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 Main Objectives of Agricultural Price Policy are

  • Procurement of food grains from farmers at remunerative prices so that he does not switch crops.
  • Distribution of food grains to the non-producing consumers particularly the vulnerable sections of society at affordable prices.
  • Maintenance of reasonable terms of trade (price ratio) between agricultural and non-agricultural sectors.
  • Maintenance of good buffers for food security and price stability.

 Instruments of APP in India

Minimum Support Prices (MSP)

  • The Commission for Agricultural Cost and Prices (CACP) analyses the input costs and recommends MSP for 26 major crops.
  • MSP can be regarded as an offer price at which government is willing to buy any amount of grain from the farmers in the years of good harvest when, in the absence of support operation, the market prices may fall below the costs of production.

The economic rationale for such built-in-subsidy are:

(a) vagaries of monsoon is an important factor of production

(b) the demand for food grains, which are necessities, does not change much with change in prices. Thus, it is greater supply through higher MSPs that can lead to higher market prices.

Procurement Prices

  • Procurement prices are the prices at which government purchases food grains for maintaining Public Distribution System (PDS) and for building up Buffer stock.
  • They are generally fixed at a level higher than MSP.

 Public Distribution System (PDS)

  • The basic objective of PDS in India is to provide essential consumer goods, particularly food grains at cheap and subsidized prices to the consumers so as to insulate them from the impact of rising prices and maintain the minimum nutrition level of the population.
  • With respect to good grains, the PDS works on the basis of explicit subsidy paid to the Food Corporation of India (FCI) to meet the difference between the procurement price paid by FCI to the farmers and the issue price at which it sells food grains to the PDS.
  • Only four items viz. Rice, Wheat, Sugar and Kerosene account for almost 86% of total sales.
  • The share of coarse grain and pulses are just about 1% and 0.2% respectively.
  • With about 5 lakh fair prices shops, PDS distributes more than Rs. 20,000 crore worth of commodities to about 160 million families and has the largest distribution network of its kind in the world.

 Targeted Public Distribution System (TPDS)

  • It was introduced in June 1997 as part of Decentralized Procurement Scheme launched in 10 states and 1 U.T.
  • Under this, the population was to be divided into Below Poverty Line (BPL) and Above Poverty Line (APL) categories. The BPL families were allocated 10 kg/household/month of food grains which increased to 35 kg/household/month in April 2002 before decreasing to 30 kg/household/month in January 2006.
  • A set of multiple prices were introduced for food grains allocated to BPL families, APL families and for Antyodaya Scheme (Since 2001).  AGRICULTURAL PRICE POLICY and FOOD MANAGEMENT
  • Since 2000, the Central Issue Price (CIP) to BPL families was 50% of the economic cost to the FCI while for APL families, CIP was 100% of the economic cost.
  • Income tax assesses were not entitled to sugar under PDS.

 Review of APP Instruments in India

MSP and Procurement Prices

  • During the 1960s, the main aim of government was to promote the production of wheat through new technology. Thus contrary to economic logic, the procurement prices (particularly for wheat) emerged as a guaranteed price, announced well ahead of harvest time.
  • Thus, MSP became same as procurement prices which made procurement of grain difficult in times of scarcity, because farmers could have got higher price in market.
  • Due to the above reason and also due to pressure of large farmers’ lobby, procurement prices have shown steep upward trend since 1990s. The MSP for wheat in 2004-05 was Rs.640/quintal, an increase of about 185% since 1980­81.
  • For 2013-14 marketing year, MSP for wheat has been increased to Rs.1400 per quintal despite CACP recommendation to keep it constant at Rs. 1285 per quintal level last year. In pulses, the MSP for both Ghana (gram) and masur (lentils) has been increased by Rs. 400 per quintal to Rs. 3200 per quintal while for sunflower and mustard MSP has been increased to Rs. 3000 per quintal and Rs. 2800 per quintal respectively. MSP for paddy has also increased to Rs. 1250 per quintal in 2011-12.
  • Higher procurement prices, while benefiting farmers, hurts non-producing poor consumers and leads to inflationary trend.  AGRICULTURAL PRICE POLICY and FOOD MANAGEMENT
  • It also decreases demand for food grains forcing FCI to store higher amount, thus increasing storage costs of FCI.
  • Further, most of the benefits of higher MSP have gone to larger farmers who were able to use new technology and to selected states.
  • Procurement of food grains continues to be higher in states such as Punjab, Haryana, UP and Andhra Pradesh. These four states accounted for about 70% of rice procured in 2007-08. Punjab and Haryana accounted for 66.9% wheat procured in 2008-09. The share of these two states was 99.5% in 2006-07.
  • The Food Corporation of India (FCI) on behalf of the Central Government has also been undertaking sale of wheat and rice at predetermined price/reserve prices in the open market to enhance market supply of food grains under the Open Market Sale Scheme (Domestic). It can be sold to the bulk consumers and small private traders.


