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Land Reforms in India

Definition

Land Reforms usually refers to redistribution of Land from rich to poor. Land reforms include;

• Regulation of Ownership
• Operation, Leasing, sale
• Inheritance of Land

In an agrarian economy like India with massive inequalities of wealth and income, great scarcity and an unequal distribution of land, coupled with a large mass of people living below the poverty line, there are strong economic and political arguments for land reforms.

Due to all these compelling reasons, Land reforms had received top priority by the governments at the time of independence. The Constitution of India left the adoption and implementation of the land reforms to the state governments. This has led to a lot of variations in the implementation of land reforms across states.

Economic Arguments in Favour of Land Reforms

Given these observations, one could make an argument in favour of land reform based not only on equity considerations but also on efficiency considerations. For example, the inverse relationship between farm size and productivity suggests that land reform could raise productivity by breaking (less productive) large farms into several (more productive) small farms. Also, lower productivity under sharecropping suggests that land reform could raise productivity by converting sharecroppers into owner-cultivators.

The Objectives of Land Reforms in India were:

After Independence, attempts had been made to alter the pattern of distribution of land holdings on the basis of four types of experiments, namely;

The Government over the years defined the aim of land reforms to cover the following:

The land reforms legislations passed/undertaken by all the state governments mainly covers and converges to the common themes/measures of the following:

Abolishment of Intermediaries

1. It was widely recognised that the main cause of stagnation in the agriculture economy was to a large extent due to exploitative agrarian relations.
2. The Chief instrument of the exploitation were the intermediaries like Zamindars, patronised and promoted by the British government.
3. About 60% of the area under cultivation was under the Zamindari system on the eve of the Independence. The States took the task of abolishing the intermediaries like Zamindars by passing the legislations.
4. The government estimates state that in total during first four Five years Plan, 173 million acres of land was acquired from the intermediaries and two crores tenants were given land to cultivate.
5. Abolition of intermediaries is generally agreed to be one component of land reforms that have been relatively successful. The record in terms of the other components is mixed and varies across states and over time. Landowners naturally resisted the implementation of these reforms by directly using their political clout and also by using various methods of evasion and coercion, which included registering their own land under names of different relatives to bypass the ceiling, and shuffling tenants around different plots of land, so that they would not acquire incumbency rights as stipulated in the tenancy law.
6. The success of land reform has been driven by the political will of specific state administrations, the notable achievers being the left-wing administrations in Kerala and West Bengal.

Tenancy Reforms

Tenancy reforms included the following set of measures:

• Regulation of rent
• Security of tenure
• Ownership rights of tenants

Tenants in India are classified into

• Occupancy Tenants: They enjoy permanent right over land and cannot be evicted easily.
• Tenants at will: They do not enjoy any right over land and can be evicted by the landlords anytime.

Therefore, to protect the tenants at will and subtenants, the tenancy reforms are passed by the various state governments.

Regulation of Rents: Under the British Government, the rents charged was highly exploitative with no sound economics behind it. These highly exploitative rents spelt high misery on the tenants and trapped them into vicious circles of debt and poverty.

To provide relief to the tenants from exploitative rents, the Indian government after independence passed legislations to regulate the rents (maximum limits on rent was fixed) and to reduce the miseries of the tenants.

Security of Tenure: To protect the tenants from arbitrary evictions and to grant them permanent rights over land, legislations had been passed in most states.

Legislations passed by the States has three essential aims; Evictions must not take place except in accordance with the provisions of law; Land may be resumed by the owner, if at all, for the “Personal Cultivation” only; In the event of land taken by the owner, the tenant is assured of a prescribed minimum area.

However, the vague definitions of Tenants Personal Cultivation and landowner under the law made it difficult to implement the tenancy reforms. The rights of resumptions provided in the law combined with the flaws in the definitions of the personal cultivation rendered all tenancies insecure.

Ownership Rights of Tenants: It has been repeatedly emphasised by the government, that the ownership rights of the land should be conferred to the actual cultivator. Accordingly, most states have passed legislations to transfer ownership rights to the tenants.

However, the success of the states in conferring the rights to the tenants varied widely. Some states like West Bengal, Kerala and Karnataka, has performed exceptionally well in this regard. In West Bengal due to the “Operation Barga” maximum sharecroppers were given ownership of land.

Land Ceilings

Land Ceiling on agriculture land means a statutory maximum limit on the quantity of land which an individual may hold. The imposition of the Land ceiling has two main aspects:

• Ceiling on future acquisitions.
• Ceilings on existing land holdings.

By 1961-62, ceiling legislation had been passed in all the States. The levels vary from State to State and are different for food and cash crops. In Uttar Pradesh and West Bengal, for example, the ceiling on existing holding is 40 acres and 25 acres. In Punjab, it ranges from 27 acres to 100 acres, in Rajasthan 22 acres to 236 acres and in Madhya Pradesh 25 acres to 75 acres.

In order to bring about uniformity, a new policy was evolved in 1971. The main features were:

1. Lowering of ceiling to 28 acres of wetland and 54 acres of unirrigated land
2. Change over to the family rather than the individual as the unit for determining land holdings lowered ceiling for a family of five.
3. Fewer exemptions from ceilings.
4. Retrospective application of the law for declaring Benami transactions null and void,
5. No scope to move the court on the ground of infringement of fundamental rights.

Why was Land Ceiling needed?

The Argument against Land Ceiling

Land Consolidation

Land Consolidation means merging of multiple consolidated farms and giving it to each farmer. The measure is adopted to solve the problem of land fragmentation. The Land consolidation program required granting of one consolidated land to the farmer, which is equal to the total land holdings in different scatters under the farmer possession. It simply means instead of holding multiple small lands in different places; the farmer will be given a single big piece of land.

Why the Program Failed?

