Price Stabilisation Fund (PSF)
Price Stabilisation Fund (PSF) refers to any fund constituted for the purpose of containing extreme volatility in prices of selected commodities. The amount in the fund is generally utilised for activities aimed at bringing down/up the high/low prices say for instance, procurement of such products and distribution of the same as and when required, so that prices remain in a range.
Many countries use such dedicated funds for stabilisation of major petroleum product prices, particularly if they are importers. Some countries use such funds for stabilising not just commodity prices but a variety of key macroeconomic variables such as the exchange rate (which is nothing but the price of the domestic currency expressed in terms of an external currency), benchmark stock indices etc. The operational details of such funds vary from country to country.
India first created a price stabilisation fund for some export oriented plantation crops in 2003, and this ceased to exist in 2013. Another fund was created in 2015 for perishable agricultural and horticultural commodities, but initially limited to support potato and onion prices only.
PSF mechanism is apart from the Minimum Support Price (MSP) based initiatives already existing in the country for certain agricultural goods. The MSP system has some price tempering properties, but it is from the perspective of the growers / farmers and becomes operative when prices fall below the cost of production. The output thus procured by the Government at MSP is later distributed at affordable rates through the public distribution system.
Another parallel to PSF are the Consumer Federations (known commonly as Consumerfeds) which undertake distribution of consumer goods at reasonable and affordable rates. They undertake bulk procurement of consumer goods, essential goods, medicines etc. (including their imports if required), and supply to affiliated and/or other Co-operatives Societies and arrange for proper storage, packing, grading and transport of such goods. While tempering the prices of such goods, these entities save the public from the exploitation by retail / middleman and continually operate throughout the year irrespective of the movement in the market prices of these goods. Some consumerfeds establish and run manufacturing and processing units for production of consumer goods in collaboration with other entities or directly by itself.
In contrast to MSP and consumer fed operations, a PSF is generally conceived to be operative in both directions of price movement, subject to prices crossing some threshold level.
Price stabilisation Fund announced in 2015
A Price Stabilization Fund of Rs. 500 Crore for agricultural commodities was announced in the Union Budget 2014-15 with a view to mitigate volatility in the prices of agricultural produce.
Accordingly, the Government of India, on 27 March 2015, approved the creation of a Price Stabilization Fund (PSF) with a corpus of Rs.500 crores as a Central Sector Scheme, to support market interventions for price control of perishable agri-horticultural commodities during 2014-15 to 2016-17. Initially the fund was proposed to be used for market interventions for onion and potato only and pulses were added subsequently.
Procurement of these commodities will be undertaken directly from farmers or farmers’ organizations at farm gate/mandi and made available at a more reasonable price to the consumers. Losses incurred, if any, in the operations will be shared between the Centre and the States. Hence, the PSF Scheme of 2015 is focused more at consumers.
PSF Scheme provides for advancing interest free loan to State Governments/Union Territories (UTs) and Central agencies to support their working capital and other expenses they might incur on procurement and distribution interventions for such commodities. Hence, the actual utilisation of the fund depends on the willingness of the state governments / union territories to avail of such loans for these purposes. Further, the actual detection of the period when support is required and the deployment of price support measures are left to the states.
For this purpose, the States will have to set up a ‘revolving fund’ (a fund which is constantly replenished and not limited by the fiscal year considerations) to which Centre and State will contribute equally (50:50). The ratio of Centre-State contribution to the State level corpus in respect of North-East States will, however, be 75:25. Central Agencies will set up their revolving fund entirely with the advance from the Centre.
The Price Stabilization Fund will be managed centrally by a Price Stabilization Fund Management Committee (PSFMC) which will approve all proposals from State Governments and Central Agencies. The PSF will be maintained as a Central Corpus Fund by Small Farmers Agribusiness Consortium (SFAC), a society promoted by Ministry of Agriculture for linking agriculture to private businesses and investments and technology. SFAC will act as Fund Manager. Funds from this Central Corpus will be released in two streams, one to the State Governments/UTs as a onetime advance to each State/UT based on its first proposal and the other to the Central Agencies. The Central Corpus Fund has already been established by SFAC in 2014-15.
The one time advance to the States/UTs based on their first proposal along with matching funds from the State/UT will form a State/UT level revolving fund, which can then be used by them for all future market interventions to control prices of onions and potatoes based on approvals by State Level Committee set up explicitly for this purpose.
The States could also request Central Agencies to undertake such operations on their behalf to be supported out of the State corpus. Additionally, the Centre can also requisition the Central Agencies like Small Farmers’ Agri Business Consortium (SFAC), National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), etc. to undertake price control operations for onion and potato.
