Thanx a ton Sir jee..

  6. Which of the following must be approved by the PAC before being submitted to the LS for voting? (Pls smbdy ;(
    1. Additional grant
    2. Exceptional grant
    3. Token grant
    4. Excess grant

    1. d) excess grant…….refer page 22.25 M LAXMIKANT

    2. option 4 (you can refer page 22.30 of Laxmi)

  7. sir
    please suggest me some books for culture, ecology, population, of india for assistant review officer exam of allahabad high court

  8. thanks alot sir………………………

  9. Sir thanx a lot , u r wonderful,,,all doubts cleared..

  10. Can any one explain how 150% income tax is deducted for warehouses

  11. Intriguing news – The candidates are hereby informed that all those who are appearing at the CSE (Preliminary) 2014 on 24th August 2014 would not be allowed to join the Foundation Course to be held for the CSE 2013 selected candidates.
    Thus that effectively means if someone, in the final merit list of CSE 2013, wants to improve his rank by writing CSE 2014, he/she would have to forfeit his place in the CSE 2013 final merit list ………….. :)

    Courtesy – http://persmin.gov.in/ais1/Docs/ExemptionFC-CSE13.pdf

    1. it means – suppose you want to be an IAS but your rank was not good enough in CSE 2013 and thus you got IPS which was yours 2nd preference. Now, you would certainly like to write CSE 2014 prelims so that you may get good enough rank to be an IAS………
      But you are not allowed to do join the Foundation Course at LBSNAA organized for every CSE 2013 recommended candidate if you write CSE 2014 PT on August 24, 2014 ……….

  12. I know its too late but the important instructions page has to be printed separately right?? because the download of admit card does not have that page…. plz tell me if i am wrong…

  13. Thanku sir for your initiative. u made my study so much entertaining with the diagrams and side remarks. The point-wise approach makes the concept learning easier to understand and grab!!

  14. sir, i have a doubt that if FRP is there and SAP is also there then at what price will the sugar factory will buy raw sugar from the farmers since they both are different

  15. reading this, today central govt announced 6000crore loan (interst free)

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