RIGHT TYPE OF SUPPORT POST COVID-19 IS A PREREQUISITE
INDIAN AGRICULTURE ENTANGLED IN A WEB OF POLICIES
By Gyan Pathak
COVID-19 has serious implications on agriculture, rural employment, and food security. Policy responses in relation to COVID-19 outbreak include several agriculture policies, agro-food supply chain policies, consumer policies, trade policies and others. However, much more are needed to overcome the crisis it has presented. Moreover, the legacy of problems cannot be left unsolved now without aggravating the agriculture crisis with the new COVID-19 twist and the largest number of stomachs in the world to feed within seven years.
It must also be noted that about two-third of the 1.37 billion of the population of the country live in rural areas, and at just 0.15 ha per capita, agriculture land is very scarce. Agriculture accounts for an estimated 43.9 per cent of employment, but its 14.6 per cent share in GDP indicates that labour productivity remains significantly lower than in the rest of the economy. The productivity gap is also reflected in the evolution of farm incomes, which correspond to less than one-third of non-agriculture income. The share of value added from agriculture has been gradually reduced, but mostly in favour of services rather than manufacturing. Indian agriculture is continuing to diversify towards livestock and away from grain crops.
While grains and milk remain dominant, there has been a gradual change in the composition of production to other crops – such as sugar cane, cotton, fruit and vegetables – as well as certain meat sub-sectors. Livestock output growth has been faster and less volatile than crop production. The sector continues to be dominated by a large number of small-scale farmers, as the national average operational holding size has been in steady decline. Against a background of already growing unemployment and falling GDP, higher prices for selected food items were posing serious concerns even before COVID-19 lockdown, which has now escalated the problem. As a net agro-food exporter, India faces new challenges while imports have been increasing since 2007. Sustained growth in agricultural output has been exerting mounting pressures on natural resources, particularly land and water.
Presently the support to farmers in India is composed of budgetary spending corresponding to only 7.8 per cent of gross farm receipts, positive market price support (MPS) of only +2.0 per cent of gross farm receipts among those commodities which are supported, and a negative MPS of -14.8 per cent among those which are implicitly taxed. Overall, this leads to negative net support of -5.0 per cent of gross farm receipts as producer support estimates (%PSE) in 2017-19. The negative value of the PSE reflects that domestic producers, overall, continue to be implicitly taxed, as budgetary payments to farmers do not offset the price-depressing effect of complex domestic regulations and trade policy measures.
Budgetary transfers to agricultural producers are dominated by subsidies for variable input use, such as fertilisers, electricity, and irrigation water. In turn, public expenditures financing general services to the sector (GSSE), principally for infrastructure-related investments, correspond to just half of the subsidies for variable input use. Total budgetary support (TBSE) is estimated at only 2.5 per cent of GDP in 2017-19.
Mirroring the farm price-depressing effect on producers, the policies provide implicit support to consumers. Policies that affect farm prices, along with food subsidies under the Targeted Public Distribution System, reduced consumption expenditure by 21.4 per cent as consumer support estimate (%CSE) on average across all commodities in 2017-19.
Main policy changes so far include increased Minimum support prices (MSPs). The application of the direct income transfer scheme Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) – providing an annual payment of Rs 6 000 per farm household – was extended from small-scale farmers (with landholdings up to 2 hectares) to all farmers with land titles. Investments in Farmer Producer Organisations (FPOs) were also stepped up in the 2019-20 and 2020-21 Union Budgets, including through new schemes in specific sectors such as vegetables (tomatoes, onions, potatoes) and dairy.
However, after an increase in both fertiliser and food subsidies in the 2019-20 Union Budget, the budgetary allocations for these were lowered in the 2020-21 Union Budget by 10.8 per cent and 37 per cent, respectively.
Agricultural Policy Monitoring and Evaluation 2020 by OECD has said that for many products and over most of the period reviewed, Indian farmers have been receiving prices that are lower than the prices prevailing on international markets. It has therefore recommended that the central government should continue the initiatives to reduce domestic marketing inefficiencies and work closer with states and Union Territories (UTs) to thoroughly reform regulations and to foster more efficient and competitive markets, including through initiatives such as the electronic National Agricultural Market (e-NAM). Marketing provisions should be adopted in a harmonised and consistent way across states and should be synchronised with any Minimum Support Price (MSP) system reforms through coherent plans.
India is an important agro-food exporter in a number of commodities. The Agricultural Export Policy (AEP) framework adopted in 2018 has set an important step towards reducing uncertainty and transaction costs throughout supply chains by engaging to avoid the application of export restrictions for organic and processed agricultural products. However, much is needed to be done for its reliability as a supplier and to create a stable and predictable market environment. Together with domestic marketing reforms, moving away from export and import restrictions has the potential to provide farmers and private traders with improved incentives to invest in supply chains.
The large share of employment in agriculture compared to its GDP contribution reflects the persistent productivity gap with other sectors, which translates into low farm incomes. In the short to medium-term, direct cash transfers targeting the incomes of poorest farmers can support their livelihoods in current market conditions. In the long-term, significant structural adjustments needed involving the transition of farm labour to other activities and a process of consolidation towards farm operations sufficiently large to benefit from economies of scale. In this sense, continued reforms in land regulations need to be complemented by investments in key public services to the sector (such as education, training, infrastructure) and the broader enabling environment (including financial services). (IPA Service)