In this election season, the gravy train of farm support has already started moving. Minimum support price (MSP) hikes, income support schemes and loan waivers are estimated to be anywhere between one to five trillion rupees and are bound to figure in election manifestos.
Trade-offs apart, all handouts and subsidy have a tendency to be irreversible and difficult to withdraw once introduced. These interventions remain anodyne without really addressing the deeper structural issues to put Indian agriculture into a virtuous cycle.
The agricultural sector requires structural reforms, breaking free of incrementalism and going beyond grain-centric food security-oriented architecture.
The problems are also clear: How do we handle surplus production? How do we mitigate price volatility and give better value-realisation to the farmer? How do we improve the income of 80% of farming households who face increasingly marginal economics?
Also read: Farm Loan Waivers and Corporate Defaulters are Two Sides of the Same Coin
A method to this madness must be found. After all, unrestricted doles, handouts and waivers help the bigger and better-off farmers disproportionately more.
Of 126 million farm holdings, 85% [with 87% farmers] belong to small and marginal farmers, accounting for 44% of land area and only 8% of large agricultural households hold as much land.
Unless it has a cap, the criticism that Rythu Bandhu scheme of Telangana faced – despite being a programme that reached all – of being in favour of bigger farmers will continue.
Farmers at a market. Credit: Reuters
More than 65% of small and marginal farmers either don’t take loan or borrow from moneylenders and only 14% of marginal and 26% of small farmers take bank loans. On the other hand, 63% of large farmers have borrowed from formal sources bank with much higher unit of loan.
This conceptual problem lends itself to a simple solution: It is better to limit loan waivers to the average indebtedness figure and then hand it over as a direct bank transfer (DBT).
These restricted handouts will limit fiscal deterioration and just about save the system from being scelerotic. For a systemic solution to credit risk and access to credit, it is better to formalise money lenders and recognise them as NBFCs who in turn will be permitted to charge interest up to 5% above the bank rate.
Golden handshake needed
The problem with MSPs and farmers getting a fair shake is an altogether different animal. MSP covers a very small percentage of farmers. Procurement, though meant to be a price stabilisation, covers only 6% of farmers for wheat and rice and even then we end up with 69 million tonnes against the required buffer stock of 31 million tonnes.
For moving farmers away from grain-centric cultivation or to encourage them for crop diversification, an easy starting point is restricting procurement to a maximum of output per farmer household.
Farmers end up getting a low share of the end consumer price because sales channels have layers of intermediaries. Direct sales or sale to retail chains or large scale processors – anything that makes a shorter channel – gives them better value. The presence of commission agents in the chain diminishes value. That is why government procurement with a shorter chain is so popular.
But what is required is stranglehold of APMC Act to go with market yards continuing to be there as one of the channels. Farmers have proved to gain when they have choice of channels. Marketing including commission cost can be as high as half to two third of the consumer’s price in fruits and vegetables.
Structural problems
In one sense, India’s ‘farm problem’ and its employment problem are two sides of the same coin. There is evidence to suggest that more educated and semi-educated young people are entering into disguised unemployment within the farm sector.
Non-farm income is a bulwark against this. A natural place to find this will be the agri-value-chain and agriculture-based industry. The employment and income found there is one way to escape farm distress, but it won’t be an easy task. Investment in agri-processing, agri-grading and sorting, cold storage and warehousing should be encouraged in the rural sector under private or PPP mode. This will help in adding value to agriculture produce and create jobs in rural areas.
Taking a step back though, fragmented farm-holding is inevitable. India has an average holding of around 1.13 hectares, with small and marginal farmers accounting for 72% of the total but owning only 11% of the land.
Also read: Without Rise in Farm Income, Congress’s Loan Waivers Won’t End Rural Distress
While the agri-system’s requirements are credit-capital, technology and economies of scale, these fragmented holdings militate against it and small farmers face imperfect market for purchase of inputs and sale of produce. Land records are antiquated and far cry from functional. Efforts at land consolidation have met with resistance. Legal banning of tenancy has created concealed or oral tenancies.
If contract farming is a way out, it is necessary that land lease market is formalised with government being at the centre as a witness and protector through the Taluka offices. If this is done the owners who are better suited for non-farm jobs can move out without the fear of being dispossessed and they can earn rent too. This will attract private players to invest in making the farms more productive.
Even the sharecroppers can invest with the assurance of long lease and will have a claim on insurance and credit. Contract farming by the retail chains and large processors can also take place who will bring in capital technology and entrepreneurship to change the agricultural eco-system.
What do about subsidies?
A farmer works in his sugarcane field. Credit: Reuters/Amit Dave/File photo
Lastly, continuing input subsidies for water, power and fertilisers along with a bailout is akin to letting go of the hand-brake and pressing the accelerator at the same time. Broadly-speaking, input subsidies are not only regressive, distorting and fiscally burdensome, they provide incentives for overuse, overdrawal and wastage.
What should be done?
On water, use-efficiency is as low as 40% in some projects with the presence of flat pricing of water. Water charge collected does not cover operation and maintenance cost making repair and up gradation a casualty and eventually shrinking the command area. This needs to be reversed to cover O&M charges, emphasis shifting to maintenance and management rather than construction. This requires resetting the subsidy.
On power, the subsidy has exacerbated over-exploitation of ground water by influencing choices for water-intensive crops in water-sensitive regions.
Also read: Telangana is Proof Farm Loan Waivers Aren’t a Long-Term Solution
The dissociation of tariffs from usage to a flat rate associated with horsepower of pump sets irrespective of water use or electricity consumption has literally made it free power. In the process, farmers changed their crop choices and electricity utilities also managed to hide their inefficiencies. Can this opportunity be utilised to meter the agricultural connections and provide separate feeder with three phase for supply to agriculture so that over-usage of farmers and inefficiencies of the SEBs be tracked and acted upon?
Finally, fertiliser subsidies have led to gold plating the accounts of fertiliser companies. Urea reigns supreme regardless of soil type because it is highly subsidised. This is at the cost of phosphoric and potash. Appropriate fertiliser usage can reduce expenditure and increase production whereas over-usage can reduce production.
Reported declining crop yields indicate a feeble response to over-usage of nitrogenous fertiliser. If the subsidy needs to be revisited, preferably money should be passed on as direct benefit transfer and balanced fertiliser usage should be encouraged in the process.
But will Indian state deliver on this agenda or conform to its a reputation of a soft state? That may be a trillion rupee question.
Satya Mohanty is Former Secretary (Higher Education), Government of India & currently Adjunct Professor of Economics in Jamia Milia Islamia University.