• The programme failed to achieve its desired objective because the farmers are reluctant to exchange their lands for the new one. The arguments given by the farmers is that there existing land is much more fertile and productive than the new land provided under land consolidation.
• The farmers also complained about nepotism and corruption in the process of consolidation. The farmers complained that the rich and influential often bribes and manage to get fertile and well-situated land, whereas the poor farmers get unfertile land.

Cooperative Farming

Cooperative farming is advocated to solve the problem of sub-divisions of land holdings. The idea was to make farming profitable for small and marginal farmers having small pieces of land.

Under Cooperative Farming setup farmers having very small holdings come together and join hands to pool their lands for the purpose of cultivation. Pooling of farms helps in increasing production, and the farmers can have more produce to sell in the markets after taking out their subsistence need.

Cooperative farming also helps in mechanisation of agriculture as the owner of the multiple small farms can pool their money to buy a mechanical tractor or other equipment’s which they could not afford otherwise.

Arguments in favour of Cooperative Farming

Land Tenure System in Pre-Independent India

At the time of independence, there were three major types of land tenure systems prevailing in the country. The basic difference in these systems was regarding the mode of payment of land revenue.

Targeted PDS in India

PDS began as a Universal Programme in India due to food shortages of the mid 1960’s. But, since 1997 it has been exclusively targeted towards the poor, providing Wheat, Rice, Sugar and Kerosene at a highly subsidised to the below poverty line households.

The objective was to help very poor families buy food grains at a reasonably low cost to enable them to improve their nutrition standards and attain food security. The new system followed a two-tier subsidised pricing structure: one for BPL families, and another for Above the Poverty Line (APL) families.

How Cheap Food Grains ensure Nutritional Security?

In both the cases, whether Substitution dominates or the Income effect dominates, the end result will be an increase in calories intake by consumer’s and reduction in nutritional deficiencies.

Note for Students:

In order to make Targeted PDS more effective the Government had launched the Antyodaya Anna Yojana in December 2000.

Antyodaya Anna Yojana (AAY): The objective of the scheme was to identify the poorest households among the BPL category and to provide each of them with the following:

• Total 25 KG of food grains per month @ fixed price of RS 2 per KG for Wheat and RS 3 Per KG for Rice.

Individuals in the following priority groups are entitled to an AAY card, including:

1. landless agricultural labourers,
2. marginal farmers,
3. rural artisans/craftsmen such as potters and tanners,
4. slum dwellers,
5. persons earning their livelihood on a daily basis in the informal sector such as porters, rickshaw pullers, cobblers,
6. destitute,
7. households headed by widows or terminally ill persons, disabled persons, persons aged 60 years or more with no assured means of subsistence, and
8. all primitive tribal households.

The Food Corporation of India (FCI) is the nodal agency at the centre that is responsible for transporting food grains to the state godowns. Specifically, FCI is responsible for:

1. procuring grains at the MSP from farmers,
2. maintaining operational and buffer stocks of grains to ensure food security,
3. allocating grains to states,
4. distributing and transporting grains to the state depots,
5. selling the grains to states at the central issue price to be eventually passed on to the beneficiaries.

Important Prices Related to the PDS

How to Strengthen the Public Distribution System.

Aadhaar Based Enrolment.

The key problem in the efficient functioning of the PDS is the inclusion errors and the exclusion errors. Aadhaar cards could be used to identify the real poor households, thereby eliminating the inclusion errors. The use of Aadhar would also help in eliminating the duplicate and ghost beneficiaries.

Use of E-Technology and ICT.

Technology based reforms would help in reducing the leakages. The current system of manual recording the beneficiary is prone to corruption and tampering. The computerisation of records will resolve this problem. The end-to-end computerisation could curb large-scale diversion of grains to the open markets and help track the delivery of food grains from state depots to beneficiaries.

Technology based reforms undertaken by States:

Removing the Urban Bias.

It has been found that most of the Ration shops are situated in the urban areas of cities rather than the backward areas and slums, where most of the people poor live. The poor often have to travel miles to procure their quota of grains. The situation of Ration shops in the Urban centres also increase the risk of inclusion errors as urban middle class have a strong incentive to enrol themselves in the local Ration shops. If the ration shops are restricted to slums than the urban middle class will find it difficult to travel to slums to buy grains. Thereby eliminating the wrongful inclusions.

Choice of Commodities sold.

The PDS in India provides cereals like Wheat and Rice to the poor. However, various studies have found that the poor generally prefers coarse grains like ragi, maize, Jowar and Bajra. These cereals are not only rich in carbohydrates and protein but are also less consumed by the rich and urban middle class. If coarse cereals are sold in the PDS shops, then the rich will automatically stop using ration shops. Thereby eliminating the inclusion problem.

Decentralisation of the PDS.

The current system of centralised PDS where the centre procures the grain and then distribute it to each state is highly inefficient. The centralised PDS further adds to the unbearable administrative cost of transporting the grains from FCI to the state depots. It would be better if the states are given the power to procure and distribute grains on their own at the MSP and CIP decided by the centre.

Alternative to the PDS

Universal PDS:

Under the Universal PDS the grains are provided to every household of the state irrespective of the income level. The non-classification of the households eliminates the risk of inclusion and exclusion errors. It also reduced the cost of running the scheme as it reduced the administrative cost of identifying the poor and cost of monitoring the scheme.

Food Coupons:

Food Coupons are another alternative to PDS. Beneficiary are provided with food coupons which are equivalent to money. The food coupons are used to buy grains from local markets and grocery stores.

Retailers or grocery shop owners take these coupons to the local bank and are reimbursed with money. According to the Economic Survey 2009-10 reports, such a system will reduce administrative costs. Food coupons also decrease the scope for corruption since the store owner gets the same price from all buyers and has no incentive to turn the poor buyers away. Moreover, BPL customers have more choice; they can avoid stores that try to sell them poor-quality grain.

