Why farming is more important than IT to India's economy and why MSP reforms shouldn't wait

We haven't created adequate work for urban youth, let alone rural ones. In fact, 40 million people have gone back to agriculture, which has saved us from having millions of people live hopelessly. It's time the government does all it can for the sector.
A farmer harvesting paddy crops on the outskirts of Bhubaneswar.
A farmer harvesting paddy crops on the outskirts of Bhubaneswar.(Photo | Debadatta Mallick, EPS)

As the farmers go on the warpath again, we looked in Part I of this series at how real their angst was.

The degree of distress that a typical farming household faces was outlined. The distress they face is caused by a low-level of earnings and high indebtedness. The farming community has opted for crop diversification, expanded the area under cultivation, improved yield and raised output. Despite all this, a farming family still struggles to earn a living that can provide a life of dignity. Nature too has not been on the farmer's side most of the times, resulting in uncertain yields, earnings, and output. Farming is an activity that does not require full-time people, which implies that there is an upper limit to growth in productivity.

In Part II, we discuss the long-term solution to the distress that now afflicts so many more, with at least 40 million people having gone back to farming post the pandemic. This requires that the farmers get a fair price for their effort, capital, and considering the uncertainty that they constantly deal with.

Our current pricing policy and the MSP mechanism are based on premises that do not recognise the reality that the farming community faces. As a first step, this article establishes the fact that the CACP (Commission for Agricultural Costs and Prices) estimates forming the basis for each crop's MSP are biased against the farming community. The minimum support prices neither compensate for increases in cost of cultivation nor for general price inflation. Consequently, they do not provide for improving the farmer's standard of living.

The article then goes on to argue the need for revamping the current MSP system, providing legal guarantee and raising the level of public investment in farming in mission mode.

Let us dive in:

Our current pricing policy: Right goals with an inappropriate structure

The government’s price policy for agricultural commodities is expected “to ensure remunerative prices to the growers for their produce with a view to encouraging higher investment and production and to safeguard the interests of consumers by making available supplies at reasonable prices with a low cost of intermediation.”

A pricing policy is considered to be remunerative if the price increases, combined with increases in yield and output:

  1. Compensates the agriculture households for inflation—general price inflation and increases in cost of cultivation

  2. Helps them maintain their relative (to rest of the economy) standards of living, i.e., results in a real increase in earnings.

  3. Provides fair compensation to an average farmer for his or her effort, investment, and uncertainty that they experience.

Let us now assess if the Minimum Support Price (MSP) mechanism, based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), is effective in ensuring a remunerative price to farmers. MSP is expected to become the floor market price and ensure that the farmers recover their cost of cultivation and earn a surplus.

Neither MSP nor Market Prices compensate the farming community for increases in cost of cultivation

The gap between prices received by farmers and the cost of cultivation is the main reason for farmers’ current plight.

Chart 7, an example from Kerala, suggests that the gap has not only been negative, but also been expanding at a rapid pace, particularly during the recent years. The gap in 2023 is 10x times that in 1999. Given what we know from Situation Assessment Surveys discussed earlier, it is extremely unlikely that the situation is qualitatively different in other states.

Increases in MSP don’t always compensate for Consumer Price Inflation

The analysis in Table 6 below suggests that the cumulative increases in MSP are not sufficient to cover the cost-of-living increases in rural India for many crops. In some cases, the deficit is large, e.g., it is more than 4% for gram, sugarcane and rapeseed and mustard during 2004-09 and wheat during 2009-14 periods, implying that the farmers growing these crops across the country would struggle to even maintain their existing standard of living.

As for the increase in MSP over and above the growth in real GDP, there are only five instances where the numbers are positive, i.e., gram and rapeseed during 2004-09 and arhar and sugarcane during 2009-14 and maize during 2019-23. The average negative level across crops is more than 5% during 2004-09 and 2014-19, with the deficit for wheat and paddy farmers being more than 6.0%.

We do, however, know that the output growth, largely driven by growth in yield, has been positive for most crops. However, the output growth has been less than 2% for most large-volume crops. Even after accounting for output growth, an average farmer’s relative standard of living would decline, as the net deficit is still high across all five periods under study.

In summary, the price increases that have not covered for inflation or provided for real growth in earnings have ensured that the majority of rural India has not participated in economic growth during the post-reform period. Given that there has been an extremely low growth in real earnings, it is not possible for an average farming household to invest in enhancing productivity and be able to deal with losses arising from weather-related uncertainty. If they cannot invest in raising their productivity or build capital for dealing with financial distress arising from weather related losses, there is no way that an average farmer can invest in building capability to migrate to higher value-adding jobs.

