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Impact of Minimum Support Prices On Agricultural Economy: A Study in Karnataka

This document summarizes a study on the impact of minimum support prices (MSP) on Karnataka's agricultural economy. The study analyzes MSP's effectiveness on price fluctuations, its role as an incentive price, impact on cropping patterns, distributional effects, and operational effectiveness. It finds that MSP growth has been about 10% annually but varies across crops and regions. While intended to be below market prices, MSP has sometimes coincided with or fallen below wholesale prices for some crops. MSP also seems to play a role as a "sticky base price" that market prices align with rather than responding to market forces.

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Mohandas Periyasamy
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92 views

Impact of Minimum Support Prices On Agricultural Economy: A Study in Karnataka

This document summarizes a study on the impact of minimum support prices (MSP) on Karnataka's agricultural economy. The study analyzes MSP's effectiveness on price fluctuations, its role as an incentive price, impact on cropping patterns, distributional effects, and operational effectiveness. It finds that MSP growth has been about 10% annually but varies across crops and regions. While intended to be below market prices, MSP has sometimes coincided with or fallen below wholesale prices for some crops. MSP also seems to play a role as a "sticky base price" that market prices align with rather than responding to market forces.

Uploaded by

Mohandas Periyasamy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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6.

Impact of Minimum Support Prices on Agricultural Economy: A Study in


Karnataka

R S Deshpande
T Raveendra Naika

Most of the reviews of the Price Policy have touched upon only the theoretical
aspects of the policy and, surprisingly, the empirical studies have been able to uphold the
theoretical scaffoldings firmly. In the entire process, the ground realities pertaining to the
intended impact of the Price Policy were relegated to the backyard or were taken for
granted. The Price Policy emerged in the context of institutionalising the agricultural
price monitoring mechanism under the recommendations of the Jha Committee Report.
The instruments of Price Policy were thus framed under the heavy shadow of food
insecurity as well as distribution mechanism (rationing system) prevailing during those
years. After the experience of a quarter of a century, in the implementation of the market
intervention scheme, recognising the oncoming changes, Prof. Dantwala (an architect of
the price policy) wrote during the early nineties urging recognition of the changing role
of Minimum Support Prices (MSP) and market intervention.

The present study focuses on the effectiveness of the Minimum Support Prices
and documents its impact on various parameters of the agricultural economy. These
parameters include growth, distribution aspects, decision-making in the allocation of
resources, environmental effects and, above all, analysis of its role as an operational
instrument of the price policy. We have also attempted here to analyse the very existence
of MSP as a tool of price policy in the context of its effectiveness. The study is expected
to highlight the factors responsible for the success of MSP as a tool of price policy as
well as the parameters responsible for its failure.

Effectiveness is viewed here from five distinct angles, viz., (i) impact on the
fluctuations in prices, (ii) role of MSP as an incentive price, (iii) its impact on
cropping pattern, (iv) distribution parameters, and (v) operational effectiveness of MSP.
The study also incorporates analysis of the administrative process in the implementation
of MSP. The study is based on secondary data at the state and district levels, and primary
data collected through a survey of households from three districts viz., Gulbarga,
Mandya, and Belgaum.

Karnataka State has a typical composition having a large share of its area under
severe climatic constraints with a highly diversified agricultural sector. The State has the
largest share of drought-prone areas of the country and exceeds the country's share of
poor. Yet, the State has achieved better rates of reduction in the poverty ratio. The high
density of low-value and high-risk crops typifies the State agriculture. The crop economy
of the State has a few typical characteristics. It has a predominantly cereal-dominant crop
pattern with coarse grains having the largest share of area. These crops generally have
low yield rates and lower prices, and thus commercial crops are taken to support the
agricultural economy. The pattern of growth depends upon the performance of the
monsoon and the availability of water. Therefore, the price incentive structure for these
crops becomes an important component of agricultural policy in the State.

The effectiveness of Price Policy at the State level involves the availability of
market infrastructure at the State level and the initiative taken by the State governments
to create an institutional structure for monitoring agricultural prices. In the case of
Karnataka, the State government has recently constituted an Agricultural Price
Commission. The Government of Karnataka, in its order establishing the Price
Commission, states that the Commission on Agricultural Prices is constituted to
recommend standard prices, those which could be sustained in the market, and support
prices at which the State government should intervene in the agricultural market.
Therefore, at the institutional level, the State government has taken a bold step towards
formalising a price monitoring system, whereby it has given a fillip to organising a Price
Policy at the State level. This institutional initiative will go a long way in building the
price policy at the State level.

The trends in MSP across crops indicate growth of about 10 per cent per annum
but there are variations across crops and regions. A comparison between MSP and
market prices clarifies this point further. Such comparison helps us in analysing not only
the relative behaviour of MSP but also its influence on price trends in the market. As a
policy tool, Minimum Support Prices are expected to be below the Wholesale Prices. But
this does not seem to hold in the field. In the case of sunflower, groundnut, and jowar.
the Wholesale Prices have either coincided with or gone below the Minimum Support
Prices. The relationship between Minimum Support Prices and Farm Harvest Prices also
indicates that the trends in Minimum Support Prices have a little difference than the Farm
Harvest Prices. An interesting point emerging from this analysis is that the distance
between market-determined prices and Minimum Support Prices has been very little and
hence the MSP is probably playing a role of sticky base prices with which the market
prices get closely identified. One tends to wonder if the MSP is providing a sticky base
level for the market prices and whether the market prices are closer to MSP by design
than responding to the market-induced upper fluctuations? In other words, are the
fluctuations upward getting minimised under the influence of Minimum Support Prices?
If so, this certainly is not welfare augmenting for the producers.

The relative neglect of jowar, ragi, maize and groundnut compared with wheat
and paddy comes is evident from the relative prices of these crops in relation to
administered prices of paddy and wheat. Similarly, market imperfection and fragile
market integration are evident from the analysis wherein it is pointed out that the price
differences prevail 2-3 times in the markets separated by about 150 kms and at times
even less than that for the same crop in the same month. Similarly, it is also pointed out
that the farm harvest prices and wholesale prices do not bear a strong lead or lag
relationship with the Minimum Support Prices. Further, it is located that MSP does not
bear any consistent and statistically significant relationship with either wholesale prices
or farm harvest prices. This is indicative of the fact that quite contrary to the policy
expectations, MSP fails to influence trends in market prices or even act as a guide price.

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