If you haven’t read first three chapters, read them here first,  Chapter two, Chapter three

India lives in villages and agriculture is the soul of Indian economy- Mahatma Gandhi

“Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture, we would know much of the economics of being poor.”- Theodore Schultz, Nobel laureate

As per NSS data avg annual income of the median farmer net of production costs from cultivation is less than Rs 20,000 (avg per cpaita income at current prices is about 98000 per annum in India)

Post independence agricultural success

• Chronic food shortages of 1960s (recall PL 480 programme) have given way to  grain self-sufficiency (not nutrition self sufficiency) despite a two-and-a-half fold increase in population.
• In 1966-67, Indian wheat and milk production were just about 1/3 of US output.  Contrast it with recent figures with wheat output being 60% higher than America’s, while milk output being 50% higher. (Result of green and white revolution)

This seems like a remarkable success. Then, what’s the problem with Indian agriculture?

• Indian agriculture has become cereal-centric (wheat and rice production to the neglect of pulses and oil seed production even though demand for protein based items is rising)
• It is regionally biased (Punjab, Haryana, western UP cornering all agri subsidies) and input-intensive, consuming generous amounts of land, water, and fertiliser
• Input intensive cultivation means there is sharp decline in cultivable land available per capita as also much lower levels of water per capita
• Challenge of climate change – erratic monsoon, more frequent flood and droughts
• Challenge of income- As we mentioned above avg income of farmer from agriculture is just 20000 per annum.

Let’s discuss some major issues with agriculture

1. Productivity/ Yield-  low productivity esp. in pulses is the central challenge facing Indian agriculture.

Consider the case of wheat and rice-

As already stated, Indian agriculture has become cereal centric and input intensive and these two crops are grown on most fertile tracts with irrigation facilities and corner bulk of agri support available to all crops across country. Yet, if we compare average yield of wheat and rice in India with China, we find that

1. avg yields of wheat is 39% below China and in case of rice 46% below that of China’s.
2. In wheat save for Punjab and Haryana, most states have yield lower than that of B’desh
3. In paddy even Punjab trails behind yield level of China while other states trail behind even B’desh.

Now if we compare productivity in pulses of which India is topmost producer, consumer as well as importer, yield gaps are even more stark.

1. On an avg, countries like Brazil, Nigeria, and Myanmar have higher yields
2. even the key pulse producing state of M.P. has 60% yield of China’s

Take home message from above analysis-

• Yield gap varies among states in India and we could make rapid gains in productivity through convergence within India
• For instance, in pulses, if all states were to attain even Bihar’s level of productivity, pulses production would increase by an estimated 41% on aggregate and we would be self sufficient in pulses

Why is pulses productivity so low (land related reasons)

• Most of the land dedicated to growing pulses in each state is unirrigated
• National output of pulses comes predominantly from un-irrigated land

Issue of Intensive use of water (problem of Indian agriculture becoming highly input intensive)

• Although water is one of India’s most scarce natural resources, We use 2 to 4 times more water to produce a unit of major food crop than does China and Brazil.
• We have invested in flood irrigation method (canal and tube wells) which is highly inefficient way of using water
• Also despite being water scarce, we are virtually exporting water by exporting water guzzling crops such as paddy, sugarcane, cotton also meat (not exactly crop)
• India now exports about 1 per cent of total available water every year (demand of 13m people)

Reason for inefficient use of water-subsidies on power and water for agriculture.

Result– water tables are declining at a rate of 0.3 meters per year

Solution-  shift to sprinkler and drip irrigation and rainwater harvesting.

• Leverage MGNREGA labour to build rainwater harvesting structures.
• accord “infrastructure lending” status to these new technologies (infra lending status decreases cost of borrowing to invest in these technologies)

Govt. response– Convergence of various schemes under PM krishi Sinchai Yojana which will help in convergence of investments in irrigation, from water source to distribution and end-use i.e. at individual farm level.

What is drip irrigation?

• A type of micro irrigation method in which perforated pipes are placed either above or slightly below ground and drip water on the roots and stems of plants, directing water more precisely to crops that need it
• It reduces consumption of fertiliser (through fertigation ) and water lost to evaporation, and higher yields than traditional flood irrigation <Fertigation is the process of introducing fertiliser directly into the crop’s irrigation system.>

Problem in adoption of drip irrigation- high initial cost of purchase and the skill required for maintenance.

Solution- the increase in yields and reduction in costs of power and fertiliser use can help farmers recover the fixed cost quickly. Hence, provision for credit to farmers to adopt this technology.

But there are teething troubles in agri finance as mentioned in last year’s economic survey box-

Problem of agri finance-

1. 40% of agri finance still by informal sector
2. 26% by usurious moneylenders
3. Share of long-term finance i.e. capital loans in overall credit going down over the years (70% in 1991 to 40% in 2011)
4. Share of small loans decreasing (less than 2lakh rupee loan from 78% of total in 2000 to 48 % in 2011 and 10 lakh and above from 8% in 2000 to 28%in 2011) March rush (jan to march quarter) in loan disbursal i.e. loan in lean season to comply with PSL
5. More and more agri loans going to urban and metropolitan areas

Implication of all this is that lending to agriculture is grossly misallocated # largely to ;arge farmers # not being used for capital formation # worst of all may not even be going into agriculture.

