Doubling Farmers’ Income?

Of Agriculture and Reforms

I Satya Sundaram

Indian agriculture has been facing formidable problems. Even when the rate of growth is satisfactory, there is no improvement in the plight of farming community. Whatever incentives are offered by the Government, the rich farmers take advantage of them. This is so in the case of minimum support price (MSP) also. The basic problem facing Indian agriculture is this: the cost, risk, and return structure of farming are unfavourable for most farmers.

 Area under irrigation should be stepped up. Of India’s 32.9 million hectares (MHs) of geographical area, nearly 140 MHs are net sown area and out of it 70 MHs are rain-fed. Rain-fed areas produce nearly 90 percent of millets, 80 percent of oil seeds and pulses and 60 percent of cotton while supporting nearly 40 percent of livestock. Thus, Indian agriculture is vulnerable to climate change. Government support is needed to bring more land under irrigation. Introducing agro-ecology in rain-fed areas could be a good policy option.

 The share of income from crop production in the total income of farmers declined to 37 percent in 2019 from 48 percent in 2014. This means there is diversification in the sources of income. The share of wage/salary in the total income has gone up to 40 percent from 32 per cent. According to the Situation Assessment Survey (SAS) of National Statistical Office (NSO), released in 2021, the average monthly income of an agricultural household has gone up to Rs 10, 218 from Rs 6, 426, up by 59 percent.

 Fragmented holdings push agricultural households to tap new sources of income. The latest Agricultural Census shows that the average size of operational holdings fell from 2.28 hectares in 1970-71 to 1.84 hactares in 1980-81, 1.41 hactares in 1995-96, and 1.08 hactares in 2015-16. The latest National Sample Survey (NSS 2018-19) shows that 37 percent of agricultural household income came from crop production and cultivation, compared to 48 percent in 2012-13.There is a substantial rise in income from animal farming. Farmers are also earning comparatively higher income from non-farm business and leasing out land.

 Experts say secondary agriculture is important to enhance farmers’ income. According to Ashok Dalwai, Chairman of the Committee on Doubling Farmers’ income, farm sector is strengthened by technological revolution. Providing food and fodder is not enough. The focus should be on employment and better income. The horticulture production is impressive. But, there is tremendous potential for plantation crops and medicinal plants as well.

 According to Food Corporation of India, wheat stocks on November 1, 2021 stood at 41.98 million tonnes (MTs), compared to 40.29 MTs in the same period a year ago. The stocks more than doubled over the past six years from 18.84 MTs in 2016.

For raising farmers’ income, agriculture diversification (AD) holds the key. AD is the shift from the regional dominance of one crop towards the production of a large number of crops to meet the increasing demand for these crops. A diversified cropping pattern will help in mitigating the risks faced by famers in terms of price shocks and production /harvest losses. India has tremendous potential for crop diversification and to make farming a sustainable and profitable economic activity.

AD is meant to reduce risks associated with traditional agriculture and improve returns to investment. AD is important because it ensures food security, generates employment and income and ensures nutrition security. Of course, diversification is influenced by price and non-price factors. The Government’s concentration is on food-grains, especially paddy and wheat. There is no MSP for horticulture crops. The non-grain sector is plagued by market inefficiencies and associated price risks.

The Government is using MSP as a signal to encourage crop diversification which ensures sustainable farming. The Committee on doubling farmers’ Income has already suggested shifting some areas for staple cereals to high-value produce in order to enhance farmers’ income.

The current stress is on precision agriculture (PA) and smart farming. PA implies site-specific crop management. Soil-test base nutrient management practices have helped to improve food-grain production. The PA extensively uses the technology driven solutions for managing the entire set. Importance is given to generating the on-site /on-farm data on a continual basis about various practices, using remote sensing, adopting latest technologies like robotics, and aerial imagery, using drones for spraying pesticides.

In January 2022, the Centre announced subsidies for drones with a view to making them more accessible to farmers. It has been decided to provide 40 to 100 percent subsidies till March 2023 by revising guidelines relating to the existing scheme on farm mechanisation. However, the 100 percent grant will be limited to only Farm Machinery Training and Testing Institutes. An institutional agency is necessary to link platform-based agri-business firms with farmer organisations.

The Government promulgated three ordinances on June 5, 2020 in the name of agro-market reforms. The three farm laws (the last one is an amendment to the Essential Commodities Act) have become polemical, leading to agitations by farmers. The PM announced the repeal of these laws on November 19, 2021.The three Laws are: The Farmers’ Produce, Trade and Commerce (Promotion and Facilitation) Act 2020, The Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act 2020, and The Essential Commodities (Amendment) Act 2020.

Some did support the farm laws. The fear about MSP is baseless. The Government did not say it will be abolished. The Government wanted to marginalise the intermediaries. Strangely, the farmers did not like this, thus indirectly supporting middlemen. There is nothing wrong in allowing farmers to sell their produce to those who offer the highest price. Moreover, the MSP has serious limitations as it benefited only some farmers and a few crops.

