Budget 2015: The need for an overhaul in Indian agriculture sector

There is a huge scope for improvement in the entire post-harvest operations that would benefit both farmers and consumers.  

By Ajeet Kumar | Last Updated: Feb 28, 2015, 03:35 AM IST

Ajeet Kumar

Agriculture is consistently losing its importance in India's economic growth. The agriculture sector contributes to just 15 percent of India's Gross Domestic Product (GDP), but over 50 percent of the population is still dependent on it.

The farm sector, including forestry and fishing, grew by 3.2 percent in the quarter ending September, as compared o 3.8 percent in previous quarter and 4.7 percent in 2013-14. For the entire financial year, it was 1.4 percent.

Backed by continued technological innovations in the sector, India’s food grain production has more than doubled over the decades to a record 264 million tonnes in 2014, but the same is not being capitalised to increase the revenue and profit margins of farmers. There is still a large dependency on rainfall and other climatic conditions for good yield, and post-harvest logistics remains an area of concern.

In the post-1990s period, there has been a continuous decline in government support in the form of declining investments in agriculture. The withdrawal of the State has led to much greater dependence of farmers on private sources. There has also been an upward trend in the cases of farmer suicides over the years, and the victims have largely been marginal and small farmers. Increasing costs of cultivation, leading to higher indebtedness, crop failures and inability to face price rise with greater liberalisation of the agricultural sector have forced farmers to take this extreme step.

With the Modi regime preparing to table the Budget 2015, serious concerns have been raised regarding the agriculture sector. While various credit rating agencies are questioning government's stand over the minimum support prices (MSP), pro-farmers groups have indulged in keeping pressure for a rise in MSP.

Beside MSP, there are other concerns too, which directly affect both the health of the farmers and consumers simultaneously-- food security, procurement and subsidies among them.

Making a decision for a rise or cut in the MSP is not so simple that it could be drawn unilaterally. Rating agencies are, however, suggesting the government to consider the recommendations of the Jalan Committee on agriculture reforms in the upcoming Budget.

The former RBI Governor Bimal Jalan-led Committee's report on agriculture reforms primarily focuses on bringing down MSP to contain both inflationary pressure and fiscal deficit.

But it's a well-known fact that in India farmers receive only around 25-30 percent of the price the consumers pay for the produce, with the difference going to losses, inefficiencies and middlemen. So blaming MSP for food inflation can’t be justified. Farmers in developed economies of Europe and the United States, in contrast, receive around 75 percent of the price that consumers pay.

The major challenge before the government therefore lies in developing a mechanism which could minimize the intervention of middlemen. There is no existing mechanism in the country which could reduce the huge difference between the farm-gate price and the price, which consumers pay. The current APMC ( Agriculture Produce Market Committee) ACT is fully inefficient in dealing with it.

It's also a known fact that a major chunk of perishable commodities like vegetables (mainly potatoes and onions) and fruits are getting damaged due to inadequate storage facility, inefficient transportation and presence of middlemen in the logistics framework.

India is the second largest producer of fruits and vegetables in the world. But it ranks tenth in terms of fruits and vegetables exports among the exporting countries. India exports only 1 percent of the total production of fruits and vegetables.
 
There is a huge scope for improvement in the entire post-harvest operations that would benefit both farmers and consumers.
 
It should be noted that more than 80 percent of India's farmers are small and marginal and their costs of production are much higher, as against the wealthy farmers. In India, medium and large farmers (5 percent of farmer households) operate more than 20 percent of total operated area.
 
Regionwise too, the situation is not homogeneous. Cost of production in Bihar, Bengal, Orissa, Uttar Pradesh, Rajasthan and Madhya Pradesh is very high as compared to the Punjab, Haryana, Gujarat and the southern states.
 
Also, the pattern of farming is not similar and it varies from region to region. While in Punjab, Haryana, Maharashtra and the southern states it is more capital and technology intensive (centric), in Bihar, UP and other BIMARU states it is more labour intensive.
 
Adding to that, infrastructure, procurement mechanisms, cooperative networks and credit flows also affect the cost of production. In all BIMARU states, these factors are not at par, compared to the northern and southern states.
 
Successful cooperative movements have brought substantial change in the rural economy of Gujarat and the southern states, which has given agro-business status to agriculture sector there.
 
One major factor that has immensely supported farmers of two major Indian states-- Punjab and Haryana-- is the procurement by the government agencies. Almost 75-80 percent of wheat going to Central Pool every year comes from Punjab and Haryana, while states like Uttar Pradesh, Madhya Pradesh Bihar and Rajasthan produce most of their wheat in the country.
 
