Do our farmers know more about their economic conditions than our policy analysts and public intellectuals? The latter would insist otherwise.
Take Bharat Ramaswami for instance. In his report to the XV Finance Commission, Ramaswami refers to a paper by Chand, Saxena and Rana to suggest that farming is a profitable activity.
“Chand, Saxena and Rana (2015) show that farm income was as much as 70% higher than the cost of all variable inputs (including hired labour) in 2011/12. While such profitability was exceptional because of the unusually high farm prices that year , the profitability ratio was in the range of 40 to 50% in the 1990s and mid-2000s,” he states.
Another popular narrative, supported by influential policy analysts and mass-media influencers,suggests that the farmers are rich people as they buy luxury cars.
This two-part series attempts to go beyond such simplistic narratives and examines the reality of farming conditions to identify a possible approach to farming policy – an approach that can help find a long-term solution.
Let us then begin with a simple assertion: Farming is not a profitable activity, and it can not make farmers rich, given our pricing policy and the MSP mechanism that helps us to implement the policy.
Distress in Agriculture is real: Low earnings, combined with high Indebtedness
The latest Situation Assessment of Agricultural Households (SAAH) Survey, released during September 2021 informs us that the average monthly income[Note 1] for the agriculture household (not per capita) was INR Rs. 10,084 per month or INR Rs. 121,008 per year, which is less than 20% of the average national household income in that year. We also observe that the average agricultural household is increasingly dependent on labour income and not on earnings from cultivation (Table 1).
Income from wages at Rs. 4,063 per month is higher than the monthly income of Rs. 3,798 from farming. During the six-year period, the income from wages has grown at thrice the rate of growth in income from farming.
The households, with land holdings of less than one hectare, earn even less than Rs. 10,000 and they constitute about 70% of the households.
Table 1
Situation Assessment of Agricultural Households, NSS Round 77, Sep 2021 and Key Indicators of Situation of Agricultural Households in India, NSS Round 70, Dec 2013
(Note: The earnings from farming (or crop production) have been arrived at by deducting only the paid-out expenses. That is, these earning do not provide for the opportunity cost of household labour or the capital (land and finance) – more on that later when we discuss the basis for arriving at MSP.)
Animal husbandry has been the only saviour for rural India, where the net earnings have grown by 12.9% per annum, but they are still less than half of the farm income. Animal husbandry is a capital-intensive activity, and the rural households are capital starved, as they are highy indebted and their indebtedness has been growing.
At the same time, the indebtedness for the households with larger land holdings has grown much faster than their smaller counterparts, with ~80% of the large land-holding households being indebted (Chart 1).
We also know that the proportion of borrowing used for revenue expenditure is higher for larger farmers. In other words, the larger farmers too are borrowing for meeting their revenue expenditure. The smaller farmers use between 50% to 80% of their loans for meeting their consumption expenditure, which means that they don’t borrow to invest (Table 2).
Yet another challenge is that the smaller farmers depend largely on non-institutional sources (Chart 2), i.e., smaller the holding, larger is the borrowings from non-institutional investors. Only 25.9% of this debt is meant for farming related capital expenditure, the rest is for revenue expenditure or personal consumption.
In summary, the average agricultural household led by a small producer earns less than 40% of its meagre monthly income of Rs. 10,000 from farming and another 40% from wages. In per capita terms, it means an average earning of about Rs. 2,000 per month. Many of the farming households then are highly indebted.
Food Subsidy Programme too suggests that “all is not well”, as also the RBI’s Consumer Confidence Survey
The Government of India’s decision to extend food subsidy programme for another five years is the proof, if we need one, to establish the fact that an average Indian is poor and will continue to be poor for the foreseeable future. The press release seems to be taking pride in a situation that, in fact, should be worrying us.
“This is a historic decision that places PMGKAY amongst the world’s biggest social welfare schemes aimed at ensuring food and nutrition security for 81.35 crore persons, at an estimated cost of Rs. 11.80 lakh crore over a 5-year period,” it states.
RBI’s urban consumer confidence survey has been reporting the pessimism zone reading since December 2016, except for just one reading of 104.6 in March 2019 – just before the general elections. That is, the urban consumer confidence has been in the pessimism zone for seven long years.
Going by the graph, both urban and rural households are stressed at this stage.
What have farmers been doing?
Crop Diversification with increased Area under Cultivation
Bharat Ramaswami, in his report that referred to earlier, quotes Engel’s law to suggest “migration away from staple agriculture” to raise living standards for the farming community. While there has not been a decrease in area under cultivation for food grains, there is a definite move to migrate away from foodgrain production. Table 3 below reviews India’s area under cultivation for food grains and commercial crops.
