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Agricultural stories

What is the need for Minimum Support Price in the agricultural price policy of India (for the farmers and consumers)

Rapid and violent fluctuations in the agricultural prices have many harmful consequences. Steep decline in the prices of a particular crop in one year can inflict heavy losses on the growers of that crop and reduce their income substantially. This will thus dampen their spirits to cultivate the same crop next year.

If this happens to be the staple food item of the masses, supply will remain below the demand, forcing the government to fill the gaps using imports (in case it does not have ample buffer stock to meet the acute shortage) If, on the other hand, prices of a particular crop soar very high in a particular year, the consumers are likely to suffer. Thus, in years of surplus the government should build up buffer stocks through purchase at minimum support prices to ensure the farmers are not penalised for producing more.

If the concerned crop constitutes a staple item for consumption, consumers will have to cut down their other expenditures substantially to meet their consumption expenditures on this item. This can have a disastrous effect on other sectors of the economy. Thus in the years of scarcity, the government should release the buffer stocks in a phased manner so that the interests of the consumers do not suffer and they are able to meet their consumption requirements at reasonable prices.

Hence, while fixing the minimum support prices the government should ensure that the MSP not only covers all the costs of the farmers but also has an element of incentive’. This means that the prices should guarantee certain minimum return above the cost of production, thus encouraging the farmers to produce more. This is very important from the point of view of developing countries like India, where the objective is not merely to ensure ‘price and income stabilization’ in the agricultural sector but to use it as an ‘instrument of growth’ also.

Accordingly, the agricultural price policy in a developing country benefits from having the following objectives:

1. To protect or insure the producer through guaranteed minimum support price, which is a stabilization measure reduces the variability in product prices and therefore price risk of the farmers.

MSP directly affects risk reduction for farmers

The impact of risk reduction, induces the farmers to undertake large investments.

The farmers will be able to part with large portions of the foodgrains and not keep more of it for self consumption (as they usually do to protect them in time of low market prices)

As more food grains are sold, income of the farmers will increase and they will be able to purchase high yielding seeds, fertilisers, irrigation facilities etc.

2. To protect the consumer against an excessive rise in prices, especially to protect the low income consumers in periods when supplies lag behind demand and market prices rise continually.

Thus Minimum Support Price plays a vital role in developing countries, like India. The agricultural price policies of the government in this manner thus serve a dual purpose- not allowing the prices to rise inordinately and not allowing them to fall below a certain minimum level.