The agricultural core of the macroeconomic problem today
There has been a total absence of the kind of syncretic policy we should have had between the Centre and states on the interlinked issues of agriculture, water, commerce and finance
Agriculture forms the problematic nucleus of the macroeconomic knot which ties us up. It called out for attention even before the pressing necessity of having to cope with a 10-day farmers’ agitation starting 1 June. What led us to this terrible state of affairs?
Agriculture (along with agricultural taxation) is on the state list of the Constitution. Strictly speaking, there should never have been a Union ministry of agriculture at the Centre. After the egregious neglect of agriculture by the Nehruvian focus on big industry, which was transmitted to the states, we hit the wall of foodgrain insufficiency in the 1960s. It was the Centre’s trespassing on to agricultural territory that solved the cereal sufficiency problem, even if the problem itself was largely a result of priorities set at the Centre. Cereal anxiety led the Centre to offer minimum support prices (MSPs) for the major cereals, which distorted cropping patterns into the “cerealization” of agriculture, as it is called.
Fast forward to the present time. The cost of food is an ever present threat to the acceptable inflation limits (4% with a 2% band on either side) adopted by the Reserve Bank of India (RBI), and even without that, runs up against the low inflation tolerance of the Indian consuming public. We continue to follow the long-standing policy of trying to keep down the price of foodstuffs by subsidizing agricultural inputs. Zero pricing of power for agriculture has indeed led to enhanced land productivity, but at the expense of over-mining ground water and seriously threatening our survival in the not too distant future.
The burden of zero-priced power for farmers was meanwhile borne by the state power sector utilities, leading to a build-up of power sector debt and default to the banking sector. The problem was finally sought to be resolved by shifting the debt build-up to state governments under the Ujwal Discom Assurance Yojana (UDAY) scheme formulated by the Centre in 2015. State governments which have opted for it are mandated to absorb a stated percentage of annual losses of power utilities, to incentivize them into right pricing of power for farmers. The evidence so far suggests that states prefer to shoulder the fiscal costs rather than charge farmers a non-zero price for power.
In the Union Budget 2018, for the first time, there was a national commitment to MSPs across the board for all crops, set at 50% above the cost of production. Disregarding the debate over how cultivation costs will be configured, this was for the first time a national policy of crop neutrality in agriculture, although the responsibility for actually delivering on the MSP promise is split in a confusing way between Centre and states, depending on the crop.
The Commission for Agricultural Costs and Prices (CACP) posts MSPs on its website for foodgrains, oilseeds, sugarcane and some non-food commercial crops (23 in all, not counting variants). State governments can optionally announce a further enhancement to the MSP for their farmers for these crops. The whole picture is muddied by the fact that the open-ended commitment to absorb all produce at the announced price, implicit in an MSP, is most usually not honoured, on account of either fiscal or warehousing limits. There is the further problem that the MSP is payable to owners and not to tenants actually cultivating the land. The MSP structure of the CACP is thus fairly ragged at the margins.
For crops other than those in the CACP set, state governments step in with an MSP for crops of special interest to them (the term MSP is technically applicable only to the CACP set of crops, but the supplementary state government schemes function essentially like MSP). In these cases as well, the promise was most usually reneged on.
When the price of onions in Madhya Pradesh crashed at the time of the rabi harvest in 2017 to 50 paise per kg, there were farmer riots, which were quelled by police firing. The state government re-constituted price support into a Bhavantar (price differential) scheme—the Bhavantar Bhugtan Yojana—with a commitment to top up the farm gate price in case it fell below a threshold level. This year, the farm gate price of the onion harvest is reported to have fallen further, to a low of 30 paise per kg. The announced threshold price for onions was Rs8 per kg.
With that kind of a market price crash, Bhavantar has basically morphed into a full-fledged MSP, the only difference being that there is no government procurement, and therefore no need for public warehousing. Before onions this year, there was the garlic price crash. Both onions and garlic are storable crops which have been bought by traders at throwaway prices for slow release later. The key beneficiary of a scheme like Bhavantar is the trader oligarchy which has its pincers into the farm sector.