Direct Benefit Transfer:

DBT provides for cash transfers to the poor. Under DBT, beneficiaries will be given money by the government in their respective bank accounts which can be used to but grains from the open markets. Under the DBT system the government will provide money directly to the target group usually poor households. The identification of the poor households are much easier under the DBT system, since the bank accounts are linked with Aadhaar and can be easily monitored.

Some of the potential advantages of these programmes include: (i) reduced administrative costs, (ii) expanded choices for beneficiaries, and (iii) competitive pricing among grocery stores.

• In PDS leakage arises due to ghost ration cards. Under DBT “the identity of a person is known and ration cards will be Aadhaar-verified, due to which, only the right beneficiaries will get the subsidy.
• The savings from DBT on food subsidy is expected to be much larger than that for LPG. According to budget estimates, India’s food subsidies for the 2015-16 will be Rs.1.24 trillion. So, if government manages to save 40% of the subsidy, it will be around Rs.50,000 crore annually.
• The saved money could be invested by Government in Infrastructure, health or education where social returns would be much higher.
• Usually the PDS grains are of inferior quality. DBT would ensure that the poor families will buy good quality grain from the open market. This would certainly improve the nutritional outcome for the people and will be a step towards equality.
• Currently More than 40% of the foodgrains in PDS are diverted to open markets. High diversion of PDS items, pilferage, transport cost ,administration cost and graft issues would be avoided under DBT.
• Providing subsidies directly to the poor would both bypass brokers as well as reduce the waste and holding costs of storing grains in government silos.
• Cash transfers would help reduce fiscal deficit by curbing expenditures earmarked for the PDS that are siphoned off through corruption, as well as avoiding substantially higher costs of transferring food rather than cash.
• DBT system Respects the autonomy of beneficiaries and ensures that the person has choice in terms of spending the money in-accordance with his priorities and cultural preferences.
• DBT will ensure that Ensures that the inefficient and corruption-prone procurement regime of government is done away.

Some issues with the DBT:

• Cash transfers may expose recipients to price fluctuation, if they are not frequently adjusted for inflation.
• Additionally, since cash transfers include the transfer of money directly to the beneficiary, poor access to banks and post offices in some areas may reduce their effectiveness.
• It is also possible for people to spend cash transfers not on more nutritious food, as proponents suggest, but instead on non-food items, which would decrease the amount of household money left for buying food.

Advantages of PDS and DBT: A Comparison

Disadvantage of PDS and DBT: A Comparison

The National Food Security Act

The NFSA was passed in the Parliament in the year 2013, the NFSA seeks to provide the food to all individuals by making it a statutory right.

A comparison of existing TDPS and NFSA

Issues Related to Public Distribution System

What is PDS?

The PDS is a part of India’s Agriculture Price Policy. The Agriculture price policy in India has a twin objective of supporting farmers at the time of bumper harvest (when the price falls due to excess production) and supporting poor consumers from price rise by providing them cheap foodgrains through a network of fair price shops (Ration Shops) at a subsidised price.

The PDS makes available fixed quotas of foodgrains to poor households through ration shops at a subsidised ration price called “Issue Price”.

The original aim of the PDS was to stabilise prices and remove fluctuations from the foodgrains market. But, later on, PDS has assumed the role of an important and most significant anti-poverty programme of the government.

The Cost of Running PDS

The cost of operation of the PDS consists of two major components:

• Subsidy Cost: The subsidy cost occurs because the cost at which foodgrains are procured is higher than the price at which they are sold in the PDS.
• Administration Cost: Administration costs occurred due to storage, procurement operations and transportation of foodgrains from farmers to consumers. Theft, wastages and damages in storage and transit add to these costs.

Why PDS was Needed?

Why the Penetration of PDS is weak, and PDS has failed to Provide food security to Poor?

The Timeline of the PDS in India

The Working of the PDS

The existing structure of the PDS works in a Cooperative Federalist system in which both Centre and State shares the responsibility.

The Central Government is responsible for buying foodgrains from farmers at MSP. The Central Government than allocates the grains to each state on the basis of a pre-determined formula.

The State Government is responsible for identifying the poor and eligible households in the states.

The Centre transports the food grains to the Central depots (FCI) in each state. After that, the state government is responsible for delivering the food grains from the centre depots to the ration shops. The Ration shops are the ultimate end points from where the food grains are sold to PDS beneficiaries.

Issues related to Minimum Support Price in India

Minimum Support Price

Definition: MSP is a part of India’s Agriculture Price Policy. MSP is the price at which the government purchases crops from the farmers. MSP is the guaranteed ‘minimum floor price’ that farmer must get from the government in case the market price of the crops falls below the MSP. The Rationale behind MSP is to support the farmer from excess fall in the crop prices.

The MSP for various crops is announced by the central government at the beginning of every crop seasons on the recommendation of CACP. The MSP is a fixed assured price that farmers gets in case price falls heavily due to a bumper harvest. MSP in a sense work as an insurance policy for the farmers to save them from price falls.

The most important aim of the MSP policy is to save the Indian farmer from making distress sales. In the event of glut and bumper harvest, when market prices fall below the announced MSP, the government through its agencies buys the entire stock offered by the farmers at the MSP.

MSP is currently announced for 24 commodities including

• Seven cereals: Paddy, Wheat, Jowar, Bajra, Barley, Maize and Ragi.
• Five Pulses: Gram, Arhar, Moong, Urad and Lentil.
• Eight Oilseeds: Groundnut, Rapseed/Mustard, Toria, Soyabean, Sunflower, Sesamum, Niger seed and Safflower seed.
• Cash Crops: Raw Cotton, Copra, Raw Jute and Virginia Flu Curved Tobacco.

MSP: Historical Context

The system of MSP in India was started in the mid 1960’s amid food shortages. The idea was to create a favourable environment and incentivise farmers to increase production by adopting “High Yield Variety” seeds and technology for cereals like Wheat and Rice.