The Government repealed the Farm Laws. Critics say this will give a free hand to traders. The state governments will be back with cess and market fees, placing burden on poor farmers. It is also true that contract farming (CF) provides safety- net to farmers. The law relating to CF provides protection against land alienation.

The Essential Commodities (Amendment) Act would have removed stockholding limits on farm produce, offering better prices to farmers and freeing businesses of the constant fear of the law being invoked. It is said that the law relating to CF will enhance demand for high value commodities for better price realisation to farmers, crop diversification, and induce asset-specific movement. The farm laws would have contributed to diversification of horticulture.

There are criticisms against the farm laws. The laws, having significant implications, were passed without any discussion, particularly with states. The laws effectively nullified the power of states to shape the nature and functioning of agriculture markets.

Most small and marginal farmers are also net buyers of food. The Essential Commodities Act (Amendment) 2020 would also hit their livelihoods hard when there is food inflation due to relaxation of stocking limits. The farm laws will not only create volatility in agriculture markets, affecting small and marginal farmers the most, but even undermine the PDS–the Public Distribution System. The small farmers feared that the new farm laws may lead to fall in demand in the local market. They may not be able to sell their produce outside mandis. Also, a few traders have monopolised almost all big mandis.

Experts say without an appropriate regulatory mechanism, deregulation is detrimental to farmers’ interests. For instance, the small and marginal farmers are not in a position to take advantage of the new farm laws. They do not have the means for storage and transportation of their produce to distant markets.

Apart from the vertical tensions between the Centre and the states emanating from them, these agrarian reforms are capable of generating new forms of federal tensions in the form of horizontal tensions–inter-state tensions.

It is widely believed that the framework of MSP and procurement is superior to income support scheme. The MSP scheme allows the state to intervene in the procurement in a targeted way. The relief, unlike cash transfers, is specific and can take care of the nutritional needs of the poor.

The new market reforms should address the problems of small farmers–low marketable surplus, high transaction cost and poor connectivity to markets. They face production and market risks. Some feel that the decision to repeal farm laws may be a stop-gap arrangement. These laws may reappear in other forms under the veneer of agriculture reforms.

Contract Farming (CF) is an arrangement between farmers and firm/contracting agency where farmers agree to grow crops specified by the firm and supply the produce to the firm for a predetermined price. The produce is supplied at specified quantity and quality levels within the given timeframe. The purchaser/firm commits to procure the produce at a predetermined price. Normally, the firm also agrees to provide certain critical agriculture inputs. CF is expected to strengthen the backward and forward market linkages, vital for market--led contractual agriculture. For farmers, CF can bring benefits of not only assured market and price but also access to new technology, seeds, extension and such other non-price benefits.

In July 2020, the Agriculture Ministry released guidelines. The farmers’ liability is limited to the advance they receive. The sponsor cannot get ownership rights, and is responsible for any loss or damage to the farm. The farming agreement should be for a minimum of one cropping season to a maximum of five years.

Some, including the Centre, believe that CF can deliver better outcomes. Giving their produce at the farm gate saves farmers transport cost. CF would help shift market risk to the contract agency, thereby possibly reducing distress selling. It is viewed as a win-win situation.

There are criticisms against CF. It reduces farmers’ bargaining power. Farmers become ‘Price takers’. The Companies are interested in profit maximisation, and hence, may go in for more capital intensive and often less sustainable patterns of cultivation. Cash crops may be preferred to food grains, thus endangering food security.

The existing marketing system is dominated by Agricultural Produce Market Committees. This failed to ensure remunerative price for the farmers. Marketing has become a big problem because the crop procurement scheme is lopsided. It benefited only some states and crops. The procurement has not been linked to the production of States. For instance, in 2018-19, Punjab’s paddy production was only 11 percent of total production of the country, but its share in total procurement of the country was 25.53 percent.

The National Agricultural Market (e-NAM), an electronic trading portal which connects buyers and sellers, was launched on 14th April, 2016. It aims to create a unified national virtual market for farm goods. It ensures better price for farm produce and provides marketing options. Under e-NAM, the Government provides free software and one time assistance of Rs 75 lakh per mandi for computer hardware and IT infrastructure.

Total transactions over e-NAM was Rs 42, 163 crore during April-January FY22 against Rs 31, 366 crore in FY21. This may reach a level of Rs 46, 000 crore in FY22. Looking at the success of 1,000 mandis, e-NAM is now on a path of expansion. According to e-NAM portal, out of 1,000 mandis integrated under e-NAM, online trading is taking place on 571 market yards. Experts say the Government has to focus on inter-state trading by providing third-party guarantees. If the government is serious about protecting small and marginal farmers, it should set up and encourage public and private wholesale markets.

