The economic survey 2016-17 prepared under former Chief Economic Adviser, Arvind Subramanian had done an in-depth analysis of the risks and possible solutions on the agricultural sector. A recap of the main findings can be a good input for the preparation of budget 2019. It pointed out clearly that the agricultural sector is characterised by instability in incomes owing to various types of risks related to production, weather, markets, and prices. The uncertainty in the growth of agriculture is mainly attributed to a deficiency in rainfall since 55 per cent of agriculture in India is rainfall dependent. As per the survey, agricultural growth varies between -0.2 and 5.6 during 2012-13 to 2016-17. The Gross Capital Formation (GCF) in Agriculture and Allied Sectors relative to Gross value Addition (GVA) in this sector is about 16.3 per cent (13.5% by the private sector and 2.8% by the public sector) in 2015-16. The GCF in agriculture as a proportion to the total GCF declined from 7.8 per cent in 2014-2015 to 6.9 per cent in 2015-16. Although yield growth of pulses, oilseeds, and cotton are comparatively better, yields of other crops highly fluctuated. The average farm size in India is small (1.15 ha) and the share of small and marginal land holdings (less than 2.0 ha) account for 72 percent of land holdings.
Average incomes are low
The median agricultural incomes (as measured by income from cultivation, net of cost) was just Rs 19,250 in 2012-13 or about Rs 1600 per month (NSS, 2012-13) which was ominously less than any salaried person at the bottom of the hierarchy. It shows the vulnerability of farmers as a whole, even of that of large farmers. These low and volatile incomes need to be addressed through effective implementation of income support schemes like PM-KISAN and also crop insurance schemes like PMFBY.
Indebtedness
Another side of the coin of low incomes is higher indebtedness. Rural indebtedness is increasing over the past decade. Of the cultivator and non-cultivator households in rural India, about 74% of the total debt was accounted for by the cultivator households. The percentage of cultivator households indebted increased to 35% in 2012 from 26 percent in 1991. The survey mentioned that indebtedness was higher among small and tenant farmers and is vulnerable to shocks and poverty.
Livestock as an alternative income
The small farmers rear livestock and poultry as a solution to the problem of low incomes and higher indebtedness in growing crops. As in the livestock sector with limited income, farmers get regular and stable income. The importance of the livestock sector is visible from the fact that the small farmers spent about 50% of average expenditure on it. However, historically, only a meager amount was allocated to this sector, now with the formation of a separate Ministry of Animal Husbandry, Dairying and Fisheries, it is now time to rectify this negligence.
Strategies for managing risks
The agricultural sector is dominated by various kinds of risks from production owing to issues of inputs such as water management, weather, price, and credit to market risks like sudden fall in prices due to a bumper crop, as in the case of tomatoes and onions every year.
Production risk
In India, for many crops, yields are half of that of the world average. It indicates scope for enhancing yield through technology. The yield per hectare of wheat in India is less than the world average and less than one-third of the best performing nation. The skewed distribution of fertiliser subsidy, pricing policies, and the resultant imbalances in the use of fertiliser, require corrective measures to optimal use of fertilisers to reduce the cost to farmers. It was addressed through Soil Health Card (SHC) Scheme and Direct Benefit Transfer (DBT) on fertilizer on a pilot basis with good results. However, both these schemes are suffering from teething troubles. The availability of quality seeds in the country is important to increase yields. The availability of quality seeds has increased from less than 40 lakh quintals during the decade of the 60s to 380 lakh quintals in 2016-17. However, the seed supply chain is not fully developed in remote and backward districts and for neglected crops like pulses and oilseeds. There is a long way to go in improving the supply chain of inputs across India to make Indian agriculture competitive.
Weather risks
The economic survey suggested that, in a scenario of water stress, cultivation of water-intensive crops like sugarcane and paddy needs to be replaced by less water-intensive crops like pulses and oilseeds. Shift from water-intensive crops to less water-intensive crops in water-stressed regions needs to be a top priority. The water use efficiency in conventional irrigation ranges from 30% to 50% against 90% in the case of Micro Irrigation (MI) including drip irrigation. Many studies confirm that, with MI system, irrigation and fertilizer costs can be reduced by about 3%. The Benefit-Cost (BC) ratio of installing MI (micro-irrigation) system is greater than one in almost all states and across crops. It signifies the economic viability of MI systems even without subsidy in the enhancement of the farmer’s net income.
Agro-meteorological Advisory Services (AAS) can be effectively used to reduce weather risks. The effective use of weather forecasts along with crop model and advanced ICT tools to communicate forewarning about drought/flood conditions along with contingency measures to benefit the farming community needs to be given priority. In general, the information provided by the AAS system may translate into a net gain ranging from 8 to 10% to farmers who used the information.
Price Risk
The Indian farmer faces price uncertainties every season year after year due to supply and demand fluctuations, speculation and hoarding by traders. There have been several reports of distress sale by farmers, especially of perishables including in the last few years in case of tomatoes, onions, and pulses. Farmers need to be compensated for inefficient input and output markets, which result in a high input cost and lower and volatile output price. Field data indicate that Minimum Support Price (MSP) operations are ineffective to support farmers and it is also incompatible with WTO. A possible solution lies in a broader shift towards Direct Benefit Transfer (DBT) from MSP procurement except for paddy and wheat. Increasing food processing infrastructure is also essential to reduce costs of transport, logistics and value, add to make the Indian agriculture competitive globally.
Credit Risks
Access to institutional credit enables the farmer to purchase inputs on cash, tide over periods till receipt of payment from the sale of produce, which at times is delayed and staggered, and also to invest to enhance productivity. The ratio of agricultural credit to agricultural GDP has increased from 12 per cent in 2001-02 to around 40 per cent in 2016-17. The economic survey raised concern over the predominance of informal sources of credit for farmers. As per the NSSO 70th round data (relating to January to December 2013), 40 per cent of the funds of farmers still come from informal sources. Local moneylenders account for almost 26 per cent share of total agricultural credit. Alarmed by these concerns, the government targeted increase institutional to 11 lakh crore for the year 2018-19. In a significant positive move, of the total institutional credit to agriculture, the share of long term credit was increased to 35 per cent. Short term loans were given under the Interest Subvention Scheme (ISS), under which farmers availed crop loans up to R 3 lakh at 7 per cent interest and the effective rate of interest was lowered to 4 percent for those who repaid their loans promptly. Although there was a uniform push from the government to enhance institutional credit, north-eastern region and other backward districts are far behind the target.
Market and policy risks
Market risks are rising in the uncertain global environment. However, it also creates some trade opportunities. The escalating US-China trade war may open up the market for Indian agricultural exports to both China and the USA. However, to capture these opportunities, India needs to remove all restrictions on internal and international trade on agricultural commodities and dismantle fragmented legislations that govern agriculture to provide space to develop one-market-one-nation.
By A Amarender Reddy
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