• UGI USER
  • Jan 11, 2024
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INCOME VS PRICE SUPPORT: PRICE DEFICIENCY PAYMENT OPTION FOR MSP

Why in the news?

  • Many economists oppose government-fixed Minimum Support Prices (MSPs) determined by cost-plus pricing without accounting for market demand.
  • They argue that farmers should align their planting decisions with market demand, as indicated by crop prices at a specific time.
  • Cost-plus MSPs, neglecting demand dynamics, can distort farmers’ production choices, leading to an overabundance of certain crops and a shortage of others.

What economists advocate?

  • Economists widely advocate providing farmers with “income” support rather than relying on “price” support mechanisms.
  • The approach involves transferring a fixed amount of money annually into farmers’ bank accounts, either on a per-farmer basis, exemplified by the Centre’s PM-Kisan Samman Nidhi, or per-acre, as demonstrated by the Telangana government’s Rythu Bandhu.
    • Direct income support schemes, such as PM-Kisan Samman Nidhi, are non-market-distorting and provide benefits to all farmers, regardless of the type or quantity of crops they cultivate and the prices at which they sell.
Aspect Income Support Price Support
Concern Uniform payments may overlook the extra efforts of primary producers. There is a need for recognition of the additional contributions and efforts of farmers investing more in their fields.
Target Group Applies to all farmers, irrespective of the scale of their operations. Particularly beneficial for farmers heavily invested in their agricultural activities.
Justification Concerns raised about fairness for those making significant investments in resources and efforts. Given the substantial risks faced by primary producers (weather, pests, diseases), a Minimum Support Price (MSP) guarantee may be considered a reasonable demand.
Promoting Crop Diversification Does not inherently promote diversification as the focus is on uniform income. Can serve as a useful tool for encouraging the cultivation of diverse crops, such as pulses and millets, by providing assurance through MSP.
Risk Exposure Uniform income support does not address the specific price and production risks faced by farmers. MSP can help mitigate the risks associated with fluctuations in market prices and production uncertainties.
Crop Choice Influence Does not directly influence farmers’ choice of crops, as income remains constant. MSP may sway farmers towards cultivating crops with assured price support, promoting diversification and sustainable agriculture.
Market Rate Alignment Independent of market rates, potentially leading to disparities. Effective when aligned reasonably with market rates, avoiding excessive deviations for fair inter-crop price parity.
Key Question How to ensure fairness and recognition for the efforts of individual farmers? Whether MSPs should be reasonably regulated to maintain a balance with market rates and support crop diversification effectively.

What is Price Deficiency Payment?

  • Price Deficiency Payments (PDP) involve the government not physically buying or storing any crop.
  • It consists of the government paying farmers the variance between the market price and MSP if the market price is lower. Payments are made based on the quantity of the crop that farmers sell to the private trade.
  • The initial implementation of Price Deficiency Payments (PDP) occurred in Madhya Pradesh through the Bhavantar Bhugtan Yojana.
  • In this scheme, the market price for a crop was determined as the average modal (most-quoted) rate in the Agricultural Produce Market Committee (APMC) mandis of Madhya Pradesh, along with two other states where the crop is grown, during the specific month of sale.
  • Haryana’s Price Deficiency Payment (PDP) scheme, known as Bhavantar Bharpai Yojana (BBY), primarily focuses on crops like bajra (pearl millet), mustard, and sunflower seed.
    • Technically, the scheme also encompasses groundnut, chana (chickpea), moong, along with 16 vegetable and 3 fruit crops.