Why do we need a Price Stabilisation Fund

Prices of horticultural commodities witness a wide fluctuation in India. There have been instances in the recent past when prices escalated and the produce became unaffordable for consumers especially in the case of vegetables such as onion, potato and tomato.

There have also been cases where farmers could not sell their produce in the mandi and preferred to dump their produce on highways due to low prices. To overcome these problems, the Centre’s recent move to introduce a Price Stabilisation Fund would give a fillip to horticultural production as well as market stabilisation.

It has been a common practice among Indian farmers to move towards a particular crop which fetches higher price in the market during the sowing season. This leads to oversupply in the market and low prices.

In addition, other factors such as poor monsoon, dearth of inputs and technology, policies influencing decision related to area allocation, etc., lead to fluctuation in production and finally to volatile prices.

Availability of stocks, volatility in international prices, functionality of market, transaction cost and government policies also have an influence on the price.

Similar attempt was made in 2003 by the Ministry of Commerce for tea, coffee, rubber and tobacco. If the domestic price falls below 20 per cent of the moving average price, then, the year is considered as one of distress.

The fund primarily focuses on supporting farmers during hard times arising due to excessive fall in the domestic price. The scheme is not found to be very attractive in the present structure. Other similar initiatives such as Revolving Fund Scheme of the Karnataka government and the Market Intervention Scheme of Nafed too are yet to gain popularity.

Initiatives such as deficiency payment and income stabilisation have also been used worldwide effectively. Deficiency payment is the difference between a target price and the domestic market price, paid by the government to farmers. Under income stabilisation, there is provision of compensation relating to the level of income decline in a particular year relative to the reference level.

In addition, producers of most of the foodgrains, oilseeds and fibre crops are protected against market failure through procurement under the minimum support price announced by the Government.

The Government may have three types of agricultural policies to influence price behaviour, namely production policies (influencing production), trade policies (export/import policy influences domestic supplies) and direct price stabilisation policies such as buffer stocks, emergency reserves, price controls, and prohibition of private trade.

Out of the various public interventions, only creation of stocks under direct price stabilisation policies has shown some result.

For horticultural commodities, an MSP-like policymay not be very effective as these are highly perishable. Also, while agricultural commodities procured by government are distributed to consumers under the Public Distribution System, there is no such provision for horticultural commodities.

However, utilising price stabilisation fund, the government may participate in the market of perishable commodities by developing backward and forward linkages and proper infrastructure provisions for procurement and distribution.

The provision for procurement through farmer producer organisations (FPOs) may also prove to be a remarkable move as this will create competitive advantage and boost infrastructure.

At the same time, it should also be considered that these FPOs are private companies and while to benefit the farmers, State governments may facilitate them in procuring, during period of scarcity (or high market price), it may not force these organisations to sell at a lower price toconsumers.

Under such circumstances, a component of Price Stabilisation Fund should be maintained aiming at avoiding interference to the autonomy of FPOs as well as consumer welfare.

The fund will be granted to FPOs releasing their stock at a lower price (stipulated by government or competent authority) than the market price with the aim of stabilising prices.

Provisions such as aid for private storage may also be introduced to promote storage of the commodity (by farmers and FPOs during period of low prices) which later can be sold at higherprices.

While finalising and floating the scheme, thought must be given to have an approach considering the entire value chain of the commodities and not a single stakeholder.

The writers are associated with National Institute of Agricultural Marketing, Jaipur. Views are personal.