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Issues related to direct and indirect farm subsidies and MSPsIndia’s combined food, fuel, and fertilizer subsidiesamount to 30% of all government subsidies, and 2.5% of the GDP.Direct Subsidies Direct subsidies are money transfers by government which reach benefeciaries through a pre-dermined routeMeritsGovernance- Reduced leakage, and checking corruption,Regular monitoring and effectient delivery of benefits Farmer centric- Reduced usage of excess inputs like fertilizers etc.., Prevent one size fits all approach, Improvement in farm eqipments, Diversification of income sourcesDemeritsUse of money for non-productive purposes (eg. alcohol, marriage)Might lead to inflation as farmers have more money with them low penetration of Aadhar and Digital still poses challenges of curbing prilferageIndirect Subsidies These are subisidies which are provided to farmer indirectly like input cost reduction (fertilizer subsidy), interest subvention, price reduction etc.MeritsThey are for steering development of a targeted priority areaKnowledge enhancement of farmers through tech and training Incentivize farmers to use better inputs for higher productivityDemeritsThis leads to biased development of few crops (rice, wheat), regional differences (eg. HYV seeds are bought by areas having good irrigation facilities)Increasing focus on pulses, vegetables etc. to remove such imbalancesFertilizer subsidy- Issues covered separately Prilferage still remains issue Increasing penetration JAM trinity Power subsidy lead to excessive discharge of ground water- Separate feeder services to ensure electricity availability for limited time Fertilizer subsidies:Issues with subsidies:Total outgo of fertilizer subsidy alone for 2017-18 stood at 70K CrFertilizer subsidies in India are given not to the farmers but to companies that make fertilizers, so that they sell fertilizers to the farmers at a reduced priceEstimates show that more than a third of the subsidy benefits the fertilizer companies instead of the farmersResearch shows that only about 50% of the overall subsidy reaches small and medium farmers, and Most of the fertilizer subsidy is cornered by farmers of Haryana, Punjab, Western UPCorrect proportion in which fertilizers should be used is 4:2:1 for NPK. However, subsidized urea (at less than half the actual price) leads to overuse of urea and underuse of P and K (8:3:1)Excessive fertilizer use also leads to ground water contamination, eutrophication by waste water of farmsPossible solutions:Subsidies should be made direct cash transfers with less price regulationFarmer awareness and increased usage of Soil Health Cards, organic farming etc. Reducing subsidy on urea to reduced excessive Nitrogen content and increase adoption of environment friendly Neem-coated Urea Decentralization non-point source pollution controlling measures Minimum Support price:Definition of various prices: MSP- Generally announced at sowing time, and the government agrees to buy all grain offered for sale at this priceProcurement prices- Higher than MSPs, usually prices at which govt. buys for PDS and FCI buffer stocksIssue prices-prices at which the Government supplies food grains through Fair Price shops and ration depots.FRP (Fair and Remunerative)-is the minimum price which the buyers of agri goods (eg. sugar mills)have to pay to the farmers for their produce (eg. sugarcane)Who, what and How:Commission?for?Agricultural Costs and PricesCACP set in 1965 is an attached office under Agriculture ministry (headed by IAS). CACP submits its recommendations every year to the government and Cabinet Committee on Economic Affairs(CCEA) (headed by PM) finally decide the price.As of now, CACP recommends MSPs of 23 commodities (FRP for sugarcane), which 14 Kharif Crops, 6 Rabi crops, sugarcane, copra and raw JuteKharif (July- October) Mnemonics- (C MSG RAM with MS. SUNita)Crops- Cotton, Millets (Jawar, Bajra, Ragi), Soyabean, Groundnut, Rice, Arhar (tur/ pigeon pea), Maize, with Mung, Sunflower, Urad, Sesamum, NigerseedRabi (November-March): Mnemonics- WBC LO toh Mustardaur Safflowerka juice piyoCrops- Wheat, Barley, Chickpea/Gram, Lentil/Masur, Oats, Mustard, SafflowerOther crops- Sugarcane, Copra, Raw JuteNote: MSP for dehusked coconut based on MSP of copra and toria based on MSP of mustard.Also, No is MSP issued for OATs (just fitting in mnemonic but it’s a rabi crop).MSP calculation methods-A2- Actual cost paid by farmer for various inputs like seeds, fertilizers A2+FL- Actual cost plus notional family labor cost C2- Comprehensive cost i/c actual+ notional (family labor, rent of land, interest on capital etc.)Objectives/Positives of MSP:Assuring remunerative and relatively stable price environment Injects an element of certainity and confidence in farmers Price failure can push farmers in