Akshay Vir Panwar - General Economics - Batch of 2019:
In 2016, the Prime Minister of India stated his aim of doubling farmers’ income by 2022-23. But past estimates clearly contradict the above statement. Since a balanced and pragmatic approach is required to fulfill this dream, the evidence based on past estimates may render the target rather implausible.
Source: Chand et al’2015
Between 2004-05 to 2011-12, total farm income in nominal terms increased to be 2.5 times of what was in 2004-05; while in real terms it increased by less than 1.5 times the value in 2004-05. CPI estimates (which are above 8% on an average) indicate that inflation plays a dominant role, rather than the farmers’ real income (and thus consumption).
Farmer’s income can be increased if there is a rise in the relative price of agricultural output, increase in farm produce, enhancement in the technology used, or/and cut down in cost incurred. The Government can take one of two routes to increase farmers’ income (i) solely increase in agricultural output or; via, (ii) balanced changes in given above all factors.
Source: Indian Economic Survey
Given that we opt for option (i), if we look at the estimates of growth rate in agriculture then, the dream of doubling income seems to fade away as it would need a sudden hike in investment to GDP ratio (which has been abysmally low in recent years) which will have a very high opportunity cost. This is because, in a developing country like India, other sectors particularly manufacturing needs to be taken care of to absorb labor coming from agriculture. Moreover, we would need a growth rate of more than 10% post-2016 which seems unrealistic based on past trends.
So, the government should focus on latter i.e. option (ii).
The estimates of real income of farmers above (Table 1) strongly suggest that a big push is needed for agriculture in the upcoming budget; the real income has never doubled between the given time periods (every 5 years above),while we need a growth rate of more than 10% post-2016 to double the real income of farmers by 2022-23.
TECHNOLOGY:
Improvement in the quality of inputs used forms the ’total factor productivity growth’. The total factor productivity growth can be used as a good proxy for technical progress in agriculture (Ravindra Dhokalia & Bakul, 1993).And, if we look at the estimates of TFP (agriculture) (between 1984-2003) of various countries then, India’s TFP (0.60) lies even below various African countries like Ghana (4.10), Guinea-Bissau (0.94), Zimbabwe (0.70) and many more (Nin-Pratt & Yu, B(2010)). Therefore, along with schemes like Pradhan Mantri Fasal Bima Yojana, e-NAM, subsidies, and others, the government needs to focus on agricultural productivity through technical progress.
Short Run Suggestions:
● Out of all cultivable land in India, 59% is dependent on rainfall. And, in the remaining portion tube well and canals form the most common source of irrigation wherein water use efficiency is very low (around 30-40%). So, government must promote Micro Irrigation techniques including, drip irrigation in which water use efficiency is as much as 80-90%. This would certainly enhance the production function of farmers. Moreover, more area could be brought into the irrigated land eventually. Pradhan Mantri Krishi Sichayee Yojana (PMKSY) aims to create effective use and new sources of water. The initial allocation of Rs.50000 crores was decided in 2015-16 over the span of 5 years. In 2015-16 center spent 7781 crores, 5767 crores in 2016-17 followed by 7377 crores in 2017-18. This is why a great fillip is expected in this area in this year’s budget.
● A sad truth is our country’s agriculture sector would remain weather dependent in short to medium term. Despite awareness of the uncertainty, the country was afflicted by droughts 5 times in the 21sr century. . Therefore, we need good forecasting techniques using modern IT and communication.
Long Run Suggestions:
There is a need to hike our R&D spending. This topic is debatable since there is a greater need to spend on social infrastructure. But we can't deny the fact that R&D spending brings the fruits in medium to long run with a greater multiplier effect. This is why countries like the USA spends 2.75% of GDP PPP, Japan spends 3.58% of GDP PPP, EU spends 2.03% of GDP PPP. While India spends only 0.85% of GDP PPP.
AGRICULTURAL OUTPUT:
The average landholdings of an Indian farmer are around 1.15 hectares. The small and marginal landholders (less than 2 hectares) accounts for around 72% of total landholders. For small and marginal landholders, it becomes very difficult to rent out capital and hire required amount of labor, as well as a predominance of informal credit sources who charge very high rate of interest. This is why the output is never produced at its potential level in India.
To ensure maximum output, we must ensure that there is an optimal supply of labor and capital to landholders.
Suggestions:
● The government should think of farmer cooperatives in which farmers pool in their machinery and labor to work collectively on each other’s farms. But, we must ensure that it is blended with stable legal environment, efficient internal management and appropriate external support from professional NGOs for training and consulting. Maximum farmers being small and marginalized in India, here cooperatives would ensure that farmers are getting the required amount of capital and labor. These farmer cooperatives have been very successful in Northwest China and France.
● Credit Problem: In order to make labor and capital available to farmers, smooth flow of credit needs to be ensured from government’s side. States have been waiving off loans. Last year UP, Maharashtra, Punjab, and Karnataka waived off about Rs.88000 crore of loans. But the sad truth is small and marginalized landholders have not been the beneficiaries as they mostly borrow from informal sources, while the larger landholders who are capable enough to buy inputs have been benefitted. Instead of wasting money in waiving off loans blindly, the government should look for formalizing the credit markets in rural areas. Banks must be incentivized to go to rural areas to provide credit which can be done when farmers have stable harvesting because, if there is stable harvesting then banks would not have to fear for NPAs. So, it is necessary to improve other areas of agriculture to improve the credit market.
