Remunerative Farming in India and its Shortcomings
Farmers’ protests regarding low harvest prices were a recurring matter throughout the harvest period. A record harvest of paddy and other crops was expected through this harvest period. Market arrivals start from October and end until December across India.
Features of Indian Agriculture
In the background of this debate, two long-standing features of Indian agriculture are notable:
- Indian agriculture is very unremunerative
- It has been heavily regulated by the govt and guarded against the free play of economic process
- Why is the new legislation introduced?
- According to the government, the new Bills gone by Parliament plan to make it easier for farmers to sell to and produce for the private sector.
- The hope is that liberalizing this world and allowing greater play for the economic process will make Indian agriculture more efficient and more remunerative for the farmers.
In this context, it’s important to know a number of the fundamentals of Indian agriculture.
Basics of Indian agriculture
(1) Workforce engaged
At the time of Independence, about 70% of India’s workforce (a little but 100 million) was employed within the agriculture sector.
Even at that point, agriculture and allied activities accounted for around 54% of India’s value.
Over the years, the contribution of agriculture to national output deteriorated abruptly. As of 2019-20, it had been but 17% (in gross value-added terms).
And yet, the proportion of Indians engaged in agriculture has fallen from 70% to only 55%
As the Committee on Doubling Farmers’ Income (2017) observed, “the dependency of the agricultural labor force on agriculture for employment has not deteriorated in proportion to the dwindling influence of agriculture to GDP”.
While the number of individuals hooked into agriculture has been burgeoning over the years, the typical size of landholdings has become reduced sharply — even to the extent of being unviable for efficient production.
The statistics show that 86% of all land-holdings in our country are small (between 1 and a couple of hectares) and marginal (less than 1 hectare — roughly half a football field).
The average size among marginal holdings is simply 0.37 hectares which hardly provides enough income to remain above the poverty level.
The combined results of several such inefficiencies are that the majority of Indian farmers are heavily indebted.
The statistics display that 40% of the 24 lakh households which function landholdings smaller than 0.01 ha are indebted. The typical amount is Rs 31,000.
A good reason why such a high proportion of farmers is so indebted is that Indian agriculture — for the foremost part — is unremunerative.
(4) Buying & selling
Another way of understanding the plight of the farmers relative to the remainder of the economy is to look at the Terms of Trade between farmers and non-farmers.
Terms of Trade is the ratio between the costs paid by the farmers for his or her inputs and therefore the prices received by the farmers for his or her output.
As such, 100 is the benchmark. If the ToT is a smaller amount than 100, it means farmers are worse off.
As the data shows, ToT swiftly enhanced between 2004-05 and 2010-11 to break the 100-mark but since then it’s deteriorated for farmers.
A key variable within the debate is the role of minimum support prices. Many protesters fear governments will roll back the system of MSPs.
MSPs provide “guaranteed prices” and an “assured market” to farmers, and save them from price fluctuations. This is often crucial because most farmers aren’t adequately informed.
But although MSPs are announced for around 23 crops, actual procurement happens for only a few crops like wheat and rice.
Moreover, the share of procurement varies sharply across states. As a consequence, real market prices — which the farmers get — are every so often below MSPs
Significant efforts from the Union and state governments are needed to form arrangements for ensuring remunerative prices.
The Union government took the policy decision to ensure a minimum support price (MSP) to hide a minimum of 1.5 times the assembly cost if prices fall below it. Towards this end, the Centre announces MSP for 25 major agricultural commodities annually in both crop seasons.
Problems in Implementation
The bigger challenge is for the announced MSP to be translated to real gain in farmers’ incomes. It’s a big task, and needs significant budget allocations and support from state governments.
Several states have different levels of capabilities. Some states like Haryana and Punjab are historically in a better position to acquire, while others like Bihar, Odisha and other eastern states have limited capabilities to acquire.
Farmers in Haryana and Punjab, thus, receive higher prices than farmers in East Indian states for equivalent crops, including paddy and wheat. there have been no proper procurement mechanisms for pulses, oilseeds and other crops — except paddy and wheat — since the revolution.
