In India, the agricultural price policy is being used as an adjunct to development policy for stimulating growth, especially since the advent of the Green Revolution in the mid-Sixties. Agricultural prices have two important roles;

1.         To allocate resources, and

2.         To distribute incomes

As allocator of resources, prices give signals to both producers and consumers regarding the levels of production and consumption respectively, and farm prices while determining the income of farmers simultaneously affect the cost of living of those engaged in other sectors. As the growth of agricultural output can come about through:

1    Increase in the area under crops,

2    Increase in productivity of individual crops, and

3    Changes in the cropping pattern from low-value crops to high-value crops.

Since prices play a crucial role in determining the allocation of resources and also in capital formation, price policy can affect all three factors through which increased agricultural production can be brought about. Besides, agricultural prices can also affect the levels of output in other sectors due to forward and backward linkages, and also the income distribution in the economy.

Pre-Green Revolution Period

In the pre-green revolution period, owing to the persistence of severe imbalances between the domestic demand for and supply of agricultural commodities, particularly foodgrains, the terms of trade (at free market prices) in general turned favorable to agriculture. Agricultural price policy was concerned in this period mainly with the procurement of part of the foodgrain surpluses from the farmers at prices lower than the free market prices with a view to protecting the consumers, especially in the urban areas.

Post-Green Revolution Period

In the post-green revolution period, however, agricultural price policy became increasingly producer-oriented. The proportion of the marketable surplus of wheat and rice procured from the farmers by the public agencies, at pre-determined procurement prices, increased steadily, which helped to prevent a dip in market prices in years of good harvests.

With the progress of the green revolution and the concentration of surpluses in a few regions, the need to protect farmers through such a policy becomes increasingly important. Despite this, the terms of trade for agriculture became slightly unfavorable during the Eighties, indicating that part of the benefits from rising productivity on account of technological change was passed on to the consumers (particularly in the case of rice and wheat, the demand for which is relatively inelastic).

The Commission on Agricultural Costs and Prices constituted in the mid-Sixties, continued to provide expert advice to the government on price policy in the light of the prevailing cost of production, variation in supplies in relation to demand, and overall price movements in the country as well as in world markets. In practice, prices fixed by the government in quite a few cases are higher than those recommended by the Commission. In a developing economy like India, the non-price measure for raising agricultural output such as the provision of basic infrastructure like irrigation and power and extension of new technology by making available to the farmers high-yielding seeds and fertilizers are far more important than incentive prices. Also, in a democratic policy faced with a growing population and widespread poverty, the need to supply essential commodities like food grains to consumers at affordable prices assumes high priority.

Broad Objectives of Price Policy

1. To protect or insure the producer through guaranteed minimum support price, which as a stabilization measure reduces the variability in product prices and therefore price risk of the farmers.  The impact of the risk reduction is expected to induce farmers to undertake large investments and adopt improved production technology.
2. To induce the desired output of different crops according to growth targets.
3. To induce an increase in aggregate agricultural output through large input use and adoption of high-yielding seed, fertilizer, and water-responsive technology.
4. To induce farmers to part with a larger proportion of foodgrain production as a marketed surplus.
5. To maintain parity/an appropriate relationship between the prices of agricultural commodities per se.
6. To protect the consumer against an excessive rise in prices, especially to protect the low-income consumers in periods when supplies lag behind demand and market prices rise continually.
7. Implementation of cooperative development plans.

Main Constituents of Price Policy Evolved by CACP

1. Announcement of minimum support prices for major foodgrains well in advance of the sowing season.
2. Fixation of procurement prices for purchasing a part of the marketable surplus (at lower than market prices) essentially for feeding the PDS system.
3. Running a public distribution system for safeguarding the interest of low-income consumers by providing them with foodgrains at an issue price that is subsidized by the Govt.
4. Building up buffer stocks to meet the emergency situation and mitigate annual price fluctuations.

