India’s Failing Enterprise: The Agriculture Sector

Though India is often characterized as a burgeoning economy rapidly undergoing the process of urbanization, 58 percent of the country’s rural population is still dependent on agriculture as a primary source of income. India’s agricultural economy has been struggling of late. Though such a large portion of the country’s population is reliant on this sector of the economy, agriculture contributes little to India’s GDP, constituting only 17.4 percent of India’s economic volume in 2016. Earlier this year, thousands of disgruntled farmers across the country demonstrated against low earnings and high debt and called on state governments to grant crop loan waivers as well as debt relief. Many state governments chose to grant these waivers, but this has only added to the plight of stressed assets in most public sector banks. A high amount of debt in public sector banks decreases the lending capacity of banks, with negative ramifications on overall agricultural investment and productivity levels.

This article discusses the current problems plaguing India’s agriculture sector, outlined under a “5P” framework i.e. Price, Product, Position, Protection, and Profitability. Agricultural reforms cohesively addressing these 5P’s will be critical in increasing the overall return on investment for farmers and agriculturalists across India.

Price

When reforming the ailing agricultural pricing mechanism, India should map the needs of its growing demographics with the entrepreneurial spirit of farmers across India to produce crops that will maximize their profits. Currently, as a result of the Essential Commodities Act (1956) and the National Food Security Act (2013), excessive government intervention and over-subsidization have worsened agri-performance and affected production patterns.

A dual-track market liberalization approach may allow farmers to get both a minimum price for their products from government agencies (in return for a minimum sell) and a market price i.e. on selling over and above a fixed quantity of agricultural produce (beyond government procurement). China followed a similar strategy at a local level across most agrarian provinces in the early 1980’s. This allowed farmers to maximize efficiency in their production patterns to get the best price for their produce while the government was able to secure a minimum procurement of crops for redistribution purposes among people who were marked below the income poverty line.

Product

Given the prevalence of low prices for agricultural goods, farmers across India often switch from producing essential cereal crops to producing more profitable cash crops (such as wheat, rice, and sugarcane). There is also little incentive to produce non-cereal crops like pulses and fruits. This often results in a supply-demand mismatch and little crop diversification, which further affects overall food prices and drives up inflation levels. To bridge this mismatch, farmers producing cereal crops across states are currently guaranteed a minimum price through a Minimum Selling Price (MSP). However, a minimum selling price is not enough for the farmer to shift the production pattern towards cereal crops and away from  higher priced cash crops.

Moreover, a lack of sufficient public and private investment in the areas of infrastructure, irrigation, and warehousing utilities facilitates the production of non-cereal crops and disincentivizes most farmers from producing the non-cereal crops. For example, when the demand for pulses in the north of India is high and supply is low due to inadequate production levels in nearby areas, seasonal food prices go up. This causes the government to often import these food products, resulting in a high import bill.

Position

After the Agricultural Produce Marketing Committee Act (APMC) was statuted, most states across India created APMC’s to allow farmers to obtain direct access to nearby markets and sell their products at a better price. Recently, to make the APMC more farmer friendly, the Modi government introduced a National Agriculture Market (NAM) strategy. NAM is a pan-India electronic trading platform created to provide a single portal for APMC-related information and services. However, sub-organizations such as the Small Farmers Agribusiness Consortium (SFAC)—the agency implementing the NAM project—does not guarantee that farmers in a particular location will obtain higher prices by selling their commodities in nearby urban centers after travel and fees paid to mandis are taken into account. Also, the limited awareness of the NAM portal among most farmers fails to structurally address the farming enterprise.

Protection

Another central issue affecting the social and economic protection of the enterprise of farming across states in India is the effectiveness of crop insurance schemes. The recently announced Pradhan Mantri Fasal Bima Yojana (PMFBY) is a scheme created to compensate farmers in the event that damage is incurred to a crop. On paper, the PMFBY comes across as a reasonably fair scheme. Apart from low premiums and the sum insured, this national crop insurance scheme also promises speedy claim settlements through the use of technology: remote sensing, satellite imagery, and drones for generating crop yield estimates and GPS handheld devices and smartphones for capturing field of images and transmission of data on a real-time basis. However, the procedural implementation of the PMFBY scheme since its announcement remains slow. Many farmers are still unaware of the scheme, and the union government has disbursed inadequate funds when crop failure of an insured person has occurred.

Profitability

The profitability of the farming enterprise is conditionally dependent on pushing forward reforms based on the 4P’s discussed above, as these would promote the maximization of sales of produced farm products. Still, investment in the agri-business sector is desperately needed to enhance the profitability of Indian’s agriculture sector. One way of doing this is to facilitate easier access to financial credit through localized financial institutions in coordination with National Bank for Agriculture and Rural Development. Another is to promote public investment in the Reserve Bank of India’s micro-finance credit program, which would produce a “crowding in” effect that could spur greater private investment in agri-business as well. Such an effect of investment from both the public and private sectors will consistently ensure the profitability of the farming enterprise through market-generated incentives under the guidance of the visible hand of the state.

Conclusion

A  package of reforms devised under the 5P framework would insert new life into India’s most beleaguered agriculture sector. While crop loan waivers may temporarily relieve farmers’ debt, they will have a harmful impact on the financial health of states while doing little to address the real problems afflicting farmers across the country. Instead, a cohesive policy approach that addresses each of the 5P’s will be a vital step towards a strong and stable India.

Image 1: Asian Development Bank via Flickr 

Image 2: International Center for Tropical Agriculture via Flickr 

Posted in , Economics, India

Deepanshu Mohan

Deepanshu Mohan

Deepanshu Mohan is an Assistant Professor of Economics at the Jindal School of International Affairs. He holds a BA in Economics from Fergusson College, Pune, and a Masters in Economic History from London School of Economics and Political Science. His main research interests lie in International Economics, History of Financial Crises and Indian Economic & Social History. Of late, Deepanshu has been researching and exploring the politico-economic impact of some of the major historical events in India’s Economic History (e.g. 1857-War of Independence, 1906-Partition of Bengal) and studying their socio-economic relevance. He is also currently associated as a Columnist with the India at LSE website.

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