Income vs price support: price deficiency payment option for MSP

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Last Updated12/01/2024

The challenges faced by farmers in a buyer's market, emphasize the need for Minimum Support Prices (MSP) or alternative mechanisms like Price Deficiency Payments (PDP).

Farmers operate in a buyer's market, leading to sudden supply increases relative to demand, affecting prices.
Such market conditions, favouring buyers over sellers, also mean farmers are price takers.
They lack market power to influence prices and sell at prevailing supply and demand determined rates.
Therefore, farmers from time to time demand legal guarantees for minimum support prices (MSP) for their crops.

Economists favour income support over government-fixed MSPs based on cost-plus pricing, as it aligns with market demand.
- Cost-plus MSPs that are oblivious to demand conditions will distort farmers’ production decisions.
- This may result in the oversupply of some crops and an undersupply of others.
Direct income support schemes, like PM-Kisan Samman Nidhi and Rythu Bandhu, are considered non-market-distorting.
Moreover, price support can be a useful tool for promoting crop diversification.

Sugar mills are required, by law, to pay cane growers a “fair and remunerative” or “state advised” price within 14 days of purchase.
However, this strategy faces potential obstacles in implementation, or, in a more severe scenario, private traders may opt not to make any purchases at all.

Government agencies buy the entire marketable produce of farmers offered at MSP.
However, it is unsustainable, both physically and fiscally.

PDP involves paying farmers the difference between the market price and MSP, avoiding physical government purchases or stocking of crops.
It has been implemented in Madhya Pradesh's Bhavantar Bhugtan Yojana and Haryana's Bhavantar Bharpai Yojana.
PDP provides price assurance to farmers without distorting market dynamics and promotes crop diversification.

Haryana's BBY operates through ‘Meri Fasal, Mera Byaura’ portal where farmers register with details of their land and crops.
A mix of both physical procurement and PDP is employed based on the gap between MSP and market price.
The PDP payment rates tend to be on a fixed rate derived from average quotes at the National Commodity and Derivatives Exchange.

Madhya Pradesh and Haryana's success in delivering MSP through PDP demonstrates feasibility.
Nationwide implementation could incentivize other states to build market infrastructure and systems for effective MSP delivery.

PDP can be a viable alternative to traditional MSP mechanisms, offering price assurance to farmers without market distortions.
They have been able to do this because of the already-created APMC mandi infrastructure and systems for farmer registration.
This success indicates PDP’s potential for nationwide implementation, fostering a system where farmers across the country can benefit from MSP.