Agriculture Reforms for Making Indian Farmers Aatmnirbhar

MAKING INDIAN FARMERS AATM-NIRMBHAR

Programme and Policy Reforms Agenda for Agriculture

SUBHASH CHANDRA GARG

Economy, Finance and Fiscal Policy Strategist; Also, Former Finance and Economic Affairs Secretary, Government of India

SUMMARY

India used more than 85% of its approximately 110 million hectares of cultivated area at the time of independence to produce about 50 million tons of foodgrains. More than 70% of the people employed worked in agriculture either as peasants or labourers. They worked very small tracts of land, more often than not as unrecognised tenants. Indian farmers typically converted their labour in food. Farmers’ lot was truly miserable. At the stroke of independence in 1947, India was a massively poor country. Indian agriculture was very traditional which did not even produce enough foodgrains for feeding India’s teeming millions.

First three plans (1951-1966) did not undertake any fundamental reform of agriculture system and essentially continued with the pre-independence system of agriculture production. During this first phase of Indian agriculture, India relied on three strategic interventions to realise its goal of raising annual foodgrains production to 100 million tons. First, bring in additional area under cultivation. Second, increase irrigation. Third, expand availability of fertilisers and improved seeds.

Only marginal gains were made in agriculture and food situation of India during first 20 years, which were also more than neutralised by increase in population. On the whole, the first phase of agriculture development programmes and policy (1947-64) was quite a failure. It did not contribute much to make India aatmnirbhar (self-sufficient) even for food. Actually, 1965 turned out to be the year of worst food disaster for India.

India changed the foodgrains development strategy massively in the second phase (1967-2002). The new strategy was based on three new principal planks- productivity, price and ground water irrigation. This strategy based on wide adoption of semi-dwarf varieties succeeded brilliantly.

The seeds of this spectacular performance were sown in 1963 when celebrated agriculture scientist Normal Borlaug visited India and agreed to supply seeds of Mexican semi-dwarf wheat varieties to India. Indian scientists, actively supported by the government, worked hard and successfully demonstrated the suitability of Mexican seeds for high yield wheat in India. They also bred Indian varieties crossing Mexican seeds with Indian varieties. Semi-dwarf varieties of rice came from the east. India introduced these high yielding varieties at a big scale in 1968-69.

Foodgrains production crossed 100 million tons in 1970-71 and 200 million tons in 1998-99. Foodgrains yields, which were less than 700 kg per hectare in 1966-67, crossed 1000 kg per hectare first time in 1978-79 and 1700 kg per hectare in 1999-2000. Foodgrains yields more than tripled only in 50 years.  India became aatmnirbhar in food and agriculture by the end of 20^th century.

Prior to 1965, Government of India undertook no price support operations in India. The MSP system got introduced in 1965 by implementing the recommendations L K Jha Committee. Food Corporation of India was also established in 1965. The MSP system has got fine-tuned over the years. The Government decided in 2017-18 to provide at least 50% profit over cost of cultivation for all the MSP crops.

The foreign exchange crisis of 1991 did not have its roots in agriculture. 1991 reforms were essentially industrial sector reforms, though depreciation of rupee did benefit agriculture exports as well. Reforms of 1990s literally ignored agriculture sector.

Agriculture programmes saw considerable consolidation and diversification in the last phase of agriculture policy and programme development (2000 to continuing). However, most agriculture development programmes of today are the repackaged versions of the programmes initiated in the second phase (1965-2000).

Agriculture marketing regulatory interventions in India were started for protection of consumers’ interests and streamlining supplies of agricultural raw materials to industries. The first legislation to provide for regulation of agriculture markets was the Berar Cotton and Grain Market Act 1887 became the model for enactment of similar legislations in other parts of the country. Quite a few states enacted such legislations in the sixty years period before the independence.

APMCs, which are essentially spot wholesale marketplaces for agriculture produce, were designed to serve three broad functions- a. to create a market place for agriculture produce, b. to regulate the contracts, practices and intermediary payments to create a fair and low-cost trading regime for farmers and c.  to generate resources for the government to invest in agriculture infrastructure. The APMCs development in the country in first 50 years seemed to serve all these objectives. A big structural mistake, however, turned APMCs into a stranglehold around the farmers’ neck over this period of five decades. This fundamental mistake was total monopolistic nature of APMC system.

The APMC reforms were initiated in 2003 did not address the principal flaw in the agriculture produce marketing- absence of competitive markets, one size fit all type of over regulation of markets implemented in a decentralised manner by organised vested interests, lack of standardisation and aggregation of farmers’ produce, leasing of land not being legally permitted and exclusion of processors and wholesalers on account of storage restrictions. These APMCs reforms, consequently, did not make much difference.

Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 promulgated on 5^th June, 2020 strikes at the root of APMCs’ monopoly over wholesale agriculture produce trading. This Ordinance also virtually abolishes the system of mandi fees. The Ordinance is truly revolutionary in respect of these two fundamental deformities of agriculture produce trading system in the country. The Ordinance does not directly dismantle APMC system (the APMCs continue to live as they are presently within the confines of their physical market yards), but has the potential of massively disrupting them indirectly.

The Ordinance- The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020- promulgated on 15^th June builds on the Model APMC Act 2003 and Draft Model Contract Act 2018 to achieve mainstreaming of contract farming. The Ordinance excludes APMCs' jurisdiction from contract farming.  The contract farming as envisaged in the Ordinance is, in essence, continuation of same artificial construct as has been the case for last 17 years. It also excessively regulates contract farming. This law is likely to meet the same fate what the contract farming provisions in the model APMC law of 2003 met with.

Essential Commodities Act 1955 (ECA-1955) was founded in 1939 as part of the Defence of India Rules. Defence of India Rules were replaced by Essential Supplies (Temporary Powers) Act, 1946. The provisions of ECA when enacted in 1955 were quite similar to the 1946 law. Continuing food-shortages provided justification of food controls in independent India and in the planned economy ushered in 1951.

Food has been the main reason ECA-1955 was sustained over several decades. Hundreds of orders were issued regulating, prohibiting, controlling prices, storage, distribution, consumption and other matters affecting foodstuffs under ECA-1955 by the time 20^th century drew to a close. At some point of time, an adjunct law- Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980- was brought in to take preventive actions against violators of control orders issued under ECA-1955.

When food position became better, instead of eliminating controls over foodstuffs, India resorted to a round-about way to defang the ECA-1955. A new Order called Removal of (Licencing requirements, Stock limits and Movement Restrictions) on Specified Foodstuffs Order 2002 was issued. This Order effectively nullified all controls on buying, stocking, selling, transporting, distributing, disposing, acquiring, using or consuming over a long list of foodstuffs- wheat, paddy/rice, coarse-grains, sugar, edible oilseeds and edible oils issued under ECA-55. The 2002 Order was substantially diluted during 2006-2014. The Government reissued 2002 Order in 2016 but kept some of exemptions, including on onion and pulses, for most of time out of the scope of 2016 Liberalising Order.

