How To Satisfactorily End the Indian Government - Farmer Confrontation?

 

The govt. passed 3 farm laws in Sept 2020 & likened it to the 1965 “Green Revolution” in agriculture with a potential to improve farmer incomes while farmers - at least in some parts of the country like Punjab & Haryana – contest the claim & have risen in protest which has since crossed the 100 day mark. A solution to the confrontation is thus called for.

Since Agriculture Pricing Marketing Committee (APMC) was abolished, in Bihar, in 2006, doing away with a comparative price discovery mechanism, leading to a further drop in farm food prices accruing to farmers; the central government, rightly, has only abolished the monopoly of the APMCs by throwing it open to private competition. The model contract farming Act, perhaps, passed with an intention to encourage larger land holdings & hence to attract private investment suffers from certain flaws though; as per Agricultural Scientist Devinder Sharma, the size of an average land holding in US is over 160 hectares & in Australia more than 4000 hectares. If open agricultural markets in US & Europe – in existence for 6- 7 decades had been so benevolent the crisis would not have been so severe as to demand an annual subsidy of $100 billion in Europe & an average US farmer annual subsidy of $60,000 against $200 in India. The new legislation strangely “arranges for a bureaucratic dispute resolution mechanism to the exclusion of civil courts” as per the former Finance Minister P Chidambaram.

Facts on the ground:

(1)Agriculture supports the largest chunk of the workforce at 43%: Agriculture accounted for 69.7% of Indian workforce, of 29.8 cr. in 1951 which dropped to 54.6%, of 48.1 cr., by 2011 & at 43% now substantial to demand attention.  Their precarious position can be gauged from the fact that about 12000 farmers commit suicide every year (As per govt. data 12360 in 2014, 12602 in 2015, 11379 in 2016); loan waivers announced by all parties is a temporary band aid that does not address the root causes.

(2)Low Farm Gate to Consumer Plate Prices: As per a 2019 RBI report the farm gate prices vary between 28% -78%of the retail prices, accentuating a demand for disintermediation to improve farmer incomes. Traders & Retailers mark-up is higher for perishables indicating the urgent need for improving cold storage facilities to reduce waste. As per the Central Institute of Post-Harvest Engineering & Technology (CIPHET), 18% of fruits & vegetables in India rot due to unavailability of storage while there are other studies that peg the fig. closer to 40%. The sector is clearly crying out for investment.

(3)Predominance of small farmers impedes price negotiation: 86% of Indian farmers have less than 2 hectares of land that accounts for 47% of total cultivable area (Agricultural Census 2015-16), indicating limited negotiation capacity, for small & medium farmers,  in the absence of Farmer Producer co-operative structures (FPO) that build successes in the milk movement, under brand Amul . But political capture of the co-operative movement for sugar, milk & financial services does not inspire confidence.

	Total Holdings
Area in Hectares	Number		Area
Below 0.5	70468756	48.1%	16472957	10.4%
0.5-1.0	29782553	20.3%	21450395	13.6%
1.0-2.0	25809332	17.6%	36150710	22.9%
2.0-3.0	9827676	6.7%	23374741	14.8%
3.0-4.0	4165538	2.8%	14244565	9.0%
4.0-5.0	2366241	1.6%	10457933	6.6%
5.0-7.5	2352020	1.6%	14146575	9.0%
7.5-10.0	843219	0.6%	7205918	4.6%
10.0-20.0	693375	0.5%	9066527	5.7%
20.0 & ABOVE	145031	0.1%	5247011	3.3%
ALL CLASSES	146453741	100%	157817336	100%

 

As per the agricultural census 2015-16, the average size of operational land holdings reduced from 1.15 hectares in 2011-12 to 1.08 hectares in 2015-16; sane to presume that it has reduced further to about 1 hectare (~2.5 acres in 2020-21). Therefore, with an average profit of Rs 15,000 per acre (Rs 30,000 across 2 crops of Kharif & Rabi) an average farmer makes Rs 75,000 per annum barely sustainable for an average family of 5.

Since Income under 5 lakhs, attracts no tax farmers upto a land holding of 16.66 acres are protected. While there have been demands to tax farming, pertinent to note that only 1.2% of farmers have land holdings in excess of 7.5 hectares (~18.75 acres) & that explains why no governments has tried to tax the ~ 15 lakh “rich farmers” since it is a political hot potato; they have instead rightly tried to tax them by tracking sale of premium cars & gold purchases.

(5)India offers low MSP & no produrement support for about 20 products: India offers lower MSP than comparable contries except Vietnam & hence there is scope for enhancing same even while working at disintermediation.

