Why are Indian farmers angry?
Rising input costs and lack of remunerative prices have turned the terms of trade against the Indian farmer
While the Bharatiya Janata Party (BJP) managed to retain its stronghold of Gujarat in the recent state assembly elections, it conceded significant ground to the Congress in rural and semi-rural constituencies. The results bring to the fore the problem of rural discontent, as farmers intensify their protests against non-remunerative prices for their produce across India.
The problem of farm discontent is not confined to Gujarat—India has witnessed an almost eight-fold rise in ‘agrarian riots’ between 2014 and 2016, data from the National Crime Records Bureau (NCRB) shows. Bihar and Uttar Pradesh alone accounted for 84% of the total reported incidents, while Gujarat ranked fifth among all states. These riots include conflict over land and water which have increasingly come under stress owing to weather-related shocks and inadequate policy attention.
In his 2014 Lok Sabha campaign, Narendra Modi had promised to raise farmer incomes and rework the minimum support price (MSP) formula to deliver “50% profits” to farmers. Many farmers, especially among the land-owning class, seem to have been taken in by his promise and voted for him in large numbers.
But the inability to fulfil that promise or make a success of other initiatives such as crop insurance seems to have led to a sense of betrayal among this class. It is worth noting that many of the recent agitations across rural India have been led by land-owning caste groups such as the Marathas in Maharashtra, the Patidars in Gujarat and the Jats in Haryana.
The disappointment among farmers becomes easier to comprehend when one considers the deterioration in their terms of trade, i.e. the movement in prices of items sold by farmers as against the prices of items they buy, either as farm inputs or for personal consumption.
Despite a relatively faster rise in food prices over the past decade, the terms of trade for farmers have largely stagnated or deteriorated since 2010. As the chart above shows, the terms of trade between agricultural and non-agricultural sectors have actually shown a modest improvement between 2010 and 2016 but that has not translated into gains in the terms of trade between farmers and non-farmers. The difference in the two indices stems from the inclusion of “hired labour” as an intermediate input in the construction of the terms of ‘trade index’ for farmers and non-farmers, and the inclusion of agricultural labourers in the overall agri terms of trade index. This suggests that while labourers may have gained over the past few years because of rising wages, this has eroded margins of farmers.
A combination of rising construction activity, introduction of the rural employment guarantee programme, and rising educational enrolment has helped push up rural wages since the mid-2000s, benefiting those at the bottom of the pyramid the most. Supportive global prices as well as relatively steep hikes in MSP ensured that farmers’ margins were protected initially. However, the turn in the global commodity cycle and slowdown in the MSP cycle turned the tide. Land-owning farmers who typically employ hired labourers seem to have been hit the hardest, leading to rising discontent among them. As the chart shows, wage growth has outpaced MSP growth over the past decade.
Indian agriculture has also grown more diverse over the past decade, with horticultural output outpacing production of cereals. Yet, farm policy continues to remain cereal-centric. As a result farmers have had little insurance against the sharp volatility in prices of other crops.
The case of pulses is a classic example. In September 2016, a panel headed by chief economic adviser Arvind Subramanian had advocated higher MSP for pulses. The committee also recommended subsidies to farmers for growing pulses and called for the elimination of ad hoc measures like an export ban on pulses. The government disregarded the advice of the committee, and instead chose to import pulses in large quantities from abroad in order to stabilize prices, thereby breaking the back of domestic farmers who had produced a record harvest in response to the higher prices in the previous season.
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For crops other than rice and wheat, the MSP system is almost dysfunctional, even when MSP is declared by the government.
Even where MSP is functional, i.e. in case of rice and wheat, it is restricted to a few major states. And even for wheat and paddy farmers in these states, the rise in MSP has been very little over the past few years in real terms, i.e., after adjusting for inflation.
Consequently, even after assuming that a farmer growing wheat or rice is able to sell at MSP, the margins remain much below the election promise of 50% profit, notwithstanding a significant rise in MSP in 2017-18.
Thus, a combination of adverse global conditions, rising input costs, and lack of remunerative prices have created a perfect storm in rural India. The government’s unwillingness to devise an effective and remunerative MSP mechanism and its inability to implement effective risk mitigation strategies have left the average Indian farmer high and dry.
The Gujarat verdict may lead to a renewed focus on India’s farm crisis. But that may not necessarily lead to structural solutions to address the problems of Indian farms. It is more likely that populist schemes such as farm waivers may become the norm even though they tend to be counter-productive over the long run.
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