The fiscal pincers matter too. There is the overarching need to contain the growth of government debt, whether at state or central levels, which leaves little room for expenditure accommodation of the transparent variety (there is a lot of expenditure postponement and such other non-transparent adjustments going on). At the present juncture, where international oil prices are rising, there is pressure on the Centre and all states to reduce excise and sales taxes on diesel and petrol—diesel in particular. A tax cut will reduce tax revenue because the demand for petroleum products is, in general, not price elastic.
So that is the macroeconomic knot today. If the Centre and states do not reduce diesel taxes, there will be the kind of transport-pushed inflation impact that RBI’s monetary policy committee looks at with disfavour. If tax revenues from petroleum taxes do indeed fall at the Centre or states or both, there will be less room for paying farmers their promised due. The problem will be greatly reduced, although not eliminated, if the trader oligarchy can be broken.
Some years ago, the existence of an onion trader cartel was established in a suo motu investigation by the Competition Commission of India (CCI), but it did not result in an order. In any case, none of the orders of the CCI have ever been able to successfully surmount legal challenge. In the Indian situation, formal court-mediated attempts to break trader cartels or impose penalties on them are unlikely to work.
The only way out of the buyer stranglehold farmers struggle with is if the attempt to develop an electronically linked National Agricultural Market (the e-NAM scheme) were really up and working. A bid to expand the e-NAM network was also promised in the budget this year. The scheme could only have made a material difference if it had been accompanied by enough warehousing capacity with quality certification. There does not seem to have been enough progress to have stemmed farmer distress.
The agriculture sector employs half the labour force, but contributes very little to the world-beating gross domestic product (GDP) growth rates we aspire to. If non-agricultural sectors were to absorb the labour force into jobs at a sufficient pace, the decline of agriculture as a provider of anything like a stable or adequate livelihood could perhaps be countenanced. But that is not happening either. So we desperately need to shore up the quality of livelihood in agriculture to keep our demographic dividend economically engaged.
There can be no getting away from the need to formulate a national approach to power pricing for farmers, the implications of right-pricing of power for the cost of cultivation, and the further fiscal implications of guaranteeing farmers a 50% rate of return above that cost of cultivation. Until these issues are tackled at the national level, states will continue with zero pricing of power for farmers. The Pradhan Mantri Krishi Sinchai Yojana proposes to replace electric-powered irrigation pumps with solar pumps, which will reduce the fiscal subsidy for power, but calls for a solar pump subsidy, and in any case does nothing for the groundwater level. There is also no consistent policy with respect to agricultural exports. There has been a total absence of the kind of syncretic policy we should have had between the Centre and states on the interlinked issues of agriculture, water, commerce and finance.
Meanwhile, alternative systems of intensified crop cultivation came to India at least 20 years ago, but have not achieved widespread adoption, even though they offer a way to get higher productivity while using less water and seeds. The method started out with rice, but has now extended to most crops. The key is wide spacing of fewer plants, use of organic manure, conserving nutrients by careful weeding, and applying water in a targeted manner to the plant rather than wastefully to the entire plot of land. A Huffington Post article, dated 15 May, by John Vidal states: “In Bihar, one of India’s poorest states, more than 335,000 hectares of rice are grown using SRI (system of rice intensification) methods… and yields have increased dramatically.” The potential yield increase in output per unit of water is estimated at 64%. He quotes Norman Uphoff, a Cornell University professor, who has been a tireless champion, to say that the initial hostility towards SRI was because it “came from the grass roots and not the well-resourced global agricultural industry, which for 50 years has invested heavily in genetics, mechanisation, improved seeds and the use of inorganic fertilisers and pesticides.”
Vidal reports that the science journal Nature endorsed SRI in 2017. With that, attitudes towards intensified cultivation should begin to change. What is needed now is to speed up the rate of adoption in our water scarce country.
Indira Rajaraman is an economist.
Comments are welcome at email@example.com