worst cycle of poverty leading to issues like suicides Improving economic access of food to peopleIf prices of a particular crop falls aharply in a particular year and farmer is not paid well, it will lead to shortage of that crop in next year putting additional import burden on government Envolving a production pattern in line with country’s needMSP has been successful in making India self-sufficientProblems with MSPs:About 1.2% of the GDP (1.7 L Cr in 2018-19) is food subsidies which also has adverse effect on investmentsNearly half of all subsidy spending goes towards food subsidy (meeting the difference between the cost of staple foods (rice, wheat, and lentils), and the artificially low CIPs)Almost 80% of public expenditure in agriculture is in form of subsidies and only 20% as investments.MSPs are lower than MS Swaminathan Commission (Link)MSPs should be set using the CACP determined ‘C2+50%’ cost, as suggested by MS Swaminathan Commission. DowntoEarth Analysis shows that MSP is less than 1.5C2 (Rs35-2500 depending upon crops)Regional imbalance in favour of relatively well-off producer states:All states produce wheat but 95% procurement is from Punjab, Haryana, West UP 20 states produce rice but 90% is procured from Punjab, Haryana, UP, AP, Tamil NaduAlso, One Nation, One MSP doesn’t work due to input (electricity, water, labor cost) variation across the statesStrangles private trade, and subsidizes inefficient FCI: In states such as Chhatisgarh and Punjab which have well functioning govt. procurement leaves hardly anything for market sale and thus leading to release of food grains at lower price. (Eco-survey 2018-19)Distorts crop production incentives: The exclusive attention to wheat and rice has distorted the cropping pattern of farmers in their favour. The higher water and fertilizer intensity of these two crops in turn has had adverse environmental impactsAt many instances small and marginal farmers are unaware of MSP prices and poor rural transport and infra provides further stumbling block. Way forward:FCI reforms- In the long-term, procurement and distribution operation should be progressively decentralized, to reduce costs incurred on FCI operations; FCI should increasingly become a coordinating bodyRevamping open ended procurement policy to selective targeting.Better targeting through JAM- ensuring small and marginal farmers get the benefit Diversification of food subsidies beyong MSP- schemes like PM-ASHA for pulses should be used more frequently Debate on removing One Nation, One MSP is need of hour Govt. initiatives to reduce regional biasis: Water conservation- FasalSeenchayiYojana, System of Rice intensification etc. Organic farming- National Mission of Sustainable Agriculture Technology mission for North Eastern states (Horticulture)Crop diversification programme under RsahtriyaKrishiVikasYojana to divert area from paddy to pulses, coarse grains etc. FasalBeemaYojanaFood subsidies and WTO:Uruguay Round created two categories of domestic support:-Green Box: exempt from reduction commitments. It includes govt. subsidies on research, education, pest control etc. and volume decopouled payments to producer.For developing countriesspecial treatment is provided in respect of governmental stockholding programmes for food security (but that must not invove price support to producer unlike MSP in Indian PDS or direct customer payments)Amber box subsidies- subsidies that distort the international trade by making products of a particular country cheaper as compared to same or similar product from another country is slotted under this box.De Minimis:-there is no requirement to reduce trade-distorting domestic support in any year in which the aggregate value of the product-specific support does not exceed. It is 5% of agriculture production value in 1986-88 for developed countries and 10% of value in 1986-88 for developing countries. Key argument is that prices being considered are 3 decades old!Blue box subsidies- These are basically Amber Box subsidies but they tend to limit the production. So generally, no one has any issues with these!Peace Clause- Art 13 of AoAcannot be challenged by other WTO Members on grounds of being illegal under the provisions of another WTO agreement. Which gave buffer amount of 10 years to countries to implement subsidiy limits etc. This was over after 2004 but At Bali WTO conference in 2013, it has been extended for 4 years (but it’s still operational as no agreement could be reached among countries). Also, countries agreed to find a permanent solution to public stockholding by developing countriues for food security.2015 Nairobi package: eliminate agricultural export subsidies. Developed countries to eliminate immediately, except for a handful of agriculture products, while developing countries to end it by 2018. Special Safeguard Mechanisms (SSG): impose an additional duty in case of import surgeAgreement is heavily loaded in favour of developed countries due to following reasonsA developed country might need only 1-2% of its GDP to subsidise 50% of its agriculture. USA use 1/3rd of its Agriculture GDP in green box subsidies and such distorations are not addressed. Post Uruguay (1994-98), the export of agricultural products from Asia actually declined steeply to 0.5% from 8.2% in 1990-94. For India, the share in 1990-91 was 18.5%, it fell to 2.2% in 2015-16. Developed countries also make use of Agreement on Sanitary and Phytosanitary Measure (SPS) and Agreement on Technical Barriers to Trade (TBT) to selectively ward off imports from developing countries by imposing higher standards than those imposed by international bodiesPDS- objectives, functioning, limitations, revampingPDS is a government sponsored chain of shops entrusted with distribution of food and non-food commodities at a cheap price to the needy section of societyObjectives of PDS:Ensure essential consumer goods availability at cheap price Insulating the citizens from increasing inflation Ensure minimum nutritional status in country Indirect control of open market prices of goods Key PDS schemes (functioning)Targeted PDS (TPDS)- Special targeting of poor 6 Cr families Antodaya Anna Yojana (AAY)Covers poorest of poor (2.5 Cr people)35 kg/month food at very cheap prices (Rice @ Rs 3/kg, wheat @ Rs 2/kg)National Food Security Act 5kg/month to selected few (82 Cr)- details aheadOWS- ICDS, MDM Functioning and Limitations:Under PDS govt. runs TPDS and Other Welfare schemes (OWS- ICDS, MDM etc.) , procured grains are supplied to consumers at CIPs via about 5 lakh FPSs; CIPs are uniform all across the country. Through PDS 6 commodities (rice, wheat, flour, sugar, edible oil, soft coke, kerosene oil) are supplied by central govt. Additionally, state govts. add a few stuff like salt, matchsticks etc. based on local demands.While MSP has been rising (rich farmer lobby), CIP has been frozen (populist measure). Beyond the MSP, government also spends about 35% extra on other incident and distribution costs; this is proving to be huge fiscal burden for central govt.About 47% of all foodgrainsare leaked before they reach the beneficiaries(Shanta Kumar committee.)Even among the beneficiaries who get the grains, targeting is poor. Many states haven’t done proper exercises to identify BPL families. Additionally, migrants, landless without resident proof are not able to get ration cards As per Right for Food campaign (Jharkhand), many eligible households are being deprived of ration cards (due to bogus ration cards- limit of 75% under NSFA). Aadhar- PDS card llinkageand Internet connectivity of EPOS machines is another challengeFCI operational inefficiencies due to poor technology, over-bureaucratization, lack of coordination with state govts. lead to wastage of food grains Artificial food inflation due to overstockingTPDS (X)Key features Targetting- BPL (<15000 pa) and AAY at very low prices wrt APL Dual prices- BPL at 50% of FCI economic cost, APL at 100% Central state control- in case of PDS central govt. only supply 6 commodities to state, rest is managed by state while TPDS is led by central govt. Issues Targetting BPL- <15000 pa leaves a lot of vulnerable outside Identification as per target- erroneous inclusions and exclsuionsGhost ration cards Leakages Shift from surplus to deficit states has reduced due to increased bracket size of beneficiaries Revamping: (Shanta Kumar Committee)Procurement States with enough PDS experience (Haryana, AP) should be encouraged to directly procure from farmers FCI should shift focus to states where sale is at prices lower than MSP like Assam, WB, East UP Private sector involvement in procurement, storage, transport should be encouraged Negotiable Warehouse receipt(NWR) system should be scaled Supply GoI should expand its commodities bracket to make food more nutrient rich Transparent liquidation policy to avoid wastage of surplus stocksGIS mapping of beneficiearies and Fair Price shops (FPS) can help reduce leakage FPS operations should be made more inclusive by incorporating SHGs, cooperatives, GPsUse of technology such as e-PDMScovering the entire food supplychain, monitoring of FPSs via CCTVs, GPS tagging of trucks used to transport food, computerized records of grain availability at various places, smart biometric cards (UIDAadhar cards) to make payments at FPSs etc. ConstumerFood coupons and DBT can be explored DBT using JAM trinityToll free helpine for grievance redressal Reduce beneficiaries to 40% (shanta kumar)Universal PDSPositives- Less exclusion error, Negatives- Cost, North African experiments suggests no significant benefit to poor, Price Issue of buffer stock and Food Security Buffer stock is a system or scheme to procure