An alternative agenda for farm support
MSP and loan-waiver policies are mere palliatives, neither sustainable nor particularly effective
In the last four years, Indian agriculture has clocked an average annual growth rate of a mere 2.5% against the economy’s growth rate of 7.2%. India’s agri-trade surplus has almost halved. The profitability of various crops has gone down by a third and real wages of farmers have fallen. Gross value added of agriculture has slumped, mirroring a massive drop in agriculture prices. The deflation has continued into 2018.
If the monsoon remains fairly normal in 2018, as forecast, it would prop up grain production sufficiently to prevent agriculture prices from recovering from their multi-year lows.
Indian farmers have been squeezed by low prices and need urgent help. The government’s minimum support price (MSP) hike last week, however, forgets past lessons. Countering low farm-gate prices through hefty MSP increases has failed time and again due to the limited reach of the government’s procurement mechanism and the lack of adequate and timely budget support. Meanwhile, MSPs fixed without reference to global prices have led to the twin problems of unbalanced cropping patterns and wide divergence of Indian prices from international prices. There is a pressing need to move away from this distortionary MSP regime.
Meanwhile, loan waivers, resorted to frequently in recent times, serve as palliatives, providing momentary relief whilst draining state exchequers and worsening credit indiscipline amongst borrowers. India needs to move away from these waivers too.
The farm crisis is real and grave. Elections are also near. In this scenario, what would be popular as well as a better alternative to MSPs and loan waivers?
The answer lies in direct income transfers that are less distortionary as a concept, and unburden the government of the liability to procure, handle and dispose.
Two states have experimented with such transfer schemes in recent times. The Madhya Pradesh government introduced the Bhavantar Bhugtan Yojana (price deficiency payment scheme), which offsets the losses of farmers selling below MSP through direct cash transfers. Though flawed in its implementation, the scheme has many potential benefits as it does not distort market prices. The major drawbacks include collusion between traders and farmers to show lower sale price, burden on the exchequer due to sale of poor quality stock in the absence of grading and assaying, and the possibility of stock recycling.
The Telangana government’s recent Rythu Bandhu scheme, which gives land-owning farmers ₹4,000 per acre before a crop season to meet input expenses, is both popular and promising in its approach—it doesn’t distort markets. There is a need to fine-tune this to tackle loopholes like the scheme’s inability to monitor expenses made with the transfer and the non-inclusion of tenant farmers in it.
These schemes spell immediate relief for farmers. However, even direct transfers are a palliative which can only supplement farmer incomes to a limited extent. We need to look at three medium- and long-term solutions.
First, there is a need to augment net farm household incomes with non-farm incomes. The reality is that the terms of trade are against agriculture; the share of agriculture in gross domestic product is poised to decline further. It cannot continue to sustain the large number of households dependent on it. According to a NITI Aayog paper, for Indian agriculture to be economically feasible, nearly 84 million individuals, i.e. 25% of the rural workforce, needs to be moved out of it. Further, various economic indicators from rural India suggest that it is the non-agriculture part of the rural workforce which is doing well. There is, thus, a very good case for deploying additional budgetary resources to create non-farm employment opportunities in rural areas.
Second, there is a need for large-scale initiatives for information dissemination among farmers to enable them to make rational cropping decisions. The main reason for glut situations is farmers responding to the price rise of certain commodities by overproducing them in the next season in an uninformed and unplanned manner. This used to be called the sugar cycle of glut and shortage, but it now affects every commodity.
Illusionary price signals from MSPs or the current season’s realization should not be the primary basis for the cropping decisions of Indian farmers. Instead, a robust price discovery mechanism through a well-functioning derivatives market needs to be put in place for various agricultural commodities to aid cropping decisions.
Third, there is a need to exploit India’s export potential and boost farmer incomes through exports. Despite being the second largest producer of agricultural products in the world, India’s total agriculture exports account for only a little over 2% of world agri-trade. In the last few years, our exports have dwindled, even though there is a huge opportunity for farmers to gain from exports.
This needs stable trade policies; ad hoc trade policies and abrupt restrictions on exports preclude farmers from releasing export profits, besides preventing traders from developing reliable international trade relations.
These three sustainable measures, as well as income transfers, need to be taken up on a priority basis. The loan waiver and MSP mechanisms are just not sustainable.
Sanjay Kaul is managing director and chief executive officer, NCML.
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