Price Support Scheme

The Price Support Scheme (PSS) is a government-intervention mechanism designed to ensure that producers—especially farmers—receive a remunerative price for their output when market conditions lead to low prices. It generally combines announcement of minimum support prices with procurement of produce by government agencies.

Background

In agricultural economies, farmers are subject to large fluctuations in market prices due to supply shocks (e.g., a bumper harvest), demand changes, and international trade dynamics. Without some protection, farmers can suffer distress sales—selling at very low prices—or might exit production altogether. Price support schemes were introduced to stabilise incomes, encourage production of essential commodities, and prevent rural distress.

Key Features

A typical Price Support Scheme includes the following components:

• Minimum Support Price (MSP) or support price: A price level announced by the government before or during the cropping season, signalling the minimum at which it will procure the produce if market prices fall below that level.
• Government procurement: If the market price falls below the support price, government agencies step in to purchase the commodity from producers at the support price.
• Coverage of commodities and area: The scheme applies to selected crops or commodities and may be limited to certain regions or procurement agencies.
• Storage, buffer stocks or disposal: Once procured, the government must store, distribute (via public distribution systems) or otherwise manage the surplus.
• Farmer registration and eligibility criteria: To participate, farmers may need to register, provide produce within specified markets or agencies, and adhere to scheme norms.

Objectives

The main aims of the Price Support Scheme are:

• To provide a guaranteed and remunerative price to producers, protecting them from steep price falls.
• To reduce distressed sales and stabilise farm incomes.
• To encourage production of important output, ensuring food security or strategic crops.
• To moderate price volatility in commodity markets.
• To enable planning of procurement and buffer stocks for distribution systems and market interventions.

Effects and Mechanism

When the market price for a commodity falls below the support price, the scheme works as follows:

1. Producers sell to the government (or nominated agencies) at the support price rather than risk lower private market prices.
2. Market supply remains relatively stable, as producers are assured of the support price.
3. The government absorbs the surplus (the quantity produced minus the quantity demanded at the support price) through procurement, storage or distribution.
4. Consumers may face higher prices for the commodity (as market price is kept above the free-market equilibrium), and taxpayers bear the cost of procurement and storage.

Advantages and Disadvantages

Advantages:

• Protects vulnerable producers from price crashes and helps maintain their livelihoods.
• Encourages production of essential or strategic commodities that might otherwise be neglected.
• Provides policy-makers with a mechanism to stabilise supply, maintain buffer stocks, and ensure food security.
• May incentivise farmers to invest in inputs and enhance productivity when they know there is a price floor.

Disadvantages:

• Can lead to over-production of supported commodities, creating large surpluses that must be stored or disposed of at cost.
• Creates inefficiency in resource allocation, as production is supported even when market demand is weak or shifting.
• Puts a fiscal burden on the government (and ultimately taxpayers) for procurement, storage, and distribution.
• May lead to higher consumer prices, as the support price raises the market price for the commodity.
• May distort trade: supported domestic prices may diverge from international prices, affecting competitiveness and trade relations.
• Often benefits larger or better-connected producers disproportionately, unless targeted carefully.

Implementation in Practice

In many countries, the scheme is integrated into broader agricultural price-support or income-support policies. For example, one government’s scheme tracks procurement of pulses and oil-seeds when market prices fall below a notified minimum price, using nominated agencies to procure up to a certain percentage of state production. The scheme thus assures farmers of a fair floor price and helps meet national food-security objectives.

Criticism & Limitations

While the Price Support Scheme serves important policy goals, critics point out that long-term reliance on guaranteed prices can discourage diversification, innovation and structural adjustment in agriculture. If support persists indefinitely, producers may become dependent, costs may escalate, and the scheme may lock resources into less-productive uses. Moreover, when procurement is concentrated in a few crops or regions, inequalities may deepen. From a trade-policy standpoint, such support may conflict with liberalised market commitments.