The long-term dynamics of development and historical experience of other countries indicate that as an economy grows the share of agriculture in GDP and employment goes down.
As far back as 1918, BR Ambedkar had warned of the dire consequences if people were not taken out of agriculture. But even after a century since Ambedkar’s warning India’s economy is still agrarian.
According to the Socio-Economic and Caste Census, SECC in 2011, out of 24.39 crore households in the country, 17.9 crore households are in villages and most of these (around 50%) are directly engaged in agriculture.
Indeed, the agriculture sector is a critical segment of India’s economy in terms of employment and income generation.
However, farming has now become a risky business, far riskier than industry. Twice every year, farmers first face a production risk and then a price risk. The average monthly income of the farm household was estimated to be about Rs. 6,426 by the Situation Assessment Survey of Agricultural Households ~ NSS 70th round (2014).
Farm incomes have almost stagnated during the past 4 years, partly due to falling prices, output and import glut and demonetisation. Nearly 70% of India’s 90 million agricultural households spend more than they earn on an average each month, pushing them towards debt, according to an IndiaSpend analysis of various Government data.
The impact of the outstanding loan to farmers manifests itself in various forms in the rural economy, the most visible one being suicide. The latest data on suicides shows that in 2015, a total of 12,602 people in the country’s farming sector committed suicide.
This comes to one suicide every hour that year. The data also dwells on the loan-waiver demands in Maharashtra, Madhya Pradesh, Uttar Pradesh, and Tamil Nadu, which account for more than 50% of farmers’ suicide in the country. This is indeed a major national tragedy.
Farmers’ distress seems to have reached a tipping point, with scenes of dejected farmers throwing agricultural produce such as vegetables and milk on the roads in many places.
Rather than address the genuine problems of farmers, politicians are shamelessly busy scoring points over deaths of innocent farmers. However, stung by the farmers’ agitation expressing their discontent, the Government of India in its Budget 2016-17 made an explicit announcement of doubling farmers’ income by 2022. The well-being of the peasantry depends on how they get the value of their produce.
If the Government’s pricing policy is unfair, then the community can never thrive. Increasing agricultural output leads to fall in prices. This can to an extent be arrested by declaring and enforcing the minimum support price (MSP) ~ the price above the market price for the commodity in question.
MSP is a form of market intervention by the Government to insure farmers against any sharp fall in prices. The MSP was announced by the Government for the first time in 1966-67; it covered wheat in the wake of the Green Revolution to save farmers from depleting profits.
Since then, it has been an integral part of India’s agricultural price policy. Presently the MSP has been announced by the Centre for as many as 25 crops (14 kharif, 7 rabi and 4 other crops) at the beginning of each season viz. rabi and kharif.
To tackle the agrarian crisis and farmers’ distress, the National Commission of Farmers (NCF) was set up in February 2004 under the chairmanship of Sompal. Subsequently it was led by MS Swaminathan.
The Commission categorically recommended that MSP should be fixed at a level that is 50% higher than the comprehensive cost of production.
Though the recommendation was not incorporated in the National Policy for Farmers 2007, the BJP promised ~ in its election manifesto for 2014 Lok Sabha elections ~ to introduce the Swaminathan recommendations on MSP.
But after coming to power, the party did not bother to keep its promise; rather it was submitted before the Supreme Court, through an affidavit, that the Government cannot implement the Swaminathan MSP.
The recent Gujarat elections revealed the political implications of the farmers’ movement that put the Union Government under tremendous pressure for taking up the farmers’ issue seriously.
As a result, the Finance Minister, in the Union Budget for 2018-19, has announced the proposal to hike the MSP of the upcoming kharif crop at a level that is 50% higher than the cost of production, ostensibly to benefit farmers. It has been claimed that this decision to hike the MSP is a “historic” step towards doubling the farmers’ income as promised in the earlier budget.
However, on close scrutiny, the assurance of a major hike in MSPs appears to be misleading and has overtones of political expediency. It is not clear whether the Government is thinking of C2 (the comprehensive cost of the farmer) or only A2+FL (paid out costs plus imputed wage of family labour).
If the latter is taken as cost of production, there is nothing new in the announcement because MSPs of the bulk of the rabi crop have remained 50% higher than A2+FL for the last 10 years and MSP for wheat is now more than 100%.
In 2014, MSPs for most crops exceeded A2+FL by more than 50%. Will the Government now reduce the MSPs? Indeed, the use of the term, “historic”, has rendered the farmers delusory.
Farmers do deserve remunerative prices for their produce. For the last several years farmers and their organisations have been demanding the Swaminathan MSP.
But it is grossly inappropriate to fix the MSP in a mechanical manner. The Commission for Agricultural Costs and Prices (CACP) is the actual authority for working out the MSP.
