We must not let Indian agriculture turn into an unending tragi-comedy

At least in major cereals, the long-term impact of such tight control seems to insulate the Indian farmer from global price volatility, rather than result in structurally lower prices for Indian consumers.
At least in major cereals, the long-term impact of such tight control seems to insulate the Indian farmer from global price volatility, rather than result in structurally lower prices for Indian consumers.

Summary

  • Farms need a new deal: Combine direct transfers with state-level policies instead of persisting with a one-size-fits-all frame.

The Ides of March came in February. Not in a tragic Shakespearean manner, but in a knotty way nevertheless. Last month saw a resurrection of India’s trickiest vertical in economic policymaking—agriculture—via a political mobilization on the streets of Delhi’s outskirts. Much of it is a throwback to the protests a couple of years ago against the country’s now-withdrawn farm laws, but they do illustrate the unaddressed challenge of Indian agriculture.

Indian agriculture is more than just another vocation. Former prime minister Lal Bahadur Shastri’s ‘Jai Jawan, Jai Kisan’ slogan still evokes mass resonance. This, despite agriculture being far less important in India’s economic scheme of things today compared to 1965 and the Army’s catchment areas for recruitment having diversified to urban centres, a contrast from decades earlier when recruits were largely from farming belts.

While a lot of bytes and decibels are spent on emotional pitches in favour of Indian agriculture, it’s useful to look at the relevant data afresh.

First, does India spend ‘enough’ on agriculture? In the Union vote-on-account for 2024-25, the total outlay for this sector—counting the fertilizer subsidy, food subsidy, PM-Kisan, interest subventions on agricultural credit, crop insurance, etc—topped 4 trillion. To put it in context, that is around 8% of the budget’s total expenditure, second only to defence in its non-interest expenditure pie. Add to it separate outlays from state governments—state-level top-ups for minimum support prices (MSPs), power subsidies, etc—and the amount is likely to go up substantially. By international standards, India is a massive outlier.

As per the Food and Agriculture Organization (FAO), India spent 7.55% of total government expenditure on agriculture in 2022. Comparative numbers for both developed and developing countries are a lot lower: the US is at 0.39%, Australia at 0.59%, Brazil at 1.05% and Indonesia at 2% in the same period.

Besides direct fiscal support, in India there is also credit directed by policy towards agriculture, with banks given hard targets for Priority Sector Lending (PSL) and the bulk of such loan use-cases relating to agriculture. As a result, nearly 12% of total credit in 2022 was extended to agriculture. Comparable numbers elsewhere were lower: the US at 0.63%, Australia at 9.5%, Brazil at 2.1% and Indonesia at 7.6%. The policy results in an implicit burden of hard PSL targets on other borrowers and depositors, as the incremental cost of extending agricultural loans needs to be spread across a base of all bank customers, including non-agricultural as well. In other words, in monetary terms, the Indian taxpayer already spends quite a lot on support for the agricultural sector.

Second, is this all eventually aimed at protecting the consumer instead of the producer (farmer)? As the popular cliché goes, it’s complicated.

On one hand, it is true that the government tightly controls foreign trade in agricultural commodities, often via sudden export curbs as knee-jerk reactions to short-term price volatility in specific commodities. On the other hand, though, at least in major cereals, the long-term impact of such tight control seems to insulate the Indian farmer from global price volatility, rather than result in structurally lower prices for Indian consumers.

(graphic:mint)
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(graphic:mint)

US spot prices of wheat (see graph) are roughly around the same level as Indian spot prices and not terribly higher than the central MSP for this cereal. The US 10-year average spot price, in fact, is marginally lower than the Indian 10-year average spot price. India’s 10-year average MSP is slightly lower than the 10-year average US spot price. At the same time, price volatility is a lot higher in US spot prices than in Indian spot, while the MSP is largely stable. This suggests that India’s policy framework does not lead to dramatically lower wheat prices for the Indian consumer (compared to the US consumer), but it does lead to more stable and predictable outcomes for the Indian farmer.

Third, agricultural spends have a targeting problem. Nowhere is it more acute than in the MSP system. Professor Ashok Gulati estimates that the MSP system’s total coverage is limited to only 5.6% of Indian farmers and just 2.2% of our agricultural produce by value. Juxtapose this with the fact that agriculture today accounts for a much lower portion of rural household incomes than is usually imagined. As per the National Statistical Office’s (NSO) Situation Assessment of Agricultural Households Report 2019, less than half the aggregate income of agricultural households is derived from agriculture. More importantly, the total number of households that derive most of their income from agriculture is less than 40%. In effect, most agricultural households are not farmers at all in terms of their primary occupation, but likely to be plumbers, electricians, cops, soldiers, construction labour and so on, while state policy spreads a large chunk of finite fiscal resources on a smaller (and likely needier) section of agricultural households.

We need a new deal in agriculture. It doesn’t start with spending more, but re-purposing the expenditure. As per the NSO, there are 93 million agricultural households in India. If the entire Union budget outlay on farm subsidies—about 4 trillion—is converted into a direct cash transfer (DCT), it would mean about 45,000 sent to every agricultural household in the country. Properly targeted, would it have a better and more equitable impact on poverty relief than today’s inefficient allocation of what Food Corporation of India procures? Or, can the outlay be devolved to states via a formula akin to the Finance Commission’s tax devolutions? It will enable more bespoke formulae for agricultural support at the state level, instead of one-size-fits-all national subsidies. It will also take political negotiations on agriculture policy away from New Delhi and into state capitals, where each state can devise an appropriate political-economy response.

More of the same isn’t the answer to India’s problems in the primary sector, unless we want Indian agriculture to become a long-running Shakespearean tragi-comedy.

These are the author’s personal views.

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