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Achieving growth and equity is the intention of deploying price policies in agricultural markets. During times of distress, price policies influence and control price fluctuation and supply shocks as produce moves from farm to retail. In this post, we will review the impact of the Indian government’s price policies over the last 50 years.

Instruments of Intervention

The government’s price policy involves three instruments. First, through the Minimum Support Price (MSP), the government guarantees farmers a minimum price for their produce regardless of the market rate. Second, the government acquires produce as buffer stock and stores it in the event of scarcity. And third, the government’s public distribution system provides food grains purchased at subsidised rates to people living below the poverty line. These three instruments help fulfil the government’s price policy’s twin objectives of higher returns to farmers (MSP) and food security (buffer stock and public distribution).

Timeline of Intervention

timeline-of-intervention

The Cycle of Intervention

As mentioned earlier, after the 1990s there was an emphasis on using price policy as an intervention measure. As production cost rose, there was a corresponding rise in MSP to insulate farmers from incurring losses on their crops. In effect, MSP and cost of production went hand in hand during this phase.

As production rises, costs decline, productivity increases and so does profitability. Therefore, intervention must stop once profitability is achieved.

However, the graph below shows that between 2004-2006 as production rose, the cost of production also rose by 3%, the yield fell by 1%, and MSP increased by 10%!

the-cycle-of-intervention

Yields fell because of a rise in the cost of production. However, this disproportionate rise in MSP was a result of the vicious cycle created by excess government intervention. Instead of using MSP as a distress measure, the government used it as a primary way of helping maintain farmer income levels.

Initially, the pricing policy helped reduce the cost of production and yields rose. However, the government lacked a simultaneous policy to encourage agricultural investment and propel technology and mechanisation. And because yields are influenced by more factors than just cost, they eventually began to decline. Again, to insulate farmers from any income loss due to low yields, the government continued to dole out higher MSPs creating a vicious circle of low productivity, high cost of production, and even higher MSPs. This also explains the stagnant, even declining, yields of food grains over the past decade.

Parting Thoughts

Ideally, a price policy should not be a constant initiative. Its primary objective is to protect both producers and consumers by balancing consumer demand with producer’s output. Therefore, MSP must be implemented in times of distress in order to influence and control price fluctuation and supply shocks. Our next post will explore the impact of India’s price policies on food wastage, monocropping, and the environment.

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