- [Act 1] Minimum support prices (MSP)
- [Act 2] Sugar pricing problem
- [Act 3] Food Corporation of India (FCI)
- [Act 4] Subsidies + MSP = Food inflation + Resource misallocation
- Appendix: MSP price for 2014-15
- Fertilizer subsidy & schemes, Budget-2014 announcement
- Minimum support pricing (you’re here)
- National food security act (NFSA)
- WTO Bali Summit
- APMC reforms, National market for agriculture, NSEL crisis
- El Nino and its impact on Indian monsoon
|Minimum Support price|
|Wheat and Rice|
- 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.
|Season||North India||South India|
|Kharif: June to Sept||Rice, Cotton, Bajra, Maize, Jowar, Tur||Rice, Maize, Ragi, Jowar, Groundnut|
|Rabi: Oct to March||Wheat, Gram, Rapeseeds and Mustard, Barley||Rice, Maize, Ragi, Groundnut, Jowar|
|Zaid: April-June||Vegetables, Fruits, Fodder||Rice, Vegetables, Fodder|
- Sugarcane is a kharif crop. (says Hindu)
- 60% of India’s foodgrain and oilseeds grown in Kharif Season. (says Economic Survey)
Sugar pricing coverned under Essential Commodities (EC) Act 1955 => Sugarcane (Control) Order 1966
|MSP||CACP recommends this price.|
- 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.
- 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.”
- 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
- open-ended procurement of food grains
- Storage of foodgrains.
- Distribution of foodgrains.
|Wheat & rice||FCI|
|Coarse grain||State Governments|
|Oil seed & Pulses|
- procurement successful mainly rice and wheat
- That too only in a few states like Punjab, Haryana, Andhra Pradesh, and Madhya Pradesh.
- Government keeps raising MSP but traders unwilling to pay that much to farmers. Ultimately, FCI has to procure.
- This higher procurement leads to exceeding stocks than the quantity necessary as buffer stock (to fight drought/worst case scenario).
- So, FCI has to carry forward this buffer stock to next year. But godowns capacity insufficient.
- Result? Rotten grain.
- FCI can E-auction of Rice and Wheat.
- August 2014: FCI began selling wheat to flour millers, traders and food companies under this scheme.
- 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.
|FCI||bidder has to pay|
|old wheat stock||Rs.1500 + transport cost|
|new wheat stock|
- 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
- Only few states implemented this Decentralized procurement scheme – And that too only for rice procurement
- Survey recommends all states should adopt this scheme, for both rice & wheat.
Since FCI’s godown capacity is insufficient, they’ve taken following initiatives
- 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.
- by NABARD
- Funds given for construction and renovation of godowns in rural areas
- Private companies, entrepreneurs, NGO and self-help groups eligible.
- 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.
- 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)
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.
- 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.
CAPF 2014 did ask a question from these figures. Altogather cost : benefit bad. Anyways, here goes the data from the official site of CACP
|Copra (Ball)||5500||Lentil (Masur)||2950|
|Paddy Grade “A”||1400||Groundnut||4000|
|Tur (Arhar)||4350||Medium Staple Cotton||3750|
|Moong||4600||Long Staple Cotton ^^||4050|