The Essential Commodities (Amendment) Ordinance 2020 promulgated on 15^th June does not take foodstuffs out of the scope of ECA-1955 but only modifies the regulatory and control regime in its application to foodstuffs. The Ordinance only modifies the circumstances in which the regulatory and control authority is exercised in case of foodstuffs and in particular while specifying stock limits.

There is actually no need for ECA-55 to remain on statute book any longer. Not only foodstuffs, remaining 7 commodities in the ECA-55 Schedule need no control mechanism today. Like industrial goods, all the five items of agriculture, including fertiliser and hank yarn, need no protection of ECA-1955. To deal with any extraordinary situation in case of disasters, if need be, provisions of Disaster Management Act can be resorted to. Essential Commodities Act 1955 needs to be simply scrapped. 

Ever since independence, India’s agriculture policy and programme strategy focused on increasing production and productivity. Farmers’ income was not the real goal of the policy. Only in 2014, the government specifically mentioned doubling the farmers’ income by 2022 as a policy goal. It is imperative that the agriculture policies and programmes are oriented completely towards increasing farmers’ income by at least five times over next ten years. This requires a multi-pronged strategy built on five critical planks of the policy and programmes:

First, an average farmer’s operational land holding need to become five times than what he cultivates today to raise his turnover to generate five times the profit/income. Second, the farmers need to get stable and predictable prices for his produce, including practically locking-in output prices before he cultivates. Third, the farmers should be able to choose right amount and quality of inputs to economise/reduce his cost of cultivation. Fourth, he should be completely free to get the best out of his land-asset. Fifth, skill-set of farmers is quite limited. There is need for a large-scale skilling required to make farmers earn income from non-farm businesses.

This would require a complete recast of today’s agriculture development programmes, input subsidy regime and minimum support price regime. The expenditure governments incurs under these programmes, which effectively exceeds 4 lakh crores need to be directly delivered to farmers freeing up the input and output markets.

COMPLETE BLOG

Food and clothing are most essential agriculture goods for human survival and happiness. Agriculture is the first organised industry created by human beings to produce food, clothing and medicine, applying human labour and capital.

India has been a pioneer throughout the history of development of agriculture over last 10 millennia, building on its tremendous natural advantages and innovative human spirit and ability. India got reckoned as the most prosperous country for centuries building its income and wealth mostly from agriculture.

Onset of industrial revolution diminished the role of agriculture as producer of income and wealth. India lost its pre-eminence and wealth as industry advanced in the west and remained subdued in India. India had become a very poor country by the time British left in 1947 with 80% of Indians living below poverty line.

Indian agriculture and farmers who had provided all the resources for prosperous empires in India over two millennia had become a pauper- a malnourished poor himself.

Indian Agriculture and Farmers at Independence

India used more than 85% of its approximately 110 million hectares of cultivated area at the time of independence to produce about 50 million tons of foodgrains. More than 70% of the people employed worked in agriculture either as peasants or labourers. They worked very small tracts of land, more often than not as unrecognised tenants. Indian farmers typically converted their labour in food. Farmers’ lot was truly miserable. At the stroke of independence in 1947, India was a massively poor country. Indian agriculture was very traditional which did not even produce enough foodgrains for feeding India’s teeming millions.

Food shortages had made the British Government control food production, supply, trade and commerce. Predecessor of Essential Commodities Act, 1955 had taken birth in 1939 as part of the Defence of India Rules and later as Essential Supplies Act 1946. Fact of food shortages had created and strengthened the mindset of control.

Regulated markets had made their appearance in 1880s. The first regulated market legislation- Berar Cotton and Grain Market Act- was passed in 1887. Seven States had agriculture produce marketing laws in 1950 yet not more than 10% of foodgrains got traded in regulated markets.

AGRICULTURE PRODUCTION POLICY AND PROGRAMMES

India Followed a Policy of Benign Agriculture Neglect (First Phase 1947-1964)

India targeted to produce 100 million tons of foodgrains by the end of third five-year plan (1961-66). Instead India faced its worst foodgrains crisis in the middle of 1960s- during the years 1964-1967.  Foodgrains production collapsed to only 77 million tons in 1965. Prime Minister Shastri implored Indians to eat only once a day. About 10 million tons of wheat- the largest food transshipment project ever undertaken - had to be shipped from the US to India in 1965 to save Indians from starvation and repeat of another famine.

First three plans (1951-1966) did not undertake any fundamental reform of agriculture system and essentially continued with the pre-independence system of agriculture production. During this first phase of Indian agriculture, India relied on three strategic interventions to realise its goal of raising annual foodgrains production to 100 million tons.

First, bring in additional area under cultivation.

Second, increase irrigation.

Third, expand availability of fertilisers and improved seeds.

Two years of droughts in 1965-67 completely exposed weaknesses of India’s agriculture development strategies.  Land Reforms of abolition of zamindaries and consequential elimination of intermediaries between the state and the peasant and reforms of conferring permanent tenancy and ownership status on the tiller of the land were carried out successfully in almost all the states. Agriculture ceiling reforms did not succeed as only less than 2 million hectares of land ceiling surplus could be distributed in 50 years.

Area expansion strategy also succeeded in its objectives. Almost entire area increase which India has since in last 73 years occurred during this phase. Net area sown at the end of third plan reached 140 million hectares. Even today, it is 140 million hectares.

Irrigation was the principal investment strategy of the first three plans. More than 2/3^rd of plan outlays on agriculture production programmes and irrigation during this period went for irrigation investments. The dams and surface irrigation, however, has a tendency to develop slowly. It is no surprise that, despite massive irrigation outlays, irrigated areas increased at a snail’s pace of average .4 million hectares per year. Net irrigated area slowly but steadily increased form 21 million hectares to 27 million hectares in 1966-67.

India’s fertiliser and new seeds was pathetically low at the time of independence. Indian farmers used a total of 66 thousand tons of fertiliser nutrients in 1950-51. Fertiliser consumption rose to 785 thousand tons in 1965-66- which was still minuscule. Indians farmers put about 27 million tons of fertiliser nutrients in the soil now. For seeds, the age of high yielding seeds had not arrived by the time the third plan ended.

Marginal gains were made in agriculture and food situation of India during first 20 years, which were also more than neutralised by increase in population. On the whole, the first phase of agriculture development programmes and policy (1947-64) was quite a failure. It did not contribute much to make India aatmnirbhar (self-sufficient) even for food.

India Faced its Worst Food Crisis in 1965-67

India imported 2.8 million tons of foodgrains in 1948. In the next three years (1949-51), foodgrains imported ranged between 2 to 5 million tons. Wheat was the real problem, accentuated by good wheat producing areas going to Pakistan after partition. Only about 10 million hectares of land was under wheat cultivation in 1950-51 producing only 6.5 million tons of wheat.