Different Terms Associated with APM

Minimum Support Price

Minimum Support Prices are in the nature of a long-term guarantee to producers that in the event of a glut in the market consequent on an increase in production or for any other reason, prices will not be allowed to fall below the minimum economic level.

While recommending the price policy of various commodities under its mandate, the Commission keeps in mind the various Terms of Reference (ToR) given to CACP in 2009. Accordingly, it analyzes

• demand and supply;
• cost of production;
• price trends in the market, both domestic and international;
• inter-crop price parity;
• terms of trade between agriculture and non-agriculture;
• a minimum of 50 percent as the margin over the cost of production; and
• likely implications of MSP on consumers of that product.

It may be noted that the cost of production is an important factor that goes as an input in the determination of MSP, but it is certainly not the only factor that determines MSP.

The Minimum Support Prices were announced by the Government of India for the first time in 1966-67 for Wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits. Since then, the MSP regime has been expanded to many crops. The minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops. The MSP is announced by the Government of India for 23 crops currently at the beginning of each season viz. Rabi and Kharif. Following are the 23 crops covered by MSP:

Kharif Crops: Paddy, Jowar, Bajra, Maize, Ragi, Arhar (Tur), Moong, Urad, Cotton, Groundnut, Sunflower Seed, Soyabeen Black, Sesamum, Nigerseed

Rabicrops: Wheat, Barley, Gram, Masur (Lentil), Rapeseed/Mustard, Safflower

Other Crops: Copra, De-Husked Coconut, Jute, Sugarcane.

These prices are announced generally well in advance of the sowing season. The underlying theoretical basis for the guaranteed minimum price policy has several elements such as price stabilization, improvement of agricultural terms of trade, and provision of insurance to the agricultural producer. Of late, much more positive and dynamic content has been sought to be imparted to the concept of minimum price guarantee. The Foodgrains Policy Committee, Dantwala, and a number of other economists have suggested that the device of minimum guaranteed prices should be utilized to assure the progressive farmer that his effort to augment production through the adoption of improved technology will not become unremunerative because of the price factor. In fixing the level of minimum support prices, CACP takes into account the following factors:

• Cost of Production
• Changes in Input Prices
• Input/Output Price Parity
• Trends in Market Prices
• Inter-crop Price Parity
• Demand and Supply Situation
• Effect on Industrial Cost Structure
• Effect on General Price Level
• Effect on Cost of Living
• International Market Price Situation

Of all the factors, the cost of production is the most tangible factor and it takes into account all operational and fixed demands. Government organizes the Price Support Scheme(PSS) of the commodities, through various public and cooperative agencies such as FCI, CCI, JCI, NAFED, Tobacco Board, etc., for which the MSPs are fixed. For commodities not covered under PSS, Government also arranges for market intervention on specific requests from the States for specific quantities at a mutually agreed price. The losses, if any, are borne by the Centre and State on a 50:50 basis.

The government decides the support prices for various agricultural commodities after taking into account the Recommendations of the Commission for Agricultural Costs and Prices, views of State Governments, views of Ministries etc

Procurement Prices

A procurement price is one at which the Govt. buys at its discretion and normally without any compulsion, In other words, while the Govt. is committed to buying all the quantities offered at the support price, it has no such commitment in respect of the procurement rice. In the actual fixation of the procurement prices from year to year, the CACP has generally accepted the principle of keeping procurement prices higher than the minimum support prices (since the latter operate when the farmer is keen to sell to the Govt. at minimum support prices in conditions of excess production, whereas the former operate when the Govt. takes the initiative to make purchases from the farmers). Though no fixed formula or set criterion has been used for determining the level of procurement prices, a variety of considerations: related to crops, prices of inputs, the need to narrow down inter States price disparities, and the desirability of providing a fair return to the cultivator without being harsh to the consumer.

Issue Price

Is the price at which the Govt. supplies the procured foodgrains/product through its regulated distribution system, like the Public Distribution System, Subsidy on PDS arises from the difference between the issue price and the economic cost of the foodgrains/product to the Govt. procurement and distribution agency like Food Corporation of India.