The adoption of the MSP Policy in India was mainly due to food scarcity and price fluctuations provoked by drought, floods and international prices for exports and imports. The policy, in general, was directed towards ensuring reasonable food prices for consumers by providing food grains through Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield by providing a price support mechanism through Minimum Support Price (MSP) system.

In order to provide farmers an assured price for their crops and motivating them to adopt advanced technology to increase production the Agricultural Price Commission was setup in the year 1965 (Renamed as Commission for Agriculture Cost and Price in 1985) on the recommendation of LK JHA Committee. The role of Agriculture Price Commission is to advise government on agriculture price policy.

Calculation of MSP

The CACP in deciding the MSP for various crops takes into account a lot of comprehensive factors including the supply and demand factors of each crop.

The Initial Success of the MSP Policy

The drawbacks of the MSP Policy

The Current situation of MSP

The most important goal of any long-term agriculture development policy in India should be to promote agriculture growth along with regional equity and natural resource sustainability. The regional equity and resource sustainability is a precondition for achieving nutritional security and balanced production. However, the system of the MSP has failed to achieve this objective of sustainability.

In order to make MSP relevant and efficient, the government have to revamp the policy.

1. MSP is announced for 24 commodities after which starts the operational part of procurement of the commodities. The procurements are made at the MSP price and government has to ensure that farmers do not get the price below MSP. However, it has been found that there exists no mechanism on the ground that ensures that farmers are paid the MSP. It has been noticed that many times farmers are forced to make distress sale at a price below the MSP.
2. For instance, it does not matter for producer of pulses or oilseeds anywhere in the country or for paddy and wheat farmers in Chhattisgarh, Orissa, Assam, Bihar and a majority of the other states whether the CACP recommends Rs 500 or Rs 5,000 per quintal for their crop as there is no enforcement of the MSP in these cases. In these cases, the long exercises and recommendations made by the CACP remain only on paper.
3. To make MSPs relevant to the country’s present situation requires changes in the criterion used by the CACP to arrive at MSPs and ensuring that MSPs are effectively implemented where they are meant to be implemented.
4. The CACP must consider both Demand and Supply factors while deciding the MSP. For instance, CACP main criteria in deciding the MSP is to take into account cost of production. The CACP completely ignores the demand side factors. When the demand for commodities are falling, and if at that time MSP is kept high, then it will lead to excess supplies and increase in government buffers stock which will be kept idle and will get wasted. In all such situation, it is important that MSP should be derived based on demand and supply factors.
5. Due to distorted MSP, inefficiency builds in into the system, and the farmers do not bother if growing a particular commodity on land that is unsuitable for its production will raise its cost and make land non-productive in the long run.

For instance, this is exactly what has happened in the case of extension of rice cultivation to the semi-arid regions and sandy soils in states like Punjab and Haryana, which is creating a host of environmental and natural resources problems in addition.

1. Fixing MSP for political reasons and under the pressure of the farmer leaders leads to a total neglect of societies preference for commodities. It also leads to serious imbalances where what is being demanded is not being produced and what is not being demanded is being produced in the economy. It would also require the government to buy produce all the time and everywhere if the MSP ignores demand-side factors.
2. Everyone in India including political leaders are convinced that the agrarian crisis and farmer distress are mainly because of low levels of MSP. The quick solution reached by them is therefore to increase the MSP. However, a comprehensive analysis and correct understanding of agricultural situation reveal that the problem lies elsewhere.
3. The Indian agriculture suffers from twin problems of lack of viability of practising agriculture due to the small and marginal size of land holdings and high volatility in farm sector due to monsoon failures and lack of irrigation.
4. The small size of land holdings, low productivity, increasing production costs, shrinking employment opportunities outside agriculture, and declining growth rate in agriculture are all major serious issues which cannot be simply resolved by increasing the MSP.
5. For instance, according to the 70th round survey of the NSSO (2014), the estimated number of agricultural households (AHHs) in India is 90.2 million, who constitute 57.8% of the total estimated rural households (156.14 million). Clearly, 42.2% of rural households (RHHs) are without any agricultural land.

Among the AHHs, 2.65% have only 0.01 hectares (ha) of land and are simply notional AHHs. Another 31.89% AHHs have land between 0.1 ha and 0.4 ha, and 34.9% have land between 0.41 ha and 1 ha. These three categories of AHHs account for 69.44% and are classified as marginal farmers. If we add small farmers (17.14%), the proportion of marginal and small farmers comes out to be 86.58% of the total.

The average size of the marginal holdings is only 0.41 ha (one acre), and that of smallholdings is 1.4 ha, much lower than the upper size-class limit of 2 ha. Given their economically unviable holding size, and small quantities of marketable surplus, there will be a marginal increase in the total net income of these farmers from agriculture even if they are given the higher MSP of over and above 50% of crops of production.

The relative economic conditions of the agricultural workforce (cultivators as well as labourers) have gone poorer vis-à-vis their counterparts in the non-agricultural sectors. Taking into account a large number of underemployed and those disguised unemployed workers in agriculture, MSP alone is not going to address the agrarian crisis and farmers’ distress, especially in the case of marginal and small AHHs, who account for 87% of AHHs.

If not MSP? Then where lies the problem?

Looking Beyond the MSP

The long-term fundamental solutions that has the potential to solve the agrarian crisis in India lies in the domain of.

An Alternative to MSP: Price Deficiency Payment System

The increase in the MSP irrespective of cost consideration is a second-best alternative to make farming viable. Moreover, to make MSPs effective to the country’s present situation requires changes in the criterion used by the CACP to arrive at MSPs.

The CACP mainly considers the cost of production as the main criterion to decide the level of MSPs. This is justified when there is a situation of scarcity and increasing the food supply is the primary objective. However, the country is now facing a situation where the demand is falling short of supply, and there is an increase in surplus. In the present context, it is highly recommended that the demand side factors should get primacy in determining the MSP.

