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At what price?

Commodity prices — the pros and cons of minimum support prices
With each passing year, we all notice the government increasing the minimum support prices (MSPs) of agricultural produce. It may be a ploy to win votes or to let citizens believe, for one instant, that it is the politicians' sincere goal to support farmers with decent prices. To understand the pros and con of the MSP in the long term and short, India would provide a good example to the rest of world. Before evaluating the MSP, let us understand the market mechanism, which is an alternate option

The market mechanism of price determination
In a market-oriented system, the price of a product is determined by supply and demand. Basically, a balance is achieved between what people are prepared to supply and what price people want to buy. Economists term this a “market equilibrium” price. As the price of a product rises, the quantity which will be supplied also rises, and the quantity demanded falls. And vice versa. The market price will rise or fall until the quantity supplied is the same as that demanded — until equilibrium is reached.

It is important to note that supply is what people are prepared to sell at a certain price. While supply is influenced by production, it is not always the same as production. Likewise, demand is not how much people would like to buy, nor is it what they should buy to maintain a healthy diet; it is how much they are prepared to buy at the market price.

The MSP mechanism
Whether the MSP mechanism is good or bad, time will tell. It is not driven by market forces, since India has a huge number of citizens living below the poverty line, and to feed them becomes a strain on the government. The goal of the minimum support price method is to ensure that farmers get some minimum per-unit price for the commodity they produce — and this price, the MSP, is fixed by the government

Farmers are sure about the minimum price they can get for their produce.
The government can ensure that a chosen commodity can gain farming attention by providing the incentive of a higher MSP. (This is evidenced by the high MSP the government has set for wheat and rice and the resulting increases in production of those crops.)
It works as a hedge platform for the farmers to rely on


However, there are some disadvantages:
This mechanism doesn't encourage farmers to use their creativity to find ways to get the best prices for their produce.

This allows the government, and not the market, to determine which food gets attention and which doesn't. Some crops inevitably get neglected as a result.
An agency is required for the procurement and support of this system.
Timely payments from agencies and follow-up on payments becomes hectic for farmers.
After procurement and storage, the same crops have to be sold in the open market, which actually decreases the importance of the products.
This attracts inflation and is a major reason for the increased cost of living.
Once prices have increased, it is not possible to lower them.
The recent sugar price hike is a good example of the failure of the MSP mechanism.
Most of the time, when fixing the MSP, the government fails to take into consideration the international prevailing price of the commodity, eg mills in south India find it cheaper to import wheat than buy on the domestic Indian market.

Can we or can’t we?
Let us take a responsible approach in dealing with what is happening. We need to address the issue logically, closely monitoring our demand and supply. Government or some other agency has to monitor demand and supply. Let experts deal with the issue, rather than politicians or bureaucrats. It is not simply a matter of managing the numbers — there should be more investigation into the micromechanisms and environments, rather than just macroeconomics.

We can ask ourselves, if our public distribution systems (PDSs) do not fulfil their primary objectives, do we need them at all? Can we control unwarranted media speculation that often gives the wrong messages both inside and outside the country? Can we monitor our public behaviour, how the food culture is changing, and how it impacts economic development? Can we predict calamities and implement policies in time to avert or mitigate their impact? Government has made export promotion councils to promote the exportation of products; in the same way, the supply of each product can be managed. Instead of waiving loans to farmer, we should use that money to create food.

Above all, we all need to accept the simple fact that commodities are not industrial products, and the price of a commodity will not be the same every day — it will fluctuate in a fluctuating environment. The factors determining the price of any commodity are like those determining the weather — unable to be accurately controlled. Therefore, it would be unfair to accept fixed price for commodities.

We are lucky that the hen does not know how much we're paying for her eggs — she would either stop laying them or demand royalties.

 
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