4 Major Instruments of Price Policy

The following points highlight the four major instruments of price policy. The instruments are: 1. Minimum Support Prices 2. Procurement Prices 3. Public Distribution System 4. Buffer Stock.

Instrument # 1. Minimum Support Prices:

The minimum support price is the foremost instrument in the nature of a long-term guarantee to producers. These prices are generally announced well in advance of the sowing season.

Once the minimum price for a product is announced, it implies that the Government is committed to purchase, by all means at the announced level of support price. By changing the relative rate of return on different crops, support prices may also help to give a boost to some crops at the expense of others.

The theoretical basis for the guaranteed minimum price policy has several elements such as price stabilization, improvement of agricultural terms of trade and provision of insurance to the agricultural producer. The notion that minimum guaranteed price forms part of a stabilization policy aimed at reducing fluctuation has not been explicitly developed by the CACP.

The CACP has mainly emphasized on the insurance aspect of the policy. Of late, a much more positive and dynamic content has been sought to be imparted to the concept of a minimum price guarantee.

The Food grains Policy Committee, Dantawala and a number of other economists have suggested that the device of minimum guaranteed price should be utilized to assure the progressive farmer that his effort to augment production through adoption of improved technology will not become un-remunerative because of the price factor. As so far the criterion for the fixation of minimum prices, different criteria have been used at different time for different crops.

In fixing the level of minimum support prices, the CACP takes into account the under mentioned factors:

(i) The available data on cost of production,

(ii) Changes in input prices,

(iii) Changes effected in the administered prices of competing crops, and

(iv) The need for maintaining overall stability in the general economy.

It is commonly accepted that the first and foremost requirement for arriving at an appropriate level of support price is to have representative cost data. The absence of reliable data on cost of production of crops on a continuous basis had been a major handicap in this regard until recently.

Presently, data on cost for some of the representative area, through not for all the producing States, are now available under the ‘comprehensive scheme for studying the cost of cultivation of principal crops’ being implemented through the agricultural universities and institutes.

However, by its very nature the data on cost of production becomes available with a time lag of one-two years. These have to be updated and adjusted on the basis of available indicators of the change in cost of important items, such as wage rates, irrigation rates, prices of fertilizers and other inputs etc.

Instrument # 2. Procurement Prices:

Price policy also aims at to stabilize prices on the part of the consumers especially in the case of food grains. In a situation of shortage, sailable supplies of food grains in the free market would generally be available at very high prices. Under such circumstances, the poor people of the community would be put to extreme hardship.

Therefore, in view to achieve the objective of stabilizing prices on the part of the consumers, the Govt., may adopt the system of public distribution. It can be in the form of rationing, fair price shops. Here, it is of immense use to quote that public distribution system cannot operate unless necessary stocks are acquired by it.

The best way to attain the stocks would be through the open market. But during the period of scarcity, it would only be possible if the Govt., offers higher price than the market price. In view of this, Govt., adopts the procurement policy, under which producers are required to sell the Govt., a part of their produce.

Instrument # 3. Public Distribution System:

Public distribution is another major instrument of price policy. It comprises of two types of rationing, viz., statutory rationing and informal rationing.

In the statutorily rationed areas, the open market is legally barred from functioning, the Government undertakes the responsibility of supplying specific rationed quantities to consumers. In the areas of informal rationing, the open market is allowed to function so that the consumers can supplement the ration obtained from fair price shops by purchase in the open market.

Objective:

The fundamental objectives of the system are enlisted below:

(i) To improve distribution of basic goods;

(ii) To control prices of essential commodities;

(iii) To meet consumption needs of masses:

(iv) To maintain good quality at low cost;

(v) To bring stability in prices;

(vi) To weave the production and marketing system into a unified whole.

Selection of Commodities:

The draft of Sixth Five Year Plan outlined that a selective approach should be adopted in the matter of selection of commodities. The necessity of the commodities covered under the system has to be determined according to the needs of the common man.

In accordance to this criteria, cereals, sugar, edible oils, tea, coffee etc. could be treated as precarious items for public distribution. Moreover, the draft of Seventh Five Year Plan laid emphasis on flexibility.

Thus, the plan remarked that “It was, however, not considered necessary that the PDS all over the country should have a standardized list of commodities. The different regions could have different needs and preferences depending upon local circumstances and might add to these seven commodities by arranging to procure these on their own or through the agencies nominated by them. Some state government has, therefore, been distributing a large number of essential commodities through fair price shops. The Central government has also been assisting the Governments by arrangements with manufactures of commodities of mass consumption like toilet soaps, matchboxes, torch cells, razor blades, cycle and tubes and in supplying these commodities at wholesale prices to the State Governments for distribution through the public distribution system. The State Governments have been advised to make full use of this facility so that consumers can have access to those commodities at reasonable prices.”

Conditions for Success:

For the success of public distribution system, the maintenance of supply line of the commodities selected for distribution is of immense importance. Even a temporary hurdle in supplies could cause a great difficulty to the people. Therefore, adequate arrangements should be made for procurement, transportation, storage etc. at all levels. In certain commodities, buffer stock may also be desirable.

Problems:

The main problems of public distribution system are as under:

(i) Restricted Scope:

It is restricted in its scope in terms of the range and quantities of different commodities supplied through the system.

