True value
Prof T Haque discusses the role of the agricultural price
policy in the wake of economic liberalisation
The Agricultural Price Policy being
followed in India from 1965 onwards, is
generally known as the minimum
support price policy. Currently, the Union
government fixes minimum support prices of as
many as 24 agricultural commodities, based on
the recommendations of the Commission for
Agricultural Costs and Prices (CACP). The
main objectives of the minimum support price
policy are to provide incentive to the farmers
for adopting improved technology and for
developing a production pattern broadly in the
light of national requirements - and also to
ensure rational utilisation of land, water and
other production resources.
It is now widely recognised that the
minimum support price policy has been one of
the key instruments, along with application of
modern technology, to make the country selfsufficient
in the production of foodgrains.
However, currently in the wake of economic
liberalisation, there are some confusing
perceptions about the relevance of minimum
support price policy. The present paper is
intended to discuss the role of agricultural
price policy in the wake of economic
liberalisation and remove various confusions
prevailing in academic, administrative as well
as political circles. While the Common
Minimum Programme of the government
promises to ensure payment of remunerative
prices to all farmers for all crops and in all
regions, the Economic Survey of 2003-04 holds
the system of open-ended procurement at
minimum support prices, responsible for high
bill of food subsidies. Besides, several
economists have recently pointed out that the
minimum support price policy tends to distort the open market prices and discourage the
growth of private trade in food grains.
It should be recognised that the minimum
support prices (MSP) fixed by the government
do not necessarily guarantee remunerative
prices to all farmers for all crops and in all
areas. In fact, farmers of several regions
complain that existing MSPs do not cover their
costs of production. It hardly requires to be
mentioned that a farmer and for that matter
any entrepreneur would have to earn some
profit for future investment and growth for
which there should be a remunerative price
for his produce. If the market fails to ensure
the remunerative price at any time, the
government should effectively intervene and
provide such support, as buyer of the last
resort. Unfortunately, the minimum support
prices are not always fixed at such incentive
levels, even though protecting the interests
of farmers and the farm economy remain
upper most in the minds of the CACP and
the government.
The factors which are considered in the
determination of minimum support prices by
CACP include (i) costs of production (ii)
changes in input prices (iii) input-output price
parity (iv) inter-sectoral terms of trade (v)
trends in domestic as well as international
market prices (i) demand-supply situation (vii)
effect on industrial cost structure and general
price level (viii) rational utilisation of land,
water and other resources (ix) inter-crop price
parity and desirable cropping/production
pattern and (x) effects of other policies on farm
economy. The weights assigned to various
factors vary from time to time, depending on
the objective needs of the economy at any
particular point of time. However, efforts are
generally made to cover at least A2+FL cost
(paid out expenses plus the imputed value of
family labour) for those states where the costs
of production are high and cover C2 cost
(including not only the paid out cost, but also
the imputed value of family labour, rental value
of land and interest on capital) for those states
where the costs are relatively low. The idea is
to encourage a regionally differentiated
production strategy based on cost-effectiveness.
Nevertheless, the MSPs fixed may not cover
any of these costs in some regions for some
crops, as the costs of production vary widely
from region to region and farm to farm, while
the CACP considers all India weighted average
costs. Unless the government fixes different
MSPs for different regions and farmers, there
is no way the existing methodology can
guarantee remunerative prices to all farmers
in all regions. At the same time, it should be
understood that the fixation of different MSPs
for different regions would not only stand in
the way of efficiency of agricultural
production and market integration - it would
also pose a problem of implementati
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