Subject: Agriculture

Context

The essential challenge of public policy for agriculture- the high price of food remains unsolved.

Implications of high food prices

• Increases poverty: A higher price of food increases poverty, especially as the rice and wheat supplied through the PDS constitute only a part of the total expenditure on food of the average Indian household.
• Reduces the expenditure on other item: For the household, a high price of food crowds out expenditure on other items ranging from health and education to non-agricultural goods.
• This prevents the market for non-agricultural goods from expanding.
• This was one of the first discoveries in economics, made by the English economist David Ricardo about two centuries ago.

Rising food prices in India

• An indication of the elevation of the price of food in an economy is the share of food in a household’s budget.
• In a global comparison we would find that this share is very large for India.
• Data from the U.S. Department of Agriculture (2016) show that this share ranges from over 30% for India to less than 10% for the U.S. and the U.K.
• This is in line with Ricardo’s understanding of how economies progress i.e., as food gets cheaper, growth in the non-agricultural economy is stimulated.
• Agricultural policy in India has remained quite unaccountable in the face of a rising relative price of food.
• Impact on manufacturing sector: Arguably, the high price of food has been a factor in the disappointing lack of expansion of the manufacturing sector in India despite repeated efforts to bring it about.

Changes needed in agricultural policy

• Both from the point of view of food security for low-income households and the dynamism of the non-agricultural sector, agricultural policy cannot ignore the price at which food is produced.
• Focus on improving the yield: The fact of low agricultural yield in India by comparison with the rest of the world has been known for long, and little is done about it.
• Management of soil nutrients and moisture: A superior management of soil nutrients and moisture, assured water supply and knowledge inputs made available via an extension service would be crucial.
• Raising yields will ensure profitability without raising producer prices, which will inflate the food subsidy bill.

How government intervention created problems

• Given the importance of food for our survival, this justifies public intervention in agriculture.
• The issue is the design and scale of this intervention.
• In the mid-sixties, when India was facing food shortage that could not be solved through trade, a concerted effort was made to raise domestic agricultural production.
• Profitability through MSP: It introduced the strategy of ensuring farm profitability though favourable prices assured by the state.
• Further, it entrenched the belief that it is the farmer’s right to have the state purchase as much grain as the farmer wishes to sell to the state agency.
• Created grain stockpile: This has resulted in grain stockpiles far greater than the officially announced buffer-stocking norm.
• These stocks have often rotted, resulting in deadweight loss, paid for by the public though taxes or public borrowing.
• Supply more than demand: Finally, with all costs of production reimbursable and all of output finding an assured outlet, supply has outstripped demand. 
• Damage to natural environment: This has led to unimaginable pressure on the natural environment, especially water supply.

Consider the question “India faces the challenge of high food prices. Examine the ways in which high food prices affects the overall economy. How far is the India’s agriculture policy responsible for the problem?”

Conclusion

India needs an agricultural policy that ensures that farming is profitable but this cannot be at the cost of a high price of food. The ‘food problem’ should no longer be seen only in terms of the availability of food from domestic sources.

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Context

Amid the demand for a guarantee of MSP, many commentators fail to understand the true spirit of the demand for a legal MSP.

How demand for legal backing for MSP is misinterpreted?

• Mandatory enforcement of price above MSP: The demand has been interpreted as a mandatory enforcement of trade in agricultural produce, including private trade to be necessarily at or above the MSP for that crop.
• Nationalisation of agricultural trade: Another interpretation is the nationalisation of agricultural trade whereby the government promises to buy all the crop produced at MSP.
• Commentators have been using these two interpretations to project large estimates of government expenditure needed to implement.
• They fail to understand the true spirit of the demand for a legal MSP.

Current nature of MSP

• It is not an income support program: By definition MSP is not an income support programme.
• Intervention to stabilise prices: It is designed to be used as government intervention to stabilise prices, to provide remunerative prices to farmers.
• Public procurement program to meet requirements of NFSA: Currently, it is no more than a public procurement programme to meet the requirements of the National Food Security Act (NFSA).
• Only rice and wheat procured: As against the official announcement of MSP for 23 crops, only two, rice and wheat are procured as these are distributed in NFSA.

Larger context of demand for legal backing to MSP

• Droughts and declining commodity prices: In addition to the twin droughts of 2014 and 2015, farmers have also suffered from declining commodity prices since 2014.
• Impact of demonetisation and GST: The twin shocks of demonetisation and hurried rollout of GST, crippled the rural economy, primarily the non-farm sector, but also agriculture.
• Impact of pandemic: The slowdown in the economy after 2016-17 followed by the pandemic has ensured that the situation remains precarious for majority of the farmers.
• Increased input prices: Higher input prices for diesel, electricity and fertilisers have only contributed to the misery.
• In this context, the demand for ensuring remunerative prices is only a reiteration of the promise by successive governments to implement the Swaminathan Committee report.

What should be the true nature of MSP?

• Intervene to stabilise price: A true MSP requires the government to intervene whenever market prices fall below a pre-defined level, primarily in case of excess production and oversupply or a price collapse due to international factors.
• It does not require the government to buy all the produce but only to the extent that creates upward price pressures in the market to stabilise prices at the MSP level.