RELATIVE PRICES:
Due to inability to hold/store their produce, unexpected outcome of their produce and lack of education/awareness; farmers in India are unable to play with the markets i.e. they don’t hedge in surplus/shortage scenario. Moreover, the agriculture sector in India being so unexpected still, expectations play a very big role in determining prices of their produce. And, this is not wrong to say that their expectations push them into the non-profitable vicious cycle whenever there is a shock in the market (COBWEB MODEL). How?
In Time period 1, if there is a shortage of produce, the market price increases but farmers do not necessarily benefit because, the output is already low and price increases once the quantity is realized in the market i.e., in the post-procurement period.
In Time period 2, farmers expect higher price of their produce so, they overproduce their crop and brings down the price of it. Thus, the lagged expectations make them vulnerable to the shocks in the market.
In Time period 3, there is a reduction in crop sown area again leading to hike in the price level. And the same cycle repeats.
The government does provide relief to farmers through MSP but, it seems to have been failing. NSS report, 2013 says that awareness of MSP is high only for few crops like; wheat, paddy, and sugarcane. Moreover, 2016’s data suggests us that government procures only a very small portion of total produce e.g. in 2016, out of 22 million tons of output of pulses only 2 million tons were procured.
Suggestions:
● To address the problem of inability to hold/store the farmer’s produce, the government should promote the setting up of cold storages and warehouses. It can be done by incentivizing people to set them up e.g. by making easy credit available to them. This will play a major role for farmers to hedge their surplus/shortages.
● The government must keep a check on foreign competition. Our government shields our farmers from cheap imports by hiking import duties. But, in recent times, there has been a delay in doing so e.g. in 2017 during Kharif Harvest government did hike the import duties of crude soya oil from 17.5 to 30% during November –end but, it was when farmers had already sold their produce. So, they were traders and middlemen who were the beneficiaries. To tackle this problem, we have to have a continuous study of agriculture markets and have a more efficient forecasting department.
Moreover, these traders and middlemen are the ones who hoard the produce since they have resources in hand. e-NAM (electronic National Agriculture Market) is a great initiative by the government. Government is expected to hike up the spending on this year’s budget. e-NAM would link farmers and traders at different locations through the internet. Till now, 14 states and 470 mandis have been linked under e-NAM. This would certainly minimize the effects of middlemen/traders on farmers income. And, the government must ensure that there is enough penetration of internet with the promotion of e-NAM all over.
COST:
As per the estimates of economic survey 2017-18, 74% of total debt in 2012 was accounted for by cultivator households. And, a total of 35% of cultivator households were indebted in 2012. Majority of the cultivators, as they are small and marginalized, at the starting of the season borrow money (majorly from non-institutional sources) to meet their cost and repay the loans once they sell off their produce. But in India, productivity in the agriculture sector is so uncertain that major chunk of farmers become unable to repay their loans due to crop failures, inefficient utilization of resources, non-availability of crop insurance and Health issues. So, the cost incurred increases many folds. This is why, as per the Indiaspend analysis of government data nearly 70% of India’s agricultural households spend more than they earn in a year.
Suggestions:
● The government should pump more money into Pradhan Mantri Fasal Bima Yojana (PMFBY). It was launched in 2016 but, has been under criticism due to its inadequacy. Its objective is to provide insurance and financial aid to farmers when there is a crop failure as a result of pests and diseases or natural calamity.
● It has been found that outstanding loans for health reasons have been doubled over a decade till 2012. The government must promote the use of insurance in the health sector too so that, people in rural areas have savings in hand and contribute towards enhancing investment to GDP ratio.
CONCLUSION:
Keeping all the above suggestions aside, some people might question the increase in government expenditure be skeptical of the efficacy of interventionist supply reforms. Although I agree that focusing on market-based supply-side reforms is a better way to deal with the problem (since other sectors would not have to suffer from under-budgeting), because in market-based supply-side policies government can reduce its spending and borrowings. But, the problem is, this is a long-term policy - as labor market adjustment is very slow unless there are required interventions. So, getting results by 2022-23 would be near to impossible then. That is why government interventions are needed in areas of infrastructure, pricing, imports & exports, and others. In simple words, the Indian government needs to give precedence to agriculture in the upcoming budget to achieve the Prime Minister’s aim.
References:
1. (2016). 2016 Global R&D Funding Forecast. A Supplement to R&D Magazine.
2. Agriculture and Food Management. (2016-17). Indian Economic Survey, Volume-2 , 164.
3. Chand, R. (March, 2017). Doubling Farmers' income Rationale, Strategy, Prospects and Action Plan. NITI Aayog, National Institute for Transforming India, Government of India .
4. Chand, R., Saxena, R., & Rana, S. (2015). Estimates and Analysis of Farm Income in India, 1983–84 to 2011–12. Economic & Political Weekly .
5. Dholakia, R. H., & Dholakia, B. H. (1993). Growth of Total Factor Productivity in Indian Agriculture. Indian Economic Review , 25-40.
6. Nin, A., & Yu, B. Developing Countries and Total Factor Productivity Growth in Agriculture: New Evidence Using a Malmquist Index with Constrained Implicit Shadow Prices.
7. Saha, D. (2017, June 27). 70% Of India’s Farm Families Spend More Than They Earn–Debt Main Cause of Suicides. Retrieved from http://www.indiaspend.com.