1965 turned out to be the year of food disaster for India. Foodgrains production fell massively to only 72 million tons in 1965-66 and 74 million tons in 1966-67.

While India was facing massive food shortages during 1950s and 1960s, on the other side of the globe, Americans were wallowing in excess production of wheat. American Food Aid to India, which later acquired very bad overtones, commenced in 1951. The US President Truman approved a 2 million wheat loan as part of India Emergency Food Aid Bill in June 1951. More food aid flowed from America under the Agriculture Trade Development and Assistance Act, passed in 1954, widely known as Public Law 480 or PL-480.

It is estimated that India received total food aid of about 50 million tons over 20-year period (1951-1971) which was estimated to be worth $10 billion. This was the largest food assistance programme ever undertaken for any country. India stopped accepting food aid from America in early 1970s. It is estimated that America provided, in 50 years of PL-480 (1954-2004), globally total food aid aggregating $33 billion. India received 1/3^rd of this total food aid.

New Agriculture Policies and Programmes (Second Phase 1965-2000) makes India Aatmnirbhar (Self-Reliant) in Food and Agriculture

You would ask for a set of three conditions to be satisfied before you could call any country, India in our case, aatmnirbhar or self-sufficient in food and agriculture. First, India stops importing cereals primarily consumed as food by humans- wheat and rice. Second, India produces more food in aggregate than it consumes. In other words, India becomes net exporter of food- cereals, pulses and edible oils taken together. Third, India becomes overall net exporter of agriculture products.

India changed its foodgrains and agriculture development policy and strategy from the middle of 1960s. India imported maximum amount of wheat in a year in 1966- a whopping 8 million tons. From then on, the imports started declining. India imported 2.6 million tons of wheat only on an average per year during 1970s, despite three awfully bad years of 1974-1976. In the year 1979, India did not import any wheat. In 1980s, the average came to about 1 million tons a year. There have been only one or two exceptional years every decade since then when India imported wheat. India effectively stopped importing wheat sometime in the middle of 1980s.  

India soon turned an exporter of wheat. India made notable exports of wheat first time in the year 1972 when .7 million tons of wheat was exported. From 1977, barring exceptional years, India has been exporting wheat consistently. During the first five years of new millennium (2000-2004), India exported in excess of 17 million tons of wheat at an average of 3.5 million tons a year.

India could turn the tables completely by the beginning of new millennium- a country which was dependent on wheat food aid during 1960s had become an established exporter of wheat. India indeed became aatmnirbhar in two principal cereals- rice and wheat- by the turn of millennium. It was a massive transformation. First condition was fully satisfied.

India has been a consistent importer of pulses. India has also been importing more than 50% of its consumption demand of edible oils. India has never been and possibly will never be self-sufficient/aatmnirbhar in both pulses and edible oils. India need not be self-sufficient in every food. India turned net food exporter sometime in 1980s.

India also became net agricultural exporter in 1980s. In 1990-91, agriculture exports exceeded 6 thousand crores whereas agriculture imports were only 1.2 thousand crores. In this year of extraordinary external crisis, agriculture was no culprit. In fact, agriculture exports have consistently exceeded imports since 1990-91.

India turned around completely during 1965-2000 and became aatmnirbhar in food and agriculture products. India has remained aatmnirbhar in food and agriculture ever since 1980s.

A Very Different Food Production Strategy in Second Phase

India changed the foodgrains development strategy massively in the second phase (1967-2002). The new strategy was based on three new principal planks- productivity, price and ground water irrigation.

High Yielding Varieties (HYVs) and later hybrids, nourished by fertilisers, with agriculture fields worked by increasing use of farm equipment helped raised the productivity. Indian Government initiated the system of minimum support prices (MSP) in 1965, which assured remunerative prices to the farmers, at least in parts of India where the foodgrains cultivation became commercial agriculture. Expansion of groundwater irrigation provided much needed assured water to foodgrains crops. This well irrigation proved far more efficient than the surface irrigation, which required massive investment, large displacements and water transportation over long distances.

India produced 16.5 million tons of wheat in 1968, an increase of 45% over the previous year crop of 11.4 million tons. This revolution was engendered by Indian cross bred variety- Sonalika- which was released the year before and was grown massively in India during 1967-68. India’s wheat production never looked back from then on, increasing to more than 25 million tons in 1971-72 and reaching 50 million tons in 1988-89. Today, India produces more than 100 million tons of wheat- growing more than 15 times of the production at the time of independence in about 40 years. India’s wheat production grew 5 times in 20 years since the horrible crisis of 1966-67.

The seeds of 1967-68 spectacular performance of wheat production were sown in 1963 when celebrated agriculture scientist Normal Borlaug visited India and agreed to supply seeds of Mexican semi-dwarf wheat varieties to India. Indian scientists, actively supported by the government, worked hard and successfully demonstrated the suitability of Mexican seeds for high yield wheat in India. They also bred Indian varieties crossing Mexican seeds with Indian varieties. Large scale experimentation were done in 1966-67 and the entire crop was saved as seeds. This scripted the 1967-68 story.

Semi-dwarf varieties of rice came from the east. India introduced these high yielding varieties at a big scale in 1968-69. It spread much more slowly and less dramatically than wheat. Rice production in 1968-69 at about 40 million tons was not majorly different than the averages of 1963-65, but yields grew gradually but steadily ever since 1968-69. Rice production crossed 50 million tons in 1977-78 and 100 million tons in 2011-12.

Foodgrains production crossed 100 million tons in 1970-71 and 200 million tons in 1998-99. Foodgrains yields, which were less than 700 kg per hectare in 1966-67, crossed 1000 kg per hectare first time in 1978-79 and 1700 kg per hectare in 1999-2000. Foodgrains yields more than tripled only in 50 years.  

Minimum Support Price System Gets Established

Prior to 1965, Government of India undertook no price support operations in India. Some states took some sporadic measures at local levels. Government of India appointed a Committee, under the chairmanship of L K Jha, Secretary to the Prime Minister, on August 1, 1964 to determine farmers’ prices of rice and wheat for the ensuing 1964-65 session. L K Jha Committee was also to provide the terms of reference for setting up an agency which can provide such recommendations on a standing basis. L K Jha Committee conceived of “the producers’ price as being the minimum price or a support price at which Government should undertake the responsibility for purchasing any quantities that are offered at approved assembling points.” The Committee recommended not only producers’ prices but also retail prices for 1964-65 rice season. As India was reeling under foodgrains deficit, the Committee also recommended ‘rationing’ system for some cities.

The MSP system has got fine-tuned over the years. The cost of cultivation got more scientifically determined and calculated. Organised formulae for building in farmers’ profit margins got devised. Governments brought more and more crops under the MSP system, though implementation of MSP for many crops could not take place on account of several issues and problems. Margins over cost also kept increasing over the years. The Government decided in 2017-18 to provide at least 50% profit over cost of cultivation for all the MSP crops.

