Agricultural Price Policy in India: Objectives, Advantages and Disadvantages

The government has formulated a price policy for agricultural produce that aims at securing remunerative prices to farmers to encourage them to invest more in agricultural production. The government announces minimum support prices for major agricultural products every year on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
Created On: Oct 20, 2015 14:47 IST
Modified On: May 27, 2016 11:47 IST

The initial price policy at the dawn of Independence was, to a large extent, based on the plethora of controls exercised during the Second World War. It included rigid controls on movement of crops from one State to the other, procurement of food grains through a compulsory levy on producers and millers, open market purchases, and rationing in practically all the States. Following the recommendation of the Food grains Policy Committee of 1947 for progressive decontrol, restrictions were relaxed. However, a food crisis appeared in 1948 and food prices rose substantially. Accordingly, controls were introduced.

On the recommendations of the Food grains Enquiry Committee, 1957, calling for 'social control over the wholesale trade in food grains' and its subsequent endorsement by the National Development Council in November 1958, the Government of India experimented with State trading in food grains in April 1959. According to this scheme, state trading was to be confined to two main commodities - wheat and rice. However, the scheme ran into difficulties since it was put into practice in a haphazard way without taking cognizance of economic forces.' For instance, procurement prices for wheat were fixed at much lower levels than those dictated by the forces of demand and supply.

The government formulated price policy for agricultural produce to secure remunerative prices for farmers to encourage them to invest more in agricultural production. Keeping in mind, the government announces Minimum Support Prices (MSP) for major agricultural products every year. Government provides food grains to the BPL families through the public distribution system. These prices are fixed after consulting the Commission for Agricultural Costs and Prices (CACP).

The Commission of Agricultural Costs and Prices (CACP) while recommending prices takes into account important factors, such as:

I. Cost of production
II. Changes in input prices
III. Input/output Price Parity
IV. Trends in market prices
V. Inter-crop Price Parity
VI. Demand and supply situation
VII. Effect on Industrial Cost Structure
VIII. Effect on general price level
IX. Effect on cost of living
X. International market price situation
XI. Parity between prices paid and prices received by farmers (Terms of Trade)

The table given below depicts the minimum support price for different crops for the 2015-16.


Motives (advantages) behind the announcement of Minimum Support Price (MSP):

To secure the interests of the farmers as also the need of self reliance, government has been announcing the minimum support price for 24 major crops. The main objectives f the MSP are:

I. To prevent fall in the price in the situation of over production.
II. To protect the interests of the farmers by ensuring them a minimum price for their crops in the situation of a price fall in the market.
III. To meet the domestic consumption requirement
IV. To provide price stability in the agricultural product
V. To ensure reasonable relationship between prices of agricultural commodities and manufactured goods
VI. To remove price difference between two regions or the whole country.
VII. To increase the production and exports of agricultural produce.
VIII. To provide raw material to the different industries at reasonable prices in the whole country.

Disadvantages of the Minimum Support Price:

I. To increase the income of the farmers, the poor of the country have to pay more. This practice will create the problem to allocate inefficiency in the country.
II. Subsidizing farmers through higher product prices is an inefficient method because it penalizes the consumer with higher prices. Also it means large farmers will benefit the most. They have received more than they need but small farmers are still struggling.
III. Farmers use fertilizers in the huge quantity to increase their production but it creates problems for those peoples who do not get benefits from this increment in the production.

Conclusion: The basic motive behind the Agriculture policy of Government of India is to save the interests of both farmers and consumers. The prices of the food grains should be decided very wisely so that neither farmers nor consumers get suffer.

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