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Price Deficiency Payments and Minimum Support Prices
There is an ongoing debate on whether minimum support prices for various agricultural commodities can be replaced by a system of price deficiency payments to farmers. The main objective of the intended policy shift is the improvement in farmers’ incomes as well as a reduction in farm subsidies. An analysis of this system suggests that price deficiency payments might be a better option for both farmers and the government. However, it should be properly designed so that it can improve farm incomes, national food security, fiscal prudence and sustainability of agriculture. Unlike the Price Loss Coverage programme in the United States, covering almost all crops, and the MSP in India covering as many as 23 crops, it should be limited to a few specific commodities.
The authors duly acknowledge the valuable comments made by an anonymous referee.
An occasional paper published in 2015 by the NITI Aayog calls for a reorientation of agricultural price policyon an urgent basis so that the farmers can get a remunerative price for their produce (GOI 2015a). According to this paper, this objective cannot be achieved through the procurement-backed minimum support price (MSP) policy because it is neither possible nor desirable for the government to buy each and every commodity in markets across the country. It goes on to suggest that the system of price deficiency payment can to some extent improve the prices received by farmers.
Under the deficiency payment system, a subsidy would be provided on targeted produce in case the price falls below a pre-specified assumed threshold. This approach would help prevent unwanted stocks and spread price incentives to producers in all the regions and all the crops considered important for providing price support. (GOI 2015a)
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