‘Not Just’ Paying the Price

Price Deficiency Payment (PDP) system in Indian Agriculture

Author: Swasti

Policy Advisor, Bhajan Global Impact Foundation

Tag(s) : Agriculture and Rural Economy

That the average Indian farmer grapples with issues of climatic and economic uncertainty has been a well-established characteristic of Indian agriculture, efforts to address her economic security remain far and few between. A belated twelve years later, since the recommendations of the National Commission on Farmers chaired by M.S. Swaminathan were proposed in 2006, the Indian agrarian crisis is mired with issues related to market volatility, and a mismatch between the high cost of cultivation and consequent remuneration.

At the heart of this conundrum is the issue of Minimum Support Price (MSP), the methodology related to its computation, and comprehensive cost of production, more commonly referred to as ‘C2’ in policy parlance. Realising these dichotomies, between MSP and the need for a fair price, NITI Aayog (i.e., the Government of India’s think tank), in its three-year action agenda released in 2017, recommended the concept of a ‘Price Deficiency Payment’ (PDP) system. Under the aegis of PDP, farmers are compensated for a price differential between the MSP and the market price. The overall objective of this recommendation is toward the larger goal of doubling farm incomes by 2022.

Earlier this year, speculations were rife preceding the Union Budget 2018-19, whether such a universal concept of PDP would be introduced across the country, following the implementation of the Mukhya Mantri Bhavantar Bhugtaan Yojana (MMBBY) in Madhya Pradesh (2017), Bhavantar Bharpai Yojana (BBY) in Haryana (2017-18), the Input Assistance scheme in Telangana later this year, and the Raita Belaku scheme in Karnataka (2018).

In this context, recently, the Commission on Agricultural Costs and Prices (CACP) recommended the need for an all India measure, based on the PDP method, as reported in the Hindu Business Line (2018). This essay attempts to explain key concepts around PDP, its limited experiences in Haryana (as the scheme is fairly nascent), and the general implementational challenges related to the PDP system.

What is the Price Deficiency Payment (PDP) system?
Touted as a farmer-friendly sop, PDP-based financing is an important recommendation, according to which farmers are compensated for the ‘difference between MSP and actual price subject to a ceiling, which may not exceed 25 percent of the MSP’ (Press Information Bureau, 2018). Essentially, it compensates a farmer for the ‘difference’ or ‘bhavantar’ between the modal rate, which is computed by considering ‘the average rate of the concerned crop in agricultural mandis (or grain markets), and two more states (calculated over two months, where the crop is grown and traded) and the MSP (Bera, 2017).

To avail the price differential benefit under this method, farmers are required to register the sown acreage at the nearest registered Agricultural Produce Market Committee (APMC) mandi, so as to avail the price differential via Direct Benefit Transfer (DBT) synced with their Aadhar accounts, in most cases (India Today, 2017). This has been the model in Madhya Pradesh under the aegis of MMBBY, introduced for select pulses and oilseeds (groundnut, maize, soybean, moong, tur, urad, ramtil, and til), following a crash in farm prices and the consequent farm agitation that rocked Mandsaur in June 2017.

In simple terms, under BBY, if the market price of a crop crashes vis-a-vis the MSP (fixed by the central government), the state government provides compensation to the affected farmers, depending on whether the modal or market rate is higher in comparison to the MSP.

Bhavantar Bharpai Yojana, Haryana
Having become the first state to introduce PDP-based market intervention for four vegetables, the Haryana government launched the ‘Bhavantar Bharpai Yojana’ (BBY) in 2018, for: potato and tomato (grown during rabi season), and onion and cauliflower (grown during kharif season). Recently in October 2018, Bajra has also been included under its aegis.

Under the scheme, potato and tomato farmers are paid ₹ 4 per kg, while onion and cauliflower farmers are paid ₹ 5 per kg, with the provision of potentially revising the rates prior to the sowing season (Gulati and Hussain, 2018). The model so envisaged is different to the one in Madhya Pradesh in that it is meant for perishables – in this case, vegetables – which do not have an associated MSP. Moreover, the scheme has been designed to inculcate a behavioural shift in farmers by nudging them to gradually increase acreage under horticultural crops, promote income diversification, and mitigate mono-cropping threats to agriculture and natural resources.

It must be noted that potential merits of a price deficiency scheme, observed internationally and from experiences in Madhya Pradesh, relate to reduced costs in procurement (Ramaswami, 2018), in addition to reduced transportation and storage costs. This has also been corroborated by the CACP according to which, the MMBBY in Madhya Pradesh, had helped ‘the government reduce its costs to about 17.85 percent of what was incurred on procurement at MSP in the previous year’ (The Hindu Business Line, 2018).

However, in the case of perishables, such as in Haryana, it remains to be seen whether such a straight-jacketed approach meant only for a few vegetables, is likely to benefit its farming population. This is because the horticultural market is subject to grave market uncertainties, where price fluctuations are higher than incentivised crops covered under mechanisms that guarantee minimum support such as the MSP. Owing to these factors, a mixed response has been reported from the ground.

For instance, one concern flagged in June this year was how farmers received a meagre price differential of ₹0.10 per kg for tomatoes, according to a report in the Indian Express (2018), which was far less than the required differential meant to protect farmers. Another emerging issue was proximity to the mandis for the average farmer. For instance, it was highlighted that compensation to farmers in districts of Bhiwani, Narnaul, and Dadri was significantly lower than that in Gurgaon and Ambala (Siwach, 2018), thereby stressing upon issues related to market access and consequent price variations, dependent on geographical factors.

At this point, it must be noted that experiences in Haryana are limited, as the scheme is new, and assessment for onion and cauliflower can only be undertaken after October 2018, once the scheme is launched for kharif crops. As a result of this limitation, a secondary literature review has been undertaken for the purpose of this essay so as to understand general implementation challenges of a PDP-based financing system. A glimpse of this is illustrated in the next section.

