The Crisis In Agriculture: The Answer Lies Outside

Unless the number of farmers (or area under cultivation devoted to such crops) declines over time, the per capita GDP going to these farmers must decline. At the same time, the subsidy on MSP will increase continuously over time.

Photo Credit : Reuters,

One thing is now clear. Whether a case of drought or plentiful rains,  there is farmer distress. The reasons are well known. In a drought, the farmer has nothing to sell and his total earnings fall as he does not get the benefit of higher prices due to limited crop production. In a year of good rains he is stuck with excess production and, in the absence of proper storage facilities, he is forced to unload his stock at low prices to meet his costs.  And the small farmer cannot afford storage costs. Here come the intermediaries who pocket most of the retail price received for any product. The issue is serious enough to constitute the focus of the Union budget of 2018.

The structure of land ownership and production supports the story above. Almost 50 percent of cultivated land is held by small or marginal farmers with land holding of 2 hectares or less. Again, 50 percent production is concentrated in a few basic food grains like wheat, rice, bajra, barley, tur dal, etc. Of this, about 38 percent is just wheat and rice which are covered by the system of MSP. So we have a large number of small farmers cultivating mainly cereals both for self-consumption and the market. To complete the national picture, for about 60 percent of the population agriculture is only a fallback occupation.  Evidence for this comes from the NSSO survey (2005) which showed that 40 percent of all farmers expressed their desire to leave farming as it was not profitable.

Over the decades a large number of measures have been applied to alleviate farmer distress.  Why have they not worked? I will argue that these measures are merely short run palliatives. More specifically, they do not address the conflict with the oldest law in Economics, the Engels Law, and may, in fact, make matters worse. This requires some explanation.

In essence, the Engels Law argues that that the income elasticity of demand for basic agricultural commodities is less than one. What this implies is that as incomes (GDP) increase individuals spend a smaller and smaller proportion on food grain consumption.  Evidence for this for India comes from various rounds of the NSS: consumption expenditure on cereals as a share of total expenditure has been declining continuously. At the macro level, it is not then surprising that the share of agriculture in GDP has declined over time from around 30 percent in 1980 to less than 15 percent today. Herein lies the problem.

The present solutions to agricultural distress cannot work given the Engels law. The oldest solution is to raise the minimum support price of some agricultural goods, mainly wheat and rice.  This was reiterated in Budget 2018. The risk-averse farmer is thus incentivized to grow mainly these two crops. Yet, as we have argued, the share of national expenditure on these items has been declining over time. Hence, unless the number of farmers (or area under cultivation devoted to such crops) declines over time, the per capita GDP going to these farmers must decline. At the same time, the subsidy on MSP will increase continuously over time. 

Paradoxically, measures to raise productivity in these crops ( without reducing the area under cultivation or number of farmers ) will make matters worse. An increase in productivity at the individual farmer level will increase production but, in the absence of storage facilities, the farmer may find himself worse off after the productivity increase. This is not just a theoretical construct. In 2005, ginger farmers of the Northeast were given improved seeds. The production went up to such an extent that prices plummeted and,  in the absence of price support, marketing and storage plans, farmers found their incomes actually declined. Today ginger farmers in the NE are totally opposed to production initiatives. 

Specific production subsidies are designed to perpetuate the structure in terms of crops and number of farmers. Thus, for example, demand is switching towards fruits and vegetables. But in the absence of storage and price uncertainties, farmers still grow these crops only on residual land where increased production possibilities are limited while continuing focus on basic food grains ( and sugar cane in wet areas). The reality is that most farmers are subsistence farmers producing mainly wheat and rice for self-consumption or to be sold under MSP. 

The focus, then, should be on how to move the farmers out of basic agriculture into valued added production. Examples are animal husbandry and processed foods, mainly fruits, and vegetables. These are mostly non-farm ( not necessarily urban) activities involving a chain consisting of production, storage, processing, and marketing. It is the last three phases that must be focused on to enable some level of commercial farming. This also involves linking farmers to the organized sector which has access to technology crucial to these phases. 

The bottom-line is that crop-specific subsidies require continuous tinkering with as demand patterns change. But the state cannot efficiently supplant the market. However, in a democracy, change has to be gradual. The answer lies in general subsidies of which MNREGA is a good example. Other examples of such general subsidies are crop insurance and interest subvention linked to total production. The current system of crop specific MSP has clearly outlived its usefulness.

But who will initiate the change? Herein lies the problem. Given the importance of farmers as political vote banks no one wants to upset the applecart as politicians are elected in the states and agriculture is a state subject. Political advocacy is crucial.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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