Along with incomes, agri needs an investment push

The agriculture sector has been charging increasing prices for the goods it produces. AFP
The agriculture sector has been charging increasing prices for the goods it produces. AFP

Summary

While allocations to the agriculture sector have been increasing, much of it is going towards current subsidies rather than forward-looking investments.

In this week’s budget, the last before the 2024 general elections, allocations and initiatives for the farm sector are expected to be in focus. Between 2016-17 and 2023-24, overall budgetary allocations to the agriculture sector increased about three-fold. The previous budget allocated 1.25 trillion to the ministry of agriculture, with about 80% earmarked for schemes entirely funded by the central government. While allocations are increasing, much of it is going towards subsidies rather than forward-looking investments.

In recent years, direct income support to farmers through the PM-Kisan scheme— 6,000 per year to farm households—has come to dominate expenditure. For 2023-24, PM-Kisan had a budget allocation of 60,000 crore. PM-Kisan, along with two other schemes focused on crop insurance and interest subsidy to farmers, together received 96,000 crore in 2023-24. While this helps farmers in the short term, the long run is a different story.

The agriculture sector has been charging increasing prices for the goods it produces. While this should lead to an overall improvement in the finances of farm households, farmers face a rise in input costs as well. This results in very slow growth in net income, or the ‘profitability’ of farm households. Further, as a recent study by the Reserve Bank of India shows (and which has been supported by similar studies in the past), farmers rarely get anywhere close to the full proportion of the price of food that is charged to the end-consumer, with the remainder taken away by traders and retailers further down the supply chain.

Terms of trade

According to a 2023 Niti Aayog study by Ramesh Chand and Jaspal Singh, the so-called terms of trade (effectively, the ratio of agricultural to non-agricultural prices) has moved sharply in favour of agriculture, and against industry. In layperson terms, this means that farmers earn higher prices for the goods they produce (agricultural produce), relative to what they have to spend on non-agricultural goods. With more remunerative prices for agriculture relative to non-agriculture, farmers should see their incomes and finances improve.

According to the authors of the study, till about 2006-07, the terms of trade showed no clear trend, but began to rise sharply after that period. “This implies that price trends have become more and more favourable for agriculture and farmers during the 15 years following 2006-07," the authors say. However, as they point out, costs have been rising too, forcing output prices to rise as well, with little change in net incomes after costs.

Gains and losses

Another issue further squeezing farm incomes is the fact that the agricultural supply chain—from farmer to end-consumer—has many intermediaries, each of which takes their cut. A survey of farmers by the RBI between December 2022 and February 2023 showed that depending on the crop, farmers earned between 33% (brinjal) and 70% (moong dal) of the final price paid by the consumer.

Of the 13 crops tracked, the share of farmers improved in six between 2018 and 2023, led by pulses. Among crops in which their share declined was rice, a staple. Further down the chain, the study found that for all commodities, “retailers’ mark-ups were found to be generally higher than those of the traders in both production and consumption centres, which may reflect significant product loss at the retail stage, especially for perishables. Also, the traders’ and retailers’ mark-ups for non-perishables were lower than perishables."

Investment vs subsidies

The RBI study argues that while “within-market competition"—an increase in the number of traders in a mandi—doesn’t affect traders’ mark-ups, more mandis in a district lowers trader margins. “Overall, the survey findings suggest that further development of agricultural markets, warehouses, pre-processing facilities, ripening units and cold storage are critical. These would help in improving competition, supply management and also reduce supply chain wastages," the study concludes.

It is in this context that the agriculture budget must be seen. To really improve farm incomes in the long run, more public investment in farm infrastructure is required. However as the Niti Aayog paper shows, subsidies have far outstripped public investment in agriculture by roughly a factor of three in most years. Thus, while the agriculture budget has grown, what may be required is shifting that mix of spending toward public investment.

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