Structural farm reforms are key

In recent years, the Centre has taken several initiatives such as the Pradhan Mantri Fasal Bima Yojana (PMFBY), electronic National Agricultural Market (e-NAM), soil health card, neem-coated urea and so on to reduce agrarian distress. However, these have not been adequate to yield the desired result in a short span of time.

Many facets

There are multiple dimensions to agrarian distress. First, input costs have gone up significantly recently while the farm gate prices of agricultural produce have continued to remain subdued.

Second, the bulk of farming activities in India is undertaken by marginal farmers, share-croppers or landless agricultural labourers with limited access to institutional finance. Third, the value chain in the agricultural sector has been exploitative as only one-third of the retail prices paid by final consumers reach the producers, unlike two-thirds in case of milk.

Fourth, the public distribution system does not have the capacity to undertake procurement operations for 24 crops for which minimum support price (MSP) is announced.

Fifth, although PDS is inefficient, an alternative mechanism is yet to emerge, which can ensure MSP to farmers during a period of bumper harvest.

Sixth, post-harvest technology is underdeveloped and farmers’ participation in such activities is limited. Seventh, monsoon dependency is very high, limiting crop diversification to a great extent.

Lending to agriculture is a major component of priority sector lending in India. The target for bank lending to agriculture has been revised upwards every year.

Moreover, lending cost to agriculture has been subsidised through interest rate subvention. The Government also provides fertiliser subsidy year after year besides food subsidy through PDS.

On the margins

The most vulnerable section in the farming community are marginal farmers, share-croppers and landless agricultural labourers. They have limited/negligible access to institutional finance. Farmers’ suicide has been typically high in this group mainly due to the financial burden arising out of borrowing from the informal sector. Loan waiver hardly helps this group. This year’s budget has indicated that the NITI Aayog would devise modalities for extending credit to this segment of people from the formal sector.

Historically, crop failure has been the major cause for agrarian distress in India. Ironically, agrarian distress has now got aggravated at a time when India’s farm output is at its peak. This is a clear case of market failure for which farmers do not have any cover. PMFBY provides protection against crop failure. No such protection is currently available to farmers for distress sale. Moreover, farmers do not use the commodity market for hedging. Procurement is limited to major crops like paddy/rice and wheat, sometimes cotton, oil seeds, and pulses.

This year’s budget not only proposes to raise the MSP by at least by one and a half times the cost of production, but also indicates a revamping of the agricultural marketing system. The NITI Aayog has to provide a foolproof mechanism to ensure remunerative prices to farmers. It is not clear how the NITI Aayog will craft an alternative mechanism to PDS to do this.

Will it compensate farmers for selling their produce below the MSP like the Bhavantar Scheme (difference between MSP and market price) introduced in Madhya Pradesh? A cheaper alternative could be to introduce a composite crop insurance scheme to cover both crop failure and market failure.

MSP is determined on a cost-plus basis as suggested by the Commission for Agricultural Costs and Prices (CACP). As of now, MSP is higher than one and half times for several crops like wheat, barley, gram lentil, rapeseed and mustard. For the remaining crops, farmers may benefit where MSP is well below one and half times the cost.

It is not clear which cost has to be considered to fix the MSP. It appears that imputed value of family labour would be included to the actual cost. This would benefit farmers in a limited way depending on the current MSP. The benefit to farmers will be significantly high if the land’s lease rental is also included in the cost. But it has fiscal implication too, which may be prohibitive.

Beyond the scope

Farmers produce several commodities that are outside the MSP. Budget FY19 has proposed the introduction of ‘Operation Greens’ for perishable commodities such as potato, tomato and onion to stabilise their prices, which can benefit both producers and consumers.

As proposed last year, the remaining APMCs will be linked to e-NAM by March 2018. As a part of revamping the agricultural marketing system, the idea is to upgrade 22,000 haats (local markets) to Gramin Agricultural Markets so that farmers can directly sell their produce to consumers without middlemen. This is likely to go down as a major marketing reform, provided it is implemented carefully by involving all stakeholders such as farmers, proposed farmer producers companies (FPCs), and State governments. FPCs with a turnover of up to ₹100 crore will enjoy a tax break for five years.

In order to double farmers’ income, there is a need to involve them in post-harvest technology through innovative programmes. The value addition is large in the case of consumer products such as ketchup, jam, wafers, pickles and so on. Farmers can participate in this process through FPCs.

Big challenge

The interlinking of rivers — a flagship programme of the Government — can help improve crop diversification in a big way. As a part of diversification, the finance minister has made sizeable allocations for forestry, animal husbandry and the restructured National Bamboo Mission.

Addressing multiple problems in a single budget is difficult. Nevertheless, this year’s proposals aim at breaking the vicious cycle of agrarian distress by sustaining structural reforms rather than providing short-term relief through loan waivers, input subsidies and the like.

The writer was principal adviser and head of the Monetary Policy Department, RBI

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