MINIMUM SUPPORT PRICE POLICY*: WHO GETS WHAT?

R K Singh, Sunita Siddharth (Maitrey ERA) & Tariq Rehman

‘Mai sarkari khareed kendra pe nahi jata hoon, wahan jane ka kya faiyda? Yeh sarkari kendra
hamare liye nahi hain, wahan paise walon ki hi pooch hoti hai aur loot machi rahti hai. Hum
apni fasal khule bazar me bechte hain’.
-Putti Lal
A marginal farmer of village Manna, Mirzapur, UP

(‘I never sell my produce (agricultural) at Government Purchase Centres. What is the benefit
going there? There are corruptions rampant all over. These centres are not for us but those who
are rich gets benefited out it. We sell our produce in open market.’) Says Putti Lal.

In fact Putti Lal is not the only farmer who finds that selling his agricultural produce at the
Government run Purchase Centres would not bring him any benefits of much hyped minimum
support price declared by the state and central governments. Ramratan of village Khilwai, Meerut
district is also of the same opinion. In fact this is not the individual opinions of one farmer or two
but these are a bit of reflections of the entire small and marginal farmers communities of the state
as to how they perceives the relevance and utility of the minimum support price (MSP) policy in
their own context.

It is unfortunate that after spending huge amount of funds, considerable time and labour in
forming several task force, committees and planning, Govt has failed to make any distinction
between a big farmer and a subsistence farmer in terms of the policies and approaches. Except for
the statistical purposes that small and marginal farmers constitutes about 90% of the total farmers
of the state, these poor and underprivileged farmers communities who largely depends on the
small pieces of lands for livelihood, finds no place in any policy documents that could reflect that
the Govt is sensitive towards their problems. There could be find no standard set of policies, rules
and practices to which the marginal farmers are or should be subject to. Hardly any official
document of Govt could spell out the steps to be taken for safeguarding the interests of the largest
contributors to the countries’ grain basket.

AGRICULTURE IN UTTAR PRADESH

The economy of the state is primarily agrarian, where 75% of the workforce earns its livelihood
from agriculture. The share of agriculture sector in the total state income is about 36 percent. One
of the most fertile tracts in the world is the Gangetic plain and Uttar Pradesh covers half of it.
Uttar Pradesh can easily be called the country’s agricultural heartland and has plenty of rich
alluvial soils and abundant ground and surface water. On account of variety of soils and climatic
conditions, the state has nine distinct agro-climatic zones, which show variation in productivity of
various types of food crops.

Uttar Pradesh is on top in total cropped area (25.3 million hectares) which is 13% of total cropped
area of the country and food grains production (42.8 million tonnes) and contributes 22% to the
national food basket. The net cultivated area and the cropping intensity is 150.39% which is well

*
This paper has been developed on a study on Minimum Support Price Policy in Uttar Pradesh conducted
by Gorakhpur Environmental Action Group. The original detailed report is compiled by R. K. Singh and
Sunita Singh for GEAG Advocacy office. This paper can also be downloaded from
http://groups.yahoo.com/group/AgriConcern/files

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above that of the nation (135.1%) the productivity of food grains in the State is 21.04 qtls/ha
whereas country’s productivity is only 16.36 qtls/ha.

The significant contribution of U.P. in food grains and commercial crops is due to rich alluvial
soils (61%of total) and vast irrigation network contributing 74% of net cultivated area as against
40% of the country.

Uttar Pradesh has about two crore holdings and there is a preponderance of small and marginal
farmers in the State, comprising 15% and 75% respectively. The average size of holdings of small
and marginal farmers is 1.41 ha. and 0.39 ha. Respectively, while the average size of holding in
the State is 0.86 ha.Uttar Pradesh has about 10 million tonnes of surplus food grains after meeting
its household and other requirements of food. The State produces 37% of country’s total wheat
and 14% of the total rice production, which is highest in the country.

U.P. has done well in the area of commercial crops. It accounts for 35% of sugarcane and 38% of
the total potato production in the country. The State produces 8.5 million tonnes of fruits and 16.5
million tonnes of vegetables, which are 8% and 20% respectively of the total production in the
country.

With all the glorious background, it’s a fact that Uttar Pradesh is predominantly a land of poor
peasant surviving on marginal and economical holding of less than 3 hectare. The bottom 70% of
the rural household constituting mostly marginal and sub-marginal cultivators, own less than 20%
of the total land under cultivation. According to 37th round of national sample survey, the bottom
50% of rural household in U.P. operates only on 12.7% of the total available land. Small,
marginal farmers are the backbone of the agriculture sector of the state, the poor and marginal
farmers constituting close to three quarters of the farming population.