There are several other problems related to cost of production used as a basis for MSPs. Wastefulness gets in-built into production process, and farmers do not have to bother if growing a particular crop on land unsuitable for its cultivation would raise cost of production

Second, fixing MSPs based on the cost of production totally neglects changes in income and society’s preference for a commodity which adversely impacts the functioning of the markets and price discovery. It also causes serious imbalances in what is being produced and what is required or demanded.

Rather than debating on the cost criterion, it is much important to ensure that the farmers do not undertake distress sale of their produce. This would require some mechanism on the ground to see that farmers are not forced to sell their produce below the MSP.

However, there exists no such mechanism on the ground except for few crops like rice and wheat in some states and in the case of sugarcane and cotton in states of Maharashtra and UP. Unfortunately, nobody seems to have raised this issue in public that implementation of the MSP is more important.

The Swaminathan Commission

The National Commission on Farmer’s headed by Dr M S Swaminathan highlighted that the main reasons of agrarian agony in India were non implementation of land reforms, water scarcity, lack of irrigation, technology exhaustion, inadequate access and availability of institutional source of finance, dependence on money lenders, weak market infrastructure, lack of opportunities for assured and remunerative marketing, low investment in research and development, low levels of education and skill, and lack of employability of surplus workforce outside agriculture.

The Swaminathan commission had recommended serval path-breaking measure to resolve agrarian distress in India. These recommendations are of a more vital nature and in all likelihood will provide a long-term solution to the agrarian crisis and farmers’ distress. The National Commission on Farmer’s recommendations are mainly in the domain of land reforms, irrigation, productivity, credit, insurance, food security, bio-resources, and public investment in agriculture, human development, and the rural nonfarm sector. The Swaminathan commission has thus provided solutions to the agrarian crisis and farmers’ distress both in the domain of the agriculture sector as well as outside agriculture sector.

The Alternative

The alternative is to go for ‘deficiency price payment’ without requiring the government to purchase undesirable quantities and undesirable commodities. Deficiency price payment must be part of the difference between the actual price received by farmers and the MSP. In order to ensure that resale of produce does not take place the size of deficiency payment should be kept less than the charges involved in the first sale of produce like mandi fee, auction, labour charges, etc.

The Madhya Pradesh government has launched a ‘Price Deficiency Payment’ schemes for the farmers called ‘Bhavantar Bhugtan Yojana’ (BBY) in October 2017. The BBY currently applies eight Kharif crops; soybean, maize, urad, tur, lentil, moong, groundnut, ramtil. Under BBY, the state government credits the difference between MSP and the modal price (average price prevailing in the market) directly into the bank accounts of the beneficiaries. The farmers have to first register on a BBY portal, after which they are asked to bring their produce to the mandis at a time specified by the government. The quantity of the produce qualified for the price deficiency payment is determined by the state government on the basis of average productivity and area under cultivation for the crop.

However, the scheme has very limited success, and the scheme is not inclusive as the benefits of the BBY is limited to small number of farmers who registered under the portal. For example, only 32 percent of urad production in Madhya Pradesh got the yojana’s benefit despite the fact that ASP of urad was 42 percent below its MSP. In other words, 68 percent of urad production was sold at prices below MSP, without any compensation under BBY. In the case of soybean, the state’s prime Kharif crop, the percentage of production benefiting from this scheme is even lower — only 18.5 percent, despite its ASP being 12 percent below the MSP. And for maize, groundnut and moong, the coverage is even poorer.  

Moreover, the farmers who are not registered under the portal have to suffer big losses because traders are suppressing the market. To conclude, BBY is not inclusive and covers only 25 percent of the farmer’s losses and is prone to manipulation by the traders.

A similar Price Deficiency scheme is launched by the Government of Haryana for onion, tomatoes, potatoes and cauliflower and the Government of Telangana (on a pilot basis) where the farmers are given investment support for their working capital needs.   

In addition to these expense, there may be further distortions. The Marketed surplus for all the crops is likely to increase since farmers may find it more profitable to sell all the produce in the mandis. The BBY scheme window is likely to be open for only a couple of months and farmers will have to sell their produce within the short time frame to avail compensation. This will eventually led to decline in the market price in that period because of large supply. The scheme will be worse for the unregistered small and marginal farmers because they will be forced to sell their produce at lower prices at a lower price and will not be compensated for their loses. The scheme will give more power to the lower bureaucracy and traders as all the paper work for farmer registration and sale of produce in the mandi will go through them. Therefore, the scheme may end up helping trader more than the needy farmers.  

The government of Telangana ‘Input Support Scheme’ is more inclusive since it does not require farmers to register their areas and crops. The scheme main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does not distort the prices of the crops.

In contrast, the Government of Telangana and Government of Karnataka has plan to launch the ‘Input/Income Support Scheme’ on per hectare basis for both the Kharif and Rabi season in 2018-19. The scheme is more inclusive since it does not require farmers to register their areas and crops. The scheme main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does not distort the prices of the crops. The Telangana government scheme will support investment at Rs 4000 per acre per farmer for the purchase of inputs like seeds; Fertilizer; Pesticides etc. The amount will be directly paid into the bank accounts of the farmers before the beginning of the sowing season. On similar lines, Karnataka Government also plans to implement DBT of Rs 5000 per hectre for dryland farmers in Kharif 2018.

Pricing policy for sugarcane

The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10 sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis. As this sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966 was amended in October 2009 and the concept of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane. A new clause ‘reasonable margins for growers of sugarcane on account of risk and profits’ was inserted as an additional factor for working out FRP, and this was made effective from the 2009-10 sugar season.