We also know that the cost of living in urban Indian is many times higher than in rural India. It is, therefore, not possible for an average farmer to migrate to urban centres and look for opportunities for work. So, is it a suprise that even when they do, they end up living without families and that too in slum-like conditions? In any case, the urban areas have not lived up to their promise as evident by low youth workforce participation.

CACP’s Cost of Cultivation estimates are biased against the farming community

We now examine the cost of cultivation estimates that form the basis for MSP decisions for 22 crops.

The manual on cost of cultivation states that these surveys are used in “fixation of MSP, selecting production strategies and identifying regional comparative advantages in crop cultivation with a view to enhance the productivity and income of the farmers.” The Government of India press releases suggest that the farmers are expected to earn a mark-up of 50% over their cost of production, though it does not mention the reference cost level for this purpose. We examine this premise and determine the level of surplus that an average farmer is expected to earn across different states.

Table 7 below is a busy Table. It attempts to present the complete picture in one go. As a first step, we have identified the best-case states for each crop. A best-case state is the one where a household is expected to realise the highest level of earnings for a given crop.

The table informs us of the following:

  1. Except for cotton in Rajasthan, the farmers don’t earn 50% even on B2 costs.

  2. The average Tamil Nadu farmer has negative earnings from maize farming on B2 costs.

  3. The maximum a farmer can hope to earn is Rs. 135,300 per hectare of sugarcane cultivation in Punjab but he earns only a marginal surplus of 6.6% on C2 costs. But sugarcane is not the main crop in Punjab.

  4. Haryana’s rapeseed and mustard farmers are expected to earn a surplus on C2 costs, with an average family income of Rs. 61,031 per hectare. Once more, rapeseed and mustard are not their main crops.

  5. Paddy and wheat farmers in Haryana and Rajasthan have negative returns on C2 costs.

We must remember that B2 costs don’t cover the imputed cost of family labour and management time. The earnings mentioned above assume that the farmer can achieve the reference level of output. In many cases, the average yield is much lower.

In Table 8 below, we present the details of imputed earnings that compensate a family for its effort and capital. In Table 8, we have provided additional information about family earnings in states that are the biggest producers for a particular crop. Family earnings are lower in these states and these states are either the poorest in the country (UP and Odisha) or the farmers face continuous distress (e.g., Maharashtra) 

In the current model the farmer gets compensated just for 400-500 hours (best-case situations) in a crop season that ranges between 4-6 months, which is less than half the available hours. Similarly, the imputed rent ranges from Rs. 4,000 to Rs. 13,000 per acre, except for sugarcane where it ranges between Rs 16,000 to Rs 35,000 per acre per season. Are these fair levels for labour and capital cost compensation?

Given that 70% of Indian farmers have a land holding of less than a hectare, are the best-case family earnings sufficient to deal with the following: 1. Increasing cost of cultivation and living that is not being covered in MSP or Market-based pricing system 2. Invest in mechanisation of farming and adopt input-intensive methods of production. 3. Invest in their family and themselves to build capabilities that can help prepare for manufacturing and services jobs in urban areas – jobs that are not growing as required. The obvious answer is NO. Therefore, the next question is: what do we need to change?

Premises underlying Agriculture Policy formulation and why these narratives must change

The policy experts argue that we must move as many people as possible away from farming, as labour productivity in farming is low. We must also keep food prices low, as food inflation hurts the poor most – a lazy argument that suggests that people will not be able to earn enough to pay for their food.

Migration from Farm to Non-farm sectors

Bharat Ramaswami, referred to in the introduction, argues that the "Structural transformation by which shares of agriculture in income and employment decline is the outcome of a development process that raises incomes and living standards... The migration of economic activity away from agriculture has its roots in productivity growth in the farm and non-farm sector."

The report argues that "a good part of the solution lies in creating productive non-farm jobs accessible to the farm labour force."

It quotes Engel’s law to stress the need for "migration of economic activity away from agriculture within the overall economy and migration of economic activity away from staple agriculture within the sector of agriculture".

As mentioned earlier, we have not even created adequate work for urban youth, let alone the rural ones. In fact, 40 million people have gone back to agriculture. If anything, agriculture has saved us from having millions of people live hopelessly in slum-like conditions in urban India.

Farm subsidies crowd out investments

Bhart Ramaswami suggests that the policy makers "be aware that subsidies crowd out agricultural investments and delay the structural transformation processes". The report estimates the subsidies to be about 20% of aggregate farm income and argues that "even a substantial rise in subsidies cannot address the sectoral gaps in productivity (which are much to large) or compensate for small size farms".