excess foodgrains at times of good harvest to prevent falling of prices below a target range and releasing of grains in case of bad harvest to keep inflation of food prices in check. Total operational stock of FCI include stocks earmarked for PDS (TPDS + OWS (MDM, ICDS etc.)) and stocks needed for food security.There are several problems with this situation of high procurement and rising stocks:Open ended Procurement- In 2016-17 govt. ended up buying 30% marketable surplus of wheat. Buffer stocks have become a tool to manage too many interlinked objectives of fair price, food security, keeping inflation in check leading to inefficient operations Central procurement should have a limit; it shouldn’t keep following the policy of acquiring unlimited amount of grain at the announced MSPInefficient inventory management Counter cyclic operations- Higher stocking in a bad crop year to ensure supply for TPDS and OWS further strains the open market operation 20-25% food is wasted in post-harvest loses Increasing gap between per capital production v/s per capita availabilityAd-hoc liquidation policy (Shanta Kumar)Need for streamlined policy- Open market sales for domestic market Exports to foreign countries as per trade policy. Inferior quality grains can be sold at a reserve price as animal feed.The cost of these stocks, calculated at economic cost plus the cost of carrying the buffer, would come to nearly Rs 100,000 crore.This illustrates the extent of economic inefficiency in the systemCoverage under NFSA should be brought down to about 40% (currently 67% current system actually hurts the BPL families by reducing their entitlement to 5 kg/ person from 7 kg (Shanta Kumar)The central government should discourage state governments from announcing bonuses on top of the announced MSP/FRPs(C.Rangarajan panel) , Also, Forex reserves are high and even to tide over a really bad harvest, even if India were to buy 10mt of wheat, it would cost only about 1.5% of India’s forex reserves. So, buffer stock amount can be rationalizedIs Food Security a challengeFAO report on The State of Food Security 2001 defines it as situation when all people at all time have access to sufficient, safe and nutritious food for an active and healthy life Steps for food security Sufficiency- MSP, PDS (FCI), Buffer stock Nutritious- ICDS, MDM State of Food Security in IndiaQuantitative needs- India produces net ~280 Mntonne of food grain in 2018 which is provides sufficient per-capital food production but food availability per capita varies between 450- 500 g/day. This fluctuations show that food security is quanitiatively an issue in IndiaQaualitative needsUndernourishment- ~14%, (FAO)Stunting- 38% (FAO)53% women (15-49) are anemic (NFHS-4)Global Hunger Index (IFPRI) ranks India below 100 Global Food Safety index ranks India 79 out of 113 which is low.Issues that cause the gap Poverty leads to lower demandIllegal practices hoarding etc.Lack of proper liquidation policy Post harvest loses (@ 20-25%)Absence of NAM Causes of post harvest losses Packaging Un-availability of temperature controlled vehice (only 10% fruits use cold storage transport)Inefficient supply chain- demand supply mismatchNFSAWho are the beneficiaries :Legal food security to 67% population (States to identify eactly who) 75% urban and 50% rural Max 5kg/person per month to elgible beneficiaries (Rs 3/kg- wheat, Rs 2/kg- Rice, Re 1/kg coarse grains), Continuation of 35 kg per household under Antodaya Ana YojanabenfeciariesIssues- Cost (1.3% of GDP), Benefeciaries identification, increasing production, Rise of leakages Storage, transport, and marketing of agricultural produce and issues and related constraintsStorage: India produces about 280mtof foodgrains per year. However, losses have remained stuck at around 10%, which means that losses are also increasing with increasing production. 6% of all losses happen at the storage stage. Storage structure design and its construction play a vital role in reducing or increasing the losses during storage. In India, the major part of production (about 70%) is stored at farmer level, and is the root cause of high storage losses. We should encourage use of coal-tar drum bins, domestic hapur bins, etc. for farmer-level storage, and pusa bins for farmer-level storage. Bulk storage responsibility lies with FCI, Central Warehousing Corporation, State Warehousing Corporations, etc. Existing storage capacity with FCI and state agencies for central pool stocks is about 72mt, of which15 mt (20%!) is CAP (cover and plinth, which just means outdoor stacks of grain covered with some waterproof material).FCI should expedite the outsourcing of storage function to CWC, SWCs, and the private sector via the PEG(Private Entrepreneurship Guarantee) scheme(under which private sector players are allowed to earn rent plus a guarantee on