We observe that the area under cultivation for cereals has not grown, and that for pulses has grown at an annual rate of 0.61%. There has also been a shift from coarse cereals to wheat, as coarse cereals are not as remunerative as wheat. During the same period, the area under cultivation for oilseeds, other than groundnut, has grown at a CAGR of 0.58%. It has also grown for sugarcane. In short, the farmers have indeed been diversifying their cropping pattern.
We use about 60% of our area under cultivation for cereals, down from 66.2% and about 17% each for pulses and oilseeds, up from 15%.
Increasing yields and raising output
Given that there are natural constraints in expanding the area under cultivation, an increase in yield is the only way to raise the level of output. As seen in the Table 4 below, we have experienced an all-round increase in yield per hectare.
Growth in agriculture output for major food grains as well as commercial crops has been driven by growth in yield, not so much from growth in area under cultivation (Chart 4). The only exceptions are rapeseed, mustard and soya bean. It is not, therefore, surprising that we continue to depend on oilseed imports.
Crop Diversification has its Limits
A very high degree of correlation can be observed in yield among various crops, even when there is limited correlation between area under cultivation, implying that the farming community does not really enjoy any significant diversification advantage within foodgrains crops. For example, the correlation between area under cultivation of coarse cereals and rice is just 0.26, but the correlation between yield is 0.71. A similar behaviour can be observed between rice and pulses. Wheat does have a lower correlation with yield for coarse cereals and pulses.
The situation is not too different even when we include commercial crops. Tables 5 below informs us that only sugarcane has low or negative correlation with other crops.
(Author's Note: It is possible that low or negative correlations may or may not hold once we estimate them by season and geographical region. For example, the wheat growing region is not necessarily the same as the sugarcane growing region and the benefit of diversification is not likely to be available to the households in each of these regions.)
Nature is not always on Farmers’ side
We now look at the uncertainty that a farming family faces – uncertainty that is largely caused by weather and other natural causes like pest attacks. Natural uncertainty is the main cause of yield and output uncertainty. Quality of output too suffers in many cases, resulting in lower price realisation.
Based on Chart 5 above, it can be observed that there is a significant decline in growth in gross value-added (GVA) in all the years following a drought (years of large rainfall deficits are in red).
For example, lower rainfall during 2002-Monsoon Season resulted in a decline in GVA growth from 9.0% to 0.2%. Similarly, it declined from a growth of 5.6% in 2014 to a decline of 0.2% in 2015 and an increase just of 0.6% in 2016 – 2014 and 2015 were the worst drought years in recent times. We also know that excess rains too destroy crops and thereby value and the ability of the farmer to invest.
(Note: Southwest Monsoon Seasons with deficit exceeding 10% of long-term average are 2002, 2004, 2009, 2014 and 2015.)
Not surprisingly, the growth in capital stock too follows the monsoon trajectory, as an average farmer, with household monthly earnings of Rs. 10,084, cannot afford to invest in building capital stock in a bad year. As we saw earlier, the farming community is already indebted. Hence, it cannot even borrow.
Farmers are not lazy: Labour productivity in Agriculture is low by its very nature
It is often argued that labour productivity in agriculture is not as good as manufacturing or services. It is inappropriate to compare the value-added per person (measure of productivity used in economics) between agriculture and manufacturing, as the nature of economic activity and its context is completely different.
By its very nature, agriculture does not require labour to be working in the field for 8 or 10 hours every day as the crop does not need continuous care. Similarly, agriculture activity has much sharper peaks, as the farmer has a very small window for field preparation, plantation, pest control, weed removal, harvesting, etc. Rest of the time, the farming family must find alternative means to earn. Since agriculture is largely a rural activity and rural India does not have opportunities for part time employment, the farming household is under-employed by the very nature of activity. It has limited or no alternative means for supplementing its income by working during the non-farming hours.
Mechanisation too, while speeding up the process, creates excess capacity unless the equipment owners can rent their equipment to other farmers. Mechanised farming also needs to deal with peak capacity requirement, given the nature of farming activity. As we know, the average size of farm holdings and poor state of the farming community’s income does not allow them to mechanise or rent. Farming supports an increasing number of people, as non-farming employment has been stagnant.
Manufacturing and services sector can shrink capacity through lay-offs or shutting down capacity, the farming community cannot do that, as the rains or lack of rains hurts only after the crop is sown. Consequently, labour productivity too is at the mercy of God.
People do move away from agriculture when they migrate to cities to look for work, but we have not been creating employment in urban areas for a while, as seen in the youth workforce (15-29 years) participation levels in urban areas below 40% for the last 5 years.Consequently, the pandemic years have seen 40 million people go back to depending on agriculture.
This among other reasons makes it imperative for us to find a long-term solution, which is laid out in Part 2.
Professor Anil K Sood is the co-founder of the Institute for Advanced Studies in Complex Choices (IASCC) based in Hyderabad.