All you wanted to know about Price Deficiency Payment

RAJALAKSHMI NIRMAL | Updated on January 10, 2018



The Niti Aayog has released a three-year agenda for the Centre. Of the several things it has touched upon, one is agriculture, with a focus on doubling farmers’ income. The think-tank has recommended reforms in the APMC Act and tenancy laws and tweaks to the eNAM (electronic National Agriculture Market). It has also suggested ‘Price Deficiency Payment’ system to address the gaps in Minimum Support Price (MSP) based procurement of crops.

What is it?

Under Price Deficiency Payment, farmers are proposed to be compensated for the difference between the government-announced MSPs for select crops and their actual market prices. For crops such as rice and wheat where it is effective now, MSP announcements will continue. For other targeted crops, price deficiency payments will be made. However, it has to be noted that there may be a cap on the extent to which the Centre will bridge the gap between MSP and market price.

Niti Aayog has said that the farmer may be entitled to the difference up to say, 10 per cent. To avail this benefit, each farmer would have to register with the nearest APMC mandi and report the total area sown. The subsidy may be paid via Direct Benefit Transfer (DBT) into the farmer’s Aadhaar-linked bank account.

Why is it important?

The key benefit from the price deficiency payment is that it will reduce the need for the government to actually procure food crops, transport and store them and then dispose of them under PDS. The difference between the support and market prices can instead simply be paid in cash to the farmer. Price deficiency payment can also keep India’s bill on food subsidies under check, believes Niti Aayog. India’s food subsidy schemes have frequently come under the WTO scanner. Even in the meeting held in March this year, there were questions raised on the minimum support price programmes for wheat, sugarcane and pulses, by the US, EU and Australia.

These countries see India’s procurement subsidies as trade-distorting. In recent years, the government has been seeing the accumulation of large food grain stocks in its godowns over and above the buffer requirement. This entails storage and wastage costs that add on to the subsidy bill.

Why should I care?

The PDP system may be more effective than MSPs at ensuring that cropping patterns in India respond to consumer needs. It may also ensure that more farmers actually benefit from price support. The current MSP system has many flaws. First, its reach is limited, in terms of both the crops and the geographical area it covers. Though every year MSPs are announced for 20-plus crops before the sowing season begins, actual procurement at MSP is restricted to a few crops such as paddy and wheat. This has led farmers to excessively focus on the crops with assured procurement. The country’s cropping pattern has been skewed in favour of rice and wheat in the last three decades, leading to reduced sowing of coarse cereals.

Monoculture also results in soil degradation and makes crops susceptible to pest and weed, leading to higher usage of chemical fertilisers and pesticides. The price deficiency system may incentivise farmers to diversify beyond the conventional cereals. The crops with effective MSPs such as rice, wheat and sugarcane, where support prices are effective now, are also water-intensive.

The bottomline

MSPs haven’t been a great support to either farmers or consumers. If the new system of price deficiency payment can be more effective, why not give it a shot?

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Published on September 25, 2017

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