CACP's Methodology

Cost calculation

The minimum support prices for major agricultural products are announced each year after taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP).  The CACP, while recommending prices takes into account all important factors including cost of production, changes in input prices, input/output price party, trends in market prices, inter-crop price parity, demand and supply situation, parity between prices paid and prices received by farmers etc. Among these multiple factors that go into the formulation of support price policy, the cost of production is the most significant.  Thus, for making the support price policy functionally meaningful, the minimum guaranteed prices ought to cover at least the reasonable cost of production in a normal agricultural season obtained from efficient farming.

The CACP analyses the cost of production data for various States in respect of various commodities in consultation with the States.  After a meeting of the State Chief Ministers, the MSP/ procurement prices are declared.  With costs of production for the same crops varying between regions and also across farms within the same region and for different producers, the level of costs that could be accepted as a norm poses enormous difficulties.

Cost Concepts

In fixing the support prices, CACP relies on the cost concept which covers all items of expenses of cultivation including in that the imputed value of inputs owned by farmers such as rental value of owned land and interest on fixed capital.   Some of the important cost concepts used by CACP are the C2 and C3 costs.

C2 Cost

C2 cost includes all actual expenses in cash and kind incurred in production by the actual owner plus rent paid for leased land plus imputed value of family labour plus interest on the value of owned capital assets (excluding land) plus rental values of owned land (net of land revenue).

C3 Cost

Cost C2 + 10 percent of cost C2 to account for managerial remuneration to the farmer.

Costs of production are calculated both on a per quintal and per hectare basis. Since cost variations are large over States, CACP recommends that MSP should be considered on the basis of C2 cost.  However, increases in MSP have been so substantial in the case of paddy and wheat that in most of the States MSPs are way above not only the C2 cost but the C3 cost as well.

Price Deficiency Payment System

The Niti Aayog has released a three-year agenda for the Centre. Of the several things it has touched upon, one is agriculture, with a focus on doubling farmers’ income. The think-tank has recommended reforms in the APMC Act and tenancy laws and tweaks to the eNAM (electronic National Agriculture Market). It has also suggested a ‘Price Deficiency Payment’ system to address the gaps in Minimum Support Price (MSP) based procurement of crops.

Under Price Deficiency Payment, farmers are proposed to be compensated for the difference between the government-announced MSPs for select crops and their actual market prices. For crops such as rice and wheat where it is effective now, MSP announcements will continue. For other targeted crops, price deficiency payments will be made. However, it has to be noted that there may be a cap on the extent to which the Centre will bridge the gap between MSP and market price. Niti Aayog has said that the farmer may be entitled to the difference up to say, 10 per cent. To avail this benefit, each farmer would have to register with the nearest APMC mandi and report the total area sown. The subsidy may be paid via Direct Benefit Transfer (DBT) into the farmer’s Aadhaar-linked bank account.

The key benefit from the price deficiency payment is that it will reduce the need for the government to actually procure food crops, transport and store them and then dispose of them under PDS. The difference between the support and market prices can instead simply be paid in cash to the farmer. Price deficiency payment can also keep India’s bill on food subsidies under check, believes Niti Aayog. India’s food subsidy schemes have frequently come under the WTO scanner. Even in the meeting held in March this year, there were questions raised on the minimum support price programmes for wheat, sugarcane, and pulses, by the US, EU, and Australia.

These countries see India’s procurement subsidies as trade-distorting. In recent years, the government has been seeing the accumulation of large food grain stocks in its godowns over and above the buffer requirement. This entails storage and wastage costs that add to the subsidy bill.