  • Since 1990s, the PDS price (issue price) has been rising which is mainly due to steep hike in MSPs. Besides this, inefficiencies in the operations of FCI have also increased the economic cost of food grains which has increased PDS price.
  • Due to hike in PDS price, the gap between allocation and off take from the PDS has widened. This, in turn, has resulted in rising storage costs incurred by FCI thus increasing food subsidy bill.
  • TPDS has worsened the above situation. While providing food grains to BPL households at lower prices has increased food subsidy bill directly, the API households have made less purchases due to higher prices. This has also increased the storage cost of FCI.
  • Besides this, TDPS has been associated with other problems like identification of the BPL households, higher incentive for black marketing due to huge difference between BPL and APL prices of food grains.
  • Regional disparity has been observed in PDS benefits. In 1995, it was estimated, that four southern states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu accounted for 48.7% of the total PDS offtake in the country.  AGRICULTURAL PRICE POLICY and FOOD MANAGEMENT
  • On the other hand, four northern states of Bihar, Madhya Pradesh, Rajasthan and UP (Comprising of almost 50% of BPL population) accounted for just 10.4% of PDS offtake.
  • Food Subsidy: It is the difference between economic cost of foodgrains and the issue price. Such subsidy provided by the Central government to FCI and some states/UTs had increased by about 40% in 2008-09 to reach beyond Rs. 58,000 crore in 2009-10. The main reasons for rising food subsidy are hike in procurement prices, increasing cost of storage and distribution, and lower issue prices (particularly under TPDS).

Commodity Futures Market (CFM)

  • The commodity futures market facilitates price discovery process i.e. it helps to predict future price levels by the producers. It also provides price risk management.
  • The market comprises 21 commodity futures exchanges including 5 national and 16 regional (commodity specific) exchanges.
  • Agricultural commodities, bullion, crude oil, energy and metal products are some types of commodities being traded in CFM.
  • In 2010, future trading was also allowed in zinc and lead after the addition of some new agricultural commodities like red areca nut, coriander seeds, and garlic were introduced in 2008-09.
  • During the year 2010-11 (up to November 2010), in value terms bullion accounted for the maximum share of traded value among the commodity groups (45.22 per cent) followed by metals (23.80 per cent), energy (19.45 per cent) and agricultural commodities (11.53 per cent). However, in quantity terms trade in energy accounted for 56.77 per cent followed by agricultural commodities (31.67 per cent), metals (11.51 percent), and bullion (0.05 per cent).
  • The year 2012-13 witnessed a decline in the total value of trade in all types of commodity futures as compared to 2011-12.  AGRICULTURAL PRICE POLICY and FOOD MANAGEMENT
  • Futures trading in chana, soy oil, rubber and potato were suspended in May 2008 due to inflationary pressure, but since December, 2008, the trading was restored.
  • The Central government had appointed a committee under the chairmanship of Prof. Abhijit Sen to study the impact of futures trading on agricultural commodity prices.

The Committee submitted the report in April, 2008, with following main findings:

  • (a) The decision to suspend futures trading in selected agricultural commodities has created negative sentiments.
  • Due to the short period of operations of the futures market, it is difficult to conclude whether price movements resulted from such market or it was due to normal cyclical adjustments.
  • The analysis of Indian data does not show any clear evidence of either reduced or increased volatility.
  • The Committee recommended for up gradation of regulation by passing of the proposed amendment of FC (R) Act 1952, and removal of infirmities in the spot market.

The Forward Markets Commission (FMC) is the regulator for commodity futures trading and it operates under the provisions of the Forward Contracts (Regulation) Act 1952.

FMC has made efforts directed at enlarging the participation of physical market stakeholders, especially farmers, as hedgers in the commodity futures market by increasing the level of awareness of physical market participants and policymakers about the economic role of this market.  AGRICULTURAL PRICE POLICY and FOOD MANAGEMENT

The FMC also ensures the dissemination of spot and futures prices of agriculture commodities at Agricultural Produce Market Committees (APMCs) through the implementation of the Price Dissemination Project, in coordination with AGMARKNET and the national commodity exchanges .

Under this, the futures and spot prices of National Exchanges and of AGMARKNET from around 1700 mandis are run on real time basis on price boards.

The project envisages placement of electronic price ticker boards at APMC markets displaying AGMARKNET spot prices and futures prices of agriculture commodities discovered on the National Exchanges, on a real-time basis.

FMC was brought under the administrative control of the Ministry of Finance in September 2013. AGRICULTURAL PRICE POLICY and FOOD MANAGEMENT



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