October 22, 2010

raising support prices of crops

For those who don’t know what food procurement and support prices mean in Indian context, this is a small primer.

India grows about 225 million tonnes of food grains and government agencies procure about 50 million tonnes of it from farmers in the harvesting season. Most of the grain so procured [mostly wheat and rice] is channelized into the state-run Public Distribution System or the rationing network.

Every year, the Union Government announces ‘support prices’ for main crops for the next season. Support price is the price at which the government commits to buy that commodity from the farmer if the market price goes below that, so that the farmer is assured of a minimum return. So, for the coming season [November-March], wheat, mustard, safflower, lentil and gram support prices have been announced. In practice, the support price does not remain a price to be paid during distress, as the procurement agencies are asked to proactively garner as much grain as they can.

Food Corporation of India is the coordinating agency for food grain procurement, storage, movement and disposal of stored grain. FCI, procurement agencies of different states and some cooperative giants carry out the actual procurement at major food grain markets and by putting up procurement centres in important production centres.

Over the years, the support prices of all crops have been raised substantially. A Commission on Agricultural Costs and Prices [CACP] comes out with the support prices based on a complex calculation to account for the cost of cultivation, profit margin, inflation etc, and the government tops it with some more for political reasons.

Government uses the support price also for giving cropping guidance – this year, the support price of wheat has been raised modestly from Rs. 1100 per quintal to Rs. 1120, while that for gram has been raised from Rs. 1760/q to Rs. 2100/q and that for mustard from Rs. 1830/q to Rs. 1850/q. Since India imports large quantities of gram and other pulses [and these are very important for nutrition security as India is predominantly a vegetarian nation], the government’s encouragement to farmers to grow pulses is understandable.

On the other hand, constantly raising food grain support prices leads to rise in food grain prices for bulk consumers such as mills and retail consumers. India’s food inflation presently stands at over 15.5% per year, and it is at least partly due to rise in support prices.

Economists, agriculturists and consumer groups, all criticise the system of support prices on one count or the other – mostly counter to each other’s points of view. But the system continues. It breeds lots of corruption, wastage and inefficiency in food trade. It also does not allow fair price discovery for farmers. The country ends up paying huge subsidies for procurement and storage. The country also loses a good deal of foreign exchange as it cannot sell surplus food grain when the global prices are high, due to political sentiment attached with food security.

In fact, India’s procurement will rise further if the government comes out with the Food Security Act [guaranteeing food grains to all, as a matter of right] – this is the promise the Congress made during the last general elections.

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