The state is full of diversity but the problems of farmers are almost the same in the entire state.
Further, problems of small marginal farmers related to utilization of resources, availability of
seeds and fertilizers on time, quality of seeds and fertilizers is always questionable, or marketing
of their produces are almost of the same magnitude in the entire state, access to information,
services and market besides land relations. Certain physical constraints and wide spread failures
and ignorance of natural resource management also contribute to the problem of low productivity.
The main problems are non-availability of health and education services, employment
opportunities or availability of developmental schemes in rural areas of the entire state. Although
the status of government programmes to improve upon this are in all parts of State, but the ill will
and mismanagement in the implementation is quite obvious.

Above all, the small-marginal farmers are top among the losers who don’t indeed receiving the
minimum guarantee of minimum support of price for their produce.

WHAT IS MINIMUM SUPPORT PRICE?

The Minimum Support Price serves as the floor prices and are fixed by the Government in the
nature of a long term guarantee for investment decisions of producers, with the assurance that
prices of their commodities would not be allowed to fall below the level fixed by the
Government, even in case of a bumper crop. Keeping in view the interests of the farmers as also
the need for self-reliance, government announces Minimum Support Price every year. It is the
price at which the government guarantees to buy all the quantities offered to it by producers
through its purchase centres spread all over the state.

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The objective of this policy is to provide an insurance against ‘a sudden and precipitous fall in the
market price due to short term fluctuations.’ This price aims at preventing distress sales arising
out of excess supplies when the market prices are likely to fall steeply and cause losses to the
producers. This price would be meaningful only if it is announced before sowing of a particular
crop and is backed with administrative machinery to purchase the quantities offered for sale
should the market price fall below the guaranteed minimum level. These prices thus set the floor
to the market price, the ceiling being set by the demand and supply conditions.

The Commission for Agricultural Costs and Prices (CACP) however does not accept this narrow
concept of minimum support prices. Which merely provides insurance against a fall in prices. It
regards support price as ‘incentive price’ which encourages the producers to adopt improved
technology to augment production. The price fixed should be such that it provides support to the
improved technology and relieves the progress farmers of the apprehension that higher
production, as a result of adoption of improved technology, would cause market price to crash.

Thus the concept of minimum support price has two variants:

1. a ‘negative’ support price which does nothing more than prevent distress sales arising
out of gluts; and
2. a ‘positive’ support price which provides incentive for higher production and is in the
nature of an ‘incentive price’.

The CACP has been given the responsibility of advising on price policy. Keeping in view the
need to provide incentive to the producer for adopting improved technology and for maximising
production without fear of an excessive price fall. Further, the minimum price was to be related to
the cost of cultivation properly defined and measured. By implication, the commission was trying
to combine the ‘insurance approach’ and the ‘incentive approach’ to the support price policy.

The minimum support price announced by the commission is related to the cost of production and
is not based on year-to-year expectation about the crop. It therefore, becomes a long-term
guarantee and provides incentive to producers while at the same time protecting them against
sudden and precipitous fall in prices.

CRITERIA FOR FIXING MSP

The minimum support prices for major agricultural products are announced each year 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, (b) risk factor, (c) change in input prices, (d) market prices, (e) demand and supply,
(f) effect on industrial cost structure, (g) effect on cost of living, (h) effect on general price level,
(i) international market price situation, (j) inter-crop price parity, (k) input-output price parity, (l)
parity between raw materials and finished products prices, (m) parity between prices paid and
prices received and (n) trend approach. 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

3
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.

THE STUDY

The present study aimed to analyze the effectiveness of the Minimum Support Prices policy vis-
à-vis its impact on small and marginal farmers of the state. The core concern of the study is
whether the MSP policy actually providing any benefits to the small-marginal farmers? The study
attempted to highlight the various factors commonly responsible for the failure of MSP as a tool
of price policy in the context of Small and Marginal farmers in the state. One obvious question
might arise that why small and marginal farmers should be given so much emphasis? The answer
is that small and marginal farmers altogether constitutes about 90% of the total agrarian
communities of Uttar Pradesh. They significantly contribute to the development of the state in
terms of providing food sufficiency. Any argument that undermines their valuable contribution
cannot be sustained on flimsy grounds. Any policy which has come into existence in the name of
protecting the interest of the farmers, if directly or indirectly ignores such a large community, is a
policy defective per se. If it cannot deliver the benefits to the most needy and unprivileged, it
needs to be reviewed holistically.