The PDP system may be more effective than MSPs at ensuring that cropping patterns in India respond to consumer needs. It may also ensure that more farmers actually benefit from price support. The current MSP system has many flaws. First, its reach is limited, in terms of both the crops and the geographical area it covers. Though every year MSPs are announced for 20-plus crops before the sowing season begins, actual procurement at MSPs is restricted to a few crops such as paddy and wheat. This has led farmers to excessively focus on the crops with assured procurement. The country’s cropping pattern has been skewed in favour of rice and wheat in the last three decades, leading to the reduced sowing of coarse cereals. Monoculture also results in soil degradation and makes crops susceptible to pests and weeds, leading to higher usage of chemical fertilizers and pesticides. The price deficiency system may incentivize farmers to diversify beyond conventional cereals. The crops with effective MSPs such as rice, wheat and sugarcane, where support prices are effective now, are also water-intensive.

Nutrient-based subsidy (NBS) scheme was launched in 2010. The issues with this scheme are as follows:

• There has been an unprecedented hike in prices of non-urea fertilizers after the introduction of the NBS scheme.
• It has been suggested that the NBS policy should be withdrawn and the previous system of fixed MRP should be restored.
• In India, Urea is the only controlled fertilizer, which is sold at the statutory notified uniform sale price. The Phosphatic and Potassic fertilizers are under a decontrolled regime and are sold at indicative maximum retail prices (MRPs).

The problems faced by the manufacturers in earning a reasonable return on their investment with reference to controlled prices are mitigated by providing support under the New Pricing Scheme (NPS) for Urea units and the concession Scheme for decontrolled Phosphatic and Potassic fertilizers. The statutorily notified sale price and indicative MRP are generally less than the cost of production of the irrespective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as a subsidy/concession to manufacturers,

As the consumer prices of both indigenous and imported fertilizers are fixed uniformly, financial support is also given on imported urea and decontrolled Phosphatic and Potassic fertilizers.

New Pricing Scheme-III or NPS-III for Urea

Till 2003, the subsidy to urea was under the provisions of the Retention Price Scheme (RPS). Under RPS, the difference between the retention price (cost of production as assessed by the Government plus 12% post-tax return on net worth) and the statutorily notified sale price was paid as a subsidy to each urea unit. Later the RPS regime was dismantled and a Concession Scheme for urea units based on the prices of feedstock used and the vintage of plants was introduced, which was called New Pricing Scheme or NPS. This scheme was introduced on April 1, 2003. It had various phases like NPS-I (2003-2004), NPS-II (2004- 2006), and NPS-III (2006 onwards).

Problems in the NPS

The problem with this scheme was that the fertilizer companies started bleeding due to fixed Urea prices and the rising cost of Inputs such as Natural Gas and Naptha. As much as 80% of India’s production of urea is gas-based. The price of Urea increased by 10 percent from 1st April 2010. After that in October 2012, the government agreed to hike the prices of urea-based fertilizers by Rs. 50 per tonne. This was the last increase in Urea Price. With this increase, urea-based fertilizers will now cost Rs. 5,360 per tonne, still a lot cheaper than potash and phosphate fertilizers, which cost Rs. 24,000 per tonne,

Thus we see that Urea is available at such a cheap price that people not only started unbalanced use of this fertilizer but also Urea was illegally exported to neighbouring countries. So, the New Pricing Scheme III needed a modification so that the companies are allowed to hike urea prices, and also there can be a check on the imbalanced use of soil nutrients and reduce the government's subsidy burden. Earlier, the government had plans to decontrol the urea sector by bringing it under the nutrient-based subsidy (NBS) scheme,

A committee headed by Planning Commission member Soumitra Choudhary had also suggested freeing of the sector. But somehow, the political class could not take bold steps and Urea is still under a price control regime,

The Soumitra Choudhary Committee also recommended that the NBS policy, which is applicable only to P and K fertilizers needs to be extended for urea also. This has become all the more desirable to maintain the ratio between MRP of urea vis-a-vis P and K fertilizers, which is essential for balanced fertilization.

On January 23, 2013, the government has formed a GoM, which will look into the modified New Pricing Scheme (NPS) III for urea as well as consider earlier proposals for de-regulating the sector. The constitution of the GOM comes in the backdrop of stiff resistance by the Fertiliser Ministry in raising urea prices and bringing the sector under the nutrient-based policy (NBS) like P&K fertilizers.

