School of Economics | Replace Minimum Support Price (MSP) with Price Deficiency Payment (PDP)
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Replace Minimum Support Price (MSP) with Price Deficiency Payment (PDP)

Why do we need MSP?

The markets for agriculture inputs and outputs are ‘inefficient’, because of speculation, hoarding and leakages. They result into high input cost and low output price. India farmers have very low resilience to such uncertainties because :

Individually, most Indian farmers produce very little marketable surplus due to small landholdings, and don’t own cold storage infrastructure, hence they can’t command the commodity prices unlike the Saudi princes’ oil wells and OPEC cartel.Traders occupying cold storage space for hoarding potatoes and onions.Commodity market players protect themselves from price fluctuations by purchasing call options and put options. But, small farmers can’t do it.

Hence, agriculture is usually a loss making businessfor farmer without government intervention. Unless he’s compensated by the means of subsidy on fertilizer, electricity and water; and MSP for the produce, he’ll be ruined. [MSP: न्यूनतम समर्थन मूल्य]

MSP: Problems

While Government announces Minimum Support Price (MSP) for 23 crops to cover the price risks faced by the farmer, but this system has following problems:

MSP procurement excessively focus on the wheat, rice and sugarcane. This has led to depletion of water resources, soil degradation and deterioration in water quality in some states, especially in the north-western India.MSP procurement of rice & wheat distorts cropping patterns, because farmers avoid pulses, oilseed and coarse grains. This result is inflation, especially in pulses and edible oil.They don’t reflect the social and environmental costs. e.g rice and sugarcane consume high amount of water, versus Pulse cultivation consumes less water, helps in nitrogen fixing and pulses are the primary source of protein for vegetarian population of India. But the Commission for Agricultural Costs and Prices (CACP) recommends the MSPs to government only based on the economic terms such as production cost, international prices, supply vs demand vs inflation. So, present MSP system is not aligned with SDG goals.Many farmers lack awareness about MSP or they are far away from FCI procurement areas.MSP further aggravates the backwardness of eastern states, where procurement at the MSP is minimal or non-existent.MSP doesn’t cover perishables.

Replace MSP with PDP: why?

To solve above problems in MSP, Both NITI and Economic Survey recommend Price Deficiency Payment (PDP).

Declare MSP for all types of crops.Each farmer would register his crop and acreage sown with the nearest APMC mandi.If the market price then falls below the floor price, the farmer would be given DBT of the difference up to a maximum of, say, 10% of the MSP-linked price, into his Aadhaar-linked bank account.

[PDP=भरपाई मूल्य भुगतान प्रणाली. It’s not literal translation but the conceptual i.e. बाजारमें कृषि फसल मूल्यों और न्यूनतम समर्थन मूल्यों के बीच के अंतर के “मूल्य की भरपाई” सरकार करेगी.]

Benefits of PDP system?

Leakage reducedWTO’s Subsidy restriction norms complied.All crops and all farmers can benefit in all regions.FCI’s “open ended” procurement will stop. This will reduce grain-spoilage in godowns. [खाद्यान्नो की खरीद करना एक ‘निर्वाध प्रक्रिया’ है.]

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