Agricultural Distress: Challenges & Remedies

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Ashish Agrawal
Founder, India Business Analysis | IIT Roorkee, IIM-C alumnus

The distress being faced by India’s agricultural sector has become a part of the mainstream agenda; and rightly so. Despite supporting almost half of India’s population, the rural economy remains in a dire state, and policy initiatives have failed to provide any breakthrough. The report published by the Swaminathan Committee more than 10 years ago remains the most comprehensive document dealing with the issue.

Here is a brief attempt to understand the issues, taking inputs from the report. The growth rate of agriculture has always lagged behind that of the other sectors. Against GDP growth rate of about 7.5% over the last 10 years, agriculture has grown at barely 3.5%. As a result, its share in the GDP has come down from about 19% to just about 12%.

The decline is agriculture’s share would not have been a problem if it had been accompanied with sufficient increase in employment opportunities in the other sectors. However, that has not happened; leading to continued high dependency of population, and therefore, higher distress. Measures required to reduce agricultural distress can be clubbed into three broad groups: increasing productivity of farmland, increasing profitability of farm produce, and most importantly, reducing the number of people dependent on agriculture. Productivity improvement is directly linked to investment in fixed assets, like in any other industry. This, itself, is linked to availability of credit.

Nearly 65% of fixed assets created in the industrial sector has been financed with bank credit. In case of agriculture, not only is the share of credit low, that of long-term credit is even lower. As per an RBI report, share of agriculture in total loan disbursed is just 7%, of which share of long-term loan is less than 1%. Clearly, the focus has been on firefighting, rather than on capacity building.

Agriculture is dependent on a large number of factors, such as availability of land, water, fertilizers & other input materials, access to finance, crop insurance, access to market and pricing, mechanization, soil health, and so on.

Water is the most critical resource for agriculture. The impact of irrigation on agricultural performance is evident from the fact that regions such as western UP, Haryana, and Punjab which have achieved 80–100% irrigation have a cropping intensity of 160–180%. Cropping intensity refers to the number of times crop is planted in an area during the year. On the other hand, Maharashtra, Jharkhand, and Chhattisgarh have less than 20% irrigated area; and therefore, are prone to maximum agricultural distress.

However, productivity enhancement has its limitations; and small farms cannot achieve the productivity level of large farms. The issue has ramifications, since almost 80% of the farm families belong to the marginal and small farmer categories.

The issue can be addressed by developing Self Help Groups (SHGs), which can bring together small holdings into an Estate model covering both the production and post-harvest phase, incentivizing agri-processing industries to tie up with these farmers, and more importantly, wean away these households to other occupations, such as livestock rearing.

A NABARD report on rural income pattern provides an interesting perspective. While households with less than 0.01 hectare of land derive about 17% of their income from livelihood, the share is only 8% for the 0.01–0.4 ha group. The impact of this income supplementation is such that households with smaller land have higher income than the next group!

The second group of intervention involves improving profitability, calling for reducing the length of supply chain, better price discovery, and reducing middlemen’s margin. The current government intervention revolves around fixing a minimum support price (MSP), which, however, is not applicable to all crops, and is physically not possible for all farmers to access.

The role of the Agricultural Produce Market Committee (APMC) Act across the states needs to be understood in this context. It was enacted during the times of scarcity to keep a tab on the quantity of food being produced, and to ensure optimal distribution within a state. With increase in food production, the shortages have largely disappeared. However, farmers were — until sometime back — forced to sell their produce through the APMC, where they also had to pay a substantial amount of fees, making it a buyers’, rather than a sellers’, market.

States have woken up to the inefficiencies caused as a result; and most of them have repealed/modified the Act in the last 2–3 years. While private procurement has been picking up, these are still localized, and do not seem to be geared towards becoming national agencies. To enable better price discovery, and develop the entire nation as one market, the central government had launched the eNAM portal (electronic National Agriculture Market) linking all the APMCs. Another innovative intervention is Bhavantar Bhugtan Yojana, introduced by the Madhya Pradesh government in 2017, whereby the farmer is paid the difference between his actual sale price and the notified price, thus eliminating the price risk. While the scheme has significant potential, it is still early days.

However, farmers are not able to derive full benefit of the schemes due to lack of knowledge and limited perceived power to command prices. About half of the surplus of small/marginal farmers is disposed of in distress sale, where he gets a lower price. As per various estimates, farmers get no more than 10–25% of the final price of their produce. The issue needs to be addressed through local bodies, which would play the role of middlemen. The Swaminathan report calls for at least one female and one male member of every one of about 250,000 Panchayats to be trained by district/state-level professional management; and help them play this role. Similarly, farmers’ organizations should be promoted to facilitate direct farmer-consumer linkage. These organizations should also be trained to handle all issues, such as choice of crop, sourcing of seeds, use of technology, handling losses in farm storage, packaging, transportation, and so on.

Yet, none of these interventions can really work unless the number of people dependent on the farmland is reduced. The problem is more acute in case of landless labor, who are reliant on farming. However, that is an issue the entire nation grapples with; and achieving a breakthrough is difficult to visualize.

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