Way forward

• Mechanism for market intervention: What is needed is a mechanism to monitor the prices.
• While such a mechanism already exists, a policy for requisite market intervention is missing.
• Use MSP as incentive to achieve nutritional security and reduce import dependence: MSP can also be an incentive price for many of the crops which are desirable for nutritional security such as coarse cereals, and also for pulses and edible oils for which we are dependent on imports. 
• Include pulses, edible oil and millets in PDS: Despite repeated demands from food activists, there has not been any progress in including pulses, edible oils and millets in PDS.
• A guaranteed MSP then is nothing more than restoring the true spirit and functions of MSP, applicable to a broad range of crops and all sections of farmers.

Issues

• The current MSP regime has no relation to prices in the domestic market.
• Its sole raison d’être is to fulfil the requirements of NFSA making it effectively a procurement price rather than an MSP. 
• It is basically a lack of understanding of what agriculture needs and above all a lack of political commitment to ensure remunerative prices to farmers.

Conclusion

An efficient and functional MSP is certainly the least that the government can do to protect a sector which remains the largest employer and a refuge for the poor and vulnerable as was seen during the pandemic.

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Context

Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill, promote the efficient use of fertilizers, achieve balanced use of N, P, and K (nitrogen, phosphorus, and potassium), and reduce water and air pollution caused by fertilizers like urea.

Several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill.

Background

• After years of unchanged prices, the budget of 1991 raised the issue prices of fertilizers by 40% on average. This rise was rolled down to 30% in a few months, with exemption to small and marginal farmers from the price increase.
• Due to opposition, the increase in Urea price was further rolled back to 17% over the pre-reform price.
• It resulted in a big shift in the composition of fertilizers used in the country in favor of urea and thus Nitrogen (N).
• The government started Nutrient Based Subsidy in 2010 to address the growing imbalance in fertilizer use, which was skewed towards urea (N).
• However, only non-nitrogenous fertilizers P and K (phosphorus and potassium) were included in NBS; urea was left out.

Need for reforms on three fronts

Reforms are needed to promote in three key areas:

1) The efficient use of fertilizers.

2) To achieve balanced use of N, P, and K (nitrogen, phosphorus, and potassium).

3) To reduce water and air pollution caused by fertilizers like urea.

Challenges in the fertilizer sector

A] Distortion in use due to price difference

• The Union Budget of July 1991 raised the issue prices of fertilizers by 40% on average.
• Due to opposition to increasing fertilizer prices, the increase in the price of urea was rolled back to 17% a year later over the pre-reform price.
• The shift in the composition of fertilizer used: This change disturbed the relative prices of various fertilizers and resulted in a big shift in the composition of fertilizers used in the country in favor of urea and thus N.
• Farmers tended to move towards balanced use, but policy and price changes reversed the favorable trend a couple of times in the last three decades.
• In 2019-20, fertilizer use per hectare of cultivated area varied from 70 kg of NPK in Rajasthan to 250 kg in Telangana
• Further, the composition of total plant nutrients in terms of the N, P, K ratio deviated considerably from the recommended or optimal NPK mix.
• It was 33.7:8.0:1 in Punjab and 1.3:0.7:1 in Kerala.

2] Increasing fertilizer subsidy

• Fertilizer subsidy has doubled in a short period of three years. For 2021-22, the Union Budget has estimated fertilizer subsidy at ₹79,530 crores (from ₹66,468 crores in 2017-18).
• The subsidy is likely to reach a much higher level due to the recent upsurge in the prices of energy, the international prices of urea and other fertilizers, and India’s dependence on imports.
• In order to minimize the impact of rising in prices on farmers, the bulk of the price rise is absorbed by the government through enhanced fertilizer subsidy.
• This is likely to create serious fiscal challenges.
• At current prices, farmers pay about ₹268 per bag of urea and the Government of India pays an average subsidy of about ₹930 per bag.
• Thus, taxpayers bear 78% of the cost of urea and farmers pay only 22%. This is expected to increase and is not sustainable.

3] Import dependence

• Total demand for urea: The total demand for urea in the country is about 34-35 million tonnes (mln t) whereas the domestic production is about 25 mln t.
• The requirement of Diammonium Phosphate (DAP) is about 12 mln t and domestic production is just 5 mln t.
• This leaves the gap of nearly 9-10 mln t for urea and 7 mln t for DAP, which is met through imports.
• The use of Muriate of Potash is about 3 mln t.
• This is entirely imported.
• The international prices of fertilizers are volatile and almost directly proportional to energy prices.

Need to shift our focus to Bio-fertilizers

• Bio-fertilizers are cheap, renewable, and eco-friendly, with great potential to supplement plant nutrients if applied properly. However, they are not a substitute for chemical fertilizers.
• They improve the health of the soil. Since it provides nutrients to the soil in a small and steady manner, its immediate effects are not very visible.
• Sales of biofertilizers in the country have not picked up because of a lack of knowledge and its slow impact on the productivity of the soil.
• The use of biofertilizers is necessary to maintain soil health as more and more use of chemical fertilizers kills all the microorganisms available in the soil, which are so essential for maintaining soil health.
• Supplementary use of biofertilizers with chemical fertilizers can help maintain soil fertility over a long period.
• The overall strategy for increasing crop yields and sustaining them at a high level must include an integrated approach to the management of soil nutrients, along with other complementary measures.

