Simplifying UPSC IAS Exam Preparation

Agriculture: Issues Related to Minimum Support

Prices (MSP), WTO and Subsidies
www.insightsonindia.com /2014/11/14/agriculture-issues-related-minimum-support-prices-mspwto-subsidies/
INSIGHTS
Pricing policy and WTO
1. Minimum Support Price
2. Additional bonus announced by Center and States
3. Commission for Agriculture Cost and Prices (CACP)
4. Criticism of MSP
5. MSP on Minor forest produce (MFP)
6. Levy procurement System
7. WTO and Subsidies

India is faced with a complicated situation as on one hand there is record production of cereals and on
the other hand there have been trends of stagnant high inflation even when FCI godowns are
overstocked. Many blame Indias minimum selling price policy for this situation. It has two unintended
negative impacts; one is growth in agriculture is not dictated by demand of economy, other is persistent
inflation. There are many other interventions which are isolated/unintegrated and lack broad vision of
sector as a whole. Further, India has challenge to align domestic markets with international markets as
exports of agriculture products can bring more prosperity to country side. It is said that 1% increase in
Agro exports results in Inflow of 8500 crores in the sector. In this sense we cant ignore WTO
negotiations. These are to be negotiated while taking care of sovereignty and food security of India.

1. Minimum Support Price

MSP initially was started as a safety net for farmers through a guarantee that if there produce is left
unsold in the market, will be bought by the government. Another purpose was to incentivize farmer to
produce more crops so as to ensure food security in India.
An ideal environment for this is one in which market prices are higher than support prices. When new
crop comes to the market it will be sold at market prices and a situation was possible where on
fulfillment of needs of consumers and industry, surplus is left with farmers. This will happen when
production is more than demand. Such situation will result in crash of prices of agri products. It is this
time when government should ideally intervene and purchase unsold stocks.
This policy took off in 1960s and at that time Procurement prices were announced at beginning of
sowing season, along with MSP. Procurement price was one under which government will buy the crop
which it needs to maintain buffer stock or for PDS. Once quantity required has been purchased,
farmers could only sell at MSP, which were kept lower than Procurement Prices. Procurement prices
were always kept lower than Market Prices. So preference of farmer was to sell in this manner 1st:
Market, 2nd: Government at Procurement Price, 3rd: Government at MSP.
From very beginning these prices were skewed in favour of food grains mainly Rice and Wheat. Soon

growth rate of production of these food grains outpaced Growth Rate of population and demand. This
was time when government should have changed its policy to diversify Farm basket more toward,
protein rich crops or horticulture, but this didnt happen and patronage to Cereals continued. In 1990s
government started announcing only MSP which was also procurement price. This was so because by
this time MSP was a big political plank and majority of farmer community was comfortable with Rice
and Wheat due to their comparative high yields. If MSP was greater or equal to procurement prices or
market prices, there is obviously no need of procurement prices. Since then MSPs has seen constant
upswings.
1. Additional bonus announced by Center and States
Apart from MSP, center often announces additional bonuses on the crops. Over the MSP and bonus of
Central Government, states also declare additional bonus. Problems are same but become
aggravated. Recently government took step in this regard by limiting procurement from states that
declare additional bonus, to the level of requirement of PDS and other schemes. Not all quantity
offered will be brought now.
1. Commission for Agriculture Cost and Prices (CACP)
Originally created as Agricultural Price Commission in 1960s to recommend Minimum Selling prices
for 11 crops and later it was renamed as CACP. It was a move to provide minimum floor price for these
crops. It was felt that a government buying agency is prerequisite for effective implementation of MSP
and Food Corporation of India was also created for procurement of foodgrains. Later for procurement of
pulses and oilseeds, National Agricultural Cooperative Marketing Federation of India Ltd (NAFED)
created. So prices are recommended by CACP for all products, foodgrains are procured by FCI and
pulse and oilseeds are procured by NAFED. However, horticulture, vegetables, fruits or dairy products
have no such support.
As of now MSP is recommended for 24 crops under 5 groups viz. Kharif Crops, Ragi crops,
Sugarcane, raw jute and copra.
For sugarcane instead of MSP, fair and remunerative price is declared. It depends upon recovery
percentage which varies from state to state. For other crops one MSP is declared for whole India. In
beginning practice was to declare regional prices. This was so because Input costs and returns of
crops vary from region to region. But later uniform MSP system was restored on ground that it alone
could lead to comparatively efficient use of resources in line with their comparative advantage.
Other issue is of data on which commission relies. In this case Directorate of Economics and statics
gives inputs about cost of cultivation to CACP. This data is assimilated over a long period and there is
time lag of about 2 years. So MSP fixed this year will be based on data captured 2 years back. This at
times has given significant variations in computation of MSP. To remedy this CACP use an adjustment
factor taking into account Inflation, but this is not effective.
MSP is based on economic criteria such as demand and supply situation, trends in domestic and
international market prices, cost of production, inter-crop price parity, terms of trade between
agriculture and non-agriculture sectors, trade policy in agriculture, effect on general price level, and so
on.
It should be noted that cost of production is just one of the factors taken into account and is not a sole
factor. Few years back Swaminathan Committee recommended that MSP should be cost plus 50%
mark up, but this was not implemented. Other Important factors which is considered is demand in the
economy this was added to terms of reference in 2009. As discussed in the beginning non sync of
MSPs with demands of economy was realized and this step was taken.
However, methodology of CACP doesnt have any specific weights attached to various given factors
and MSP is influenced by Subjective discretion of members. CAG also criticized methodology on