The MSP system initiated in 1965 has got deeply entrenched in the system now, in some respects, turning into a system of vested interests.   

Agriculture Consolidates but Farmers’ Income Stagnates (Third Phase – From 2000 & Continuing)

Once India overcame the food problem, the policy makers lost the key anchor and driver of agriculture development programmes and policy. The farmers and the landless farmers still constituted a formidable force in 2000.

India had approximately 14 crore workers in 1951. About 70% of these workers were farmers and landless agriculture labourers. Despite phenomenal development of agriculture in India, dependence of rural workers on agriculture has not diminished much. In the year 2001, as many as 23.4 crore workers (58% of total workers) eked out their livelihood from agriculture workers (about 13 crores as cultivators and 10.5 crore as labourers).

Indian economy has been expanding rapidly in last 20 years, but agriculture is constantly losing ground. Agriculture and allied sector make up only about 15% of India’s GDP. The share of income accruing to about 60% of the population in 2000-01 dependent upon agriculture had fallen to very low levels. No wonder farmers and agriculture labourers lived a very poor existence.

Agriculture programmes saw considerable consolidation and diversification in last twenty years. RKVY brought all agricultural interventions, including in animal husbandry, marketing and infrastructure under one umbrella with considerable choice and decision-making left to States. Specialised missions and sub-missions on horticulture, food, agriculture machinery, seeds, storage, animal diseases focused agriculture systems and package of programme approach of the second phase into different crop and component specific programmes.

Agriculture development programmes of today are mostly the repackaged versions of the programmes initiated in the second phase (1965-2000). High Yield Varieties (HYV) Programme of 1960s-70s got re-organised as Mini kit Programme for Rice, Wheat and Coarse grains and Integrated Cereals Development Programme- Rice/ Coarse cereals/ Wheat Based Cropping System and Third, Development of Pulses. These programmes became part of RKVY and National Food Security Mission in 2007-08. Horticulture Programmes got converted into National Horticulture Mission in 2003. In all, the production and productivity enhancement programmes in the two decades of 21^st century are old vines in new bottles.

The agriculture development programmes witnessed more differentiated approach to maximise productivity gains during this period. Eastern India had much better water regime but relatively poor productivity of foodgrains crops. The agriculture development programmes were focussed more on eastern India. With cereals no longer facing shortages, emphasis on pulses cultivation, horticulture, proteins- milk, meat etc.- increased. India consolidated gains in these fields and achieved 90% self-sufficiency in pulses as well. India became largest milk producer and its production of fruits and vegetables also went up quite a lot.

Wells irrigation expanded to about 60 million hectares (almost thrice the canal irrigation). Programmatic interventions to popularise use of sprinklers and drips and use of water efficient seeds and farming practices have been taken up. Likewise, increased chemical residues in food, fruits and vegetables have led to programmatic interventions being increased to grow organic agriculture.

Agriculture has been growing at a reasonably good growth rate- in excess of 3% during last 20 years. The demand and supply situation for most agriculture crops has changed for better on account of population growth at much lesser rate than agriculture growth rate. The farmers’ incomes have, however, stagnated.

Reforms of 1990s Bypassed Agriculture

The foreign exchange crisis of 1991 did not have its roots in agriculture. 1991 reforms were essentially industrial sector reforms, though depreciation of rupee did benefit agriculture exports as well.

New Industrial Policy was unveiled in 1991. New Trade Policy was announced. Considerable liberalisation of licencing and control over industries took place in 1991. New FDI policy was announced. No new Agriculture Policy was announced in 1990s. Agriculture continued to be protected. No FDI was permitted in agriculture. We negotiated largest protection for agriculture when WTO was set up in 1990s. 1991-92 Budget only promised continued protection of agriculture and rural development outlays at 50 per cent of the plan resources.

All the programmes of agriculture development were continued with some more or less emphasis during the post 1991 reform period. Some minor upward adjustment on fertiliser prices were done. Reforms of 1990s ignored agriculture sector.

Direct Income Transfers Makes Beginning

The government initiated a number of programmes to protect the income from agriculture. Different crop insurance programmes, disaster relief and rehabilitation assistance programmes, minimum support prices etc. are all meant to ensure that farmers income don’t fall below their normal incomes.

PM-KISAN started in the financial year 2018-19 is the first direct benefit transfer scheme in agriculture as a means to protect farmers’ incomes in the face of very deep downfall in agriculture produce prices in 2018-19. The scheme provides Rs. 6000 per annum to about 9 crore farmers. The outlay of PM KISAN exceeds the total outlay of all other schemes of the Department of Agriculture and Farmers Welfare for the year 2020-21.

AGRICULTURE MARKETING

Farmers must get good prices for their agriculture produce. Agriculture produce especially if sold as fresh or unprocessed is, however, a very difficult commodity. Developing right kind of market infrastructure, regulatory institutions and regulatory system for agriculture produce is necessary but tough.

Indian agriculture is small-holders’ agriculture. The farmer has no real pricing power. He sells mostly in buyers’ market. At the time of sowing, generally the farmer has no idea of overall demand supply situation likely to prevail when he harvests his crop. Absence of developed futures market in India makes the whole thing quite dicey for the farmer. It is not unusual to witness alternate bouts of increased and reduced sowing by farmers depending upon the price prevailing at the time of sowing and farmers making wrong bets.

Agriculture Marketing Regulation Started in 19^th Century

Agriculture marketing regulatory interventions in India started from the other end- protection of consumers’ interests and streamlining supplies of agricultural raw materials to industries.

The first regulated market, called Karanja, was established in 1886 in Hyderabad to ensure availability of pure cotton at reasonable prices for the textile mills of Manchester. The first legislation to provide for regulation of agriculture markets was the Berar Cotton and Grain Market Act 1887 which empowered British Resident to declare any place in the assigned district a market for sale and purchase of agricultural produce and constitute a Committee to supervise the regulated markets. This law seeded the agriculture produce mandis and the agriculture produce mandi committees of today.

This Act became the model for enactment of similar legislations in other parts of the country. Quite a few states enacted such legislations in the sixty years period before the independence.

India Adopts APMCs and Legislates for Regulation of Forward Markets

Independent India liked the approach of regulated APMCs.

First Plan promoted the concept and encouraged more and more States to go in for such regulated agriculture produce markets. Second Plan rued that not sufficient progress has been made in this regard. The Second Plan, noting the rationale of the regulated agricultural produce markets encouraged States to set up such markets and laid targets for the expansion of such markets in the country.

Globally agriculture produce is traded more in forwards than in spot. Spot markets do not eliminate the price risk. Forward markets do provide a mechanism for income assurance. This was the rationale for India to legislate the Forward Contracts (Regulation) Act, 1952 or FCRA. For forward markets, India adopted a diametrically opposite model than Agriculture Produce Markets Committee Acts. The APMCs provided for hard-coded regulations by the State Governments and implemented in a totally decentralised mode by Agriculture Produce Market Committees (APMCs). FCRA provided for a centralised body- Forward Markets Commission (FMC) to regulate forward markets. 

