Disclaimer: The following analysis is neither in favour of nor against the recent farm laws since the matter is already being decided at democratic and judicial levels. The intent of the article is to create a critical ability within the UPSC aspirants as to why there is a need for policy reforms in agriculture? Once that is established firmly, the “How” can then be decided.
The major policy reforms of 1991 did not cover agriculture. Initially, many thought these reforms were useless, they would harm the country, and were being undertaken due to pressure from the World Bank and IMF. So, nobody felt concerned about the exclusion of the agriculture sector from the 1991 reforms agenda. After a few years, it was found that the growth rate of the Indian economy had started accelerating, driven by the non-agriculture sector. Consequently, India entered the league of modern, emerging economies instead of sinking into that of the third world. This was attributed to liberalization, lesser control of the government on economic activities, and dilution of inspector raj and licence/permit raj. However, agricultural growth remained stuck at the earlier level––with negative growth in agriculture income in five out of 12 years following 1990–91. No wonder, the gap in the agri-income of a farmer and that of a non-agriculture worker increased from Rs 25,398 in 1993–94 to Rs 54,377 by 1999–2000. In the next ten years, the income of a non-agriculture worker exceeded that of a farmer by Rs 1.42 lakh. The favourable effects of the 1991 policy reforms on the non-agriculture sector and the growing disparity between agriculture and non-agriculture incomes caught the attention of some experts and they started speaking about the need for reforms in the agriculture sector. This was followed by a series of papers, committee reports and books emphasizing the need for bringing reforms in agriculture marketing, liberalizing trade, and attracting modern capital and investments into logistics and food value chains. Some clear template for reforms in agriculture emerged around the year 2000. The need for policy reforms in agriculture was further necessitated by the liberalization of agriculture trade due to WTO agreement and rising cases of farmers’ suicides and agrarian distress.
The second reason relates to imbalance between domestic demand and supply. India is accumulating a large surplus of some commodities and at the same time importing huge quantities of edible oil and pulses. Even the import of fruit and vegetables, which can be grown in the country and fetches good income, has been increasing. The reasons are the poor state of market facility, post-harvest infrastructure, and logistics and high risks in returns from oilseeds and pulses.
The third reason is the pressing need for improving export competitiveness of Indian agriculture. The growth rate of India’s population is decelerating whereas that of agriculture has increased to a record level. The declining population growth rate has lowered the growth rate in domestic demand for some food groups and aggregate food to a certain extent. According to the emerging scenario of demand and supply, India will be required to sell 20–25% of the incremental agri-food production in overseas markets in the coming years. This is not possible in the “business as usual” setting, which involves a long chain of intermediaries, small market lots, and high transaction costs. The country is witnessing the accumulation of a large surplus of grain and sugar, which is getting increasingly difficult to dispose of in the overseas markets due to poor price competitiveness of our produce. We need to reduce the logistics cost––which is about 15%––to at least half, to make our products competitive.
Fourth, agricultural segments such as horticulture, milk and fishery––where market intervention by the government is either nil or very little––show 4–10% annual growth. Compared to this, the growth rate in cereals––where MSP and other interventions are quite high––remained 1.1% after 2011–12. This clearly indicates that in recent times liberalized markets are more favourable to agricultural growth than government support and intervention in markets.
Fifth, India is dominated by small holdings that typically have small surpluses. Most of these farmers lack scale, resources, and the ability to take price risk to go for high-value crops. It is not economically viable for them to take a few kilos of fruit and vegetables to the market as these crops mature in lots. If such farmers get markets close to production, like milk collection centres, and have price assurance, they will be encouraged to diversify towards high-value crops.
Sixth, despite the development of communication, road networks and other trade infrastructure, agri-markets remain fragmented––somewhere glut and price crash, somewhere shortage and high prices. There is also poor integration of prices between the harvest and lean months. Farm to retail price difference shows unjustified spread. The reason is low investments in storage and warehouses and dominance of local traders in the market.
Seventh, the growth of food processing needs to be accelerated to (i) match with the rising demand; (ii) pull agri-diversification; and (iii) create more jobs in the rural economy. For this, processors need raw material of desired quality and at the desired time. Buying so many small lots of different quality in scattered markets adds to the cost of raw materials. This requires new arrangement and partnership between processors and producers.
Eighth, with the rise in specialization and commercialization of agriculture, most of the output of several crops produced in a state is consumed outside than within it. This supports efficient and barrier-free interstate trade in the spirit of one nation one market.
Ninth, investment and capital formation in agriculture, which is so essential for the progress and growth of any sector, has seen an unhealthy trend in recent years––the growth rate fell from close to 10% per year during 2002–03 to 2011–12 to 2% in the following decade. The private corporate sector has almost avoided the sector and constitutes less than 2% of the total investments in agriculture and less than 0.5% of the total annual investments of the corporate sector in the Indian economy. There is a pressing need to revive investments in agriculture to modernize the sector.
Lastly, farmers are forced to seek remunerative prices through MSP and government procurement because of their disillusionment with the existing marketing system. Government intervention through procurement-backed MSP is needed and justified in selected cases like staple foods for food security. However, expanding MSP through procurement to all crops involves very heavy fiscal cost––nearly one third of MSP to back MSP through procurement. The Central government had offered states procurement of pulses and oilseeds at MSP and sharing the costs and losses with it. But, states did not opt for this due to fear of heavy losses. This necessitates that farmers are given more and better options and a competitive environment to get better deals for their produce in the open market.