The premise ignores that the fact that an average farming household borrows for consumption and has nothing much to invest. What are we going to crowd out? If anything, the farmers need investment as well as consumption subsidies to survive.

Finance capital from private equity or enterprise is an expensive solution as they too don’t have a solution to deal with natural uncertainty and are used to receiving bailouts even for dealing with market uncertainty.

What truly constrains farm incomes

Ramaswami also considers the farm size to be a "fundamental constraint to farm incomes". He, however, does recognise that "Production and market risks are a burden to small farmers".

In fact, it is not the farm size, but the MSP mechanism that constrains farm incomes. As discussed in the previous section, the current MSP regime does not provide even fair compensation for effort and capital that the farmers invests and the uncertainty that they have to deal with.

Food inflation hurts the poor

We also hear an argument that an increase in prices for agriculture commodities is not the solution, as food inflation hurts the poor and low-income families the most, as food expenditure is the biggest component of their monthly expenditure.

Food inflation does hurt the poor. But that doesn't mean that we continue with policies that, by design, increase poverty.

Given these arguments, it is not surprising that the policy choices are ensuring that the farmers don’t get the right prices for their produce. Combined with inadequate or inappropriate government investment in agriculture, we end up ensuring that the farming community has a limited chance of raising its standard of living. The fiscal support that is given to the farmer is positioned as a “subsidy” or “revadi” and not a compensation for the uncertainty that the farmer must deal with.

Why should we reform our Pricing and Farming Policy?

It is worth reforming the MSP mechanism, as agriculture employs nearly as many people as the services sector and its impact on India’s consumption growth is more than 2x that of the services sector, as seen in the chart below. Growth in manufacturing drives consumption growth to a far lower extent, as nearly two-third of manufacturing labour does low value-adding work – correlation between manufacturing GVA and consumption growth is just 0.07.

Chart 4

Not being able to get break-even prices leaves no surplus with the farming family, which means that an average family’s ability to invest in its future is compromised across its lifetime, if not generations.

We are heading in that direction, where we are celebrating being the fastest growing major economy with growth rates between 6-7%, without considering the fact our per capita is about 5% of UK’s per capita -- an economy that is about our size.

Summary and agenda for reform of Farming and Pricing Policy

The most important reason that a market-based system will fail is the fact that most Indian farmers are poor and so are most consumers. A farmer must harvest his or her crop during a short window, whereas the consumer buys as and when required. Neither a typical Indian farmer nor a consumer can stock for long periods of time.

We make it an intractable problem through our policy choices, which include ban on exports or allowing imports in the name of protecting consumers. A policy intervention that helps the consumer or producer, at each other’s cost, destroys a market-based system – we have just too many cases where the government keeps banning exports or imports for farm produce. 

Therefore, any argument that suggests that we must have a market-based system in agriculture is fundamentally flawed. We need a governance mechanism that balances long-term interests of producers, consumers, and intermediaries – everyone who participates in the farming value-chain that feeds all of us.

The Minimum Support Price (MSP) programme is meant to be one such governance mechanism that is expected to help farmers recover their cost, earn a fair compensation for their labour and capital. It also allows for keeping prices stable, as the increase in MSP is a policy choice and the government procurement helps manage demand-supply balances during the harvest as well as consumption periods.

We, therefore, argue that we invest to strengthen the MSP system and not destroy it. We propose the following:

1.       Shift to C2 as the basis for assessing farming household’s earnings and identify the minimum required earnings. Farmers are not close to being rich any time soon!

2.       Adjust the imputed cost of labour and capital to reach the reference level of earnings (point 1 above) that allows them to take care of family and compensates for uncertainty and risk they deal with.

3.       Provide legal guarantee so that the market-failure or government’s own tendency to distort prices does not hurt the farming community’s ability to earn.

4.       Invest in farming infrastructure in mission mode as a community resource. If we are resource constrained, expansion of national highways and vanity railway and other projects must wait.

5.       Restructure PM-KISAN, crop insurance, etc. to help build the ability to take risk, not election-timed sops, which includes debt-waiver.

In short, we must go beyond rhetorical references like Annadata to ensure that our policies help our farming families have a fair chance at living a life of dignity. A market-based system, as was being proposed through the now-withdrawn farm laws, is not the solution.

 Professor Anil K Sood is the co-founder of the Institute for Advanced Studies in Complex Choices (IASCC) based in Hyderabad.

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