Before fixing the price tag every year, the authorities analyse a wide spectrum of information and data ~ the cost of production, change in input prices, input-output price parity, trends in market prices, demand and supply, intercrop price parity, the international price situation, implications of subsidy, the impact on the cost of living and so on.
The Minimum Support Price can have an impact on the country’s economy. A steep hike in MSP (more than the wholesale prices across all states) will provide an incentive to producers to sell their produce to the Government procurement agencies and hence, the supply to the open market will be reduced and the price will rise.
In the absence of an effective Public Distribution System (PDS), this may endanger food security of substantial sections of the rural poor. Moreover, the rural poor who are the net buyer of food grain, will be adversely affected owing to the erosion of real incomes with the rise in prices.
The resultant rise in prices of agricultural commodities, used as raw materials in processing and manufacturing, shall severely affect the overall growth rate and the global competitive capacity of the country.
MSPs shall have a definite effect on the cost of public procurement, distribution and buffer stocks of PDS food grain. This means an increased subsidy bill. The increase in MSP can also result in inflation.
MSPs are like an option or insurance, and kicks in only if market prices fall below the threshold. NSSO data reveals that more than 75% of Indian households are not aware of the MSP of crops grown by them.
Moreover, around 93% of farmers in our country do not have access to MSPs as the Government does not procure on time and farmers have to resort to distress sale. Farmers in India are not a homogeneous segment.
Landholdings are getting fragmented. According to the 70th survey of the NSSO (2014) among the agricultural households, 69.44% are classified as marginal farmers and 17.14% are small farmers. The proportion of marginal and small farmers works out to be 86.58%.
The average size of marginal holdings in only 0.41 ha (1 acre) and that of small holdings is 1.4 ha. Given their economically unviable size, and small quantities of marketable surplus, there would be a marginal increase in the total net income of these farmers from agriculture even if the Swaminathan MSP is allowed to them.
Governments procure food grain ~ mainly rice and wheat ~ at MSPs in order to release the procured stocks at much lower prices through PDS. This would mean an increased subsidy bill. Since procurement is an open-ended system, buffer stocks continue to increase.
Thus the Government becomes the biggest hoarder of food, thanks to the annual ratcheting up of MSP. The rise in stock means rise in storage cost, loss due to deterioration in quality and consequential rise in food subsidy. It is a reality that traders (middlemen) and rich farmers predominantly earn a profit from the procurement operation, while poor and marginal farmers are victimised by exploitative prices.
The MSP also has the added problems of distorting the crop-choice on land. This is evident from the declining groundwater table in Punjab, which become major paddy producing area though it is, traditionally, not a paddy-producing region.
As per the Shanta Kumar Committee report, MSP benefits only 6% of farmers. Considering its deleterious effects, there was a move to freeze MSP in 2002. In the present era of market-driven development, the CACP and public procurement system are liable to be more vulnerable.
In the initial stages of the Green Revolution, the main objective of Government intervention in the agricultural market, buying food grain at MSP and so on was maximisation of food production to make the country self-sufficient and building up of buffer stocks.
But continuing such intervention, especially by increasing MSP every year, serves the interests of a few groups rather than society as a whole. The interventionist policy is determined by the interest of farming groups which ultimately determine the fate of political parties in the country.
They clamour for price support for their products and other subsidies, but they are less interested about encouraging the Government to undertake any long-term solution to mitigate the agrarian crisis and farmers’ distress, especially of the marginal and small agricultural households. Demands for MSP and subsidies are emphasised because they are more visible to voters than the demand for a long-term solution.
Indeed, the MSP is not necessarily a panacea for the problems that plague Indian agriculture. We need to look beyond MSP. Significantly, certain long-term and fundamental reforms of agriculture were recommended in 2004-06 ~ land reforms, access to irrigation facilities, productivity of land and labour, credit, insurance, public investment in agricultural infrastructure, education and skill development of farmers, promotion of rural non-farm sectors, setting up of village level labour intensive agro industries, etc.
We need to create a farmers’ group in collaboration with marketing NGOs, SHGs, agri-processors, modern retailers and agro-exporters. Since the volume of productive assets owned by poor farmers is falling over time, the income earned by these assets is also deceasing.
To arrest this decline, they must be given other productive assets, like education, skill, health, infrastructure, and economic activities. Only then will those in agriculture be able to earn a higher income through higher yields. Otherwise, we will spend public money, increase the yield and bear witness to the diminishing income of farmers.
In the words of the Nobel Laureate, Muhammad Yunus; “Poor people are bonsai people. There is nothing wrong with their seeds. Our society never gave them a base to grow on. All that is required to get poor people out of poverty is for us to create an enabling environment for them.” Likewise, our distressed farmers do not need market-distorting MSP or subsidies. They need an enabling environment and scope to grow like tall trees.
The writer is a retired IAS officer (Courtesy: TS)