Issue of Minimum support Price (MSP) and Procurement being cereal centric and regionally biased

• while the government announces MSP for 23 crops, effective MSP-linked procurement occurs mainly for wheat, rice and cotton and indirectly for sugarcane via sugar mills
• Even in these crops majority of procurement is from Punjab, Haryana, Western UP.
• Poor farmers aof Rajasthan and Jharkhand are not even aware of any such MSP policy

Result– Regional disparity, excess stock of wheat and pulses and import and volatility in prices of pulses.

Solution-reorienting agriculture price policies, such that MSPs are matched by public procurement efforts towards crops that better reflect the country’s natural resource scarcities i.e. provide higher MSP for those crops which we import such as pulses and oil seeds and at the same time procure thise crops so that MSP policy is effective on the ground.

One way we discussed in chapter two was to not only taking economic but social and environmental costs and benefit into account while deciding MSP. Copy pasting from chapter two

• Eg. Costs of producing cereals in Punjab and Haryana; declining water table, soil quality degradation, post harvest burning of stalks causing pollution, rich farmers getting benefits
• v/s benefits from pulses; nitrogen fixation, lower import dependency etc.

For cereals a system of Price Deficiency payment can be instituted

Under this system if the price in an APMC mandi fell below the MSP then the farmer would be entitled to a maximum of, say, 50% of the difference between the MSP and the market price. This subsidy could be paid to the farmer via Direct Benefits Transfer (DBT)

For eg. If say MSP for wheat is 100 rs per kg. In present scenario, govt would procure it at 100 no matter if market demand is very low and prices some 10 rs per kg. Farmer has no incentive to switch to other crops to reflect market demand.

But in price deficiency payment, he will receive only 10 + (1/2*100-10) = 10 + 45 = 55 rs. It protects farmers while signalling him to produce crops reflecting market demand.

Issue of Agri Research and extension 

Agricultural extension is the application of scientific research and new knowledge to agricultural practices through farmer education. Basically educating farmers about the latest technologies being developed in the labs i.e. lab to land linkage.

While Indian Council of Agricultural Research (ICAR) with agriculture research universities played a key role in the Green revolution. Of late agriculture research has been plagued by severe under investment and neglect.

Three key weaknesses

1. Agri education is weak in states due to (i) resource crunch, (ii) difficulty in attracting talented faculty, (iii) limited linkages and collaborations with international counterparts, (iv) weakening of the lab-to-land connect; and, (v) lack of innovation
2. Low investment in public agricultural research in India. As share of agriculture GDP, it is even less than that of Bangladesh and Indonesia
3. Majority (63.5 per cent) of scientists have low to very low level of productivity

Solution

• There is need of instituting performance indicators in universities.
• Improve investment as a proportion of agri GDP
• securing participation from the private sector
• instituting a system in which the winner is offered a proportionately large enough award for innovating desirable agricultural traits (such as improving pules productivity considerably) but the intellectual property rights of the innovation are transferred to the government
• Leverage mobile phones to provide timely information to farmers
• Leverage the potential of drones (UAVs) to provide crucial information on crop health, irrigation problems, soil variation and even pest and fungal infestations that are not apparent at eye level to farmers
• Improve regulatory process to address concerns against GM crops while adapting high yielding technologies

Agriculture market segmentation

Last year’s economic survey mentions, effectively, India has not one, not 29 but thousands of agricultural markets.

Why are so many markets bad?

Whole capitalistic economy is dependent on trade, competition and specialisation and so many markets prevent that thus reduces overall welfare because it prevents gains through competition, efficient resource allocation, specialization in sub sectors (everyone has to produce everything as they can’t trade with others resulting in jack of all trades master of none) and fewer intermediaries. 

• If there were one common market, prices would be same from Kashmir to Kanyakumari and Dwarka to Puri (don’t add transport and storage cost please).
• In USA which has a common market, maximum price variation is in case of peanuts with highest prices being 1.75 times that of lowest prices. Remarkably it is lower than India’s minimum price variation crop Tur dal.
• It creates particular problem for perishables such as fruits, vegetables, onions, hence sudden and sharp spike in prices in one area while being sold at throwaway prices in some other area

Solution-

• Pass GST bill
• Create common national agriculture market
• Create better physical infrastructure
• Improved price dissemination campaign
• Remove laws that force farmers to sell to local monopolies i.e APMC act

What you have to read for yourself

1. All the figures which are basically curves
2. Open all the hyperlinks. Learn, understand and revise
3. Read chapter eight A National Market for Agricultural Commodities- Some Issues and the Way Forward  from last year’s economic survey to understand concepts behind need for common agri market

Ask all your doubts in the comment section below or in doubts clearing forum . All your suggestions, criticism and feedback are most welcome.

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