Farm distress: direct income support ‘less distortionary’, says ICRIER study

TV Jayan | | Updated on: Dec 06, 2021

Giving direct income support (DIS) to farmers — similar to what Telangana recently launched — may be a better option than the price deficiency payment (PDP) scheme or higher minimum support price (MSP) to address farm distress, according to a new study.

Paying higher MSP based on cost-plus pricing would lead to market distortion. PDP schemes such as Bhavantar Bhugtan Yojana (BBY), which was in force in Madhya Pradesh till March 2018, had only a limited impact as it covered less than a quarter of the produce, said a working paper authored by noted agricultural economist Ashok Gulati and his colleagues at the Indian Council for Research on International Economic Relations (ICRIER).

Positives of DIS

DIS is easier to implement, more transparent, equitable and crop-neutral. China also implements a sort of DIS, which it calls comprehensive input subsidy scheme that gives an aggregate input support to the farmer on a per acre basis, said the authors.

They tabulated that if it is implemented across the country at ₹10,000 per ha, the total funds required could be in the range of ₹1.97 lakh crore.

But the bill could come down significantly if the scheme were to exclude farmers whose wheat and rice are procured by government agencies; sugarcane growers who are paid by sugar mills and those farmers growing non-MSP crops.

Drawbacks in BBY, MSP

“The BBY scheme in MP could benefit only 23 per cent of production casting a shadow on how it will benefit majority of farmers if it is scaled up to all-India level,” the authors said. Besides, the scheme was prone to manipulation by traders and lower level mandi functionaries, and may end up helping them more than the farmers, they said.

The authors, who computed costs for three different scenarios under the BBY, found that the expansion of the scheme to national level would cost ₹56,518 crore if the gap between MSP and market price is 10 per cent; ₹1.13 lakh crore at 20 per cent; and ₹1.69 lakh crore, if the gap is 30 per cent.

Market distortion

They were not in favour of higher MSPs which are based on cost plus pricing as they distort market seriously.

“The resulting efficiency losses may far exceed the support that government is intending to extend to farmers. Therefore, wisdom lies in thinking rationally now, and support farmers through less distortionary policies,” they said.

Published on April 13, 2018
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