The government’s push to reform India’s agriculture sector has divided opinions and triggered a debate about the state of Indian agriculture. In the context of this debate, two long-standing characteristics of Indian agriculture are noteworthy.
One, Indian agriculture is highly unremunerative. Two, it has been heavily regulated by the government and protected from the free play of market forces.
According to the government, the new Bills passed by Parliament attempt to make it easier for farmers to sell to and produce for the private sector. The hope is that liberalising the sector and allowing greater play for market forces will make Indian agriculture more efficient and more remunerative for the farmers.
In this context, it is important to understand some of the basics of Indian agriculture.
Holdings, income & debt
At the time of Independence, about 70% of India’s workforce (a little less than 100 million) was employed in the agriculture sector. Even at that time, agriculture and allied activities accounted for around 54% of India’s national income. Over the years, agriculture’s contribution to national output declined sharply. As of 2019-20, it was less than 17% (in gross value added terms).
And yet, the proportion of Indians engaged in agriculture has fallen from 70% to just 55% (Chart 1). As the Committee on Doubling Farmers’ Income (2017) observes, “the dependence of the rural workforce on agriculture for employment has not declined in proportion to the falling contribution of agriculture to GDP”.
A crucial statistic is the proportion of landless labourers (among people engaged in this sector) as it captures the growing level of impoverishment. It went up from 28% (27 mn) in 1951 to 55% (144 mn) in 2011.
While the number of people dependent on agriculture has been burgeoning over the years, the average size of landholdings has become reduced sharply — even to the extent of being unviable for efficient production. Data shows that 86% of all landholdings in India are small (between 1 and 2 hectares) and marginal (less than 1 hectare — roughly half a football field). The average size among marginal holdings is just 0.37 ha.
According to a 2015 study by Ramesh Chand, now a member of Niti Aayog, a plot smaller than 0.63 ha does not provide enough income to stay above the poverty line.
The combined result of several such inefficiencies is that most Indian farmers are heavily indebted (Chart 2). The data shows that 40% of the 24 lakh households that operate on landholdings smaller than 0.01 ha are indebted. The average amount is Rs 31,000.
A good reason why such a high proportion of farmers is so indebted is that Indian agriculture — for the most part — is unremunerative. Chart 3 provides the monthly income estimates for an agriculture household in four very different states as well as the all-India number.
Some of the most populous states like Bihar, West Bengal and Uttar Pradesh have very low levels of income and very high proportions of indebtedness. And even the relatively more prosperous states have fairly high levels of indebtedness.
Buying & selling
Another way of understanding the plight of the farmers relative to the rest of the economy is to look at the Terms of Trade between farmers and non-farmers. Terms of Trade is the ratio between the prices paid by the farmers for their inputs and the prices received by the farmers for their output, explained Himanshu, an economics professor at the JNU. As such, 100 is the benchmark. If the ToT is less than 100, it means farmers are worse off. As Chart 4 shows, ToT rapidly improved between 2004-05 and 2010-11 to breach the 100-mark but since then it has worsened for farmers.
A key variable in the debate is the role of minimum support prices. Many protesters fear governments will roll back the system of MSPs. MSP is the price at which the government buys a crop from a farmer. Over the years, MSPs have served several goals. They have nudged farmers towards the production of key crops required for attaining basic self-sufficiency in foodgrains. MSPs provide “guaranteed prices” and an “assured market” to farmers, and save them from price fluctuations. This is crucial because most farmers are not adequately informed.
But although MSPs are announced for around 23 crops, actual procurement happens for very few crops such as wheat and rice. Moreover, the percentage of procurement varies sharply across states (Chart 5). As a result, actual market prices — what the farmers get — are often below MSPs.
These trends of income, indebtedness and procurement are aligned to the inter-state migration. Chart 6 shows the states that witness the most out-migration.
Lastly, the government hopes that these reforms, including the relaxations to stocking food articles, will boost the food processing industry. An RBI study (see Chart 7) found that India has a lot of room to grow in this regard, and generate employment and income.
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This article first appeared in the print edition on September 24, 2020 under the title ‘Simply Put: The farmer — a field report’.
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