Accordingly, the CACP is required to pay due regard to the statutory factors listed in the Control Order, which are

• the cost of production of sugarcane;
• the return to the grower from alternative crops and the general trend of prices of agricultural commodities;
• the availability of sugar to the consumers at a fair price;
• the price of sugar;
• the recovery rate of sugar from sugarcane;
• the realization made from the sale of by-products viz. molasses, bagasse and press mud or their imputed value (inserted in December 2008) and;
• Reasonable margins for growers of sugarcane on account of risk and profits (inserted in October 2009).

States also announce a price called the State Advisory Price (SAP), which is usually higher than the SMP.

Other Major Support Schemes of Government

Market Intervention Scheme

Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented at the request of State Governments for procurement of perishable and horticultural commodities in the event of fall in market prices.

The Scheme is implemented when there is at least 10% increase in production or 10% decrease in the ruling rates over the previous normal year. Proposal of MIS is approved on the specific request of State/UT Government, if the State/UT Government is ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.

Under MIS, funds are not allocated to the States. Instead, the central government share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved based on specific proposals received from them.

Price Supports Scheme (PSS)

The Department of Agriculture and Cooperation implements the PSS for procurement of oilseeds, pulses and cotton, through NAFED which is the Central nodal agency, at the Minimum Support Price (MSP) declared by the government.

NAFED undertakes procurement as and when prices fall below the MSP.

Procurement under PSS is continued till prices stabilize at or above the MSP. Losses, if any incurred by NAFED in undertaking MSP operations are reimbursed by the central Government. Profit, if any, earned in undertaking MSP operations is credited to the central government.

BUFFER STOCK

Buffer Stock is another main instrument of Agriculture pricing policy in India. India has a policy of maintaining a minimum reserve of foodgrains (only for wheat and rice) so that food is available throughout the country at affordable prices round the year.

The main supply from the government’s buffer stock goes to the public distribution system (now TPDS) and at times goes to the open market to check the rising prices if needed.

Public sector food grain stocks are significant support of India’s food policy and food security. They have three important societal goals.

1. To provide space for effective implementation of minimum support price for rice and wheat through procurement mechanism.
2. To maintain price stability arising out of year to year fluctuations in output or any other exigency.
3. As a source of supply for public distribution system and various other schemes to sustain food and nutrition security particularly of economically weaker sections.

The Food Corporation of India is the key agency for procurement, storage and distribution of food grains. In addition to the requirements of wheat and rice under the targeted public distribution system, the Central Pool is essential to have sufficient stocks of these in order to meet any emergencies such as drought/failures of the crop, as well as to allow open market intervention if price increases.

Major objectives of Buffer Stocks:

However, the Buffer Stock policy has raised the questions over the storage capability of the FCI and contaminated grains in the open godowns in the country. The issue of storage had also been highlighted by the Supreme Court, which recommended that government should allocate the grains free to the poor section of society. The problem is huge, but the government does not have an immediate solution. The FCI has to increase the storage capacity to accommodate the record procurement.

Current Buffer Stock Policy of Government:

1. The current buffer norms were reviewed in January 2015. According to the new norms, the central pool should have 41.1 million tonnes of rice and wheat on July 1 and 30.7 million tonnes on October 1 every year. These limits were 32 million tonnes and 21 million tonnes earlier.
2. The stocking norms for the quarters beginning January’1 and April’1 have been revised only slightly. Main drivers for increased buffer stocks were increased offtake from the targeted public distribution system and also the enactment of National Food Security Act.
3. It was observed that Food Corporation of India buys almost one-third of the total rice and wheat produced in the country at minimum support prices. It does imply that denying to any farmer who wants to sell his produce at MSP. But then it also needs to maintain an excessive, uncontrollable and monetarily troublesome food inventory.
4. Previously, once the buffer norms were met, cabinet approval was needed to sell any part of it in the open market. But in January 2015, it is revised.
5. The current policy is that Food Ministry is authorized to dispose the surplus stock into open market without seeking cabinet approval. This was a major policy decision, and it was needed to resolve the problem of burdensome inventories at Food Corporation of India and misrepresentation created in the market.
6. The maintenance of a buffer stock is also important to ensure national food security. Stocks mainly of rice and wheat are commonly maintained from year to year at a substantial cost in order to effectively take care of variations in domestic food grain production. These variations occur quite regularly due to climate and man-made factors.
7. Buffer stocks are created from the domestic food surpluses available in years of high production. They are also built and maintained through imports as and when required. The optimum size of the buffer stocks at any point of time is based on the proposals of expert committees appointed for the purpose by the government from time to time.

In the context of India, buffer stocking of food grains is theoretically seen as a mechanism to deliver strategic food and agricultural domestic support policies, but in terms of its effectiveness to accomplish its objective, there is a growing consent, both domestically and internationally, that the food stocking programme has been not just expensive but also indiscreetly wasteful.

In India, the prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend to alter more than prices of manufactured products and services. This is mainly due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.

In order to manage the fluctuations in prices, it needs to operate price support schemes through the use of buffer stocks. Buffer stock schemes stabilize the market price of agricultural products by buying up supplies of the product when harvests are copious and selling stocks of the product onto the market when supplies are low.

Problems with buffer stock schemes:

• Theoretically, buffer stock schemes should be lucrative, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. Nonetheless, they do not often work well in practice. Evidently, perishable items cannot be stored for a long time and can, therefore, be immediately ruled out of buffer stock schemes.
• Cost of buying excess supply can cause a buffer stock scheme to run out of cash. A guaranteed minimum price causes over-production of rice and wheat which has its economic and environmental costs.
• There are also high administrative and storage costs to be considered.
• Open-ended Procurement policy leads to excess procurement and since FCI storage capacity of grains is limited a large amount of grain procured under buffer stock scheme is wasted and rotten.

