Unshackling the farm sector

Agriculture and allied activities contributed 14.5 per cent of India’s GDP and 10.5 per cent of its exports in 2010-11. Despite over six decades of economic planning, it continues to provide livelihood support to more than 50 per cent of India’s population.

Of late, buoyed by better terms of trade, increased urbanisation and additional income from government transfers, India’s farm sector has become a potent source of demand for industrial goods and services. It is also a key source of raw material for manufacturing sector.

Poor performance of the farm sector, adversely affects the overall economic performance by its direct and indirect impact on other sectors of the economy. Lower food production leads to food inflation and hike in industrial wages. This adversely affects the cost competiveness of manufacturing sector and ultimately exports. Despite its pivotal role in the economy, India’s farm sector is in crisis because of low yield, crop failure, post harvest losses and low net realisation.

Even though the primary focus of India’s agriculture policy has been foodgrains, its production rose from 52 million tonnes in 1951-52 to just 244.78 million tonnes in 2010-11. During the period 1960-61 to 2010-11, food grains production grew at a compound annual growth rate of less than 2 per cent as compared with the more than 2 per cent growth rate in population. As a result, per capita, food grain availability has decreased to 438 grams per day per person in 2010-11 from 480 grams per day per person in 1960s.

Besides, the supply of non-cereal, protein-rich food items such as egg, milk and pulses is not keeping pace with their increased demand because of growing urbanisation and shifting consumption preferences, making management of food inflation difficult. It would be pertinent to look into the factors that have shackled India’s farm sector from realising its full potential.

Investment vs Input Subsidy

Public expenditure on agriculture is roughly equal to 25 per cent of farm GDP – which is one of the highest in the Asian region, yet agricultural productivity in India remains abysmally low for most crops.

Secondly, more than three-fourth of public spending on agriculture is on input (chemical fertilisers, electricity and water) subsidies and less than one-fourth is on investment.

Such a high proportion of input subsidy in public spending cannot be justified when per unit return on investment in farm infrastructure is substantially higher than that on input subsidy.

Even when it comes to using input subsidies, market-distorting policies prevail.

Deregulating non-urea fertilisers while keeping urea regulated has increased the relative price gap of urea and non-urea fertilisers.

The result is unbalanced use of fertilisers, wastage of nutrients, soil degradation and lower return on per unit of fertiliser use.

Over-use of urea induced by its relatively low price also leads to increasing burden of subsidy, that in turn adds to fiscal deficit.

The coverage of select farm commodities under MSP and public procurement makes the role of price signals in resource allocation ineffective. It leads to sub-optimal allocation of productive resources. Overemphasis on cereals cannot be a good policy when demand for non-cereal food items like eggs, milk, pulses and fruits/vegetables is growing faster than that of cereals.

MSP problems

While higher MSPs may be required to support the high cost of farming, artificially high MSPs will lead to over-production, over-procurement and ultimately excessive subsidy burden, and leave less resources available for capital investment.

High MSPs, along with high taxes (e.g. 14.5 per cent in Punjab and 11.5 per cent in Haryana) and introduction of bonuses (e.g. in MP) are crowding out the private sector from procurement activities in the mandis by artificially raising the price of farm produce.

This leaves farmers at the mercy of public procurement agencies like FCI for sale of their produce. Regulations like Essential Commodities Act (ECA) empower the Central Government to declare any commodity as essential and impose restrictions on its production, marketing and distribution.

The Agriculture Produce Marketing Committee (APMC) Act mandates the purchase and sale of farm products in government-regulated mandis . This has resulted in creation of rent-seeking intermediaries and low net realisation (to farmers) from the sale of the produce. Further, such regulations also restrict inter-state movement of farm produce that could have been helpful in checking local scarcities and ensuring better prices to farmers.

Export bans or introduction of minimum export price (MEP) for agri commodities make India an unreliable supplier -- forcing Indian export at lower prices. India has a notorious history of covert and overt export restrictions with respect to many agri-commodities such as cotton, onion, rice and wheat. Free trade in agri commodities is the least-cost antidote to inflation. Restricting trade in agri-commodities just does the opposite.

What can be done?

Replacing the current practice in public spending of ‘predominance of input subsidy’ by ‘predominance of investment’ aimed at creating or improving agri-infrastructure, in particular irrigation facilities, rural connectivity and intensifying R&D for better yield.

India’s farm sector is deficient in post-harvest infrastructure. Organised retailing (owned and operated by Indians or foreigners) will strengthen rural-urban linkage, encourage agro-processing and reduce wastage of perishable items by improving post harvest facilities.

Cash transfer or income support in place of price support (input and output) is another option that needs serious consideration. Crop insurance is poor in India. It needs urgent improvement for safeguarding farmers from crop failure.

Rationalisation of fertiliser subsidies, by bringing urea under ‘Nutrient Based Subsidy’ (NBS) will help improve fertiliser mix and return on per unit of fertiliser use.

Reforming the archaic laws like ECA, APMC, abolition of levies, freeing up leasing of land and linking the farmers directly to agri-processors and modern retailers can incentivise the farm sector with no extra cost.

A variable export tax system (instead of an outright export ban) can meet occasional domestic shortage of specific commodities. This will also reduce price volatility, yet be predictable and less trade distorting.

Allowing regular imports of agri-commodities (in smaller quantities with the total quantities decided well in advance after assessing the domestic demand and supply situations) will ensure price stability at a relatively lower cost.

Well-functioning future markets in agri-commodities will reduce price volatility by providing a platform to buyers and sellers for hedging their exposure. It will also lead to better price discovery and thus needs to be encouraged.

(Prerna Sharma is a research analyst in agri commodities. Ritesh Kumar Singh is Group Economist of a corporate house.)

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