3.1.2. Critical Evaluation of Minimum Support Price

a) Injects an element of certainty and confidence: The advance announcement of MSP and procurement prices by CACP (Commission for Agricultural Costs and Prices) provides an assurance to the farmers and they can confidently invest in the crops.

b) Contributes to inflationary trend: There has been continuous hike in MSP and Procurement prices due to the rich farmers’ lobby and it has pushed up the carrying cost of buffer stocks of FCI considerably. This has pushed up the food subsidy bill to a very high level.

c) Bias in favour of surplus states: Almost all states produce wheat, but 95% procurement is from Punjab, Haryana and Western UP. Similarly, around 20 states produce rice, while 90% is procured from Punjab, Andhra Pradesh, Haryana, UP and Tamil Nadu. Other states do not get much benefit from it.

d) Adverse impact on investment: Due to extra expenditure in food procurement, the other sectors looses out on new investments. It has been observed that a 10% increase in MSP of wheat and rice leads to a decline in investment by 1.9% and in overall GDP by 0.33%.

e) Distortion in cropping pattern: MSP of wheat and rice has generally been higher than the cost of production and that of cereals and pulses has been less than the cost of production. So farmers get incentivised for growing profitable crops and hence cropping pattern gets distorted.

f) Faulty criterion being used for calculating MSP: Since cost of production is the major criterion to decide MSP by CACP, inefficiency gets built up, land unsuitable for cultivation of particular crop is being used e.g. rice cultivation is being done in semi-arid regions of Punjab & Haryana which is creating environment and natural resources problem.

g) Bias in favour of large farmers: It has been estimated that in each state, the average income transfer to large farmers is approximately ten or more times greater than those received by marginal farmers.

h) Deterrent to crop diversification: With the price support policy favoring food grains, there is very little incentive for the farmer to move away from the food grains to the production of other crop. The price support policy has been a major deterrent to crop diversification. In determining minimum support prices, the CACP has taken into account cost of production as well as domestic and global market conditions. MSP is determined by the principle of full

cost of production that includes the rental value of land, an imputed value of family labor and returns to management.

i) Flaws in PDS: It is restricted mainly to wheat and rice only, while inferior grains which are main food of the poor have been neglected, PDS coverage in rural areas have been lesser than that in urban areas, high cost of running, and benefits not reaching the targeted beneficiary are the major flaws in PDS.

j) Impact on rural poor: Rise in price of cereals (due to higher MSP) leads to significant burden of high cost for the buyers.

k) Price incentives and fiscal squeeze: Because of the price incentives, there is an agricultural price rise. Since wages are linked to the agricultural price, it will end up in raising wage cost in non-agriculture sector and hence fall in private profits. This will lead to less tax collection by Government. Also, fall in purchasing power of people due to price rise will compress effective demand and hence will affect the economy negatively.

The pricing policy has proved to be helpful in several ways. From a situation of massive shortages, India has emerged as a grain surplus country with self reliance in food grains, and this inherent process of self sufficiency subsumed the inbuilt proposition of attaining food security at the national level. A strong base has been created for grain production and for meeting grain demand in the medium term. The policy has had a favorable impact on farm income and has led to an economic transformation in the well-endowed, mainly irrigated regions.

However, the adverse effects can also be recognized as the food policy has been highly asymmetric and skewed mainly towards the production of rice and wheat at the cost of cultivation of pulses, oilseeds and other crops. This has created serious imbalances in demand and supply of principal crops in the country. Similarly, the country has been facing large shortages of pulses and edible oils and now has to meet about one-tenth of its demand for pulses and close to half of the demand for edible oil through imports. These imports are in turn having an adverse impact on producers in the unfavorable dry-land areas. These changes necessitate a fresh look at the role and relevance of the Minimum Support Price system in the country.

Announcing procurement prices has become one of the primary tools of intervention in agriculture while other crucial issues like fall in capital formation, developing irrigation facilities, need of changing land holding pattern etc. have been ignored.