20th October 2020

Confidant Classes

A Premier Judicial Service Coaching

Agriculture sector: Last hope of Indian Economy

The Macroeconomic Report for July, released by the Economic Affairs Department said. “With India unlocking, the worst seems to be over for the economy as high-frequency indicators recovered in June 2020 from unprecedented troughs in April; however, risks on account of rising COVID-19 cases and intermittent State lockdowns remain,” it said.

  • It further noted that the rise in COVID-19 cases and subsequent intermittent lockdowns make the recovery prospects fragile and called for constant and dynamic monitoring.
  • Pinning hopes on the farm sector, the report said, agriculture is set to cushion the shock of the COVID pandemic on the Indian economy in 2020-21.

“With the forecast of a normal monsoon at 102% of long-period average (LPA), agriculture, which contributes about 15% of total gross value added, is set to cushion the shock of COVID pandemic on the Indian economy in 2020-21,”

it said.

Timely and proactive exemptions from COVID-induced lockdowns to the sector facilitated uninterrupted harvesting of rabi crops and enhanced sowing of kharif crops, it said, adding, a record procurement of wheat has enabled a flow of around RS. 75,000 crore to the farmers which will boost private consumption in rural areas.

“Since September, 2019, the terms of trade has moved in favour of agriculture and has reinforced rural demand. This has manifested in an increase in rural core inflation between March and June 2020. As a result, the push for growth in coming months appears to be pitched in rural India,”

it said.
  • Pointing at the recent landmark reforms announced in agricultural sector, it said the deregulated and liberalised agricultural sector, further, empower the farmers to become a bigger and more stable participant in India’s growth journey.
  • Talking about some parameters showing improvement, the report said, contraction in industrial activity, measured by Index of Industrial Production (IIP) and eight core industries, has eased in May as compared to April.
  • Industrial output increased across all sectors and sub-sectors within IIP in May as against April. Signs of further recovery were witnessed in June with India’s Manufacturing PMI improving from 30.8 in May 2020 to 47.2 in June 2020 with output and new orders contracting at much softer rates than seen in April and May, it said.
  • Services PMI recovered from 12.6 in May 2020 to 33.7 in June 2020, owing to some stabilisation in output levels with around 59% of firms reporting no change in output, 4% reporting growth and 37% reporting reduction since May, it added.
  • There was also an uptick in infrastructure and construction activities in the unlocking phase, it said, adding, contraction in production of finished domestic steel recovered from 41% in May to 31.1% in June 2020.

With mandi closures and supply chain disruptions causing havoc in agricultural marketing, the COVID-19 pandemic has put a spotlight on some of the critical infrastructure gaps and long-pending governance issues that plague the farm sector. The third tranche of the Atmanirbhar Bharat Abhiyan listed measures to deal with those gaps, though there has been no announcement on an immediate economic stimulus for the sector.

What are the reforms announced in the farm sector?

  • The third tranche announcement focused on long-term issues in the agricultural sector, by promising financing to strengthen infrastructure, build better logistics and ramp up storage capacities, as well as proposing three major governance and administrative reforms that have been in the pipeline for many years.
  • Finance Minister Nirmala Sitharaman’s rationale for the third tranche was that improving farmers’ income needed such long-term investments and changes, rather than a focus on short-term crop loans.
  • However, a number of farmers and activists said that in the light of the COVID-19 crisis, immediate support and relief in the form of cash transfers, loan waivers, and compensation for unsold produce should have come before long-term reforms.

How will they change the agriculture sector?

Taking the opportunity of a crisis situation, the Finance Minister has pushed through reforms that the Centre has been trying to implement for years. For instance, the Essential Commodities Act, 1955 came into being at a time of food scarcity and famine; last year’s Economic Survey called it an “anachronistic legislation”.

  • It allows the government to control price rise and inflation by imposing stock limits and movement restrictions on commodities, giving States the power to regulate dealer licensing, confiscate stock and even jail traders who fail to comply with restrictions.
  • Earlier this year, it was used to control soaring onion prices. Traders have long complained of harassment under the Act on the suspicion of hoarding, black marketing and speculation, while food processors and exporters have also pointed out that they may need to stock commodities for longer periods of time.
  • The Act has dis incentivised construction of storage capacity and hindered farm exports. Discussions about amending or repealing the Act have been going on for almost two decades.
  • On Friday, the Finance Minister announced that the Act would be amended to deregulate six categories of agricultural foodstuffs: cereals, pulses, edible oils, oilseeds, potato and onion.
  • Stock limits on these commodities will not be imposed except in times of a national calamity or a famine, and will not be imposed at all on food processors or value chain participants, which/who will be allowed to store as much as allowed by their installed capacity.
  • Exporters will also be exempted. It is hoped that the amendment will bring more private investment into warehouses and post-harvest agricultural infrastructure, including processors, mills and cold chain storage.
  • It could help farmers sell their produce at more competitive rates if there is no fear of government intervention to artificially suppress market prices, and is likely to give a boost to farm exports.