Presently, Urea is being provided to the farmers at a statutorily notified Maximum Retail Price (MRP). The MRP of a 45 kg bag of Urea is Rs.242 per bag (exclusive of charges towards neem coating and taxes as applicable) and the MRP of a 50 kg bag of Urea is Rs. 268 per bag (exclusive of charges towards neem coating and taxes as applicable). The difference between the delivered cost of fertilizers at the farm gate and net market realization by the urea units is given as a subsidy to the urea manufacturer/importer by the Government of India.

As far as Phosphatic and Potassic (P&K) fertilizers are concerned, the Government is implementing the Nutrient Based Subsidy (NBS) Scheme w.e.f 1.4.2010. Under the said scheme, a fixed amount of subsidy decided on an annual basis, is provided on each grade of subsidized Phosphatic and Potassic (P&K) fertilizers depending upon its nutrient content. This subsidy is given by the Government of India to the P&K fertilizer companies which are therefore able to provide P&K fertilizers to the farmers at a subsidized MRP, which is lower than it would have been. Accordingly, farmers across the country who are procuring fertilizers at MRP is availing the benefit of the subsidy.

Nutrient Based Subsidy (NBS) scheme for other fertilizers

The Government of India is implementing a Nutrient Based Subsidy (NBS) policy w.e.f. 1st April 2010. The notable features of this scheme are as follows:

• This scheme is for 22 grades of decontrolled fertilizers namely DAP, MAP, TSP, DAP Lite, MOP, SSP, Ammonium Sulphate, and 15 grades of complex fertilizers.
• These fertilizers are provided to the farmers at subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
• Additional subsidy is also provided on the fertilizers fortified with secondary and micronutrients as per the Fertilizer Control Order such as Boron and Zinc.
• The subsidy given to the companies is fixed annually on the basis of its nutrients content (i.e. Nitrogen, Phosphate, Potash, and Sulphur).
• Under this scheme, the Maximum Retail Price (MRP) of fertilizers has been left open and manufacturers/marketers are allowed to fix the MRP at a reasonable level.

Problems of the NBS Scheme

The objective of this scheme was that it would foster balanced use of fertilizers and thus would improve soil health and also reduces the government's outgo on fertilizer support. The policy has so far failed to achieve the first objective of improving soil health. The reason is the prices are skewed towards the low prices of Urea.

NBS Scheme could not improve the Soil Fertility

The above discussion makes it clear that on the one side, we have Urea available for Rs. 5360 per tonne, while on the other hand, we have potash and phosphate fertilizers, which cost Rs. 24,000 per tonne.

Urea, as we know, is destined for use as a nitrogen-release fertilizer. Urea has the highest nitrogen content of all solid nitrogenous fertilizers in common use.

The skewed price regime led to a skew in the use of fertilizers. We use the NPK Ratio to label fertilizer based on the relative content of the chemical elements nitrogen (N), phosphorus (P), and potassium (K). The ideal NPK ratio for healthy soil should be 4:2:1. But one of the studies conducted by the Fertiliser Association of India says the nitrogen- phosphorus pot-ash (NPK ) ratio in 2011-12 was 10:4:1. There can be two reasons for such a skewed ratio, one is that the K and P fertilizers could not reach farmers in time, second is that there is the indiscriminate use of Urea due to it being relatively cheap. Also, the lack of extension services to guide farmers about the proper use of fertilizers are absent.

This data is one year later than the launch of the NBS scheme. This indicates that the scheme is not being implemented properly. The experts blame the partial NBS scheme for distortion. The rapid increase in phosphorus and potassium prices, along with the control over the prices of urea is creating the problem. This growing imbalance in the use of nutrients is a very bad sign for agricultural productivity in the long run.

The Shanta Kumar committee recommended that the government should give direct cash subsidies to farmers on a per-hectare basis (around 5000-10000 rupees per hectare). Then the farmer will judiciously use different fertilizers as per his soil and crop requirements.