From Plate to plough: Why bumper harvests spell doom

With a glut in agricultural production, prices have fallen below MSPs. The government needs to get the agri-market right to address the farm crisis

Written by Ashok Gulati , Prerna Terway | Updated: June 19, 2017 6:18 am
farmers protest, madhya pradesh farmers protest, maharashtra farmers, farmer loans, loan waiver, Madhya Pradesh Chief Minister Shivraj Singh Chouhan consoles family members of a deceased farmer, killed in the recent police firing, at village Lodh in Mandsaur district. PTI Photo

The farmers’ protests in Madhya Pradesh (MP) and Maharashtra indicate that all is not well on the economic front, especially agriculture. If such unrest could happen in MP, which claims to have registered the fastest agri-GDP growth at 9.7 per cent per year during 2005-06 to 2014-15, then no state is likely to be immune from it.

MP has been a showcase for the performance of BJP-ruled states in agriculture. But it now appears that agriculture could be Prime Minister Narendra Modi’s Achilles heel. The government’s poor performance in the sector at the all-India level — testified to by a growth rate of less than 2 per cent per annum during 2014/15 to 2016/17 — has to be addressed quickly, and in a sustained manner. Otherwise, the neglect of agriculture may cost the PM heavily in 2019.

What has really gone wrong with agriculture during the Modi era? And how can it be fixed? We focus here on prices and farm loans, although agriculture suffers from a number of problems.

The current protest in MP seems to have been triggered by the crash in onion prices, but it also drew strength from the news of loan waivers in Uttar Pradesh (UP) and Maharashtra. The seeds of competitive loan waivers were sown by the PM himself — at a rally during the election to the UP assembly, he announced that farmer loans will be waived in the very first meeting of the new UP cabinet, if the BJP were to be voted to power in the state. The new UP Chief Minister, Yogi Adityanath, followed the PM’s advice diligently.

Farmers in other states have been watching, and the loan waiver could lead to a demand for similar waivers in other states — Haryana, Punjab, Karnataka and Tamil Nadu. We won’t be surprised if loan waivers cost state treasuries Rs 2,00,000 crore in the months to come, taking state-level deficits closer to 4 per cent of their GDP.

What is it that the farmers are demanding? Simply remunerative prices for their farm produce. The BJP had promised in its 2014 election manifesto that if voted to office, the party will ensure 50 per cent margin to farmers over their costs. Where does the Modi government stand on that promise after three years in office, compared to the last three years of the Manmohan Singh government?

Graphics by Sarfaraz

We dug out official data of net margins (the MSP minus cost C2) from the Commission for Agricultural Costs and Prices reports of the last six years (see Graph 1). The bitter truth is that net margins in most agricultural commodities — paddy, maize, cotton, gram, sugarcane — have actually declined during the Modi regime. Moreover, if one looks at just 2016-17 data, there were negative margins on several commodities: Jowar (-18 per cent), ragi (-20 per cent), sesamum (-14 per cent), sunflower (-13 per cent), groundnut (-4 per cent), moong (-7 per cent) and urad (-4 per cent). With a glut in tur production, market prices fell way below the MSP and the real losses were even higher. Potatoes, onions and tomatoes seem to have met the same fate.

No wonder there is widespread unrest amongst farmers. They suffered back-to-back droughts in the first two years of the Modi government, and now, in the third year, despite good rains and bumper harvests, they are suffering due to the collapse in prices. Loan waivers are not a solution: They are band-aids and give temporary breathing space to policymakers.

The best way to handle prices is to “get the markets right”. Remember, prices are determined by the forces of demand and supply, and cost enters through the supply curve. Factoring in only the costs plus pricing without considering the demand side can lead to even greater distortions, and therefore needs to be avoided.

But how does one get markets right? Take the case of tur; India had a bumper harvest of tur in the last season. But the government banned its exports, private entities were not allowed to hold stocks and trading in futures had also been banned. No wonder, with bumper harvest on the one hand, and strangulated markets on the other, prices crashed, tumbling way below the MSP, creating misery for farmers and causing unrest.

The solution is simple: Abolish all export bans, private stocking limits and restrictions on futures trading in all agri-commodities. This is all the more desirable in commodities whose imports are open at low or zero duties. If this is not done, the government will be forced to buy all commodities whose prices nosedive. This is neither an efficient, nor a feasible policy option.

For perishables like onions, potatoes and tomatoes, we need more and better storage facilities, linkages with processing firms, contract farming, opening land lease markets, etc. We need to develop efficient, equitable value chains — like the AMUL model in dairy.

But there is one problem on the agri-credit front that needs to be addressed urgently. Farmers need cash immediately after harvests to pay their debts from formal and informal sources. Warehouse receipt systems and giving the farmers advances against their stocks is the way to go.

The biggest failure of the RBI and NABARD has been on the financial inclusion front: Even in 2013 — the latest information we have — of the total outstanding debt of rural households, 44 per cent came from informal sources (Graph 2). Interest rates in the informal sector hover anywhere from 15-30 per cent.

Thus, instead of interest subvention schemes, the government needs to focus on financial inclusion if it wants to address farmers’ problems on a sustainable basis.

Gulati is Infosys Chair Professor of Agriculture and Terway is research associate at ICRIER
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