Keeping in mind the above facts, a study was undertaken to find out the answer of the following
questions:

 Firstly, does the MSP policy delivering any good to the small and marginal farmers in the
state;
 Secondly, what are the general constraints that restrict the small and marginal farmers in
taking advantage of the policy

STUDY METHODOLOGY

For the purpose of this study, the primary research was conducted in the selected 31 villages of
14 districts of Uttar Pradesh through focused group discussion and personal interviews of small
and marginal farmers (detail list of the villages attached). This forms 20% of the total districts in
Uttar Pradesh which was divided into four categories for wider coverage of the study. From two
to four districts were selected from each region. The findings of the primary research are
representative of the general overall condition of the whole of Uttar Pradesh. The Primary
Research dwells upon improving our understanding of the various socio-economic and cultural
attributes of UP with regards to Minimum Support Price.

Within the selected districts an average of two villages were covered. An average of 10 farmers
were interviewed, and around twenty participated in FGD constituted the sample size for the
primary research in each village. The focus of the primary research was upon the small and
marginal farmers. Secondary data also collected and consulted mainly from the periodical reports
and various departments of agriculture in the state.

WHY SMALL & MARGINAL FARMERS ARE NOT BENEFITED BY MINIMUM

SUPPORT PRICE CRITERIA

Despite the fact that all the significant achievements of the State in terms of high yield and food
grain sufficiency that could have never been possible without the hard work of the small and
marginal farmer community which by producing grains and other crops out of their small
fragmented lands, has not only considerably reduced the demand aspect but also play key role by

4
working in big farmer’s farms as seasonal agriculture labours, small and marginal farmers are not
getting justice. Unfortunately, while the big farmers get the benefits of minimum support price,
the small and marginal farmers, who really need such guarantees, are neglected as the policy
itself has failed to protect the interest of these farmers. It doesn’t protect the small-marginal
farmers from fraud, corruption that are rampant at the Govt purchase centres, involvement of
middlemen, arbitrary decisions of staff deputed at purchase centres, mishandling by staff and
numerous other coercive practices.

The minimum support price announced by the commission is related to all type of cultivators, but
small and marginal farmers are not benefiting due to various factors and imperfections in the
market. Because of inter regional variation in the pattern of both production and marketing; there
cannot be a rice market or a wheat market. Besides, due to various reasons the traditional
marketing channels even in a homogeneous region have been undergoing changes. Various
unscrupulous persons with large unaccounted money also enter the market and thus the trading
units are not always those which are licensed wholesalers and retailers, but they also include
speculators and hoarders, who make huge purchases with their unaccounted money generally
with a view to make quick profits.

The total trading in the subsistence farming is small and the cash needs of the cultivators and non-
cultivators in the rural areas are very limited. The subsistence farm holders have very little or no
marketable surplus as a substantial portion of their produce is consumed within the farmhouse.
Generally payments (rents, wages, interest etc.) are made in kind rather than in cash.

Its a well known fact that a substantial portion of the produce is likely to be brought to the
marketing centre by the cultivator himself, in case he is not indebted to a money-lender-cum-
trader. Most of the indebted cultivators who account for 60 to 80 percent of all the cultivators are
forced to sell their produce to the money-lender-cum-trader. Thus here again a sizeable portion of
the produce is channeled through intermediaries.

In few cases the landlord is paid the rent in kind, but generally repayment of loan is made in kind.
Besides, some quantity is sold to the moneylender to whom the producer is indebted. Thus, either
a payment of loans or direct sales or contracted sales, or sizable portion of the produce comes to
moneylenders or money lenders-cum-landlord or traders.

However, among the most important reasons as to why a subsistence farmer does not prefer to
bring their produce to the Govt purchase centres are that various undefined, unspecified and
arbitrary market charges forced them to sell their produce in open market on relatively lower
prices. They prefer to dispose of the produce in the village at a lower price instead of becoming
the victims of traders in unregulated markets. They do so in order to avoid the multiple charges
such as handling charges, quality allowance (Karda etc.), weight allowance (Dhatt),
commissioner brokerage, charities (Dharmadha), interest, octroi, and market fees, charges of the
munims, loading charges and a number of other charges varying from centre to centre.

The purchase centre gives priority to big farmers who bring large produce for sale or to
middlemen who have bought the crop at much lower price than the MSP from the small and
marginal farmers.