APMCs Turns into a Stranglehold Over Farmers

APMCs, which are essentially spot wholesale marketplaces for agriculture produce, were designed to serve three broad functions:

First, create a market place for agriculture produce where sellers (the farmers) and buyers (government organisations, industries and traders) can transact with the assistance of market infrastructure and agents.

Second, regulate the contracts, practices and intermediary payments to create a fair and low-cost trading regime for farmers who, on account of being the weakling, were quite vulnerable to market abuse.

Third, generate resources for the government to invest in infrastructure to facilitate packaging, transportation, storage and marketing of farmers’ produce.

The APMCs development in first 50 years seemed to serve all these objectives. Thousands of market yards got created all over the country over first five decades of independence. APMC laws hard-coded contracts, commissions and other market practices to make these quite predictable and known to the farmers. The fees levied (popularly known as mandi fees) under the APMC laws generated substantial resources, which were administered by Marketing Boards to create market infrastructure. Indian farmers kept increasing marketable surplus which was then transacted in these APMCs all over the country. The APMCs successfully converted a totally disorganised wholesale agriculture produce marketing of 1950s into a largely streamlined and organised agriculture produce marketing by the end of 20^th century all over the country.

A big structural policy mistake, however, turned APMCs into a stranglehold around sellers (the farmers) neck over this period of five decades. This fundamental mistake was total monopolistic nature of APMC system.

Every APMC was legislated to have a physical market-yard and a market catchment area under the APMC laws.  This resulted into only one mandi/market for the agriculture produce of a defined market area. The agriculture produce grown in the market area was to be brought only to the designated market yard. The farmer got totally cornered over the years and was left with no choice. He had to bring his produce to only the designated mandi in the state.

The other law- Essential Commodities Act- placed restrictions over industrial and wholesale buyers. They were subjected to stock limits. Having a shop became an essential prerequisite for traders and commission agents to buy the stuff in the mandi. This restricted purchasers to a small band of buyers and agents which, more often than not, colluded with each other to get better of the farmers. The farmer literally was at the mercy of these small number of traders to sale his produce. APMCs had become a total stranglehold around farmers’ neck. The reform had turned into deform.

Some APMC Reforms Initiated in 2003                

Recognising the problems in the APMC marketing system, the Government set up a Committee in 2001. A Task Force examined the recommendations in 2002. The labour of the Committee and Task Force resulted into Model APMC Law 2003. Some states carried out these recommendations over next decade. The progress was not considered satisfactory. A Group of State Agriculture Ministers, appointed by the Union Agriculture Ministry on direction of the Prime Minister, reviewed the progress in 2011-2012. The Group made its recommendations as well. Their main recommendation was that the Model APMC Act 2003 should be adopted by all States in its entirety.

The Model APMC Act 2003 and subsequent amendments in the model law diluted the monopoly of APMCs only a little bit. Market area for each APMC was sought to be increased to entire state. Traders licences were to be converted into pan-state licences. These reforms were carried out by some states, but remained more in paper. As the regulatory regime and the fee structure remained same in every mandi, it made no difference for a farmer. The monopolistic character of APMCs remained unaffected even in the states where the model APMC Act 2003 was legislated.

Some more choices were offered to the farmers. Farmers’ markets could be established in addition to the APMCs. Contract farming was allowed to enable farmers to enter into direct contracts with processors. It is difficult for farmers to set up markets as they do not have resources, time and ability to set up markets. Contract farming contracts were very highly regulated. Result was again not very encouraging. Only a limited number of farmers’ markets got set up in 17 years of these market reforms. Almost negligible contracts were registered under the contract farming facility.

Some exemptions were provided in some of the states on horticulture products. Mandi fee regime essentially remained intact. Mandi fees, in effect, generate small resources these days to take care of market infrastructure. Most market infrastructure in last two decades has been constructed under central schemes like RKVY, Market Infrastructure Scheme, Warehousing Scheme of FCI and the like.

The APMC reforms of last two decades did not address the principal flaw in the agriculture produce marketing- absence of competitive markets, one size fit all type of over regulation of markets implemented in a decentralised manner by organised vested interests, lack of standardisation and aggregation of farmers’ produce, leasing of land not being legally permitted and exclusion of processors and wholesalers on account of storage restrictions. The APMC reforms, consequently, did not make much difference.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020

Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 promulgated on 5^th June, 2020 strikes at the root of APMCs’ monopoly over wholesale agriculture produce trading. This Ordinance also virtually abolishes the system of mandi fees. The Ordinance is truly revolutionary in respect of these two fundamental deformities of agriculture produce trading system in the country. The Ordinance does not directly dismantle APMC system (the APMCs continue to live as they are presently within the confines of their physical market yards), but has the potential of massively disrupting them indirectly.

The Ordinance grants complete freedom to farmers to sell at the regulated market yards of AMPCs or outside. It enfranchises almost every business (the person has been very widely defined) to set up physical trading station outside the APMC market yard or establish and electronic trading system. The farmers and traders can take inter-state and intra-state transactions without any restrictions on them. As there is distinct comparative advantage to set up shop outside the APMCs to trade in agriculture produce- both in terms of trading freedom as well as non-payment of mandi fees, it should be reasonable to expect that trading of the agriculture produce will soon commence outside APMC market yards. If counter-resistance does not come from state governments, trading in market yards of APMCs should become defunct over a period of time. To make sure that the APMCs do not become defunct, it is likely that the state governments would amend their APMC laws to abolish or drastically reduce mandi fees and permit the traders there to undertake intra-state and inter-state transactions as the Ordinance permits non-APMC traders.

The transition, however, will be extremely chaotic and may lead to undoing of the reforms unleased by the Ordinance.

One of the key objectives of establishing APMC system was to provide a fair and level playing field to farmers in the matter of trading practices, charges and payments. The Ordinance literally creates anarchy. There is no regulated marketing regime applicable to trade transactions undertaken under the Ordinance. There is no regulator either. The electronic trading platforms are supposed to, on their own, ‘prepare and implement guidelines for fair trade practices such as mode of trading, fees, technical parameters including inter-interoperability with other platforms, logistics arrangements, quality assessment, timely payment, dissemination of guidelines in local language of the place of operation of the platform and such other matters’. Central Government, if it is of the opinion, may frame some of these regulations.

For physical trades, there is no requirement of such self-regulation as well. It can be argued that traders of non-agriculture produce are also implicitly permitted to do so. In respect of agriculture produce, there is quite an uneven relationship between farmers and traders.

Quite a chaotic ride lies ahead. In the long run, however, this reform is likely to do lot of good.

The Government of India may improve the Ordinance to make the disruptive process more orderly. A market regulator is needed for the spot market to lay regulations for trading, to register and supervise the traders and to resolve the grievances. A unified regulatory system and a single regulator for spot and derivative trading in agriculture produce and also other commodities is the answer for ensuring that the big reform unleased by the Ordinance is implemented in an orderly manner.

Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020

Land revenue and tenancy laws of most of the states do not permit leasing of agriculture land. Legally, contract farming, which normally requires leasing of land, is outlawed in the country. The leasing of land for farming however is widespread in the country. The widespread arrangement of share-cropping/ contract farming, based on leasing of land, is almost universally in India informal.

Processing of agriculture produce necessitates growing of appropriate varieties in conditions which can yield good quality processable produce at a scale which can be processed in factories. In Indian conditions, this would require production in several farms as our farm sizes are quite small. As leasing of land is not permissible, a modified concept of contract farming has been devised in India. The farmer undertakes production of desired kind of crop or other agriculture produce mostly using the planting material provided by the processor, called sponsor, under supervision of sponsor to be sold usually at pre-determined/ assured prices. Sponsor has no right over land. Pioneered by Pepsi chips and some other processors, such contract farming is quite minuscule.

2003 APMC Model Act brought in the contract farming. The law required a Sponsor to register him and the contract farming agreement with an APMC. The contract was prescribed by the government. The model law also provided that no title, rights, ownership or possession shall be transferred or alienated or vest in the sponsor. Model law exempted contract farming from the mandi tax.

The contract farming regime ushered into by the Model APMC law, 2003 did not make much progress. Over the years, the APMCs came to be viewed as culprits rather than facilitators. Central Government drafted a specialised Model Contract Act 2018 to exclude APMCs from the business of contract farming in the country. The Ordinance promulgated builds on the Model APMC Act 2003 and Draft Model Contract Act 2018 and intends to achieve what has not happened so far for mainstreaming contract farming.

The Ordinance envisages two types of farming agreements- trade and commerce agreements for production and sales of farming produce and production agreement for provision of farm services by the sponsor. The law provides for every aspect of contract- period, terms and conditions, obligations, pricing and so on which any contract production agreement would have and leaves these to be determined by the parties concerned. Some obligations are set in directory terms- a guaranteed price, delivery to be taken at farm gate and the like.

The Ordinance excludes APMC’s jurisdiction from contract farming. It confers authority on the central government to issue directions for effective implementation of the provisions. It confers dispute settlement authority on the sub-divisional magistrates.

The contract farming as envisaged in the Ordinance is, in essence, continuation of same artificial construct as has been the case for last 17 years. It is also excessively regulated. The Ordinance unnecessarily provides for several things which are part of any normal contract and no law is required to restate such terms. This law is likely to meet the same fate what the contract farming provisions in the model APMC law of 2003 met with.

AGRICULTURE PRODUCE DISTRIBUTION AND CONSUMPTION

Essential Commodities Act 1955- Relic of Different Era 

Essential Commodities Act 1955 (ECA 1955) was founded in 1939 as part of the Defence of India Rules. Defence of India Rules were replaced by Essential Supplies (Temporary Powers) Act, 1946. The provisions of ECA when enacted in 1955 were quite similar to the 1946 law.

Continuing food-shortages provided justification of food controls in independent India and in the planned economy ushered in 1951. First Plan document noted- “In a planned economy, food controls have thus certain positive functions, such as safeguarding the minimum consumption standards of the poorer classes, preventing excessive or ostentatious consumption by the well-to-do, and facilitating the country's programme of direct utilisation of unemployed manpower for investment.”

The ECA-1955 conferred powers on the central government to ‘regulate or prohibit’ ‘production, supply and distribution’ of an ‘essential commodity’ and ‘trade and commerce therein’. These powers were to be exercised for ‘maintaining or increasing supplies of the commodity’, or for ‘securing their equitable distribution’ and ‘availability at fair prices’.

ECA-1955 had an extensive list of essential commodities. The definition clause 2 (a) had a long list including ‘foodstuffs, including edible oilseeds and oils’, cotton, jute and cattle fodder from the agriculture commodities universe. It had a number of industrial goods like iron and steel, petroleum products, parts of automobiles, paper and drugs. There was also an omnibus clause which authorised central government to declare product of any industry the control of which has been declared expedient by the Parliament in the public interest as an essential commodity. Quite a few products like cement, sugar etc. were brought under the ECA-1955 using this power.

These powers were exercised by issuing control orders, which specified specific regulations, prohibitions, measures, penalties and other measures, including administration thereof. The mischief and dread of the ECA-1955 was in these control orders. At one point of time in 1980s, as many as 70 commodities were under these control orders. It was a licence-permit-price control raj at its zenith.   

As Industrial economy expanded and shortages of industrial goods disappeared after 1980s, control orders for most of the industrial goods were rescinded. In 2006, the ECA-1955 was amended to omit Section 2(a) which included the list of essential commodities, to include a new Section 2A to define the essential commodity as a ‘commodity specified in the Schedule’ and to confer power on the central government to add or remove any commodity from the Schedule. In the Schedule, all commodities, other than drugs and petroleum products, were from the agriculture world- fertilisers, foodstuffs, hank-yarn, jute and seeds. Cottonseed was added to the seeds list in 2009.

The latest entry in the ECA-1955 Schedule is entry 8- masks (2ply and 3ply surgical masks, N95 masks) and hand sanitizers- included on March 13 after Covid-19 virus hit India (this has been included only for the period up to 30^th June, 2020).

Food-stuffs Have Been Raison d’etre of ECA-1955

Food has been the main reason why ECA was brought in and sustained over several decades. Chronic and major shortages of food in first 25 years of India’s independence provided all the justification for the draconian ECA. At some point of time, an adjunct law- Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980- was brought in to take preventive actions against violators of control orders issued under ECA-1955.

Hundreds of orders had been issued regulating, prohibiting, otherwise controlling prices, storage, distribution, consumption and other matters affecting foodstuffs under ECA-1955 by the time 20^th century drew to a close. While the production of agriculture commodities and supply of foodstuffs had increased substantially by this time, still the system has not been prepared to junk the law.

However, India resorted to a round-about way to defang the ECA-1955 once food shortages had become things of past, in general, and to prevent abuse of the draconian law, in 2002. A new Order called Removal of (Licencing requirements, Stock limits and Movement Restrictions) on Specified Foodstuffs Order 2002 was issued. This Order removed all controls on buying, stocking, selling, transporting, distributing, disposing, acquiring, using or consuming over a long list of foodstuffs- wheat, paddy/rice, coarse-grains, sugar, edible oilseeds and edible oils. No person (dealer) engaged in the business of purchase, movement, sale, supply, distribution and storage required any licence or permit under any order to engage in any of these activities. All orders specifying anything, including the orders issued by the state governments, contrary to this liberalising order became infructuous. In November 2004, 1999 order declaring ‘onion’ as essential commodity was rescinded as well.

