Subsidies and MSP (DAMP)

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Contents

• The existing MSP procurement system is unsustainable economically and environmentally. Elaborate. Also assess alternative methods to enhance the MSP regime’s effectiveness.
• What is Agri-Credit, and how does it support the agriculture sector in India? Discuss the key steps taken over the years to improve the Agri-credit situation in the country.

11-08-2023

Q: The existing MSP procurement system is unsustainable economically and environmentally. Elaborate. Also assess alternative methods to enhance the MSP regime’s effectiveness. (15 Marks, 250 Words)

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Answer :

Minimum Support Price (MSP) is a government intervention that shields farmers from unpredictable price fluctuations, encourages specific crop cultivation, and safeguards consumers against abrupt price surges. Nevertheless, the current MSP system has drawbacks:

• Limited Scope: The benefits of MSP are unevenly distributed among a few crops and regions. Mainly, sugarcane, paddy/rice, wheat, and cotton receive MSP support, creating disparities.
• Water-Intensive Crops: The prominent crops supported by MSP, including sugarcane, wheat, and certain paddy/rice varieties, are water-intensive. These crops heavily rely on irrigation, straining water resources.
• Procurement Challenges: A significant portion of cereal production is channeled through MSP, causing an overdependence on this system and distorting the open market.
• Excess Production: MSP’s relevance is diminished as India has a surplus of cereals and sugar. Households’ consumption of these items has either decreased or stagnated over time.
• Risk Aversion: Farmers’ overproduction of MSP crops coincides with periods of low prices due to economic factors like market fluctuations, policy changes, and inflation-targeting strategies, indicating risk aversion.

Potential alternatives to the current MSP model are:

• Comprehensive MSP Model: Expanding the legal enforcement of MSP to cover all officially recognized crops could address existing distortions. This could also prioritize setting MSPs for water-efficient crops. However, this might strain the government’s resources if open-ended procurement is pursued.
• Price Deficiency Payments (PDP): Instead of physically buying grains, the government can pay the difference between MSP and market prices when the latter is lower. Ensuring timely payments and maintaining grain quality is crucial.
• Direct Income Support: Providing direct financial assistance to farmers during agricultural hardships without market distortions. This approach is inclusive and equitable across different farm sizes.
• Area Planning: Government-led area planning would align production goals with demand, social considerations, and current conditions. Although time-consuming, this could mitigate issues of oversupply and falling prices.

Given the inherent risks in agriculture related to production and prices, a thoughtful discussion on how to effectively utilize MSP for the benefit of farmers is essential.

14-06-2023

Q: What is Agri-Credit, and how does it support the agriculture sector in India? Discuss the key steps taken over the years to improve the Agri-credit situation in the country. (10 Marks, 150 words)

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Answer :

Agri-Credit is a credit designed to meet the financing needs of agricultural farmers and businesses. It enables farmers and agricultural enterprises to access funds for Agri- production, equipment purchase, expanding operations, warehousing etc.

• Spectacular growth in Agri credit sector (from 2% of Agri-GDP in 1970s to around 40% in 2019-20).
• Enhanced Agri productivity leads to food security.
• Increased investment in agriculture infrastructure such as irrigation systems, storage facilities etc.
• Diversification and Modernization: Easy credit can give farmers scope to new crops, adopt organic farming, or invest in livestock sector.
• Income Stability for farmers: Easy farm credit can reduce dependency on unauthorized money lenders and allow them to meet their expenses through institutional credit.

• Nationalization of Commercial Banks in 1969, Establishment of Regional Rural Banks in 1976 and setting up of NABARD in 1982 led to increasing farm credit.
• Priority Sector Lending (PSL) norms initiated in 1974, mandates all domestic commercial banks (and foreign banks with 20 or more branches) to earmark 18% of loans for farm credit.
• The Kisan Credit Card (KCC) introduced in 1998, is aimed at providing adequate and timely short-term credit needs for farmers and has now been extended to fishery and animal husbandry sector also.
• Modified Interest Subvention Scheme, operational since 2006-07, provides short term Agri credit of up to Rs 3 lakh at a subsidized interest rate of 7% per annum to farmers engaged in agriculture and allied activities.
• The Agriculture Infrastructure Fund announced as a part of AtmaNirbhar Bharat Abhiyan will further boost the credit flow to Agri-sector.

The steps taken over the years to improve Agri-Credit in India have played a pivotal role in supporting the agriculture sector and empowering farmers. The positive strides made in Agri-Credit have not only empowered farmers but have also laid a strong foundation for a prosperous and resilient agricultural sector, driving India’s journey towards food security, rural prosperity, and economic well-being.