Minimum Support Prices for Agricultural Commodities - Letter to the Prime Minister

Esteemed Prime Minister Dr. Manmohan Singh ji,

There is enormous unrest in the farming community in Andhra Pradesh resulting from the severe discrimination in determining the minimum support price for paddy. In this connection, we appeal to you to examine three interrelated issues of procurement price of rice; trade policies in relation to agricultural commodities and marketing regulations affecting the producers' interests.

Procurement Price of Rice:

It is estimated that a quantity of about 90 million tons of paddy is produced by the farmers in the country and this is the largest quantity in the food-grain basket. There is a misconception in the minds of the policy makers that when paddy is converted to rice, only 65% is redeemed and the balance is wasted. However, the residual products like husk, broken rice etc., are valuable and marketable products. 100 Kg of milled-paddy would yield 65 kg rice, 10-12 kg of broken rice, 8 kg of cattle feed and the balance would be husk. The government already has a scheme to modernize all rice mills to enhance the yield of rice and minimize wastage in milling. Hence, the difference in value between wheat and rice is very marginal and accordingly the minimum support price difference also should be marginal.

Government of India is spending huge money on Food Corporation of India (FCI) for maintaining the buffer stocks. It is estimated that an amount of Rs. 760 is spent by FCI, as handling and carrying costs for one quintal of rice every year. Compared to this expenditure by FCI, the additional support given to the rice farmer by way of a proper minimum support price is negligible. The high operational costs of FCI are because of its highly centralized and corrupt administrative apparatus. Given these problems, public distribution system needs to be reoriented to meet the requirements of the people below poverty line by creating Grain Banks managed at the local level. This will definitely reduce transaction, transport, handling and storage costs, while enhancing the rural employment opportunities. Most importantly, it will eliminate corruption and leakages in the system, and reduce food subsidies.

Trade policies in respect of agricultural products:

As on date, the government seems to be having ad-hoc export and import policies with reference to many agricultural products. For instance, 7,90,000 tonnes of wheat has been imported from international markets by paying Rs. 1600 a quintal during 2006-2007, when the Indian farmer was paid at the rate of Rs 750 per quintal.

Similarly, cotton is imported periodically by paying higher prices for a limited quantity to meet the short-term domestic requirement and this step has an adverse affect on the price of cotton in the local markets. Such irrational, ad-hoc, anti-producer policies are distorting the market forces, and severely depressing prices of agricultural commodities. In case of garment industry, cotton cost is only a small proportion of the final product price and yet short-sighted policies have done great damage to the farm sector. Not surprisingly the largest numbers of farmer suicides are from the cotton-growing-areas.

Political sensitivity of onion prices since 1980 is well-known. The government certainly has responsibility to help consumers in times of severe price escalation. However, the producer cannot be penalized. And the government has an obligation to buy the produce at market prices and subsidize the consumer. Instead, over the years, dramatic short-term steps were taken to depress the prices and the farmers were left in lurch. At the same time the government and Planning Commission keep emphasizing the importance of rejuvenating agricultural sector. As a great economist and architect of liberalization policies promoting competition and choice, you are more aware than anybody else of the crisis afflicting Indian agriculture. When over 60% of people depend on agriculture, which accounts for 19% of GDP today, a simple arithmetic tells us that the average rural per-capita is only 1/6th of that of the urban population. This is a potentially an explosive situation causing devastation to millions of households resulting in agrarian strife. Successive governments have been aggravating this crisis by acting in a cavalier and short-term fashion without deeper reflection or long-term sustainable policy.

When the World Trade Organisation (WTO) permits an aggregate of 10% subsidies, government policies have not merely denied active support to agriculture, but have actually done everything possible to undermine agriculture by depressing and distorting the markets. The least that the farmers expect from the government headed by a great economist and true champion of fair competition is to let the market forces prevail and provide judicious support to the poor consumers through subsidies when needed. It follows therefore, that our farmers should get benefit of international prices whenever there are supply constraints. Our farmers should also be supported by strong government protection through minimum support prices whenever the prices are depressed. Unfortunately, the exact opposite policy prevails now to the long-term detriment of agricultural economy.

Restrictions on Marketing:

There are about 7,810 regulated markets in the country. The average area to be covered by a regulated market varies from 200 Sq.Km to 780 Sq.Km. Most of these markets are controlled by middle men and commission agents. Small farmers suffer from poor access to markets and are forced to sell their produce to the local trader-moneylender-input supplier at a price dictated by him.

The farmers are also getting short-changed in the market yards, which are headed by nominated bodies. The commission agents and the traders join hands to offer the lowest possible price to the agricultural produce, apart from short-changing the farmer in weighments and charging exorbitant commission (20% - 25%) as against the authorized commission of 4%. In order to address this situation, all the restrictions on movement, storage, processing and trading of agricultural commodities should be immediately lifted. However, the government should insist on reporting requirements in order to keep track of demand-supply situation. The farmers must be organized and empowered to undertake various marketing operations including exports.

Under these circumstances, Lok Satta Party earnestly urges you to immediately take the following steps:

The paddy procurement price of at least Rs. 1000/- per quintal should be announced. On a long-term basis, there should be parity between paddy and wheat as has been the case historically.

Agricultural trade policies must be immediately rationalized. When the international prices are higher, domestic farmers must have an unfettered right to export. In order to sustain the public distribution system, the government must procure at market prices or at minimum support price, whichever is higher, and bear the cost of subsidy. Minimum support price must guarantee fair returns to farmers as recommended by the National Commission on Farmers chaired by Dr. MS Swaminathan. Import of agricultural commodities if any should be only to the extent of actual demand-supply gap when there is inadequate production of agricultural commodities. Imports must never be resorted to as a mechanism to depress agricultural prices. All regulations on agricultural trading, movement, storage, processing and marketing should be immediately repealed.

I am sure your government understands the gravity of the situation and will act swiftly to ameliorate the distress of paddy farmers in Andhra Pradesh, and help rejuvenate the agricultural and rural economy.


Yours Sincerely,

Dr Jayaprakash Narayan