[Summary] Economy#4A: Agriculture Output Selling (3/3): Price Deficiency Payment (PDP), MSP, APMC & Food Management gist of Survey Vol1&2, NITI 3YRs & SDG30

1. Prologue
2. MSP: Why?
   • MSP: Problems
   • Replace MSP with PDP: why?
   • Counter-cyclical sowing:
3. APMC act: problems and remedies
   1. APMC Reforms?
   2. E-NAM: Feature & PRoblems
4. Food Management
   • OMSS
   • Price Stabilization Fund-2014
   • DCP-1997
   • NFSA-2013

Prologue

In the previous two articles, I covered summary of NITI3Yr & Economic Survey 2016 summary on what should be done at the input (farming) and research level to double the farmers’ income. Now to the last stage i.e. output (selling):

Why do we need MSP?

The markets for agriculture inputs and outputs are ‘inefficient’, because of speculation, hoarding and leakages. They result into high input cost and low output price. India farmers have very low resilience to such uncertainties because :

1. Individually, most Indian farmers produce very little marketable surplus due to small landholdings, and don’t own cold storage infrastructure, hence they can’t command the commodity prices unlike the Saudi princes’ oil wells and OPEC cartel.
2. Traders occupying cold storage space for hoarding potatoes and onions.
3. Commodity market players protect themselves from price fluctuations by purchasing call options and put options. But, small farmers can’t do it.

Hence, agriculture is usually a loss making business for farmer without government intervention. Unless he’s compensated by the means of subsidy on fertilizer, electricity and water; and MSP for the produce, he’ll be ruined. [MSP: न्यूनतम समर्थन मूल्य]

MSP: Problems

While Government announces Minimum Support Price (MSP) for 23 crops to cover the price risks faced by the farmer, but this system has following problems:

1. MSP procurement excessively focus on the wheat, rice and sugarcane. This has led to depletion of water resources, soil degradation and deterioration in water quality in some states, especially in the north-western India.
2. MSP procurement of rice & wheat distorts cropping patterns, because farmers avoid pulses, oilseed and coarse grains. This result is inflation, especially in pulses and edible oil.
3. They don’t reflect the social and environmental costs. e.g rice and sugarcane consume high amount of water, versus Pulse cultivation consumes less water, helps in nitrogen fixing and pulses are the primary source of protein for vegetarian population of India. But the Commission for Agricultural Costs and Prices (CACP) recommends the MSPs to government only based on the economic terms such as production cost, international prices, supply vs demand vs inflation. So, present MSP system is not aligned with SDG goals.
4. Many farmers lack awareness about MSP or they are far away from FCI procurement areas.
5. MSP further aggravates the backwardness of eastern states, where procurement at the MSP is minimal or non-existent.
6. MSP doesn’t cover perishables.

Replace MSP with PDP: why?

To solve above problems in MSP, Both NITI and Economic Survey recommend Price Deficiency Payment (PDP).

• Declare MSP for all types of crops.
• Each farmer would register his crop and acreage sown with the nearest APMC mandi.
• If the market price then falls below the floor price, the farmer would be given DBT of the difference up to a maximum of, say, 10% of the MSP-linked price, into his Aadhaar-linked bank account.

[PDP=भरपाई मूल्य भुगतान प्रणाली. It’s not literal translation but the conceptual i.e. बाजारमें कृषि फसल मूल्यों और न्यूनतम समर्थन मूल्यों के बीच के अंतर के “मूल्य की भरपाई” सरकार करेगी.]

Benefits of PDP system?

1. Leakage reduced
2. WTO’s Subsidy restriction norms complied.
3. All crops and all farmers can benefit in all regions.
4. FCI’s “open ended” procurement will stop. This will reduce grain-spoilage in godowns. [खाद्यान्नो की खरीद करना एक ‘निर्वाध प्रक्रिया’ है.]

Counter-cyclical sowing:

• Farmer’s response to price uncertainty comes only after the lag of year. E.g. in Year#1, if tomatoes are selling at over Rs.100 per kilo due to shortage, then next year all farmers will shift from onions to tomatoes cultivation to fetch better returns, leading to excess production and drastic fall in the tomato prices may be Rs.5 per kilo; while simultaneously onion reaches at Rs.100/kg.
• A farmer in the above scenarios can benefit, only if his pattern of sowing is contra-cyclical, akin to trading in the stock market. [बुआई का तरीका मूल्य-चक्र से विपरीत होना चाहिए.]
• Agriculture extension workers have to educate farmers on this, to adopt a stable sowing pattern so that in the long run farmer receives the average price of the produce. [दीर्घावधि में उत्पाद की ओसत कीमत उसे मिल सके.]