their warehouses, when they’re being used for bulk storage by the government)Covered and plinth (CAP) storage should be gradually phased out with no grain stocks remaining in CAP for more than 3 months. Silo bag technology and conventional storages, wherever possible, should replace CAP, with potential help from the private sectorNegotiable Warehouse Receipt System (NWRS) should be taken up on priority basis, and scaled up quickly. Under this, farmers can deposit their produce to the registered warehouses, and get, say, 80 percent advance from banks against their produce valued at MSP. They can sell later when they feel prices are good for them. This will bring back the private sector, reduce massively the costs of storage to the government, and be more compatible with a market economyGoI can encourage building of warehouses with better technology, ande-track levels of stocks on a regular basisFor scientific storage, drying of food grains to a safe moisture level is essential; We should tap into FDI and financing from ADB, IFC etc. for creating storage infrastructure.Targeted beneficiaries can be given 6-month rations in one go; this will save on storage costs, as well as transaction costs for the beneficiariesTransport/ Movement of agriculture produce:In order to ensure availability of foodgrains for TPDS and OWS (other welfare schemes), and to maintain reasonable levels of buffer stocks at various strategic locations throughout the country, and to reduce the strain on existing storage capacity,FCI undertakes transportation of foodgrain (wheat and rice) from surplus States to the deficit States and also within the States by rail, road and riverine modes. About 90% is undertaken by railways and rest by road and waterways.CAG report says that the main reasons for inefficiencies in movement of food grains were deficient monthly movement planning, unplanned/unscheduled supply of rakes and dispatch without proper assessment of requirement at the consignee end, delay in loading and unloading of railway wagons, and weakness in existing system of claim settlement. To overcome these, CAG recommended that there be better coordination between the FCI and railways.Movement of grains needs to be gradually containerized which will help reducetransit losses, and have faster turn-around-time by having more mechanized facilities at railway sidings. Using inland waterways and hinterland ports could be further explored, especially from coastal states with a net surplus etc.HLC also recommends total end-to-end computerization of the entire food management system, starting from procurement from farmers, to stocking, movement and finally distribution through TPDSInvite FDI in construction of modern silos and grain movement through containers. Railways need to be encouraged to open it for private sector, both domestic and foreign. Scarcity of storage space and lack of timely availability of railway rakes is a major bottleneck in movement of grains in timeMarketing of agricultural produce:Agricultural marketing covers the services involved in moving an agricultural product from the farm to the consumer. Due to the involvement of various levels of middlemen, the actual producers of food get the lowest price in the entire chain, while the consumers pay the highest. Presently, markets in agricultural products are regulated under the APMC Act enacted by State Governments. There are about 2,500 principal regulated markets in India (!). The Act covers not only cereals, pulses etc., but also chicken, goat, fish etc.,The purpose of state regulation of agricultural markets was to protect farmers from the exploitation of intermediaries and traders and also to ensure better prices and timely payment for their produce. Over a period, markets have become restrictive and monopolistic markets, providing no help in direct and free marketing, organized retailing and smooth raw material supplies to agro-industries. Exporters, processors and retail chain operators cannot procure directly from the farmers and says that the first sale of these commodities can be done only through the commission agents licensed by APMC Act. Various taxes, fees/charges and cess levied on the trades conducted in the Mandis are also notified under the Act in the process, an enormous increase in the cost of marketing and farmers end up getting a low price for their produce. APMCs charge a market fee from buyers, and a licensing fee from commissioning agents who mediate between farmers and buyers. States also impose their own VAT and other levies. Such high taxes at the first level of trading have significant cascading effects on the prices as the commodity passes through the supply chain, and hence the consumers end up paying a much higher price than what the farmers receive (for rice and wheat, such levies are 10-15% of the cost). These taxes vary