Decoding the Union Budget 2104: Agri Sector

Very few sectors are as important, yet as beleaguered as agriculture in India. Engaging more than 50% of the country’s workforce, it offers livelihoods to 75% of the population living below the poverty line. It consumes 80% of the nation’s fresh water resources, a quarter of the total electricity and more than 70% of central government subsidies. However, it accounts for just about 14 per cent of GDP.

Indian agriculture is heavily dependent on rainfall, with just about a third of the total arable area being irrigated. In recent times, temperatures as well as the variability in rainfall have been increasing, adversely impacting the farm production.

Consequently, the policy agenda must aim to contain food inflation, yet making farming profitable; make agricultural production and the farmers more resilient to weather variations; improve productivity of the subsidy spends, and minimise their market distortion impact.

Regrouping the proposals along the above lines will help decode the Budget.

Contain food inflation, yet making farming profitable:

Since this objective has an inherent conflict, the Government is using five different strategies to tackle the complexity, viz (1) funds have been allocated to set up two more research institutions of excellence, two additional agricultural and horticultural universities, and a Kisan TV, (2) substantial resources have been provided for upgrading the warehousing and agri-tech infrastructure, besides creating a corpus for ‘Long Term Rural Credit Fund’ to boost investments, (3) financial support has been extended to Bhoomi Heen Kisan through NABARD, and to set up a Producers Development and Upliftment Corpus (PRODUCE) to build the capacity of the producers organisations, (4) promised that the Central Government will work closely with the State Governments to reform the APMC Acts, and (5) proposed to establish a Price Stabilization Fund to mitigate the distress from price volatility.

Make agricultural production and the farmers more resilient to weather variations:

Besides giving impetus to watershed development through a new programme called Neeranchal, a new scheme called Pradhan Mantri Krishi Sinchayee Yojana has also been announced. If the Sinchayee Yojana is implemented as well as the earlier Pradhan Mantri Gram Sadak Yojana that made a significant difference to the rural road, we can hope for better days ahead in irrigating farms. Funds have also been allocated to establish a National Adaptation Fund to mitigate the challenges arising out of climate change. One would have liked to see some funds allocated to a reworked crop / weather insurance scheme too. That didn’t happen.

Improve productivity of the subsidy spends, and minimise their market distortion impact:

Quite rightly, it has been announced that MNREGA will now be substantially linked to agriculture and allied activities. Shortage of labour during the peak agricultural operations was a major problem of the farmers so far. It is also good to see the Government’s commitment to restructure FCI, and improve the efficiency of food grain management in the country. Perhaps the most important announcement related to agriculture in the Budget is the scheme to provide to every farmer a soil health card in a Mission mode. This will go a long way in scientifically rationalising the fertiliser usage and reducing the subsidies.

In sum, all of these steps will put more money into the hands of the farmers!

 

First published in the Rural Marketing Association of India's Special Budget Edition at http://www.rmai.in/pdf/rmai%2021-07-2014.pdf

Curb food prices without harming the farmers

Various measures have been deployed to combat food inflation. Subsidies on food and fertilisers, imports of food as well as regulations to prevent hoarding of farm produce did succeed in stabilising prices from time to time. But such crisis management has been able to provide only short-lived relief, and prices have gone up from 2007.

Bringing down food inflation will benefit the consumer, but make prices unattractive to farmers. This will accentuate poverty. Unremunerative prices discourage investments in agriculture, causing supply-side shortages, fuelling inflation further. So, the most effective way of tackling this issue is to focus on bringing down consumer prices, ploughing a larger share of the consumer spend back to the farmer.

First we need to lower transaction costs. The Agricultural Produce Market Committee (APMC) Acts mandate all farm produce should be brought to mandisfor auctioning, making these platforms virtual monopolies. The farmer pays to transport his produce over long distances, before knowing the price at which his produce would be sold, or whether any other market would have paid a better price.

The journey from farm to consumer involves multiple levels of transportation, handling expenses, commissions of agents and a mandi cess, adding nearly 20% cost to food prices. This absurdity was acknowledged years ago, and anew Model APMC Act recommended by the Centre in 2003.

This Model Act must be implemented in all states. Unless farmers have the freedom to sell at farm-gate or other transparent platforms directly to buyers, transaction costs will remain high and drive consumer prices higher. Next, we need to cut wastage. Anywhere from 5% to 40% of food is wasted along the chain, depending on the perishability of the crop and the season. First, market instruments must empower farmers to produce as per tomorrow's demand, rather than be guided by yesterday's prices.

If the Forward Contracts Regulation Act (FCRA) is amended to permit trading in options, farmers are assured of a minimum price when sowing, based on future projections simulated by a market consensus. This will align production volumes to future demand conditions and minimise wastage. We need large investments to set up climate-controlled infrastructure to enhance the shelf life of farm produce. The private sector has the capacity to invest and add value to such infrastructure.

But regulations like the Essential Commodities Act (ECA), which impose stock limits and curb movements, create uncertainty, acting as a deterrent to such long-term investments. We need to add value to farm produce by facilitating food processing on a much larger scale. Food processors do not find it worth their while to engage with farmers directly due to APMC restrictions. And the ECA does not distinguish between hoarders and genuine market players. The risk management capacity of food processors is squeezed, because options are not permitted under FCRA. So, reforms in APMC, ECA and FCRA are critical to mobilise investments in the food processing sector.

India's agricultural yields are far below the best-in-class. Depending on the crop, productivity improvements can range from 20% to 100%. Though Indian farming has seen progress, induction of technology and mechanisation is still below par. Agriculture is still exposed to high climate variation risks. Given that around 65% of India's total sowed area meets its requirements from rainwater alone, it is imperative to invest in technology to make agriculture climate- and weatherproof.

These include introduction of specially-developed seeds that withstand extreme weather, diverse soil conditions and various biotic stresses. Solutions like crop and weather insurance are also essential to whet the risk-taking capability of the farmer, who can then invest to step up productivity, participate more effectively in agricultural value chains and garner alarger share of consumer spends.

Market-distorting subsidies have to be rationalised to make agri-business more viable and bring investments into the sector. Private enterprises engaged in agribusiness must focus on research and innovation to make agriculture remunerative to farmers and ensure the products are relevant to consumers.

First published in Economic Times on 27th June 2014 at http://economictimes.indiatimes.com/opinion/curb-food-prices-without-harming-the-farmers/articleshow/37280685.cms