Indian government plans two new schemes to procure crops – but may lack capacity to do so

Over the next week, the government is likely to submit plans to the cabinet for two new schemes to deliver price support to farmers through state-level procurement schemes, according to reports in the Hindustan Times and Economic Times. However, states do not necessarily have the capacity to undertake such largescale procurement operations, even with the aid of the Centre, experts said.

“No state has the manpower to undertake such a large operation,” said Siraj Hussain, former secretary of agriculture.

In an attempt to buffer farmers should market rates fall, the Centre declares minimum support prices for 23 crops, based on its estimate of the farmers’ cost of production. The minimum support price represents a promise from the Centre that it will step in and buy these crops if their market prices fall below a certain level. But in practice, the Centre has effective procurement mechanisms only for wheat and rice, and partly for pulses, which are commodities it can then pass on to the public distribution system. The two new schemes shift the responsibility of procurement from the Centre to the states.

One of these schemes is the Market Assurance Scheme for pulses, oilseeds and coarse grains. Under it, states will be able to decide how much of what crop to procure and when, and can use Central, state or private procurement agencies to do so.

The other scheme that has been proposed is the Price Deficit Payment Scheme, a pilot of which ran as the Bhavantar Bhugtan Yojana in Madhya Pradesh last year. Through this scheme, the Centre will directly pay farmers the difference between the minimum support price and the price at which they sell their crops in the market, but with several riders. States will be responsible for selecting the crops to which it wants to apply the scheme.

Placing states at the forefront

The Market Assurance Scheme would make states significant market players should they decide to procure. Under the scheme, they will be permitted to decide how to dispose of the commodities procured, whether by channelling them into the public distribution system, selling them in the market or exporting them.

If the states make a loss in these transactions, the Centre will step in to compensate them – but only up to 40% of the value of the commodities procured by the states, or 50% in the case of the North-Eastern and Himalayan states. The Centre will also create a corpus to provide interest-free working capital loans to the states for procurement operations.

“This scheme is not adding any infrastructure to procurement systems, it is only adding money,” said economist Abhijit Sen. “The ability of states to make use of this scheme is then limited to the infrastructure they already have.”

An article in the Financial Express noted that the Centre will have to spend Rs 1.04 lakh crore to implement this scheme, compared to the Rs 60,000 crore it spent last year on the procurement of wheat, rice and coarse grains under the National Food Security Act and of pulses and oilseeds under the Price Support Scheme. (The National Food Security Act aims to provide subsidised foodgrains to two-thirds of India’s population).

The Market Assurance Scheme is structurally similar to the existing Market Intervention Scheme introduced in 2014, which is for crops that lie outside the ambit of minimum support prices, for instance horticultural produce. States request the Centre to implement the scheme. Funds are not directly allocated to the states, but the share of losses through procurement is shared equally by the Centre and states.

A Price Support Scheme has also been around for three decades, applicable to minimum support price crops. In this scheme, state-level organisations such as Farmer Producer Companies, cooperative societies or panchayati raj institutions can in the event of a market glut procure up to 25% of the estimated production quantity of a crop for that season. The Centre will reimburse the losses, if any, of these organisations after they have sold the stock, but the state will have to provide working capital to them before that.

The Union Agriculture Ministry claimed in a report to the Parliamentary Standing Committee on Agriculture in March that any delay in activating these two existing schemes is the fault of state governments. The report said states had failed to write to the Centre in time, and accused them of collaborating with traders to delay procurement as per the convenience of the traders. There is no mention in the report of any mechanism to control this in the proposed Market Assurance Scheme.

Paying directly to farmers

The Market Assurance Scheme is only one facet of the Centre’s attempt to rethink the minimum support price system. The other is the Price Deficit Payment Scheme.

Through this scheme, the Centre will directly pay farmers the difference between the minimum support price and the price at which they sell their crops in the market, but with riders. The Centre will pay the price difference for only 75% of the average productivity or average yield per hectare to farmers, depending on the acreage they have sown. This limits the amount of compensation available to farmers.

Only those states that have enacted or promised to enact the new Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act of 2017 at the state level will be eligible for the scheme. Every season, these states will be allowed to select a maximum of four crops under the scheme. Farmers will have to register online with their expected sowing area and sell the crops within a specified 90-day window at a registered agricultural market. They will be compensated only for produce that is of “fair average quality”.

Versions of this scheme are being tested in Madhya Pradesh with eight pulses and oilseeds and in Haryana for four vegetables.

Some challenges

Experts note that implementing these schemes will have challenges. To begin with, as former secretary of agriculture Siraj Hussain noted, states are short on manpower. “The procurement of 23 commodities by any state is not possible ,” he said.

There are also other problems. Though both the Price Deficit Payment Scheme of the Centre and the Bhavantar Bhugtan Yojana in Madhya Pradesh call for a modal or average price to be declared based on average sales, traders in Madhya Pradesh are reported to have manipulated the market to suppress prices during the sales window, allowing them to buy the crops at lower prices and sell for a higher profit once the window had closed. Madhya Pradesh only managed to compensate a quarter of production within the state. Dealing with perishable vegetables, Haryana’s scheme seems to be less susceptible to trader manipulation.

Implementing the Price Deficit Payment Scheme at the national level is also likely to cost much more than anticipated if market prices go below the increased minimum support price promised by Finance Minister Arun Jaitley, according to a new study on the scheme by the Indian Council for Research on International Economic Relations. If prices fall 10% below the minimum support price, the cost of implementing the scheme will be Rs 56,518 crore, if 20% below then Rs 1.1 lakh crore, and if 30% below it will cost Rs 1.7 lakh crore.

“With implementation of [Bhavantar Bhugtan Yojana] for a narrow period of say two-three months, market arrivals are likely to increase more than usual, and therefore the market prices may get depressed even further,” authors Ashok Gulati, Tirtha Chatterjee and Siraj Hussein say in the report. “Traders are likely to take full advantage of that situation, widening the gap between market prices and MSP. Thus, in reality, if the scheme is fully implemented, it won’t be a surprise if the costs even cross the estimates being presented here.”

The Standing Committee’s assessment of both the Market Assurance Scheme and Price Deficit Payment Scheme notes that state-level procurement operations are not robust and states are often not in a financial position to undertake these schemes. It says the Centre should strengthen these agencies and consider allotting more funds to the states for implementing the schemes.