widely between states- from 20% in AP for rice, to near zero in Maharashtra and Gujarat.Model APMC Act 2017: Since various State APMC Acts created 2,500 fragmented markets for agricultural commodities and curtailed the freedom of farmers to sell their produce other than through the commission agents, the centre has drafted a model APMC and has been urging States to adapt it. It provides for:Defined each state/UT as a single unified market area.Establishment of consumers’ and farmers’ markets to facilitate direct sale of agricultural produce to consumersPermits private persons/growers/local authoritiesto establish new markets for agricultural produce in any areaRequires a single levy of market fee on the sale of agricultural commoditiesReplaces licensing of market functionaries to allow them to operate in one or more different market areas Provides for the creation of marketing infrastructure from the revenue earned by the APMC Proposes to put a cap on mandi taxes at 1% for foodgrain and 2% for fruits and vegetables as well as commission agent’s levy at 2% of the total transactionPublicizing data on arrivals and rates of agricultural produce brought into the market area for saleProvisions of the model APMC act can lead to greater competition. Since Agricultural marketing is a state subject, any changes need to be made with respective states. Many of the States have partially adopted the provisions of model APMC Acts and amended their APMC Acts. Some of the states, however, have not; this indicates hesitancy on the part of state governments to liberalize the statutory compulsion on farmers to sell their produce through APMCs. Inadequacies of the Model APMC act:Even though the model APMC act allows for direct selling, it retains the mandatory requirement of the buyers having to pay APMC charges even when the produce is sold directly outside the APMC area, say, to the contract sponsors or in a market set up by private individuals even though no facility provided by the APMC is used. This would render private players uncompetitive, as they will need to charge APMC levy on top of their service fee (grading, loading, weighing, storage etc.) and desired profitThough the model APMC Act bars the APMCs and commission agents from deducting the market fee/commission from the seller, the incidence of these fees/commission falls on the farmers since buyers would discount their bids to the extent of the fees/commission charged by the APMC and the Commission agents The provisions of the Model APMC Act do not go far enough to create a national common market for agricultural commodities. In fact, market may get more fragmentedMany large states like UP have not enacted the act.Suggestions:States should be guided to drop fruits and vegetables from the APMC act; this could then be followed by more commodities, until in the limit all commodities are droppedState governments should be persuaded to provide support for setting up infrastructure (warehousing, cold storage etc.), land allotment etc. for marketsOther issues with marketing Warehousing and transportation issues covered above Lack of gradation and standardization of multiple goods Intermediaries APMC issues- covered aboveMarket information gap Supply chain issues Streamlining the FCIFood Cooperation of IndiaFCI - set up by Food Cooperation Act 1964. HQed at Chennai. It works under Consumer Affairs ministry. 3 key Objectives:Ensuring remunerative prices to farmers (MSP/FRP)Ensuring food security by strategic buffer stocksEnsuring access to affordable food to consumers (state run PDS)Shanta Kumar Committee recommendationsProcurement Handover procurement to experienced states (AP, Haryana) and focus on states with poor operationsMSP to be reviewed to make it more diversified which currently skewed towards rice and wheat Trade policy to ensure that landed cost of imported crops is not lower than MSP Storage and movements of grain should be slowly outsourced to CWC and SWCs, and private sector participation should be encouragedPDS and NFSADeferingNFSA implementation in states who have not identified beneficiariesReducing beneficiary cover from 67% to 40% to reduce fiscal burdenGradual introduction of DBT starting with 1Mn+ citiesBuffer stock and liquidificationTransparent liquidfication policy is need of hour. Current policy is ad-hoc, slow and cost the nation a lotLabor issues Increase mechanization to reduce to manual labor at offices Top level executives from private sector Daily wage contractual labor wherever possible Cross- cutting The entire food management system should undergo end-to-end computerizationThe new face of FCI should be akin to an agency for innovations in Food Management Systemwith a primary focus to create competition in every segment of foodgrain supply chain ................
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