During the previous harvest season, for instance, the market value for soybean was 6-13 per cent but the MSP and for groundnut 20-40 per cent but the MSP in most of the markets.
This discriminatory policy hugely disincentivized growing these crops, leading to huge deficits and high-import dependency. India imported 70 per cent edible oils for domestic consumption annually, for instance, incurring a Rs 70,000 crore cost to the exchequer.
The Centre introduced Pradhan Mantri-Annadata Aay Sanrakshan Abhiyan (PM-AASHA) in 2018 to correct policy bias in procurement operations and ensure farmers growing pulses and oilseeds and truly get the MSPs they were promised for his or her crops.
The policy also took under consideration differences in crops, state capabilities, local preferences, feasibility and gave flexibility to state governments to settle on different operational modalities to make sure MSP for every crop.
PM-AASHA has three sub-schemes: subsidy Scheme (PSS), Price Deficiency Payment Scheme (PDPS) and therefore the pilot of personal Procurement and Stockist Scheme (PPSS).
PSS is actual procurement by Union/government procurement agencies at MSP from the farmers during the harvest period. it’s going to be adopted where there’s the sizable concentration of production, giving economies of scale to procurement agencies in handling procurement operations.
Under this scheme, the Centre compensates states up to 25 percent of production for any losses. Although PSS was alive for quite three decades for paddy and wheat, its implementation for procuring pulses and oilseeds was poor.
Under PM-AASHA, PSS is implemented for procurement of pulses, oilseeds and copra at MSP.
Experience displayed PSS application was hindered by several factors:
- Lack of awareness about MSPs
- Lack of capital with procurement agencies
- Arrangement of gunny bags
- Transportation facility
- Delayed payments to farmers
- Logistic arrangements like godowns
- Processing mills within the procuring areas
- Disposal of procured stocks
- Open market operations
- Reimbursement of losses
Under PDPS, farmers are paid the difference between MSP and therefore the modal price of the market without actual procurement. It’s the foremost efficient method because it eliminates all logistic costs associated with procurement, storage and offloading. it’s advisable to implement PDPS for crops with scattered and thinly distributed production, like oilseeds.
Under PPSS, private players can procure oilseeds at the state-mandated MSP during the notified period in select districts or markets of agricultural produce market committees, that they might be paid a service fee not exceeding 15 percent of the notified support price.
States are liberal to choose among these sub-schemes for oilseeds. The foremost suitable mechanism for oilseeds, however, is PDPS because it doesn’t require physical procurement by government agencies and depends on market signals and market players for purchasing at ongoing market prices.
Historically, oilseed prices were mostly determined by the free play of domestic and international market participants with almost zero import tariff rates and negligible government intervention by its MSP procurement.
With India importing about 70 per cent of its domestic consumption annually, Indian edible oilseed prices are more aligned with international prices than influenced by domestic market imperfections.
Under this scenario, the worth mechanism of oilseeds is decided by the free economic process. It is, thus, important for state policy to not intervene in the free economic process of oilseeds and price deficiency payment through direct money transfer by using the already existing Jan Dhan-Aadhar-Mobile (JAM) trinity.
The actual procurement at MSP cannot reach quite 20 percent of the peasantry. The augmented procurement of pulses and oilseeds through PSS and PPSS, thus, can’t be an answer to raising farmers’ incomes. The particular procurement reached only five per cent of market arrivals for pulses and oilseeds in the 2019 crop season.
PPSS may be a non-starter in many nations thanks to a limit imposed on a service fee to be paid by the government to non-public procurement agencies, as 15 per cent is uneconomical in procuring from scattered and thinly distributed oilseeds production areas.
At the end of the day, thus, the sole alternative is PDPS because it doesn’t require physical procurement, avoids logistics and storage expenditure is free from operational inefficiency, corruption and reaches all farmers.
The PDPS schemes can cash in of giant procurement, storage and distributional networks of personal players in procuring, transportation, storing and disposing of oilseeds, including price deficiency payment to farmers using the JAM trinity. This will also reduce the burden on governments, enhancing market efficiency and price off.