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Our study shows that only 7.6% of the surveyed small and marginal farmers sell their produce at
Government purchase centre for varied reasons which are presented in the diagram given below:

Reasons for not selling at Government Purchase

Centre
b
2%
m p c
n o a
7% 3% 2%
4% 4% 14%
l d
5% 8%
k
4% e
I f 10%
j h g
8% 7% 4%
6% 12%

MOST COMMON REASONS RESTRAINING SMALL-MARGINAL FARMERS FROM

SELLING THEIR PROIDUCE TO GOVT PURCHASE CENTRES

Our research proves that delay in payment is the most common reason which hinders a small-
marginal farmer to sell their produce in Govt purchase centres. A total of 14% respondents
informed that getting payment in time is their utmost priority. The payment at these centres is
made through cheques and to get these encashed one has to open a bank account. A poor farmer
normally doesn’t have a bank account ready or enough cash to fulfill such a formality. Besides,
the banks are located at a far off resulting in expenditure of more than half in conveyance of the
total cheque amount as the rarely pay attention to their problems in first visit.

Immediate requirement of cash, thus, a compelling factor in selling the produce to the village
businessman/ middleman or in the open market at times at a much lower price than the MSP. The
difference ranges between Rs. 100-150/- per quintal.

Exploitation of small-marginal farmers is another major hindering factor that discourages these
farmers from selling their produce. 12% of the total farmers surveyed informed that the staff
deputed at these centres adopts various exploitative means to harass them. These purchase centres
always give priority to the big farmers/ middlemen over small and marginal farmers, as their
yield is much lesser than the big farmers. After waiting several hours at the centre, when their
turns come, purchase centre employees avoid taking their produce on lame excuses such as
excess moisture, broken grain, etc.

Other compelling reasons due to which farmers do not prefer selling their produce at purchase
centres are:

 That some time produce is sold to the local businessman or moneylender against
repayment of debts;

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  Under weighing of the produce brought in by the small farmers;

 Small-marginal farmers normally do not posses required papers of landholding while

purchase centres insists for a number of paper formalities. Instead of problem solving
approach, they try to harass them by all possible means;

 Cost of transportation of produce to the purchase centre usually not affordable due to
limited financial capacities of small farmers;

 The dignity and self respect is perceived to be an asset by small and marginal farmers
while purchase centres staff do not treat women farmers with respect;

 Rampant corruption – they insist for bribes as ‘commission’;

 Purchase centre do not procure anything other than wheat and paddy. Indirectly
discouraging diversification of agriculture which is generally practiced by marginalized
farming communities. In this way a bias has been created in agricultural support policies
in favour of rice and wheat has distorted cropping pattern and input usage. Market for
farm output continues to be subject to heavy procurement interventions. This is also
reflected in our study conducted in different regions of UP.

 Irregular opening hours, Purchase Centre do not open on time hence a farmer has to
compromise with his/her other engagements;

 Brokers are preferred over small farmers;

 Lack of information about Government Purchase Centre

Although the Commission for Agricultural Costs and Prices (CACP) justifies the criteria for
fixing the price as an ‘incentive’ to encourage the high produce, the ground realities are that due
to the poor procurement and storage infrastructure have many a times, failed to provide this
guarantee.

On the basis of the above study, the following points need immediate response from the state
Govt. in order to ensure that the interests of the poor and marginalized farmers are protected. Our
study recommends that:

 A system should be developed which ensure immediate payment to the farmers for their
sale at the purchase centres itself. The local banks may be asked to assign certain days
exclusively devoted to make payments to the farmers. Alternatively, the local banks
could make specific arrangement to extend their services to the purchase centers either by
way of opening ad hoc Extension Counters or any other possible steps;

 Corruption and harassment of small-marginal farmers at the purchase centres should be

thoroughly checked. Making the entire procurement processes at purchase centres
transparent, purchase centres staff more accountable and responsible, could ensure it.

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  Summarily and arbitrarily refusal to purchase the produce for vested interest is a common
practice at purchase centres. Discretion of PC staff for accepting and rejecting the
produce should be controlled. Every such refusal should be made in writing and must
record reasons for refusal.

 Mandatory provisions for paper formalities should be made minimal and poor farmers
having stake in other’s field (adhiya, batai) should be recognized and given priority over
big farmers.

 For small and marginal farmers to benefit from MSP, procurement of produce should be
done at the Gram Panchayat level. This would substantially reduce the cost and time
spent in transportation and traveling. Also the Kisan Mitra or other village level
functionaries could be trained and given the responsibility of procurement;

 A bias in agricultural support policies in favour of rice and wheat has distorted cropping
pattern and input usage. This could be balanced with other crops encouraged according to
the different agro-climatic regions;

 Organic farming should be encouraged. Slogans and interactive charts, other information
pertaining to the less use of chemical fertilizers and pesticides should be highlighted at
the purchase centres.

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Gorakhpur Environmental Action Group
224, Purdilpur, PO Box # 60
Gorakhpur 273 001 (UP)
INDIA
Tel: +91 551 2339774
Fax: +91 551 2344832
E-mail: geag2@sancharnet.in
Website: www.geagindia.org