Price Stabilisation Fund (PSF)

The Price Stabilization Fund (PSF) was instituted in 2014-15. It prevents the economy from abrupt changes in the prices of essential commodities.
Price Stabilisation Fund (PSF)
3 mins read
11-June-2024

The Price Stabilisation Fund (PSF) serves as a safety net and shields the economy from the consequences of sudden price changes in the prices of essential commodities. This mechanism was launched in 2003 for plantation crops and later expanded its purview. Let’s understand the PSF in detail and see how it works and secures funding.

What is the Price Stabilisation Fund (PSF)?

The price stabilisation fund is like a safety net created by the government to protect the economy from major fluctuations in the prices of essential commodities, such as oil or agricultural products. It is designed to:

  • Prevent overheating in the domestic economy
  • Avoid inflation and
  • Nullify atrophy of other domestic sectors

Some historical context of Price Stabilisation Fund

In India, the price stabilisation fund was first established in 2003 for plantation crops such as coffee, tea, rubber, and tobacco. Since these commodities were facing low prices in the international market, the PSF was launched to safeguard the interests of growers.

Key Statistics of Price Stabilisation Fund

  • The PSF Scheme commenced its operations in April 2003 with an initial tenure slated for a decade, extending until March 2013.
  • It was administered by the Ministry of Commerce
  • It intended to cover a total of about 3.42 lakh growers (having operational holdings of up to 4 hectares) of:
    • Tea
    • Coffee
    • Natural rubber, and
    • Tobacco,

Later, in 2014-15, a new PSF was announced in the Union Budget to mitigate volatility in the prices of agricultural commodities. This new PSF scheme also provided for the advancement of interest-free loans to:

  • State Governments
  • Union Territories (UTs) and
  • Central Agencies

Understanding the PSF in detail

It is essential to note that the oversight and management of the PSF is done by the Price Stabilisation Fund Management Committee (PSFMC). It approves all State Government's and Central Agencies' proposals.

Furthermore, the PSF is maintained as a central corpus fund by The Small Farmers Agribusiness Consortium (SFAC). It is a society promoted by the Ministry of Agriculture and Farmers’ Welfare.

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How does the price stabilisation fund work?

The PSF manages price fluctuations in essential commodities and ensures stability in the market. Its primary goal is to protect consumers and producers from sudden price shocks.

Let’s understand through easy steps how a price stabilisation fund typically works:

Step I: Monitoring market conditions

  • Authorities monitor market conditions, which include:
    • Supply
    • Demand, and
    • Price trends for essential commodities like food items.

Step II: Identification of price volatility

  • PSF identifies major price fluctuations, which commonly occur due to factors such as:
    • Shortages
    • Surpluses
    • Weather conditions, or
    • Market speculation

Step III: Intervention strategies:

  • The PSF formulates intervention strategies to:
    • Stabilise prices and
    • Ensure market stability.
  • Some common strategies are:
    • Procurement
      • The PSF facilitates direct purchases from farmers or their associations at farm gates or mandis.
      • By doing so, it bypasses intermediaries and ensures fair prices for producers.
    • Maintenance of a buffer stock
      • The PSF maintains buffer stocks of essential commodities such as pulses, onions, and tomatoes.
      • These stocks act as a safeguard against price surges
      • Also, buffers ensure consistent availability of essential commodities in major consumption centres.
    • Price regulation
      • The PSF regulates the prices of key commodities like onions, potatoes, and pulses
      • This regulation ensures market stability and affordability for consumers.

Interest-free loans under Price Stabilisation Funds

The PSF extends interest-free loans to State Governments/Union Territories (UTs) and Central Agencies. This financial assistance is usually given to cover their operational expenses, which are particularly incurred during the procurement and distribution of commodities.

These interest-free loans serve as crucial support for governments and agencies and help them in:

  • Effectively managing price fluctuations
  • Maintaining market stability
  • Ensuring that essential goods remain accessible to consumers at reasonable rates.

The different types of loans offered by the PSF scheme include:

  • Pre-shipment finance (PSF)
  • Credit guarantee fund for Micro & small enterprises, and
  • Export Packing Credit (EPC)

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Fund management of Price Stabilisation Fund

The management structure of a price stabilisation fund involves various entities functioning at various levels. Let’s have a look at them:

Government authorities

Ministry of Consumer Affairs, Food and Public Distribution State governments
  • This ministry is usually responsible for formulating policies related to price stabilisation
  • It also oversees the functioning of the PSF and provides overall direction and guidance.
  • State governments play a significant role in the implementation of price stabilisation measures at the regional level.
  • They help in:
    • Contributing to the corpus fund,
    • Coordinating procurement activities, and
    • Facilitating the distribution of buffer stocks

 

Price stabilisation fund board

  • A governing board or committee is set up.
  • This board is often chaired by a:
    • Government official or
    • Representative from the Ministry of Consumer Affairs, Food and Public Distribution,
  • The board oversees the operations of the PSF and:
    • Sets policies
    • Approves budgets, and
    • Monitors the fund's performance

Procurement agencies

  • The agencies, such as the Food Corporation of India (FCI) and State Agricultural Marketing Boards, are responsible for procuring essential commodities from farmers when prices are low.
  • They also ensure the availability of buffer stocks for the purposes of price stabilisation.

Maintaining the corpus fund

The primary source of funding for the PSF is government allocations from the central budget or state budgets. These allocations are earmarked specifically for price stabilisation activities and are utilised to build and maintain the corpus fund.

Additionally, PSF also generates revenue through the sale of commodities from its buffer stocks. These revenues are often reinvested into the corpus fund to:

  • Replenish stocks or
  • Fund future stabilisation activities.

Conclusion

The Price Stabilisation Fund (PSF) is a crucial mechanism implemented by the Indian government to safeguard the interests of both producers and consumers, particularly in sectors such as agriculture.

The fund operates through a well-defined management structure. From monitoring market conditions to implementing intervention strategies like procurement and maintenance of buffer stocks, the PSF aims to stabilise prices and maintain market equilibrium.

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Frequently asked questions

What does PSF price mean?
PSF price refers to the stable price range maintained for certain commodities. This is usually achieved through interventions funded by the Price Stabilisation Fund.
What is PSF in India?
PSF in India refers to the Price Stabilisation Fund. It is a mechanism managed by the government to stabilise prices of essential commodities, especially agricultural products.
How is PSF calculated?
PSF calculations involve assessing market conditions, production costs, demand-supply dynamics, and international prices to determine the appropriate interventions needed to stabilise commodity prices.
Why is price stabilisation important?
Price stabilisation is crucial to prevent sudden fluctuations in prices, which can negatively impact producers, consumers, and the overall market stability.
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