(ii) Urban Biased:

The PDS is largely urban- biased. In the 60s and early 70s, public distribution was probably urban biased, but in the 80s a distinct change appears to have taken place. A recent study analysed the public distribution data collected by the NSSO for the year 1986-87 and found that the criticism that the PDS was urban-biased was no longer correct.

(iii) Limited Coverage:

As against its declared objective, the system has largely benefited the well to do sections of the society with majority of the rural poor still out of its reach due to lack of economic and physical access. The poorest in the cities and migrants are left out for they do not generally possess ration cards.

(iv) Inadequate Infrastructure:

The system has been faced with serious operational problems like inadequate procurement and storage facilities, finance, administrative capability etc.

(v) High cost:

The cost of operating the system has been very high.

(vi) Malpractices.

The operations of fair price shops and cooperatives have led to serious malpractices, like issuing ration against bogus cards, charging higher prices for controlled commodities, delay in lifting of stocks etc.

(vii) Increase in Price:

The operations of the PDS in fact result in an all- round price rise. This is because by procuring large quantities of food grains every year the government actually reduces the net quantities available in the open market.

Suggestions:

Keeping in view the various problems. Following suggestions are made to overcome the bottlenecks in the system.

First of all the whole system need to be reformulated. The PDS should be made target group oriented the non-poor should be excluded without any delay.

Secondly, the PDS should be closely linked with programmers of employment generation and nutrition improvement.

Finally, the following measures need to be taken to make the operation of the PDS more efficient.

(i) Facilities of fair price shops should be extended to each village panchayats.

(ii) Efforts should be made to provide these outlets regularly with essential commodities,

(iii) Special quotas should be provided to consumers in relation to quality, quantity and prices,

(v) It will be better if fair price shops are operated and managed by the actual beneficiaries and supervised by specially recruited and trained officials.

Revamped Public Distribution System (1992):

The Government has taken a new initiative on the public distribution system. The government has identified 1,700 blocks in desert areas, hill regions, drought-prone areas and tribal belts for special focus. The PDS would cover about 16 crore people living in these identified areas. It has been estimated that about 11,000 more fair price shops (FPS) would also be opened in these areas to cater for the needs of the people. Initiatives are being taken to open 1,000 more godowns with a total capacity of 330,000 tonnes in these areas.

The broad objectives of the “new initiative” are stated below:

(i) Special efforts would be made for effective reach of benefits of the new proposals to families below the poverty line living in these areas.

(ii) A minimum availability of food grains per adult per month would be ensured to the people living in these areas.

(iii) Delivery of commodities to the doorsteps of the fair price shops would be taken up by the State Government in the identified areas wherever feasible.

(iv) Supervision would be exercised to ensure strict vigilance over the delivery system. To this end, vigilance comities would be set up at the FPS level.

(v) Participation of the beneficiaries attached to the shops, voluntary consumer organizations and responsible persons of the area would be necessary. Women beneficiaries would be associated with such vigilance committees.

Instrument # 4. Buffer Stock:

Buffer stocks refer to the buying and selling out stock with sole purpose of moderating the price fluctuations. Buffer stocks serve as shock absorbers in the economy and provide a defense mechanism against widely fluctuating price levels.

Under this policy Govt., builds stocks of food, agricultural goods and other essential commodities either through direct purchase from the domestic market or through imports from outside and release these stocks for sale in the domestic market when prices are going up.

Thus, the Govt., through supplementing the market supply prevents any sharp rise in prices which would have occurred if these supplies were not released from the stocks built up by it. On the contrary, if due to good harvest, there is excess supply in the market, the prices would fall which leads to a decline in the farmers income. In such a situation, the Govt., enters the market and makes direct purchases, thereby prevent a fall in prices. Therefore, buffer stock operations aim at eliminating unduly low prices consequent to bumper crops.

Price and policy:

Classification of Stocks:

The total stocks with the Govt., are not meant to be used as a buffer stock. The govt., has to keep operational stock need for meeting the requirements of fair price shops.

Therefore, size of stock is determined by two considerations viz.;

1. To meet the current needs.

2. To maintain supply in the years of crop failure.

The first consideration helps to even out seasonal fluctuations. The second helps to even out annual fluctuations. Prof. Khusro termed the first consideration as the buffer stocks.

Objectives:

The main objectives of buffer stocks are as stated below:

(i) Stability in Income:

The foremost objective of the buffer stock policy is to achieve stability in the farmers income. Buffer stocks by elimination peaks and troughs in commodity prices can assure stability in farm income.

(ii) Stability in Food Prices:

Another related objective of buffer stock policy is to ensure stability in food prices when enough food grains are available through public distribution, hoarders and speculators cannot manipulate price and exploit the general masses. Therefore, prices of food grains should remain stable throughout the year.

(iii) Public Distribution System:

Buffer stocks can be utilised to provide food grains for public distribution system. It enables supply of food grains to the weaker sections of the society at reasonable prices.

(iv) To Ensure Remunerative Price to Farmers:

Generally, during the good harvest prices of food grains tend to fall and farmers do not get the remunerative prices. As a result, farmers are forced to resort to distress sale of their crops because there are no enough buyers in the market. In such a situation, the policy of Govt., ensure reasonable prices to the farmers.

(v) Food Security:

Buffer stocks policy ensures the food security in the country. In Indian context production of food grains fluctuates from year to year. The buffer stock provides adequate stocks to cope up with the shortfall in production.