What about the other planned reforms?

The Centre plans to bring in a new federal law to break the nearly half-century long monopoly of the Agricultural Produce Market Committee (APMC) mandis. It has already tried the route of trying to coax State governments into adopting its Model APMC Amendment Act which aims at developing unified State-level markets by offering a State-wide licence and single point levy of market fees while also allowing private markets, direct marketing, ad hoc wholesale buying and e-trading.

  • However, only a few large States ruled by the Bharatiya Janata Party, including Gujarat and Madhya Pradesh, have amended their Acts. Now, the Centre proposes to bypass States altogether by bringing in a federal law to abolish inter-State trade barriers.
  • The hope is that these reforms will bring in more options for the farmer, offering more competitive prices if there is a wider choice of buyers. The plan to bring in a legal framework for contract farming also aims to provide more certainty and choice for farmers, although some experts caution that recent drafts of contract farming law promote the interests of the large corporate player at the expense of safeguarding the small farmer.

How are infrastructure investments expected to help?

  • Reforming governance structures is of no use unless there is infrastructure on the ground to enable farmers to take advantages of the wider choices with which they are being provided.
  • A Rs. 1-lakh crore agriculture infrastructure fund run by the National Bank for Agriculture and Rural Development will help create affordable and financially viable post-harvest management infrastructure at the farm gate and aggregation points.
  • The Finance Minister emphasises that her announcements would also bring better infrastructure and logistics support to fish workers, dairy and other livestock farmers, beekeepers and vegetable and medicinal plant growers.
  • She also offered support to lakhs of small informal food processors, mostly women, who need technical upgradation and marketing support in order to compete in a changing marketplace.
  • India’s food grain production in 2019-20 was 3.7% higher than in 2018-19. The procurement of rabi wheat in 2020-21 was 12.6% higher than in 2019-20.
  • These indicate, it is argued, resilience in the agricultural sector. Food inflation in the Q1 of 2020-21, at 9.2%, was higher than in the previous year due to “sustained demand for food”. This shows a shift of terms of trade in favour of agriculture.
  • The area under kharif sowing in 2020-21 was 14% higher than in 2019-20. Higher kharif sowing was accompanied by higher tractor and fertilizer sales, which bodes well for economic recovery.
  • The government’s economic package for agriculture — as part of the Rs. 20-lakh crore Atmanirbhar Bharat package — will further position agriculture as the engine of revival.

Let us now consider each of the above claims

Rabi procurement: During the lockdown, State governments in many northern States put in considerable efforts to ensure that procurement did not suffer.

  • As a result, procurement of rabi wheat was higher in 2020-21. However, this claim hides more than it reveals. As per official data, only 13.5% of paddy farmers and 16.2% of wheat farmers in India sell their harvest to a procurement agency at an assured Minimum Support Price (MSP).
  • The rest sell their output to private traders at prices lower than MSP. One should, then, be looking not at procurement but market arrivals.
  • Total market arrivals of 15 major crops in India between March 15 and June 30 in 2019 and 2020.
  • The market arrivals of all the 15 crops were lower in 2020 than in 2019. It was only in paddy, lentil, tomato and banana that market arrivals in 2020 constituted more than 75% of market arrivals in 2019.
  • In wheat, barley, potato, cauliflower, cabbage and lady’s finger, market arrivals in 2020 were between 50% and 75% of market arrivals in 2019.
  • For gram, pigeon pea, onion, peas and mango, market arrivals in 2020 were less than half of market arrivals in 2019. In wheat, the most important rabi crop, only 61.6% of the arrivals in 2019 was recorded in 2020.
  • Thus, the most important problem faced by farmers during the lockdown was the loss of markets, stemming from the disruption in supply chains, closure of mandis and a fall in consumer food demand.
  • Farmers suffered major loss of incomes, and higher procurement was hardly alleviating.
  • In addition, there were major losses in the milk, meat and poultry sectors; industry associations estimate the total loss for the poultry industry at Rs. 25,000 crore.