grounds of non-transparency.

Note that Jowar, which is a coarse grain, has its MSP higher than Rice. Cultivated area under Jowar
was on persistent decline and to arrest this decline its MSP was raised substantially in 2011.

MSP regime is often criticized on ground of

Distorted Production
Recent trends by NSSO indicates shift in pattern of food consumption from cereals to protein rich
foods, but no such remarkable shift is seen in sowing or production patterns. For e.g. India is largest
producer and consumer of pulses in the world, but still 25 % of the pulses consumed are imported.

Huge Stocks
This resulted in Open ended procurement which means government cant decide quantity it wants to
buy. How much ever grains are offered by farmers to gov. has to purchase. So now government has
huge stocks which are almost double the requirements for Buffer stock, PDS and Other government
schemes such as Midday Meal Scheme.
Out of control Inflation
As we have seen initially MSP and procurement prices were kept lower in relation to Market Prices. So
lower the market prices, even lower were MSP and procurement prices. Situation now is that Market
prices are dictated by MSP which remains most of the time higher. This brings market prices atleast on
par with MSP. Data suggests an obvious directly proportional link between hike in MSPs and Food
Inflation.
Only 1/3rd of the total cereal production is left for open market after government procurement and
captive consumption by the farmers. This creates shortage in open market and abundance in
government godowns.
Also, inflation in crops not covered under MSP is because of other reasons. As we have seen there is
shift in consumption pattern toward non cereal foods, but no corresponding growth in production. As a
result there is demand supply mismatch. So growth in non-cereal production is compromised in favour
of crops that fetch higher yields, which is out of sync with market demand.
Backwardness in Agriculture
Any industry grows when it adapts to a competitive environment. If farmers get market signals from the
market about upcoming trends of demands of consumers, total supply in economy, new technologies,
export opportunities or import vulnerabilities, they will find out more profitable crops, technologies and
will keenly adapt. Present system creates glut in market of particular crops. It leads to intensive farming
year after year, which degrades soil. Farmers rely on political pressure to remedy their problems,
instead of adapting to market. This all keeps private investment away for the sector.
Notwithstanding all this, it is unquestionable that our farmer needs support. Question under debate is
what sort of support should farmer get? Currently farmers besides numerous other input subsidies are
getting crop specific support. This means that our policy makers dictate agricultural product mix, which
otherwise is domain of consumers. For this it is essential that
1. Support should be Crop Neutral as has been recommended by many experts on the topic. If all
farmers get same monetary support despite of crops produced, then they are better placed to
diversify their crops as per demands of the market. This can be done by changeover to Income
support from MSP.
2. Farmers should get support at the time of distressed market prices. 1 st preference of farmers
should be to sell in market. At price which should be higher than MSP
MSP on Minor forest produce (MFP)
The MFP gatherers are mostly poor who are unable to bargain for fair prices. Govt. of India has
decided to introduce the scheme of Mechanism for Marketing of Minor Forest Produce (MFP) through
Minimum Support Price (MSP) and development of value chain. The scheme is designed as a social
safety net for improvement of livelihood of MFP gatherers by providing them fair price for the MFPs
they collect.
The scheme has been started with following objectives
To provide fair price to the MFP gatherers for the produce collected by them and enhance their

