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Sunday, September 19, 2021

Farm reforms must be oriented towards minimising risk and increasing returns for farmers

Nimai M Mehta writes: Just as entrepreneurs in the non-farm sector, they must be allowed to enter and exit agriculture, on their own terms and contract with whomever they wish.

Written by Nimai M Mehta |
Updated: July 29, 2021 8:17:32 am
Within a true decentralised polity, a farmer in Assam ought to benefit as much from the “Punjab model” as do farmers in Punjab, and vice-versa.

At the height of the farm protests, the ideologically charged rhetoric that the new farm laws would result in a corporate takeover of Indian farms led to the toppling of Reliance cell towers in Punjab. Soon afterward, Reliance issued an official statement that the company had no interest in entering the farm sector. It’s this reluctance of private corporations, large or small, to plunge into the currents of Indian agriculture that ought to worry us all.

Contrary to the dark warnings of capitalist takeovers, the mundane reality of a market economy is that firms survive by being prudent in taking risks. In contrast with the imperial era, when the East India Company grew by muscling its hold within the country, private firms in a market economy grow in size primarily because they have efficiently managed the level of risk while securing real productivity gains for all. Instead, our large public sector undertakings suffer perennial losses because political, not market, motives have inevitably shaped the risk-to-returns profile of our overextended public sector while undermining productivity gains for the economy.

While Indian agriculture was saved from outright nationalisation — thanks to principled opposition by the Swatantra Party in Parliament against Jawaharlal Nehru’s farm collectivisation efforts in the 1950s — the Indian state has since then, in the name of food security, done everything for the peasant farmer but stay off his back, to paraphrase Gandhi’s prophetic views. Even today, a cornucopia of government agencies have a say on all aspects of the farmer’s livelihood — the latest count (https://icrier.org/pdf/Agriculture-India-OECD-ICRIER.pdf) includes 13 central and countless state ministries and agencies that oversee rural property rights, land use and land ceilings; commodity prices, input subsidies and taxes, infrastructure, production, credit, marketing and procurement, public distribution, research, education and extension services; trade policy; agri-business and research — the list goes on.

The result has been a suffocating mix of arbitrary and conflicting policy interventions by both the central and state government agencies. This, combined with poor and varying levels of provision of basic public goods, including irrigation, has meant that some 50 years after the Green Revolution, we all find ourselves trapped in an all-India agricultural landscape characterised by relatively low productivity levels that co-exist with high levels of variation in crop yields across our farming districts. Ironically, we have bought “food security” at the cost of an agricultural sector that ensnares all of us — farmers, households, consumers, traders, firms, and the state — with lower levels of individual welfare and higher levels of overall risk.

Using official crop production statistics for some 734 districts, I have computed the median (typical) district-level yield (in tonnes-per-hectare) for four major crops — rice, wheat, maize, and cotton — along with the geographic variability of this yield (risk) across all reporting districts for each year from 1966 to 2018. Combining these two values — median district yield and its geographic variability across all farming districts — provides us a measure of the all-India level of risk-to-return, in percentage terms, that has shaped the agricultural landscape for each of the four major crops over the past 50 years. The results for rice and wheat, captured in the chart, confirm the following stark lessons.

One, the large gap in rice and wheat yields that opened up between Punjab and Haryana and the farm districts in the rest of the country remains far from being closed — some five decades after the Green Revolution took root in these two states. Plus, rice and wheat grown outside of Punjab and Haryana continue to display far higher levels of yield variation or risk across districts.

Two, severe unevenness in the provision of common goods across districts — irrigation, roads, power, etc — when combined with the absence of well-functioning markets for agricultural land, crops, and inputs, the slow if any progress achieved on labour reform, and the poor quality of education have, taken together, worked to reduce overall resource mobility within and across our farming districts. Most importantly, they have limited the mobility of ideas and technology needed to increase productivity and reduce the variation of yield across districts.

Three, as a result, the real promise of a decentralised system — of experimentation, of learning from each other, and the adoption of best-practices and policies — has failed to materialise. Instead, Indian agriculture since Independence has remained a highly fragmented effort. We seem to have a different “agricultural model” for each of the 734 farming districts in the country.

Without fundamental reforms that allow for greater mobility of farmers and agricultural resources across the country, our farm households remain trapped, each subject to the failings of their own farming districts and states. Within a true decentralised polity, a farmer in Assam ought to benefit as much from the “Punjab model” as do farmers in Punjab, and vice-versa.

Four, the various input subsidies and minimum price guarantee procurement schemes provided by the state, far from addressing the above underlying problems, have worked to worsen the overall levels of productivity and the risk in agriculture, generating adverse effects for all of us, through the degradation of our water resources, soil, health, and climate. At the same time, these policies have tightened the trap our farm households find themselves in. Thus, as is evident in the next chart, outside of rice and wheat, the risk-to-return levels are even higher in the case of maize and cotton, including for Punjab. It is no surprise then that the farm households of Punjab and Haryana fear both, the loss of state support for rice and wheat and the higher risks implied by a switch to other crops.

Finally, the three farm laws are only a part of the far wider set of economic reforms that will be needed to stabilise Indian agriculture. The guiding principle for these reforms must be to create conditions that allow farm households to maximise their income while minimising the overall level of risk in Indian agriculture. Farmers must be made free to determine the best mix of resources, land, inputs, technology, and organisational forms for their farms. The state has too long subjected our farm households to top-down production, marketing, and distribution schemes while trapping them in an agricultural landscape fraught with risk. Farmers, just as entrepreneurs in the non-farm sector, must be allowed to enter and exit agriculture, on their own terms and contract with whomever they wish. The day large or small private corporates show a greater willingness to enter the Indian agricultural stream will at the same time prove to be the day the Indian farmer, along with the rest of us, will have moved to a low-risk, high return path of progress. Getting there is a long-term project that will require commitment on part of all stakeholders. The more we delay the needed reforms, the more difficult it will prove to be for all of us to extract ourselves out of these risk-laden currents of agriculture.

This column first appeared in the print edition on July 29, 2021 under the title ‘How to exit farming risk trap’. The writer is with the Department of Mathematics and Statistics, American University, Washington, DC. Amna Rana, a graduate student at the School of International Service, American University, provided research support

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