APMC act: problems and remedies

Introduction (Origin)

• In the post independent India, despite the abolition of zamindari, the farmers were not ‘liberated’ from exploitation. Because the goons of local bainyaa or moneylender would (often forcibly) take away the produce to recover their dues without adequate compensation to the farmer.
• To address this nuisance, state governments began enacting laws to provide that “first sale of agriculture produce can occur only at the government notified market yards only”.
• Such laws are known as “APMC Acts”.
• Under these acts, agricultural produce market committees (APMC) are formed, who are responsible for the operation of the local mandis / market yards. [APMC: कृषिगत उत्पाद विपणन समिति]

APMC Problems?

• APMC office bearers are politically influential persons. They enjoy a cozy relationship with the licensed commission agents. These agents then form cartel, manipulate prices and deprive farmers of remunerative prices.
• APMC office bearers lack corporate skill for vertical integration with food processing industries. [because their only skill is ‘politics.’]
• While these Mandis charge multiple entry, exit and other fees. But money is siphoned off hence they’ve poor infrastructure, lack of cold-storage and transport facilities esp. for fruits and vegetables. This leads to substantial waste of the produce despite bumper harvests during good monsoon years.
• Thus, APMC’s cartelization and poor infrastructure leads to artificial or real shortage of food supply in the retail market, thereby driving up the food inflation.

APMC Reforms?

Since agriculture is a state subject, ultimately state governments have to reform their archaic laws. Union Government already circulated a model APMC Act, but most states have implemented it only half-heartedly. Hence, Both Niti3YR & ES16 have recommended following:

1. Replace the APMC ‘licensed’ intermediary system with open registration backed by bank guarantees. So that entrepreneurs without political clout, can also enter this game.
2. Such Non-APMC registered buyers should have right to
   • Setup alternate marketplace.
   • Buy produce directly from the farmer.
3. This will create competition and pave the way for the farmer to receive lucrative prices.
4. For small farmers it is neither feasible nor profitable to take their produce to markets, so governments should allow for “aggregators” who would collect produce from farmers for sale in competitive marketplaces.
5. Exempt perishables from the APMC acts.
6. Promote farmer cooperatives for direct retailing to customers.
7. Encourage contract farming.

Apart from that, many points such as mega food parks, contract farming etc. already covered in my food processing article series for GSM3. See it on this URL

E-NAM: Feature & PRoblems

• 2016: Electronic-National Agricultural Market (e-NAM) was launched to unify mandis across the nation into a single national market through electronic trading. [इलेक्ट्रोनिक राष्ट्रीय कृषि बाजार]
• Any registered buyer located anywhere in India can buy from any farmer anywhere in in India.
• In theory, E-NAM is to reduce the asymmetry of information between buyer and seller; as well as the cartelization among buyers. But….
• Buyers (especially food processing companies) have a strong preference for physical inspection of grain (instead of online purchase), but sellers (Farmers) fear this will reduce the prices, as buyers will make frivolous complaints about poor-quality.
• Ultimately, both big buyers (such as food processing companies, big retailers etc.) and small farmers feel hesitant in opting for E-NAM online trading.
• Suggested Reforms in E-NAM? Third party assaying and quality certification mechanisms, dispute settlement mechanisms, systems for forwarding goods to buyers etc….only then both buyer and seller can trade confidently.

Conclusion (Output)

For all the descriptive questions associated with “agriculture selling”, you can utilize following readymade conclusions:

• Indian agriculture has predominance of small and marginal farmers, for whom Mechanization and economies of scale not possible. They have very little marketable surplus, their bargaining power is low. They’re price takers, not price makers.
• Consequently, the annual median agriculture income for an Indian farmer is less than 20,000 rupees. Therefore ______ reform(s) is essential for enhancing their income and achieving the target of doubling the farmers income by 2022.