Way forward

• Self-reliance: we need to be self-reliant and not depend on the import of fertilizers.
• In this way, we can escape the vagaries of high volatility in international prices.
• In this direction, five urea plants at Gorakhpur, Sindri, Barauni, Talcher, and Ramagundam are being revived in the public sector.
• Extend NBS model to urea: The government introduced the Nutrient Based Subsidy (NBS) in 2010 to address the growing imbalance in fertilizer use.
• However, only non-nitrogenous fertilizers (P and K) moved to NBS; urea was left out.
• We need to extend the NBS model to urea and allow for price rationalization of urea compared to non-nitrogenous fertilizers and prices of crops.
• Develop alternative sources of nutrition for plants: Discussions with farmers and consumers reveal a strong desire to shift towards the use of non-chemical fertilizers as well as a demand for bringing parity in prices and subsidy given to chemical fertilizers with organic and biofertilizers.
• This also provides the scope to use large biomass of crop that goes waste and enhance the value of livestock by-products.
• We need to scale up and improve innovations to develop alternative fertilizers.
• Improve fertilizer efficiency:  India should pay attention to improving fertilizer efficiency through need-based use rather than broadcasting fertilizer in the field.
• The recently developed Nano urea by IFFCO shows promising results in reducing the usage of urea.

Consider the question “What are the challenges facing the fertiliser sector in India? How subsidies lead to distortion in the use of various types of fertilisers.”

Conclusion

These changes will go a long way in enhancing the productivity of agriculture, mitigating climate change, providing an alternative to chemical fertilizers and balancing the fiscal impact of fertilizer subsidy on the Union Budgets in the years to come.

Back2Basics: Nutrient Based Subsidy

• Under the NBS regime – fertilizers are provided to the farmers at subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
• Also, the fertilizers which are fortified with secondary and micronutrients such as molybdenum (Mo) and zinc are given additional subsidy.
• The subsidy on Phosphatic and Potassic (P&K) fertilizers is announced by the Government on an annual basis for each nutrient on a per kg basis – which are determined taking into account the international and domestic prices of P&K fertilizers, exchange rate, inventory level in the country etc.
• NBS policy intends to increase the consumption of P&K fertilizers so that optimum balance (N:P:K= 4:2:1) of NPK fertilization is achieved.

[pib] Nutrient Based Subsidy (NBS) for Phosphatic & Potassic (P&K) Fertilizers

Context

In a surprise move, Prime Minister Narendra Modi announced that the government will repeal the farm laws in the Winter Session of Parliament.

Economic impact

• Agri-growth rate to remain constant: The agri-GDP growth has been 3.5 per cent per annum in the last seven years.
• One expects this trend to continue — there might be minor changes in the agri-GDP depending on rainfall patterns.
• Cropping pattern to remain skewed: Cropping patterns will remain skewed in favour of rice and wheat, with the granaries of the Food Corporation of India bulging with stocks of grain.
• Increase in food subsidy: The food subsidy will keep bloating and there will be large leakages.
• Environmental impact: The groundwater table in the north-western states will keep receding and methane and nitrous oxide will keep polluting the environment.

Suggestion on increasing farmers income

• Average agri-household income: The latest Situation Assessment Survey of the NSO reveals that the income of an average agri-household in India was only Rs 10,218 per month in 2018-19.
• This is not a very happy situation and all out measures need to be taken to increase rural incomes in a sustained manner.
• How to increase farmers income: Given that the average holding size stands at just 0.9 ha (2018-19), and has been shrinking over the years.
• Efficient functioning value chain: Unless one goes for high-value agriculture — and, that’s where one needs efficient functioning value chains from farm to fork by the infusion of private investments in logistics, storage, processing, e-commerce, and digital technologies — the incomes of farmers cannot be increased significantly.
• Reforms: This sector needs reforms, both in the marketing of outputs as well as inputs, including land lease markets and direct benefit transfer of all input subsidies — fertilisers, power, credit and farm machinery.

Implications

• Demand for legal status to MSP could strengthen: Farmer leaders are already asking for the legal guarantee of MSPs for 23 agri-commodities.
• Their demand could increase to include a larger basket of commodities.
• Demand for privatisation: There could be demands to block the privatisation reforms of public sector enterprises — Air India, for instance — or to scuttle any other reform for that matter.
• The net result is likely to be slowing down the economic reforms that are desperately needed to propel growth.

Consider the question “The latest Situation Assessment Survey of the NSO reveal the low average agri-household income in India. All out measures need to be taken to increase rural incomes in a sustained manner. In the context of this, suggest the measures to increase the farmers’ income and challenges in it.

Conclusion

The most important lesson from the repeal of the farm laws is that the process of economic reforms has to be more consultative, more transparent and better communicated to the potential beneficiaries. It is this inclusiveness that lies at the heart of democratic functioning of India.

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