However, there is too much of vested interest in keeping foodstuffs under control. Any fall in production provide excuse to reverse the gear. The process of unraveling 2002 Foodstuffs liberalisation Order started in 2006. This 2002 order was first placed in abeyance as regards wheat and pulses for a period of six months on 29^th August 2006. Most of the commodities over which ECA-1955 was rendered inapplicable by 2002 Order were brought back under control by issuing such abeyance orders.

New Government in 2014 soon again decided to bring liberalisation of 2002 back. The Government consolidated all orders issued under the Foodstuffs Order 2002 and issued a fresh Order- Foodstuffs Order 2016- superseding the 2002 Order in September 2016. This 2016 Order is worded almost similarly to 2002 Order. Some additional foodstuffs were included- wheat products (maida, rava, suji, atta, resultant atta and bran), gur, and hydrogenated oils or vanaspati. As the Government was not willing to go whole hog, the order was placed under abeyance for varying periods of time for pulses, sugar, edible oilseeds and oils. Onion was also taken out of the scope of 2016 Foodstuff Order in August 2017.

Quite a complicated state of affairs was in play when the Finance Minister announced that the Government would undertake reforms of Essential Commodities Act. The ECA 1955 was very much in effect. It was applicable to 8 commodities- five of these agricultural- foodstuffs, pulses, fertilisers, hank yarn, seeds and jute and drugs, petroleum products and masks. Production, distribution, storage and prices were liberalised for many foodstuffs- wheat, wheat products, rice, paddy, sugar and gur, edible oilseeds and oils, hydrogenated oils, onion and potatoes but liberalisation was kept in abeyance to varying degrees for pulses, edible oilseeds and oils, sugar and onion.

ECA Reform as Part of Aatm Nirbhar Bharat

The Essential Commodities (Amendment) Ordinance 2020 promulgated on 15^th June modifies the regulatory and control regime for foodstuffs.

The Ordinance does not exclude the agriculture commodities from the Schedule of the ECA-55. Nor does it delete Section 2 Sub-section 4 which confers jurisdiction on the central government to exercise the powers of ECA-55 over foodstuffs. The Ordinance modifies the circumstances in which the regulatory and control authority is exercised in case of foodstuffs and in case of specifying stock limits as the control mechanism some additional exclusions have been built in.

Section 3 (1) allows the Central Government to provide by way of an order for regulating or prohibiting the production, supply and distribution of an essential commodity, if it is of the opinion, that it is necessary or expedient to do so for maintaining or increasing supplies of any essential commodity or for securing their equitable distribution and availability at fair prices or for securing any essential commodity for the defence of India or the efficient conduct of military operation. The Section 3 (1A) inserted by the Ordinance will allow the Central Government to do so only in ‘extra ordinary circumstances, which may include war, famine, extra ordinary price rise and natural calamity of grave nature’. Extraordinary circumstances have not been defined. It is a matter of interpretation. Effectively, the amended law permits the central government to exercise the authority under ECA for foodstuffs in wide ranging circumstances.

For exercising regulatory authority for fixing stock limit only, extraordinary price rise has been defined. Extraordinary price rise has been defined to mean 100% price rise in case of horticulture produce and 50% price rise in case of other crops over the price prevailing last year on the same day or five years’ average retail price whichever is low. 100% price rise year on year for onions and other horticulture produce is very common. Extraordinary price rise and natural calamity are quite loose concepts to prevent continuation of ECA-55 to foodstuffs.

Essential Commodities Act needs to be Junked

Industrial commodities which were part of the ECA regime in 1960s to 1980s are no longer part of ECA-55. These commodities have been removed from the Schedule of the ECA-55. This happened as the demand and supply situation of these industrial goods improved and there was no good reason for anyone to stock the commodities in anticipation of price rise.

The situation is same for most of agriculture commodities. There is no shortage of cereals in the country. In fact, we produce rice, wheat and maize in excess of our requirements and regularly export. Agriculture exports itself more than cover the imports of pulses and oilseeds, the demand supply gap of which has also come down sharply. The country now has about $500 billion of foreign currency reserves to be able to import any commodity needed for consumption. The shortages of 1940s to 1960s are long gone.

In fact, there is no need for ECA-55 to remain on statute book any longer. Not only foodstuffs, remaining 7 commodities in the ECA-55 Schedule need no controls. Like industrial goods, all the five items of agriculture should go out of ECA. Likewise, you don’t need any controls over petroleum products, fertilisers and masks. To deal with extraordinary situation in disasters, if need be, provisions of Disaster Management Act can be resorted to.

Essential Commodities Act 1955 needs to be simply scrapped. 

Reforms for Making Farmers Aatmnirbhar

India today is not only self-sufficient in food production but India has become a significant exporter of agriculture products. While Indian agriculture has become aatmnirbhar, Indian farmer has not.  There is an unfortunate irony in India’s stellar story of agriculture turn-around. Indian farmers have not seen much change in their fortunes. Farmers and agriculture labourers who still make more than 50% of India’s work force continue to be the poorest income earners.

Ever since independence, India’s agriculture policy and programme strategy focussed only on increasing production and productivity. Farmers’ income was not the real goal of the policy. Only in 2014, the government specifically mentioned doubling the farmers’ income by 2022 as a policy goal. However, the agriculture programmes and policies did not change much to attain this goal.

Farmers’ income is the net sales price of his produce minus the cost of cultivation. As farmers’ operational holdings are small- less than a hectare on an average, farmers end up earning very low profits as such small landholdings deliver only very small crop output for sales. Farmers’ incomes in India on an average are about 1/5^th of other workers and about 30% of national average income.

The goal of doubling the farmers’ income has not been very well defined. Neither has a coherent policy and strategy spelt out to achieve this. Farmers’ income needs to be raised at least five time to bring about worthwhile change in their lives. This requires a multi-pronged strategy. There are five critical planks of the policy, strategy and programmes for achieving this goal.

First, an average farmer’s operational land holding need to become five times than what he cultivates today. This is necessary to raise his turnover to generate five times the profit/income.

Second, the farmers need to get stable and predictable prices for his produce, preferably it should be possible for him to lock-in output prices before he cultivates.

Third, the farmers should be able to choose right amount and quality of inputs to economise/reduce his cost of cultivation.

Fourth, land is the biggest asset, mostly the only asset, which the farmers own. Farmers should be completely free to get the best out of his land-asset.

Fifth, skill-set of farmers is quite limited. The farmers know how to cultivate traditional agriculture. Most farmers and agriculture labourers are good enough to work only as unskilled manual labour outside agriculture.  There is need for a large-scale skilling required to make farmers earn income from non-farm businesses.     

Increasing Average Operational Holding Five Times

On an average, a wheat farmer in India producing 3 tons per hectare with a profit margin of Rs. 600 per quintal, earns a profit of 18000 per hectare. For an average farmer in Bihar operating .25 hectare of land, his profits would only be Rs. 4500 only. Even if you assume that a Bihari marginal farmer is able to raise two crops a year, his annual income from the .25 hectare would be only Rs. 9000 a year. Even if you add the imputed cost of his labour which is part of the cost of cultivation, the income does not go beyond Rs.12500. It is also not certain that the Bihari wheat farmer would end up getting minimum support price. For a national marginal farmer operating .4 hectare of land it will be Rs. 14400 income per year. Barring some cash crops like sugarcane, average farm earnings in the country range between Rs. 10000-15000 per farmer.