OR you can play the Pipudi (small-flute) of SDG:

• SDG (Goal#2) requires all the nations to double small farmers’ incomes by 2030 and correct the restrictions and distortions in the local and international agricultural markets.
• Indeed, the ____ reform in MSP/APMC/E-NAM therefore deserves priority and attention.

OR you can play the Pipudi of DPSP also:

• The directive principles of state policy enshrined in our constitution requires the governments to ensure the right to adequate means of livelihood for all citizens and prevent of concentration of wealth.
• The APMC cartels (or the aforementioned issues in MSP) are one of the stumbling blocks in this path, hence aforementioned reforms need to be implemented on on war-footing.

Food Management (खाद्यान्न प्रबंधन)

It involves following stages:

1. Procure food grains from farmers at remunerative prices / Minimum Support Price (MSP). For cereals, FCI conducts open ended procurement i.e. all farmers can sell any amount of quantity, no quota system or upper ceiling. (Even if FCI doesn’t have enough storage capacity!)
2. Store food buffer to ensure food security and price stability. FCI also keeps 5 million tones of food grains as “Strategic reserves” for extreme situations.
3. Sell/ Distribute the food grains to consumers, especially poors, at affordable prices [=Central Issue Price (CIP)]. It’s not open ended. Here, “state wise, beneficiary wise” allocation depends on various rules and laws.

OMSS

By default, the food grains procured by FCI are to be sold at the PDS outlets. However, if there is rise in food inflation, FCI would also sell the grains in open market to increase supply and curb price rise. This is called Open Market Sale Scheme [खुला बाजार बिक्री स्कीम]. OMSS benefits:

1. Increases food grains supply @lean season, thereby moderating the inflation.
2. Excess stocks offloaded so, FCI’s godown/storage cost is reduced.
3. Saves food grains from deteriorating in public godowns.

Price Stabilization Fund-2014

Objective is similar to OMSS i.e. curb food inflation.

• Union Government gives interest free advances to various central/state/UT agencies to procure food from local and foreign farmers and sell it to aam-aadmi at reasonable prices.
• The losses during sale are borne by Union and State. (Ratio is different for ordinary and special category states but we are not preparing for MCQs so let’s not bother.)
• Eligible items are pulses and perishable agri-horticultural commodities

DCP-1997

• Food corporation of India (FCI) is responsible for procurement, storage and distribution of food grains.
• But since FCI alone can’t reach all farmers, Government launched a scheme Decentralized Procurement (DCP) [विकेंद्रीकृत अधिप्रापण योजना]
• Wherein State Government themselves procure and distribute the wheat and rice. Union will bear the costs.

DCP benefits:

1. More farmers covered
2. Saves transit losses and costs
3. Procurement of foodgrains more suited to local taste for distribution under the targeted public distribution system (TPDS) [लक्षित सार्वजनिक वितरण प्रणाली].

Associated topic is Shanta Kumar Committee on FCI reforms. I’ve given its summary in this Article (Click Me).

NFSA-2013

• 1997: Department of Food & Public Distribution started Targeted Public Distribution System (TPDS) to provide affordable food grains to poor Indians.
• 2013: National Food Security Act (NFSA) was enacted to make TPDS a ‘legal right’ for 50% of urban and 75% of rural population. [खाध्य सुरक्षा अधिनियम]
• Union procures the foodgrain and supplies to the states. State identify the beneficiaries and provide them food (or cash, if they don’t have distribution mechanism.)
• NFSA has lifecycle approach i.e.
  1. For children: nutritional meal at school
  2. For pregnant and lactating mothers: cash transfer + food grain.
  3. For others: food grains at subsidized prices: coarse grains @Rs. 1/kg, Wheat @ Rs. 2/kg,Rice @Rs.3/kg with quota limits, viz.
     • For priority households: 5 kg per person per month
     • For antyodaya Anna households i.e. poorest of the poor: 35 kg per family per month.
• 2016: All States/UTs have implemented this NFSA act.
• Chandigarh, Puducherry, Dadra & Nagar Haveli have started DBT of NFSA food subsidy, so beneficiary can buy food grains from open market. [नकदी अंतरण प्रणाली]

I’m not going into Malnutrition, merits/demerits of DBT/UBI etc. here, we’ll see it along with Human development i.e. 6^th pillar.
As such the three part series “input-R&D-output” is over, but some misc. allied topics are still pending such as Tomato inflation and animal husbandry. That we’ll see in the next time.