income level
To ensure sustainable harvesting of MFPs.
The Scheme will have a huge social dividend for MFP gatherers, majority of whom are tribals.
It is a holistic scheme for development of MFP trade including its value chain and necessary
infrastructure at local level. The MSP scheme seeks to establish a framework to ensure fair
returns for the produce collected by tribals, assurance of buying at a particular price, primary
processing, storage, transportation etc while ensuring sustainability of the resource base
Levy procurement System
State Governments/UT Administrations issue levy orders in exercise of the powers delegated to
them under the Essential Commodity Act, 1955 after obtaining the prior concurrence of Central
Government.
The aim is to increase procurement for governments buffer stocking and distribution through
PDS. Rice millers are mandated to supply a certain proportion (levy) of processed rice to the FCI
at a fixed processing margin.
The percentage of rice is fixed by the state governments taking into account requirements of
the Central Pool, domestic consumption and marketable surplus. The centre fixes the prices of
levy rice, which are typically below the market price, before the Kharif Marketing Season (KMS)
commences. The quantum of levy varies across states and ranges between 30 per cent and 75
per cent.
In nineteen of the 23 states/Union Territories that impose the levy it is 50 percent or more; it is
60 per cent in Uttar Pradesh and 75 per cent in AP, Haryana, Punjab, Uttrakhand and Odisha
thus leaving little rice for the open market. Kerala is the only state that has no system of levy.
The adverse effects that rice levies have on the markets are obvious: they discourage rice
millers investment, increase private traders transactions costs, breed corruption, and create
rents for special interests. Since millers are not allowed to sell in the open market until levy
requirement is met and because market price is generally higher than levy price, it creates
various avenues of corruption in the foodgrains marketing chain. Further bad quality is supplied
to government (such as broken rice) which otherwise would have fetched low prices.
Until last year sugar was also under levy and non-levy obligations, on recommendations of
Rangarajan committee these were removed. Under Non levy obligations Sugar mills were given
fortnightly, monthly, half yearly quotas for sale of sugar. This was because sugarcane is
seasonal crop and about 90% of sugar is produced in just two months. Unregulated sale can
create avenues for hoarding and big price fluctuations.
WTO and Subsidies
WTOs agreement on agriculture was concluded in 1994, and was aimed to remove trade
barriers and to promote transparent market access and integration of global markets. Agreement
is highly complicated and controversial; it is often criticized as a tool in hands of developed
countries to exploit weak countries. Negotiations are still going on for some of its aspects.
Agreement on agriculture stands on 3 pillars viz. Domestic Support, Market Access, and Export
Subsidies.
1. Domestic Support It refers to subsidies such Guaranteed Minimum Price or Input subsidies
which direct and product specific. Under this Subsidies are categorized into 3 boxes
1. Green Box Subsidies which are no or least market distorting includes measures

decoupled from output such as income-support payments (decoupled income support),

safety net programs, payments under environmental programs, and agricultural
research and-development subsidies.
Such as Income Support which is not product specific. Like in India farmer is supported
for specific products and separate support prices are there for rice, wheat etc. On the
other hand income support is uniformly available to farmers and crop doesnt matter.
US has exploited this opportunity to fullest by decoupling subsidies from outputs and as
of now green box subsidies are about 90% of its total subsidies. It was easy for USA
because it doesnt have concern for food security. Further, it has prosperous agro
economy, and farmers can better respond to markets and shift to other crops. But in
India, domestic support regime provides livelihood guarantee to farmers and also
ensures food security and sufficiency. For this MSP regime tries to promote production of
particular crop in demand. And this makes decoupling Support with output very
complicated.
USA was also in position to subsidies R&D expenditure in agriculture as almost all the
farming in US is capitalist and commercial. Big agriculturists spend substantial amount on
technology upgradations and R&D. But in India about 80% of farming is subsistence and
hence, India & other developing countries can use this opportunity.
2. Blue Box
Only Production limiting Subsidies under this are allowed. They cover payments
based on acreage, yield, or number of livestock in a base year.
Targets price are allowed to be fixed by government and if market prices are lower than farmer
will be compensated with difference between target prices and market prices in cash. This cash
shall not be invested by farmer in expansion of production.
Loophole here is that there no limit on target prices that can be set and those are often set far
above market prices deliberately. USA currently isnt using this method, instead here EU is
active.
1. Amber Box
Those subsidies which are trade distorting and need to be curbed.
The Amber Box contains category of domestic support that is scheduled for reduction based on
a formula called the Aggregate Measure of Support (AMS).
The AMS is the amount of money spent by governments on agricultural production, except for
those contained in the Blue Box, Green Box and de minimis.
It required member countries to report their total AMS for the period between 1986 and 1988,
bind it, and reduce it according to an agreed upon schedule. Developed countries agreed to
reduce these figures by 20% over six years starting in 1995. Developing countries agreed to
make 13% cuts over 10 years. Least developed countries do not need to make any cuts.
As we can note that Subsidies were bind to levels of 1986-1988, there was inequality at very
beginning of the agreement. At that time subsidies which latter came under Amber Box were
historically high in western countries. In developing countries, including India these subsidies
were very limited. It is only now under pressure of Inflation in prices of agricultural Inputs, and
wide differences between market prices and Minimum support Price, subsidies have grown to
this level. In effect developed countries are allowed to maintain substantially higher amount of
trade distorting subsidies.
De-Minimis provision