Minimum wage in Bihar is about Rs. 7000 per month. Annual wages which can be earned under MGNREGS for 100 days work is about Rs. 30000 at the rate of Rs. 300 per day. It is easy to understand that the farmer is the poorest amongst the poor. Unless his income increases manifold- at least 5 times- there is no real hope for the farmers of India to live a life which meets his minimum needs.

How do you increase operational holdings five times?

Two reforms are crucial to achieve this objective. First, remove all restrictions and prohibitions on land leasing. Second, remove all restrictions and prohibitions on sale of land.

Model Agriculture Land Leasing Act 2016 is awaiting adoption for last four years. This need to be enacted. In fact, the land revenue and tenancy laws of the States should be amended to put in place a simple, practical and liberal land leasing regime in the country in place of prohibitory and restrictive system of today. This would formalise informal contracting of today which would encourage consolidation of operational land holdings.

There are enormous direct and indirect restrictions on land sale. The agriculture land cannot be sold for non-agriculture purposes. Agricultural land of SCs and STs cannot be sold to non SCs and STs. All restrictions on sale of land need to be removed.

These two measures, not the artificial constructs like contract farming provisions in the APMCs Act of 2003 or the new Ordinance- Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020, would usher in increasing average operational land holdings in India.

Stable, Predicable, Preferably Locked-In Prices

Paying good prices to farmers for their cereals produce was adopted as the policy goal in India in 1965 when the system of minimum support prices got instituted and Food Corporation of India was established to make procurement at such support prices (MSP). The minimum price support mechanism has been expanded to include almost every foodgrains and fiber crop today. Profit element for the farmers also kept increasing. In 2018, the Government decided to build in at least 50% profit over cost of cultivation as part of the MSP.

There are two necessary conditions for the MSP system to operate successfully. First, the government agency must be able to buy whatever quantity farmers offer to sell at MSP for all the crops under MSP and in all places. Second, the surplus supply over domestic demand is exported away. 

Despite 55 years of operating MSP system, the government system is able to buy essentially two crops- wheat and rice- in the country. Some of the remaining crops are sporadically bought. The system of MSP purchases, even for wheat and rice, does not operate efficiently in some states still.  As a result, not only providing 50% of cost of cultivation as income to farmers, but the MSP system itself has remained unimplemented for most crops.

The core objective of MSP system is to provide farmers a minimum return/income. PM KISAN operates as income transfer scheme for the farmer. The element of income in actual procurement undertaken by the Government of India in a year, which should be in the range of about Rs. 50-60000 crore can be added to the actual outgo of PM KISAN (approximately Rs. 54000 crore). Taking it to an outlay of Rs. 1 lakh crore, PM KISAN can operate as the genuine income/profit transfer scheme for the farmers. Rs. 1 lakh crore transferred to about 10 crore farmers would imply transfer of Rs. 10000 per farmer irrespective of crop or the area.

A better variation would be to pay an amount per hectare rather than per farmer. As India cultivates about 14 crore hectares of land, an amount of Rs. 7000-7500 per hectare would provide requisite support. This system would have added advantage of incentivising many marginal farmers to move away from agriculture. All MSP operations will need to be discontinued. The Government should buy only that much quantity which is required for food security operations at prevailing prices.

Doing Away with Input Subsidies

India has built a massive system of agriculture input subsidisation since independence. There was some rationale to subsidise inputs like fertiliser, seeds, electricity, water etc. in the initial years to popularise their use to increase productivity of crops. These objectives have been achieved by now. In fact, there is now overuse of fertilisers, electricity and water. The overuse is proving counter productive rather than contributing anything to further increase in productivity.

The input subsidy programmes have distorted markets. Lot of inefficient fertiliser producing entities continue to exist putting undue burden on government finances. Government of India foots the bill of over Rs. 70000 crores in fertiliser subsidies. Most States provide subsidised or free electricity to farmers. It is estimated that States provide about Rs. 80000 crores in electricity subsidies. Central Government and State Governments virtually underwrite interest on farm loans. Government of India incurs expenditure of about Rs. 20000 crores annually. State Governments are estimated to provide another Rs. 30000 crores in interest subsidies. Water subsidies are not directly computable.

Fertiliser, electricity and interest subsidies cost about Rs. 2 lakh crores to the Central and State Governments annually. These subsidies should be replaced by a system of direct cash benefit transfer to farmers. In this system, the farmers would get cash support which other wise accrues to inefficient industries and electricity boards. The industry would become efficient and competitive and the farmers would also get real choice and flexibility in making their decisions about crops to grow, water and electricity use and how much loans to take.

Freeing-up Land Asset

Land is the only real asset which farmers have. On account of severe restrictions imposed on agriculture land, the land as an asset is however grossly under-valued. Agriculture land can be put to only agriculture use. Returns from agriculture are very poor. Therefore, the imputed value of future returns from agriculture makes the price of agriculture land very low.

Non-agriculture land is, however, in short supply. Returns from non-agriculture use is much higher. The ratio of GDP generated from land used in agriculture and non-agriculture is 1:200. Non-agriculture land is 200 times more valuable. That is the reason, whenever agriculture land is converted into non-agriculture use, its price shoots up.

Two policy actions are needed to remedy this situation. One, increasing the supply of non-agriculture land. Second, freeing up agriculture land for non-agriculture use by farmers. This would require amendments in the land revenue and tenancy laws to freely allow sale of agriculture land and to allow farmers to use agricultural land for non-agricultural purposes.

Re-skilling Farmers for More Non-Farm Income

Agriculture cannot provide adequate income to teeming millions of farmers in India. At the time of independence about 70% of workers were farmers and agriculture labourers. Now a little more than 50% of workers are farmers. In absolute number, there are about three times more cultivators and agricultural labourers in 2011 compared to 1951- 26.3 crores as against 9.7 crores. Agriculture land has increased only by 15% in this period.

This requires lot of farmers to move into non-agricultural occupations. This has been happening for ever but the speed has been quite slow. Government policies have been discouraging migration of agriculture labour to non-agriculture. Migration of farmers from agriculture to non-agriculture would have no adverse impact on agriculture productivity. Rather, it would help in raising it as this would lead to more mechanisation and efficient operation of farm holdings.

Farmers do not have skills for non-agriculture work. When they leave agriculture, they end up mostly doing manual work. Focused skill development programme for farmers to skill them for construction, manufacturing and services businesses would help this transition. Migrant friendly policies, lot of rental housing in urban areas and industry led skilling programmes would make lot of difference.

SUBHASH CHANDRA GARG

NEW DELHI- JUNE 13, 2020