Farm credit is another factor which should be kept in mind while considering MSP prices. The flow of credit to the farmers of Punjab, Haryana and southern states is easier and effectively operative as compared to the farmers of Bihar, UP, Bengal, Orissa, MP and Rajasthan.
 
Situation of rural co-operative banking system that lends for agriculture and allied activities is very pathetic in all the BIMARU states.
 
Basic infrastructure like irrigation, roads, electrification, storage, access to markets and government procurement is far from satisfactory in states like Bihar. Once these factors improve, the cost of production will certainly go down. Apart from these basics things, use of new technology of farming and the development of allied activities, such as dairy, poultry, fishing, plantation, forestry and food processing will lower cost of production.
 
There is also a need to promote medicinal farming in India. Seaweed is the most important resource for the pharmaceutical sector. Both China and India have the Himalayan region in their territory, but China has progressed ahead in medicinal farming.
 
If the government works seriously in this regard, large scale employment will be generated in rural areas, which can help in curbing speedy migration and strengthening sustainable and inclusive growth.
 
There is also a need to encourage the farmers to export more, or to provide them an easily accessible platform for exporting their produce. Food processing, development of cold storage chains and e-marketing will certainly help in this regard.
 
Those blaming MSP for price rise should also be concerned about inflation that is mainly linked to the supply side. There is always a usual seasonality in the appearance of price rise and it mainly starts taking shape before the sowing period. This is the time when speculators and hoarders start hoarding their stocks, forcing artificial shortages of that commodity in the market. Also, this is the time when stock of that produce is about to end.
 
Like wheat and rice, if the government develops a storage capacity for the perishable commodity, then seasonal price rises would be checked effectively, by supplying those commodities at a time of shortage.
 
Food inflation also has links with the supply crunch, triggered by the international market. To deal with this type of vulnerability, there is also a need to make long-term plan. After 67 years since Independence, India is still dependent on the international market for commodities such as edible oil (mostly palm oil) and pulses. India imports more than 50 percent of its cooking oil demand. Dependency on overseas markets for these commodities is mainly due to lack of consistency and long-term approach in trade policy.
 
To tame price rise, government generally reduces the import duty of that particular commodity but in the longer run this move only escalates the inflow of that commodity in the domestic market and expands our dependability. The government should take into account the concerns of all stakeholders related to that commodity, mainly producers exporters and consumers while taking a decision on duty.
 
When the government reduces import duty, it impacts all stakeholders simultaneously. First of all, import duty cut makes the same domestic commodity dearer and uncompetitive. But at the same time, consumers get the same international commodity at a lower price.
 
The same impact appears when government decides to increase import duty. In that situation, the produce for which import duty is increased minimizes the option for consumers to get same international commodity at best competitive price. In those circumstances, consumers have only choice to purchase domestic products, as the import duty hike makes the same produce of the international market dearer compared to its Indian substitute. However, it protects the interest of farmers or producers.

Apart from that, the government also takes decisions of extending minimum export prices or lowering minimum export prices. When government raises minimum export price (MEP) then it affects interest of both the exporters and exporters-cum-producers by hampering the export of that produce. But the decision enhances the availability of the produce in domestic market and benefits consumers.
 
Wheat, sugar, cotton, edible oil, rubber are commodities that are directly related to the government’s trade decisions. In the past few years, the government's approach to deal with these commodities trade has been widely exposed.
 
In liberalised economies, removal of trade barriers in the form of free trade agreements with different regions and countries are also a major concern for their own farmers. For example, with the signing of free trade agreement (FTA) with South East Asian countries, a detrimental impact was observed on the Indian farmers who produce black pepper, cardamom and rubber. Prior to signing the agreement, India was leading exporter of these commodities in international market. But after the agreement, India's exports have been on a continuous decline.  
 
There is a growing demand that the government should be careful in signing these agreements for the well-being of domestic growers. The government should first prioritize the concerns of their own farmers.
 
In the coming days, Indian farmers will have to face more challenges. With falling oil prices, demand for cutting MSP will escalate in the coming days, as it has triggered the decline in the prices of sugar, edible oil and rubber internationally.
 
Falling oil prices are now restraining the diversion of sugar, maize, rape seed and palm oil for ethanol production, as the production cost of this alternative oil now has become uncompetitive compared to the crude. Low diversion of these commodities will add more to supply resulting in more pressure on prices.