GOI releases MSP for 23 products – 7 cereals (Paddy, wheat, Maize, Sorghum, Pearl Millets, Barley & Ragi)  5 pulses (Grams, Tur, Moong, Urad, Masoor) 7 oilseeds (groundnut, Rapeseed & mustard soyabeen sesamum sunflower seeds, , nigerseed, , safflower) & 4 cash crops – cotton, jute, sugarcane, copra & de-husked coconut) but procurement by FCI is done only for rice, wheat & partially for cotton & some pulses. Bereft of a procurement mechanism, MSP on the remaining products is a farce allowing private players do secure products at 15-20% lesser than the MSP announced.

Lured by procurement support farmers have overproduced water guzzling crops like rice & wheat unlike millets & sorghum depleting the water table demanding a correction to be effected in cropping patterns. As per the PRS Legislative Research data India consumes about twice the water to produce a unit of output demanding the use of drip & sprinkler system.

As per capita incomes of societies increase, the consumption of proteins – pulses, eggs, milk, meat etc. – increases & Indian food inflation during the last 2 decades was on account of such shortages indicating the need to demarket cereal production & incentivize pulses & oilseeds production

(6)Agricultural Trade Disputes on the rise: Countries like US & Canada have dragged India to the dispute resolution mechanism under the World Trade Organization (WTO) on subsidies on rice & wheat; likewise, Brazil, Australia & Guatemala on sugar subsidies. As per WTO mandate, agricultural subsidy cannot exceed 10% of the value.  Input subsidies like free water, electricity, subsidized fertilizers & MSP have been cited as the villains by the complainants who are demanding reduction of the same & opening up of agricultural markets & India might have to opt for some compromise as way forward if it wants a rules based international trade order - that has served it well - to prosper. This shall impact farmers.

As per the Food & Agricultural Organization of the United Nations, India is the 2^nd largest producer of rice in the world,  but the largest exporter with over 25%% market share (Global Market of 40MT) & growing share further might not be easy.  Increase in production worldwide led to price pressures because of which 2018 prices were nearly equivalent to those in 2009 indicating the urgent need for India to change cropping pattern away from rice.

On wheat India faces quality issues & lack of competitive advantage due to relatively higher MSP as compared to formidable competition from Australia, Ukraine, Russian Federation & US. While global wheat trade is 170 MT per annum, India exported about 5 lakh tonnes in 2019-20 largely to Nepal (~2 L tonnes)

As per US FA during the year 2019-20 India is expected to produce 112 MT of Rice & consumes 102 MT while producing 100MT of wheat consuming 91.5Mt & using 5.5MT as feed.  Thus India can afford to increase wheat production, but by rationalizing MSP, to help export competitiveness while there is a need to shift away from rice production. Incidentally, rice is produced across the country while wheat is produced predominantly in the North & Central region. Productivity of wheat in Punjab/Haryana is comparable to the global figs. while lower irrigation facilities impedes production in the drier central region; need for producing region specific seeds to enhance productivity.

Need for Rationalizing subsidy: Fertilizer subsidy of about Rs 75000 cr per annum on nitrogenous (N) fertilizers – urea - & none on phosphorous(P) & Potassium(K) has led to excessive usage of N shifting N:P:K ratio to 6.1:2.46:1 in 2017-18 against an ideal 4:2:1. The Shanta Kumar Committee therefore, recommends removal of subsidy & direct benefits transfer (DBT) at the rate of about Rs 7000/ hectare.

Understanding the interests of the 4 stakeholders - the government, Farmers, Consumers & the private sector -  in this policy document shall help chalk out an agreeable compromise.

(a)The govt. spends more than 2 Lakh cr. every year in Food Subsidy – to provide food to 66% of Indian population under the Food Safety Act 2013. Rice & Wheat are procured by the Food Corporation of India (FCI) & sold at a subsidized rate to the beneficiaries; the difference is the subsidy, which the govt. passes to the FCI albeit with a huge delay, consequent to its weak finances, pushing the organization into the Red. Furthermore, while the buffer stock required is 41.1 million tonnes on 1^st July every year to cater to any famine/drought situations & targeted Public Distribution System (PDS) needs, FCI godowns are overflowing with stocks, more than 50% of those set limits,  due to the political pressure on procurement. Short of space, FCI has been stocking up in the open, exposing stocks to rain gods & consequently selling rotten stock to breweries at a huge discount. Govt. thus is right in exploring ways to rationalize subsidies & making FCI operations efficient.

(b)Farmers accounted for 43% of the Indian workforce but contribute only about 15% of GDP (Gross Domestic Product); clearly, most of them are poor & would do well with a hike in the Minimum Support Price MSP). If the govt. genuinely wants the improvement in farmer’s incomes why are they loathe to make MSP a “legal right” i.e. even private sector cannot procure at less than MSP?

