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The agricultural pricing policies and allied institutional mechanisms evolved in India in the context of shortages in the availability and excess demand for food grains during 1960s. A system of procurement and distribution of major food grains was introduced and statutory minimum prices were set, though not strictly enforced. India’s agricultural price policy includes three main types of administered prices: support, procurement, and issue price.
The support price is generally announced at sowing time, and the government agrees to buy all grain offered for sale at this price. These prices guarantee to the farmer that, in the event of excessive production leading to oversupply in the market, prices of his produce will not fall below the support price. Support prices generally affect farmers’ decisions indirectly, regarding land allocation to crops. The areas to be sown, however, depend upon the actual prices farmers realized from the previous crop and their expectations for the coming season.
The quantity to be procured is determined by the government’s needs for disbursements under the public distribution system. In recent years, however, the actual quantities procured have depended upon the grain offered for sale by farmers at prices fixed by the government. These prices are generally higher than the support prices but lower than the free market prices in normal years. In a good crop year, in surplus states, free market prices would have been lower but for government purchases; after the surplus is mopped up, market prices tend to run higher than procurement prices. The government recognizes the importance of assuring reasonable prices to farmers to motivate them to adopt improved technology and to promote investment by them in farm enterprises for increasing agricultural production.
Minimum Support Prices | These provide a long term guarantee to the producers, that in case of glut, prices will not fall below these announced minimum prices. The Government started large scale procurement of food grains at the MSP to ensure its intent. |
Procurement Prices | These are higher than MSP and are meant essentially for the purchase of quantities needed by the Government to maintain its PDS and for building up the Buffer Stock. |
Issue Prices | These indicate prices at which the Government supplies food grains through Fair Price shops and ration depots. |
The basic objective of agricultural pricing policy in India is to evolve a balanced and stable price structure to meet the overall needs of the economy while protecting, in particular, the interests of the producers’ and the consumers’. The policy is aimed towards facilitating the desirable path of attaining the objectives of growth and equity in the process of economic development.
Incentive prices in the form of minimum support prices are essential for the success of agricultural production programs based on high-yielding-varieties technology. At the same time, undue reliance cannot be placed on high prices alone as an incentive for increasing production of food grains. Effective implementation of price support policies requires adequate institutional arrangements for the purchase of quantities offered for sale at that price.