General challenges in the implementation of (schemes based on) PDP
In general, the challenges associated with price deficit schemes have been acknowledged by policy experts at large, some of which are mentioned below. Addressing them is likely to strengthen both policy design and implementation.

First, there are concerns about the universal implementation of PDP at the national level. For instance, according to Ashok Gulati’s working paper, at the Indian Council for Research on International Economic Relations (ICRIER), ‘the BBY scheme in Madhya Pradesh could benefit only 23 percent of production, raising doubts on how it may well be able to benefit the majority of farmers, at an all-India level’ (Gulati and Hussain, 2018).

Second, several instances earlier this year were reported from Madhya Pradesh, on how the deliberate manufacturing (and the consequent dampening) of prices impacted soybean farmers adversely, resulting in the cartelisation of agricultural produce traders in mandis (Chari, 2018). Such oligopolistic collusion at the mandi level defeats the purpose of hedging against price risks and correct targeting of the subsidy, leaving farmers bereft of a fair and remunerative price. Therefore, regulation of traders and careful monitoring of markets are necessary. Consequently, implementation of the MMBBY is currently being evaluated for these challenges in Madhya Pradesh.

Third, if a universal scheme is to be introduced, its methodology should factor in an outreach model that addresses concerns of remote and tribal areas, where digital prerequisites of DBT may be difficult to comply with.

Fourth, PDP differentials in the case of perishable commodities – as in Haryana – should include at least the full cost of production. According to Gulati and Hussain (2018), the presumed MSP in Haryana (₹ 400 per quintal for potatoes and tomatoes and ₹ 500 per quintal for onions and cauliflower) do not cover the full cost of production, as estimated by the Union Ministry of Agriculture and the National Horticulture Board for these crops.

Fifth, schemes based on PDP models in India necessarily bring out land ownership variation and gender skewness in property ownership. This is because requirements of online registration ensure that land ownership trends and patterns are revealed through such schemes. This could also be a good point of intervention by the governments to assess land ownership patterns according to gender and could be a case in point towards recommendations on women land rights (WLR) which are hitherto, conspicuous by exclusion, in large number of cases. For instance, according to a study by Oxfam, in 2013, even though women did 80 percent of farm work, in reality owned only 13 percent of the land (Hindu Business Line, 2013). Such gendered skewness is corroborated limitedly, albeit; from statistics emerging from Madhya Pradesh, where under the MMBBY 4,290 of the 4,435 registered individuals till March 2018 were male (Chari, 2018).

It must be noted that a well-intentioned intervention of this kind, in the case of horticultural crops, could give a major boost to Government of India’s scheme ‘Operation Greens’, provided that farmers that grow vegetables are insured against price risks. However, going forward, in order to minimise economic errors of targeting of inclusion and exclusion, a universal scheme that provides subsidy on agricultural inputs rather than price differentials, may become quintessential.

For instance, according to Gulati and Hussain (2018), Telangana’s Input Assistance scheme could be implemented nationwide, where farmers have been offered an assistance of ₹ 4,000 per acre for the two agricultural seasons. Rather than merely bridging the price gap, this type of structure achieves targeted subsidies on input and does not require farmers to register their acreage. It also gives them the freedom to grow crops of their choice, thus avoiding a myopic approach of including select cropping patterns. This potentially eliminates risks of wasteful expenditure and market-related distortions. Moreover, in the case of universal targeting of subsidies, objectives of socio-economic justice and equitable development could be met, in addition to fast forwarding objectives under Sustainable Development Goals (SDG) as envisaged under SDG 2 on ending hunger and promoting sustainable agriculture.

Bera, S. (2017) Madhya Pradesh launches new farm scheme to hedge price risks in farming, Live Mint, 30 Aug [online]. Available from: https://www.livemint.com/Politics/uDdclMv4VKUhGvpSEqtmqL/Madhya-Pradesh-launches-new-farm-scheme-to-hedge-price-risks.html [Accessed September 20 2018].

Chari, M. (2018) Soaring soyabean prices in Madhya Pradesh show why a pet government scheme may be flawed, Scroll, 31 Jan [online]. Available from: https://scroll.in/article/866986/soyabean-prices-shoot-up-weeks-after-madhya-pradeshs-ambitious-crop-compensation-scheme-ends [Accessed September 22 2018].

Chari, M. (2018) Why Haryana’s plan to shield vegetable farmers from low prices might just work, Scroll, 22 March [online]. Available from: https://scroll.in/article/872592/haryanas-plan-to-shield-vegetable-farmers-from-low-prices-might-just-work-unlike-in-madhya-pradesh [Accessed September 22 2018].

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Krar, P. (2018) Haryana assures farmers Rs 4 a kilo for tomato, Rs 5 for onion, The Economic Times, 8 Feb [online]. Available from: https://economictimes.indiatimes.com/news/economy/agriculture/haryana-assures-farmers-rs-4-a-kilo-for-tomato-rs-5-for-onion/articleshow/62836795.cms [Accessed September 20].

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Price support to farmers: States roll out schemes even as Modi government has a pan-India plan (2018) Financial Express, 12 March [online]. Available from: https://www.financialexpress.com/economy/price-support-to-farmers-states-roll-out-schemes-even-as-modi-government-has-a-pan-india-plan/1094865/ [Accessed September 20 2018]

Over 16 lakh MP farmers to benefit from Bhavantar Yojana (2018) India Today, 25 October [online]. Available from: https://www.indiatoday.in/pti-feed/story/over-16-lakh-mp-farmers-to-benefit-from-bhavantar-yojana-1072617-2017-10-25 [Accessed October 16 2018]