Under this provision developed countries are allowed to maintain trade distorting subsidies or
Amber box subsidies to level of 5% of total value of agricultural output. For developing countries
this figure was 10%.
So far Indias subsidies are below this limit, but it is growing consistently. This is because MSP
are always revised upward whereas Market Prices have fluctuating trends. In recent times when
crash in international market prices of many crops is seen, government doesnt have much
option to reduce MSP drastically. By this analogy Indias amber box subsidies are likely to cross
10% level allowed by de Minimis provision.
Bali Summit, Trade facilitation and Peace Clause
These provisions are not agreed to by India yet and for this Negotiations are going on. This
matter was taken up in recent Bali meet and an interim peace clause was reached at.
Developed countries made an attempt to couple negotiations on this issue with another issue of
Trade facilitation. Under a package, Trade facilitation was agreed to by all nations and for
revision of limits under de minimis provisions; a Peace clause was agreed at. Please clause
gave countries 4 year times to adjust to the limit and avoid sanctions.
Date for ratification of Bali agreement was 31 July, 2014, on which India declined to ratify unless
a permanent solution is reached. After this in November, India US reached understanding in
which time limit of 4 years was removed and in return Trade Facilitation was agreed to by India.
Notably in Deal at Bali, Developed countries were able to woo under developed countries on
basis of a Special Package for them directed toward Social and physical infrastructure. India as
a result was isolated in all this, only South Africa extended some support to Indias stand
Trade Facilitation requires member countries to invest in Infrastructure that facilitates Imports
and exports, simplify custom procedures and remove other non-tariff barriers.
It should be note that development of Infrastructure is already a priority for government and it is
much desirable in agriculture too, as India is net exporter of agri products. But issue was of 4
years of peace clause, which now stands removed.
Trade facilitation deal
was marketed by developed countries as a progressive and much needed deal for good of all
type of countries. It is being said that it will boost up Global GDP by $ 1 Trillion and will add
millions of new job. This argument has a little or no empirical backing and it is feared that
western supplier will invade domestic markets of developing and underdeveloped countries.
Trade facilitation along with special package is like saying that gains of developed countries
will be so big, that losses of under-developed countries will be lucratively compensated by them.

Market Access: The market access requires that tariffs fixed (like custom duties) by individual
countries be cut progressively to allow free trade. It also required countries to remove non-tariff
barriers and convert them to Tariff duties.
Earlier there were quotas for Imports under which only certain quantities of particular
commodities were allowed to Import. This is an example of Non-tariff Barrier.
India has agreed to this agreement and substantially reduced tariffs. Only goods which are
exempted by the agreement are kept under control.
Maximum tariff has been bonded as required by WTO, under which a higher side of tariffs is
fixed in percentage that should never be surpassed. Generally actual tariffs are far below this
high limit. This makes custom policy transparent and tariffs cant be fixed arbitrarily.
If India is able to diversify its production and add value by food processing, then this is a win-win
deal for India. A number of commodities are exported to West and low tariffs in west will benefit
Indian suppliers.
Export Subsidy: These can be in form of subsidy on inputs of agriculture, making export
cheaper or can be other incentives for exports such as import duty remission etc. These can
result in dumping of highly subsidized (and cheap) products in other country. This can damage
domestic agriculture sector of other country.
These subsidies are also aligned to 1986-1990 levels, when export subsidies by developed
countries was substantially higher and Developing countries almost had no export subsidies

that time.
But USA is dodging this provision by its Export credit guarantee program. In this USA gov. gives
subsidized credit to purchaser of US agricultural products, which are to be paid back in long
periods. This is generally done for Food Aid programs, such as (Public Law-480) under which
food aid is send massively to under developed countries. India also received this Aid in 1960s.
But this is only at concessional rates and credit options. But this results in perpetual
dependence on foreign grain in recipient countries and destroys their domestic agriculture. So
this is equally trade distorting subsidy, which is not currently under ambit of WTOs AOA.
There is little doubt that subsidies and support to agriculture should be controlled and better targeted.
WTO negotiations also claim to work towards this direction, but inherent conflicting and vested interest
of few countries are too influential in WTO. Many allege that WTOs agreement on agriculture is just a
tool for neo-imperialism in hand of MNCs. Every country has different requirements and different
product mix, so enough flexibility is must in any agreement. Further, right to food is a global movement
and is guaranteed by numerous UN conventions. So, ensuring food security is a domestic concern of a
nation, international community can just advice but cant coerce other sovereign country. Thus, India
has to made its expenditure much more effective, with dynamic policy and resist any outside pressure
which is misdirected towards negative results for Indian people.
In last few years, due to global slowdown, there was very low Inflation (or even deflation) in
International commodity prices. At same time prices in India was reeling under double digit food
inflation. This indicates toward highly distorted agro economy not only in India, but globally. In WTO
negotiation there should be constant pressure on developed countries to align their total subsidies to
developing countries. System of Amber, blue, green box should be considered for change and
preferably it should be done away with as it gives leeway to developed countries to carry on with
distorting subsidies.