While the advance/ loan given to states is returnable, the Central Government will share 50% of losses (75% in case of NE States), if any, at the time of settlement of the advance on 31st March, 2017. The Central Government, likewise, also intends to share the profits, if any, in the same ratio.
The Price Stabilization Fund (PSF) was set up under the Department of Agriculture, Cooperation & Famers Welfare (DAC&FW),Ministry of Agriculture. The PSF scheme was transferred from DAC&FW to the Department of Consumer Affairs (DOCA) w.e.f. 1st April, 2016.
Detailed guidelines for the scheme may be seen here. As per a press release dated 28 March 2017,the fund allocated under PSF has been primarily utilized towards building the buffer of upto 20 lakh tonnes of pulses. In addition, other activities like creation of a buffer of 17,747 tonnes of Onions; import of 5000 tonnes of Tur and 2000 tonnes of Onions; purchase of 6011 tonnes of Onions by NAFED and SFAC ; financial assistance to States like West Bengal ( Rs. 2.5 crores), Andhra Pradesh ( Rs. 25 crores) and Telangana ( Rs. 9.15 crores) for setting State Level PSF; etc. were also undertaken.
Price Stabilisation Fund of 2003
Earlier on 24 July 2003, Government had established a Price Stabilisation Fund (PSF) Trust for plantation crops such as coffee, tea, rubber and tobacco due to continued low prices of these commodities in the international market and to safeguard the interests of the growers of these commodities. The Price Stabilisation Fund (PSF) Scheme was launched initially for a period of ten years from April 2003 to March 2013 (though the trust was set up only in July 2003). The extended Scheme period got over on 30.09.2013. This Scheme was administered by Ministry of Commerce.
PSF Scheme of Ministry of Commerce was intended to cover a total of about 3.42 lakh growers of tea, coffee, natural rubber and tobacco, having operational holdings of upto 4 hectares. The objective of the PSF was to provide financial relief to the growers when prices of these commodities fell below a specified level, but without resorting to the practice of procurement operations by the Government agencies, as is normally the case.
Unlike the PSF of 2015, the Scheme was based on the principle of contributions from the growers and from the Government depending on whether the year is a normal/boom/distress period. A provision for withdrawal of funds by the growers was allowed only during distress periods. Categorization of a year as Boom/Normal/Distress was decided on the basis of relationship of Domestic Price to Price Spectrum Band. For this purpose, a uniform band of 40 per cent for all the four commodities was adopted with a price spectrum band of +/- 20% from the seven years moving average of international prices. Lower Band would be (-) 20% and Upper Band would be +20% of the Seven Years Average of International Prices.
A Normal Year is when Domestic Price is within the Lower Band and the Upper Band. A Boom Year is when Domestic Price is higher than the Upper Band. A Distress Year occurs when Domestic Price is lower than the Lower Band.
Under the scheme, growers are entitled for financial assistance at the rate of Rs 1000 only when average annual domestic price falls below twenty percent of seven years moving average of international price. That is, in Distress Year, Government deposits Rs.1000/- per grower and the grower is permitted to withdraw up to Rs.1000/-. In Normal Year, however, Government deposits Rs.500/- per grower, and each grower deposits Rs.500/-. No withdrawal is permitted during a normal year. In Boom Year, the grower deposits Rs.1000/- and no withdrawal is permitted during a boom year.
Hence, the scheme worked more like an insurance cover even though it was named as price stabilisation fund.
The contributions of the participant as well as of the Government would be made to an account of the participant grower, opened for the purpose of this Scheme, with any designated Bank. The contribution of the participant grower/Government to the grower’s account and withdrawal there from would be with reference to the price band specified. The Trust Fund was administered by NABARD and was to be audited by the Comptroller & Auditor General of India.
More details can be seen at Ministry of Commerce website. The corpus of this Price Stabilisation Fund consists of one time contribution of Rs 435.55 crores received from the government and the growers (the contribution by growers is not more than Rs 2 Crores) and stood at Rs 1011.69 crores as on 31.03.2015. The total cumulative expenditure of the above schemes since inception of the Fund was only Rs 1.53 crores. During calendar year 2010, 2011 and 2012 all crops were under “Boom” Category. Therefore, actual utlisation under PSF Scheme remained low. The PSF 2003 Scheme could not be effective for a number of reasons including low financial assistance offered, assistance not linked to landholding, stringent criteria for determination of distress and the prices generally ruling high during the implementation period as part of commodity super cycle. Department of Commerce is in the process of redesigning the scheme as an insurance scheme for coffee, rubber tobacco and cardamom against price and production risk.
Based on various press releases, replies to parliament questions and Annual Report of Ministry of Commerce