GS Paper: GS3-08.Issues related to direct and indirect farm subsidies and MSP

The article highlights the ambiguity about the number of farmers in India and related issues.

How many farmers does India really have

• The Agriculture Ministry’s last Input Survey for 2016-17 pegged the total operational holdings at 146.19 million.
• The NABARD All India Rural Financial Inclusion Survey of the same year estimated the country’s “agricultural households” at 100.7 million.
• The Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) has around 111.5 million enrolled beneficiaries.
• Agricultural households, as per NABARD’s definition, cover any household whose value of produce from farming activities is more than Rs 5,000 during a year.
• That obviously is too little to qualify as living income.

Who is real farmer

• Agricultural households, as per NABARD’s definition, cover any household whose value of produce from farming activities is more than Rs 5,000 during a year.
• That obviously is too little to qualify as living income.
• A “real” farmer is someone who would derive a significant part of his/her income from agriculture.
• This, one can reasonably assume, requires growing at least two crops in a year.
• The 2016-17 Input Survey report shows that out of the total 157.21 million hectares (mh) of farmland with 146.19 million holdings, only 140 mh was cultivated.
• And even out of this net sown area, a mere 50.48 mh was cropped two times or more, which includes 40.76 mh of irrigated and 9.72 mh of un-irrigated land.
• Taking the average holding size of 1.08 hectares for 2016-17, the number of “serious full-time farmers” cultivating a minimum of two crops a year  would be hardly 47 million.
• The above figure is also consistent with other data from the Input Survey.
• These pertain to the number of cultivators planting certified/high yielding seeds (59.01 million), using own or hired tractors (72.29 million) and electric/diesel engine pumpsets (45.96 million), and availing institutional credit (57.08 million).
• Whichever metric one considers, the farmer population significantly engaged and dependent on agriculture as a primary source of income is well within 50-75 million.
• The current agriculture crisis is largely about these 50-75 million farm households.

Lack of price parity

• At the heart of farmers’ crisis is the absence of price parity.
• In 1970-71, when the minimum support price (MSP) of wheat was Rs 76 per quintal, 10 grams of 24-carat gold cost about Rs 185.
•  Today, the wheat MSP is at Rs 1,975/quintal, gold prices are Rs 45,000/10g.
• The absence of farm price parity didn’t hurt much initially when crop productivity was rising.
• Since the 1990s, yields have further gone up to 5.1-5.2 tonnes/hectare in wheat and 6.4-6.5 tonnes for paddy. But so have production costs. 
• The demand for making MSP a legal right is basically a demand for price parity that gives agricultural commodities sufficient purchasing power with respect to things bought by farmers.

Way forward

• Most government welfare schemes are aimed at poverty alleviation and uplifting those at the bottom of the pyramid.
• But there’s no policy for those in the “middle” and in danger of slipping to the bottom.
•  When crop prices fail to keep pace with escalating costs — of not only inputs, but everything the farmer buys — the impact is on the 50-75 million surplus producers.
• Any “agriculture policy” has to first and foremost address the problem of price parity.
• Farmers’ interest be even better served by the government guaranteeing a minimum “income” rather than “price” support.
• Subsistence or part-time agriculturalists, on the other hand, would benefit more from welfare schemes and other interventions to boost non-farm employment.

Conclusion

Whether it is crop, livestock or poultry, agriculture policy has to focus on “serious full-time farmers”, most of them neither rich nor poor. This rural middle class that was once very confident of its future in agriculture today risks going out of business. That shouldn’t be allowed to happen.

Enabling the Business of Agriculture (EBA) 2019, published by the World Bank highlights the constraints faced by farmers. The article highlights the key findings of the publication.

Constraints in carrying out farming activity

• Debates around the farm laws have brought to light the issue of developing a sound regulatory framework to promote India’s agricultural growth.
• The fact remains that farmers, mainly smallholders, across India continue to face various constraints.
• They include constraints in accessing agricultural inputs, markets, finance, human resources, and information, which are critical for increasing farmers’ competitiveness.
• A recent publication by the World Bank titled Enabling the Business of Agriculture (EBA) 2019 measures the extent to which government regulatory systems in 101 countries worldwide make it easier for their farmers to operate agricultural activities.
• These indicators measure the strength of a country’s agricultural regulatory environment pertaining to market integration and entrepreneurship in agriculture.
• Among 101 countries covered, India ranked 49 on the EBA aggregate score.

Key takeaways from EBA for India

• India lags behind its close competitors in world agriculture, namely China, Brazil, and Russia.
• Compared to these three countries, India has the weakest performance on five out of eight indicators.
• They are registering fertilizer and machinery, securing water, sustaining livestock, and protecting plant health indicators.
• Registering fertilizer and machinery indicators measure domestic laws and regulations that provide farmers access to fertilizer and agricultural machinery.
• The regulatory processes that help farmers make appropriate decisions regarding the level of investment in irrigation are measured by securing water indicator.
• Sustaining livestock indicator captures the quality of regulations affecting farmers’ access to livestock farming inputs.
• The quality of legislation on phytosanitary standards (SPS) is captured through the protecting plant health indicator.

Need to develop a suitable regulatory system

• Governments can play a critical role in this regard by enacting laws and regulations.
• Such laws and regulations can influence farmers’ access to agricultural inputs, cost of production, agricultural markets and value chains, the competitiveness of farmers, and private investment in the farming sector.
• The regulatory system that governs irrigation management is essential for reducing the variability of farm output, prices, and incomes, minimising vulnerability to natural shocks, and incentivising the production of riskier and high returns crops.
• Gaining access to the global agricultural value chain requires a sound regulatory framework on SPS.