By February 2022, about 1.72 crore farmers, 2 lakh traders and 1 lakh commission agents have been registered on the e-NAM platform. The Centre wants to bring reforms at state level so that inter-mandi and inter-state transactions go up. In March 2022, three states (Rajasthan, Gujarat and Karnataka) allowed free trade of agriculure produce outside mandis, without charging any fee for such deals.

Indian agriculture continues to be a victim of natural calamities. The situation worsened because of climate change. The Government launched Pradhan Mantri Fasal Bima Yojana (PMFBY) in kharif 2016 with the aim to strengthen risk coverage of crops for farmer premium cost over and above the farmer share is equally subsidised by the States and the Centre.

The average sum insured per hectare has increased from Rs15, 100 during the pre-PMFBY schemes to Rs 40, 700 under PMFBY. The scheme covers over 5.5 crore farmer applications year- on- year. Under PMFBY, the premium paid by farmers is fixed at 1.5 percent of the sum insured for Rabi crops, 2 percent for Kharif crops and 5 percent for cash crops. The scheme is implemented on an “area approach basis”.

At the end of 2020, PMFBY disbursed Rs 90, 000 crore to farmers in five years. However, the participation of marginal farmers in the scheme declined in the three years ending March 2021. By January 22, 2022, claims worth Rs 2, 822 crore were pending as states drag their feet on subsidy. This is due to State governments not contributing their share to the scheme.

In the Indian context, Farmer Producer Organisations (FPOs) have to play a vital role in helping small and marginal farmers. The size of the landholding is declining. About 85 percent of the farm land is owned by small and marginal farmers. Also, farmers in the rain-fed areas are left in the lurch in getting benefits of government schemes. With limited marketable surplus, they have lost access to value addition and marketing.

Of course, rural India has credit and non-credit cooperatives. Some of them are however not active. They are also dominated by better-off sections. The FPOs can help farmers in the areas of procurement of inputs, disseminating market information and spreading technology and innovations. They are useful in spheres like primary processing, brand building, packaging, labelling and standardisation. Of course, the success of FPOs depends on professionalisation of management.

The Union Budget 2019-20 announced setting up of 10,000 new FPOs over five years. At present, the intermediaries control prices, credit and marketing. The FPOs are expected to change this situation. They are described as "cluster-based business organisations”.

The Centre has earmarked a credit requirement of Rs 18 lakh and an equity grant of Rs 15 lakh for each genuine FPO (with a membership of at least 300 farmers, with at least half comprising small and marginal farmers). The FPOs now enjoy income tax relief, but they seek MAT (minimum alternate tax). There are zero- tax paying companies. MAT aims to collect minimum tax from such companies.

The Union Budget 2021-22 enhanced the allocation for FPOs by 40 percent to Rs 700 crore, up from Rs 500 crore in 2020-21. However, this allocation has been reduced to Rs 250 crore (a 64 percent cut) in the revised estimates for 2021-22. For 2022-23, it stands at Rs 500 crore—the same as two years ago.

The Centre launched the Agriculture Infrastructure Fund (AIF) in 2020. Studies show it has given a major boost to the strengthening of Primary Agriculture Cooperative Societies (PACS) which are the bedrock of village level credit system. According to the data provided to Rajya Sabha in August 2021, a total of 6,524 projects, at a cost of Rs 4, 503 crore have been sanctioned under AIF–65 percent of the funds have gone to PACS projects.

An important feature of the present agriculture credit policy is interest subvention scheme introduced to provide farmers access to affordable credit. The scheme suffers from limitations in directing credit to a particular crop or a region. The situation may change with the advent of fintech companies assuming important role. For 2021-22, farm credit is around Rs 16.50 lakh crore. This has been raised to Rs.18 lakh crore by Budget 2022-23. The small and marginal farmers can get a loan of Rs.1.6 lakh without any security, up from Rs.1 lakh.

It is possible to adopt a differentiated need-based approach. This would make subvention credit more effective. Of course, the FPOs help is necessary. Also, the present credit system continues to neglect horticulture sector. The credit policy should give priority to enhancing productivity and sustainability.

A recent Study by the Indian Council of Agricultural Research (ICAR) has revealed that technology- centric approach is the key to agriculture prosperity. It has observed that doubling of farmers’ income is possible, irrespective of land size, provided there is backing from the administration. It also observed that horticulture had the prominent share in total income. In some States, livestock and fisheries matter. The ICAR has evolved site-specific plans to double farmers’ income.

Strengthening agriculture is no easy task because the number of farmers is large. Most of them are small and marginal farmers. The Government should concentrate on them. This is possible only when market reforms are taken up seriously. Technology and reforms can ensure economic viability of Indian agriculture.

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Vol 55, No. 32, Feb 5 - 11, 2023