Inflation and prices: Inflation rates estimated using consumer price indices are not representative of farmer’s prices. Inflation was largely due to disruptions in supply chains and rise in trader margins. In examination the wholesale market prices for 15 agricultural commodities between March 15 and June 30, 2020.

  • Prices of most crops declined. For example, average paddy prices were about Rs. 1,730 per quintal on March 23, but Rs. 1,691 per quintal on June 30. Average wheat prices were Rs. 2,045 per quintal on April 1, but Rs. 1,865 per quintal on June 30.
  • A moderate uptick in prices was visible in a few vegetables, but not before June 2020. The dark side of higher rural inflation in India is that small and marginal farmers are not net sellers, but net buyers of food. So, it was not just that farmer’s prices fell; most were also forced to pay more for food purchases.
  • There is also strong evidence from small sample surveys that rural households reduced food purchases during the lockdown. Thus, the claims that higher rural inflation benefited farmers, and that it was due to higher food demand, are misplaced.

Higher kharif sowing: There is no surprise in the growth of kharif sowings in 2020. Given that rabi incomes fell during the lockdown, many rural households may have returned to farming or intensified farming for food- and income-security. Lakhs of migrant workers returned to their villages from urban areas.

They may have taken up agriculture in previously fallow or uncultivated lands. Data on monthly employment released by the Centre for Monitoring Indian Economy (CMIE) show that the number of persons employed as “farmers” in June and July 2019 were 11.2 crore and 11.4 crore, respectively. But in June and July 2020, these numbers rose to 13 crore and 12.6 crore, respectively.

  • These are indicators of distress, not prosperity. It is no cause for celebration also because the rural unemployment rates rose sharply in 2020, to 22.8% (April), 21.1% (May) and 9.5% (June). Even in August 2020, rural unemployment rates were higher than in February 2020 or August 2019.

Trickle from package: Agriculture contributes only about 15% to India’s Gross Value Added (GVA). Thus, even if agriculture grows by 4%, it is likely to contribute only 0.6 percentage points to GVA growth.

To contribute a full one percentage point to GVA growth, agriculture will have to grow by 6%, which is unlikely in 2020-21. This is not to deny a potential rise in demand from higher rabi procurement, higher kharif sowing and flow of cheap credit, which together appear to have resulted in higher purchase of tractors and fertilizers.

But the counteracting tendencies in rural areas — i.e., lower crop prices, lower market arrivals and higher unemployment — would overwhelm these “green shoots”.

  • Rural expectations were high when the Atmanirbhar Bharat package was announced. However, the details were disappointing. Total fresh spending for agriculture in the package is a trickle: less than Rs. 5,000 crore.
  • The rest are schemes already included in the past Budgets, announcements with no financial outgo or liquidity/loan measures routed through banks.
  • The package also failed to provide financial support to farmers. PM-KISAN, or Pradhan Mantri Kisan Samman Nidhi, is hardly an ideal scheme. But instead of frontloading the instalments of PM-KISAN, the government should have doubled the payments to farmers from Rs. 6,000 a year to Rs. 12,000 a year.
  • Instead of raising the minimum support price (MSP) for kharif paddy by Rs. 53 per quintal (which, actually, was the lowest rise in over a decade), or cotton by Rs. 260 per quintal, the government should have set all MSPs at 150% of the C2 cost (comprehensive cost) of production.
  • Instead of a moratorium on loan repayments, the government should have waived the interest on loans taken by farmers in 2019 and 2020. Instead of vague loan-based schemes in animal husbandry, the government should have announced a package of direct assistance for the crisis-ridden poultry and meat sectors amounting to at least Rs. 20,000 crore.
  • Instead of loan-based schemes to support private investment in dairy, the government should have arranged direct financial assistance to small milk producers, for whom milk prices have literally plummeted.
  • In all, the government’s strategy appears to be to squeeze farmers without investing in agriculture or rural employment. Such an approach would not just fail; it would also be counterproductive. Rural incomes will remain depressed, and push the economy further into a vicious cycle of poor demand, low prices and low growth.
  • The government should discard its role as a passive observer, and decisively intervene in rural India with a substantial fiscal stimulus. The earlier the better as delays would only compound mistakes.
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