India’s strong areas

• The comparative score of India on supplying seed, trading food, and accessing finance indicators is high.
• Supplying seed indicator evaluates laws and regulations that ensure timely release of seed to farmers.
• The trading food indicator assesses laws and regulations that facilitate exporting of farm products by farmers.
• The regulatory framework on the use of warehouse receipts is assessed using accessing finance indicator.
• A robust warehouse receipts system enables the farmers to obtain the credit needed to invest in agriculture.

Opportunity for India

• The future of world agriculture and food production is expected to increasingly depend on middle-income countries such as China, India, Brazil, and Indonesia.
• To make the best use of this great opportunity, India needs to put in place an agricultural regulatory system that would make it easier for its farmers to conduct agricultural activities.

Consider the question “Farmers, mainly smallholders, across India continue to face various constraints in carrying out farming activities. What are the implications of such constraints? What role government can play in removing these constraints?”

Conclusion

The EBA project results reveal that, compared to its close competitors, the strength of India’s agricultural regulatory environment is weak on the whole and with respect to key performance indicators.

The article argues for consideration of the regional variation in the conditions of farmers and their concerns in the context of recently introduced farm laws.

Argument against diversification

• In Punjab, Haryana and western UP, minimum support price (MSP)-based agriculture has a logic.
• Not all regions must diversify.
• The region has great alluvial soil, good irrigation and almost a century-long tradition of the application of science to agriculture.
• In south Punjab, with less irrigation, and parts of Haryana not covered by the Indira Gandhi Canal, some diversification to pulses, cotton etc. could work but the solid specialisation in this region remains.

Issue of middlemen

• Arhtiyas (middlemen) are important in Indian agricultural markets.
• They are a part of the supply chain in north-west India.
• Here they are not like the middlemen elsewhere.
• They function simply as agents of the procurement agencies.
• This was done by the past government to reduce overhead costs of procurement.

Steps need to be taken

• The e-markets, forwards and farmer-managed companies are not the dominant mode of rural organisations.
• Agriculture is the one good sector in otherwise dismal year.
• So, we need to strengthen it, not feed off on its glory, even outside north-west India.
• We have the largest spread of agricultural markets in the world according to spatial maps.
• But they are not APMCs.
• With weak markets (outside of grains) and without first-stage processing and other infrastructure, the farmer knows he is at the mercy of the trader and comes out on the streets when that is not understood.

Evolution of MSP

• The MSP played a crucial role in the days of compulsory procurement and zonal restrictions.
• Each crop had its own report then.
• Later separate reports were replaced by two reports, one for kharif and another one for rabi, apart from one for sugarcane (an annual crop).
• The 1982 rabi report stated that relative prices and, in that context, MSP had the role of an intervention mechanism when markets failed, outside the compulsory procurement area.
• Later, the concept of transport costs and managerial costs became important.

Way forward

• The Essential Commodities Act should be ditched.
• Good laws are good because progress starts with them, but not all laws are good everywhere.
• A modified version of the laws with a roadmap can be on the agenda — not everywhere, but most places outside the lands of the five rivers.

Conclusion

The amended laws should be considered in the context of regional variation in the country and necessary changes should be made to address the concerns of the farmers.

China and Israel offer two important lessons for India to transform its agriculture: agri-market reforms and water accounting.

Lessons from Israel and China

• India, China and Israel — started off their new political journey in late 1940s, but today China’s per capita income in dollar terms is almost five times that of India, and Israel’s almost 20 times higher than India.
• China produces three times more agri-output than India from a smaller arable area.
• China started off its economic reforms in 1978 by taking up agriculture first.
• It dismantled its commune system of land holdings and liberated agri-markets that allowed farmers to get much higher prices.
• As a result, in 1978-84, farmers’ incomes in China increased by almost 14 per cent per annum, more than doubling in six years.
• Israel cultivates high-value crops for exports (citrus fruits, dates, olives) by using every drop of water and recycling urban waste water for agriculture, by de-salinisation of sea waters.
• Water accounting in Israel is something exemplary.

Need for agri-reform in India

• The average holding size in China was just 0.9 ha in 2016-18, smaller than India’s 1.08 ha in 2015-16.
• So there is no doubt that small holders can do wonders, if they are given the right incentives, good infrastructure and research support, and the right institutional framework to operate.
• In India, the 1991 reforms did not include agriculture.
• Indian agri-food policies remained more consumer-oriented with a view to protect the poor.
• Export controls, stocking limits on traders, movement restrictions, etc all continued at the hint of any price rise.
• The net result of all this was farmers’ incomes remained low and so did those of landless agri-labourers.

Way forward

• India needs to change its policy framework from being subsidy-led to investment-driven, from being consumer-oriented to producer-oriented, and from being supply-oriented to demand-driven by linking farms with factories and foreign markets, and, finally, from being business as usual to an innovations-centred system.
• Until India breaks away from the policy of free power for agriculture, there would be no incentive for farmers to save water.
• In a state like Punjab where almost 80 per cent of blocks are over-exploited or critical, meaning the withdrawal of water is much more than the recharge.
• Highly subsidised urea and open-ended procurement have become a deadly cocktail that are eating away the natural wealth of Punjab.
• Out-of-box thinking is needed to break this regressive cycle for a brighter future for Punjab, for our own children.

Consider the question “What are the implications of subsidy oriented policies for Indian agriculture.”

Conclusion

Lessons from China and Israel suggest that India need reform in agri-food policies and water accounting to address several issues plaguing agriculture.