Context:

• Under a limited procurement system, government would procure excess farm produce and leave rest to be cleared at market price. For it to work, MSP must not be at a level to which market price will not rise.

Strategies for raising farm output:

• Recently, there has been an active discussion on the strategies for raising farm output by providing remunerative prices to agricultural products.
• Over the years, between the price and non-price factors, on balance, the latter has been seen as more effective.
• However, our experience also shows that the price environment cannot be ignored.

Various mechanisms of farmer support

• The effectiveness of a price support mechanism such as the Minimum Support Price (MSP) for addressing price decline would depend on how effective the system is for managing the supply-demand imbalances
• The scheme of “price deficiency compensation”, which amounts to paying the difference between the market price and MSP, has gained acceptance in states such as Madhya Pradesh, Rajasthan and Haryana
• At the other extreme is the “open procurement system”, that has been in vogue quite effectively in the case of rice and wheat, where procurement is open-ended at the MSP.

The “price deficiency” scheme:

• The “price deficiency” scheme may compensate the farmers when prices decrease below a certain specified level
• However, the market prices may continue to fall as the supply exceeds the “normal demand”
• Nearly all the produce may become eligible for the “deficiency payments” in theory as the prices, in general, would have fallen for all the producers
• An alternative is the limited procurement scheme. Under this scheme, the government will procure the “excess”, leaving the normal production level to clear the market at a remunerative price
• Thus, procurement will continue until the market price rises to touch the MSP

Factors for limited procurement system:

• The timing and speed with which the procurement is implemented are critical. It is important to determine the excess supply, which will indicate how much is to be procured
• Equally important is the quick assessment of price trends, particularly in the period immediately after the harvest begins, to arrive in the key markets
• In any case, the idea is not to absorb all the output but a quantity that would keep the supply-demand balance at the trend level
• The suggested “limited procurement system” will not work if the MSP is fixed at a level to which the market price will never rise
• A limited procurement option is necessary only in times of a sharp increase in production

Source:IE