(c)Consumers want an anaemic increase in MSP so that inflation is kept in check & savings thereof can fund their other consumption splurges.

(d)The private sector, answerable rightly to their shareholders, would not want MSP as a legal right, as it is an impediment to maximize profits.

The interests of the farmers are thus is opposition to the govt., consumers & the private sector & that explains the conflict. But mere slogans of “Jai Jaiwan, Jai Kisan” do not help when budgets for both are either slashed or experience a yearly increase that barely covers inflation.

The Way forward:

The govt. needs to improve farmer incomes through concrete action rather than assuming that the entry of the private sector shall automatically usher in prosperity. The policy however should be WTO compliant that mandates that agricultural subsidy cannot exceed 10% of the value. Reduction of procurement by FCI is necessary to pull the organization out of the red. With per capita incomes under pressure, an increase in agriculture production cannot be absorbed in India & export markets, since 2012, have experienced anaemic growth. India became the largest producer of sugar in the world, last year but found it difficult to sell the excess production despite the loss of crop in Brazil. 

Therefore:

(1) Replace MSP with Input subsidy so that farmers produce what the market can absorb:

(a)Direct benefits transfer of the Rs75000 cr. fertilizer subsidy at Rs 7000/ hectare (Rs 2800 per acre)

(b)Since FSA mandates 75% of rural & 50% of urban population as beneficiaries, sane to assume that most of the land owning farmers & agricultural labourers, in rural shall fall into the beneficiary’s category. DBT of the food subsidy at about Rs 7500 per family (Rs 25/Kg X 5 Kgs/Month X 5 persons/Family X 12 months) which translated into ~Rs 3000 per acre - assuming an average holding of 1 hectare per family.

This is borne out vide the Shanta Kumar Committee recommendations; In 2013 cost of rice procured was Rs 20 & sold at Rs 3 to the beneficiaries of the Food bill incurring a subsidy of Rs 17/Kg. The logistics & storage costs were Rs 10 extra & hence the resultant subsidy was Rs 27/ Kg (Rs 30 – Rs 3). DBT of Rs 22/Kg - as part of the food bill - to the bottom 40% of the population, instead of 67% of the population (75% of rural & 50% of urban); issue wheat & rice at 50% of MSP for non-Antyodya households.

(c)Continue PM KIsan of Rs 6000/- (Rs 2400 per acre)

(d)States to replicate the Telangana Ryutu Bandhu scheme of providing an input subsidy of Rs 10,000 per acre.

These figures add up to Rs 17200 (Rs 8,200/- per acre by the central govt. & Rs 10,000 per acre by the state govt.)- about 60% of the current profit of about Rs 30,000 per acre secured by the farmer annually across 2 crops.  

(2)Launch Farmer Markets in Urban centres to reduce intermediation to enhance farmer incomes: There are some best practices of states worth a national replication. Ryathu Bazaar of undivided AP or Uzhavar Sandhai of TN – where farmers sell directly to consumers in designated spots at urban centres - have found that farmers secure 15-40 % more than wholesale prices & consumers pay 15-30% less (GOI 2011 RBI report 2019)

(3)Launch Farmer Co-operatives to help in collective bargaining: The govt. wants the creation of 10,000 farmer co-operatives & promised credit of Rs 1lakh cr. vide National Bank for Agriculture & Rural Development (NABARD) to build agricultural infrastructure; Intent is welcome but challenges in execution persist

(4)Nudge farmers to diversify Income streams: Ultimately, doubling of farmer incomes needs diversification of farmers into horticulture, poultry & animal husbandry.

(5)Need to shift workforce from agriculture to manufacturing & services:  Agriculture accounts for 15% of GDP but employs 43% of the workforce alluding to low productivity. Govt. should accelerate efforts at shifting at least 15 cr. farmers into manufacturing – especially labour intensive leather, footwear, toys, textile etc. - & service sector jobs. Landless labourers should perhaps be the first focussed group.

Conclusion

Protecting 43% of workforce, surviving on agriculture, is a must without sacrificing the inflation concerns of 100% of the consuming population & the necessity of pulling the FCI out of the red. Replacing MSP with input subsidy, disintermediation by launching farmer markets in urban areas, nudging farmers towards sustainable agricultural practices away from producing water guzzling crops like rice, wheat, sugar, etc. in favour of oilseeds, pulses, fruits & vegetables etc. - currently in short supply - & incentivizing farmers vide banking loans into diversifying income streams by starting horticulture, animal husbandry, poultry etc. is a beneficial way forward. Finally, India has no option but to arrange for shifting a majority of the farmers into manufacturing & services or else stare at a demographic nightmare. Since agriculture is a “state” subject, a consensus driven equal contribution approach by both the centre & the states can help execute the aforementioned solution. The clock is ticking.