Issues Related to Government Intervention in India’s Agriculture

Background

Government intervention in food grain marketing in India began in 1960’s. The objective of the intervention is to revamp and incentivise the agriculture sector by using HYV seeds and technological inputs with the ultimate aim of increasing food grain production.

Increasing production alone is not sufficient; the government needs to ensure that increase in production benefits the poor/ consumer. Several measures were undertaken to achieve the twin objective of ensuring food security and raising food production. The key measures were:

• Price assurance to producers using the system of Minimum Support Prices.
• Maintaining Buffer Stocks.
• Distribution of food grains at a reasonable price through a network of fair price shop under Public Distribution System.

The policy of increasing production and providing food security has been helpful to India in several ways.

The biggest disadvantage of such an interventionist policy especially since the beginning of economic reforms of 1991 are:

Why is Government intervention needed in food grain markets?

• To achieve the goal price stability at the time of bumper harvest or below normal production.
• To provide a guaranteed price to producer farmers.
• To supply food to vulnerable and poor sections at a lower price.

The government has been carrying out procurement and storage of food grains in India since 1960’s through mainly two institutions:

• The Commission for Agriculture Cost and Prices (CACP).
• The Food Corporation of India (FCI)

The CACP is entrusted with the task of suggesting the Minimum Support Prices. The FCI is entrusted the task of procurement and storage of food grains.

The critical aspect of this whole intervention is the price at which the produce is procured from farmers. Till the beginning of economic reforms MSPs for food grains were based entirely on domestic factors, mainly on the cost of production of crops. Though CACP was required to take into consideration the international price situation, this aspect was never given any weight while arriving at the level of MSPs.

The situation changed post-1991 when India embraced economic reforms.

Subsidies in Indian Agriculture

Major subsidies on Agricultural Inputs

Power and Irrigation Subsidies:

Subsidies on power and irrigation are provided by the state governments.

Power subsidy is granted on power that is used to draw on groundwater. Accordingly, it is a subsidy to privately drawing and privately-owned means of irrigation. Power subsidy is the difference between the price paid by the farmer for the usage of electricity and the actual cost of generating the electricity.

The sustainability of the power subsidies has come under a lot of stress in recent years mainly because of the bad health of State electricity boards finances. The states like Punjab and Tamil Nadu has provided electricity to the farmers free of cost which has led to its wastage and financial losses to the state electricity boards. Estimates further suggests that the average cost recovered by the SEB’s form the agriculture sector is only 10 percent of the cost of generating electricity.

Irrigation subsidy is the subsidy provided on the usage of government provided canal water. Irrigation subsidy is the difference between operating and maintenance cost of irrigation infrastructure in the state and irrigation charges recovered from farmers. This may work through provisions of public goods such as canals, dams which the government constructs and charges low prices or no prices at all for their use from the farmers. It may also be through cheap private irrigation equipment such as pump sets.

Irrigation subsidies has become unsustainable mainly because the states have failed to device a rational pricing model for the canal water. Estimates suggest that the pricing of the canal water did not cover more than 20 percent of the operational and maintenance expense of the canals.

Fertilizer Subsidies

The fertilizer subsidies are borne by the Central Government. The need for the fertilizer subsidy arises from the nature of fertilizer pricing policy of the government. The fertilizer price policy is being governed with the following two objectives:

• Making fertilizer available to farmers at a low and affordable price to encourage their use and increase production.
• Ensuring fair returns on the investment made by the fertilizer industry to attract more investment in the fertilizer industry.

To fulfil the first objective, the government has been keeping the selling prices of fertilizers static and uniformly low throughout the country.

As far as the second objective is concerned, the government had come up with the policy of “Retention Price Scheme” in the year 1977.

Retention Price Scheme: Under RPS, the government fixes a fair ex-factory retention price for various fertilizers of different manufacturers. The Government pays the manufacturers their cost of production along with a profit margin of 12 percent (post tax) if the factory utilises the 90 percent of the installed capacity.

Calculation of Fertilizer Subsidy

Under the fertilizer pricing policy, the farmer gets the fertilizer at a pre-determined low rate called maximum selling price. The manufacturer was paid an amount called Retention Price which is fixed at a high level so that manufacturer can cover his cost and yet leave a 12 percent profit.

Fertilizer subsidies in the Post Reform Period

1. The mounting burden of subsidies compelled the policy planners to make a serious attempt to reform the fertiliser price policy to rationalise the fertiliser subsidy. As part of economic reforms initiated in the early 1990s, the government decontrolled the import of complex fertilisers such as di-ammonium phosphate (DAP) and muriate of potash (MOP) in 1992, and extended a flat-rate concession on these fertilisers. But, urea imports continue to be restricted and canalised.
2. Based on the recommendations of various committees including the High-Powered Fertiliser Pricing Policy Review Committee (HPC) and the Expenditure Reforms Commission (ERC), a New Pricing Scheme (NPS) for urea units was implemented in a phased manner from April 2003 with an objective to bring transparency, uniformity, and efficiency, and reduce the cost of production. Similarly, based on the recommendations of the Expert Group on P and K fertilisers, a policy for phosphatic and potassic fertilisers has been implemented.

Nutrient Based Subsidy Scheme

The Government of India implemented a Nutrient Based Scheme with effect from 2010. Under the NBS scheme, a fixed subsidy is announced on per KG based on nutrients annually. An additional subsidy is also given for micronutrients.

With the objective of providing quality fertilizer to the farmers depending on the crops and soil requirements, the government has included new grade of complex fertilizers under the NBS scheme.

Under the NBS, manufacturers are allowed to fix the MRP. The farmers pay only 50 percent of the delivered cost of Phosphate (P) and Potash (K) fertilizer and the rest is borne by the government in the form of subsidy.

Neem Coated Urea Policy, 2015:

The government has made it mandatory for domestic fertilizer firms to “Neem coat” at least 75 per cent of their urea production (It can even go upto 100%).Earlier, there was a cap of 35% on this. The government has also allowed manufacturers to charge a small 5 per cent premium on Neem-coated urea

Aim:

Checking the excessive use of urea which is deteriorating the soil health and adversely impacting overall crop yield

Benefits:

• Reduce the subsidy outgo
• Prevent diversion of urea for industrial use

Limitations:

The subsidy savings arising out of this pales beside the enormity (financially and politically) of the fertilizer subsidy that is paid on the three major fertilizers, N, P and K

New Urea Policy, 2015:

To incentivize domestic manufacturers and free transportation of P (phosphorus) and K (potassium) fertilizers. It will be in force from 2015 to 2019 (4 Financial years)

Need for the Policy:

• India is world’s third-largest consumer of fertilizers
• India is highly import-dependent in the case of urea. Presently, India is importing about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes

Objectives:

• Maximize indigenous Urea Production to reduce import dependency and reduce subsidy burden on the government
• Promote energy efficiency to reduce Carbon-footprint (via energy efficiency) to make Urea production environment-friendly. [This will be done via revised specific energy consumption norms]
• Make Urea production plant to adopt the best technology available and become globally competitive
• Rationalization of Subsidy burden
• Timely supply of Urea to farmers at the same MRP

Salient Feature:

• The government will cover the entire cost of natural gas, which is the main feedstock of urea.
• Movement plan for P&K fertilizers has also been freed to reduce monopoly of few companies in a particular area so that any company can sell any P&K fertilizer in any part of the country. Rail freight subsidy has been decided to be given on a lump sum basis so that the companies economize on transport. This will help farmers and reduce pressure on the railway network

Proposed Outcome:

• Will cut the yearly subsidy bill
• Increase annual production by 2 million tonnes

Imbalance in Fertilizer Use Consumption

The government interventions in the fertilizer policy over the years has resulted in uneven pricing structure and nutrient usage. The result of this is distorted pattern and application of the fertilizer usage in India. The application of N-Nitrogen, P-Phosphate and K-Potash in the farms is distorted. The ideal ration of N: P: K usage IN India is 4:2:1.

However, due to inaccurate price structure, the N: P: K ratio in India has become 10:3:1 in the year 1997-98. The ratio had further deteriorated in the succeeding years. The current situation is, however, improved a little with N: P: K ratio at 8.2:3.2:1 in the year 2013-14.

The reason for such a gross mismatch is the relative cheap price of the urea (Nitrogen) as compared to the other two nutrients Phosphate and Potash. The imbalance and excessive use of urea had also resulted in the degradation of the environment and soil fertility.

Seed Subsidy: Seed subsidy is granted through the distribution of quality seeds at a price that is less than the market price of the seeds.

Credit Subsidy: It is the difference between interest charged from farmers, and actual cost of providing credit, plus other costs such as write-offs bad loans. Availability of credit is a major problem for poor farmers. They are cash strapped and cannot approach the credit market because they do not have the collateral needed for loans. To carry out production activities, they approach the local money lenders.

Taking advantage of the helplessness of the poor farmers the lenders charge exorbitantly high rates of interest. Many times, even the farmers who have some collateral cannot avail loans because banking institutions are largely urban based and many times they do not indulge in agricultural credit operations, which is considered to be risky. (such as collateral requirements) can be relaxed for the poor.

Infrastructural Subsidy: Private efforts to construct basic infrastructure in many areas do not prove to be sufficient to improve agricultural production. Good roads, storage facilities, power, information about the market, transportation to the ports, etc. are vital for carrying out production and sale operations. These facilities are in the domain of public goods, the costs of which are huge and whose benefits accrue to all the cultivators in an area.

No individual farmer will come forward to provide these facilities because of their long gestation period and inherent problems related to revenue collections (no one can be excluded from its benefit on the ground of non-payment). Therefore, the government takes the responsibility of providing these and given the condition of Indian farmers a lower price can be charged from the poorer farmers.

Agriculture Subsidies in India

Introduction of the HYV program in the mid-1960s necessitated a high priority to supplying quality inputs like irrigation, water, fertilizers and electricity to the Indian farmers. These all were classified as essential inputs for the development of the agriculture.

To ensure that these inputs are accessible to all farmers at all the times the government decided to subsidised these inputs.

How Subsidy Works

There are two most common ways of subsidising agriculture;

1. Firstly, governments may pay much higher prices for the agricultural products than what the farmers can obtain under free market environment, and
2. Secondly, by supplying the inputs at a price that is below the cost of supplying these inputs or below at the price that would prevail in an open free trade environment.

• Higher prices for farm products can be provided mainly by insulating the domestic markets from the world economy through a restrictive trade policy.
• On the other hand, vital inputs like fertilisers, irrigation water, credit, electricity used in the agricultural sector can be supplied to the farmers at prices which are below the open market prices. The prices of these inputs, therefore, do not reflect their true value, i.e, the real cost of supplying these inputs.
• Of the above mentioned two alternatives, subsidies on inputs are normally preferred because it is believed that benefits of government expenditure can be derived by the farmers only in proportion to their use of inputs. Input subsidisation also avoids raising food and raw material prices, thus avoiding the plausible adverse effect on growing industrial sector or a large mass of poor living in the developing countries.
• However, most often, it is not just a single mechanism but a combination of both higher output prices and lower input prices which has been used to subsidise agriculture with objectives varying from the need to raise domestic production and protect incomes of the farming community.
• India also tinkered with both input and output prices, primarily to protect the poor and/or to stimulate the use of modern inputs.

Rationale for subsidising Agriculture

Negative Impacts of Agriculture Subsidies

However, the issue of agriculture subsidies is not to be examined only from the perspective of fiscal imbalances, but from a much wider perspective of ensuring food and nutritional security for Billions and ensuring that poor and marginal farmers do not get wiped out from the market.

Direct and Indirect Farm Subsidies