Economy and Business

India's agriculture crisis: Can Modi government address stagnating farm incomes?

India may be the world’s fastest growing large economy but the growth process has not been inclusive enough to lift the incomes of its 119-odd million farmers.

Jun 16, 2018
By N Chandra Mohan 
 
India may be the world’s fastest growing large economy but the growth process has not been inclusive enough to lift the incomes of its 119-odd million farmers. This has triggered unrest in many states with protesting farmers dumping milk and vegetables like tomatoes on the roads. In March, they peacefully marched to Mumbai, forcing the state government of Maharashtra, India’s most industrialised state, to accept most of their demands. Agrarian distress has obvious political ramifications for the NDA government of Prime Minister Narendra Modi that faces important state assembly elections in Rajasthan and Madhya Pradesh and a national election in 2019.
 
For a sense of perspective, the real income of a cultivator was estimated at Rs 44,027 in 2015-16 according to the Niti Aayog, the government think-tank. This works out to USD672 or close to the World Bank’s poverty line of USD1.9 a day. Such low incomes stem not just from the inherent risks of farming due to the vagaries of the southwest monsoon on which half of India’s agriculture depends. It arises also from the fact that 72% of farmers have small and marginal holdings of less than 2 hectares. Operating such sub-optimal holdings is a barrier to higher incomes.
 
Farmer incomes have collapsed as the prices they receive for their crops are rising at a slower rate than overall prices. Food deflation is occurring against the backdrop of bumper crop production after two back-to-back drought years in 2014-15 and 2015-16. Economists typically attribute the falling food prices to demand-supply mismatches. When farmers reap record harvests, prices are bound to collapse with excess production. The opposite holds if there are severe shortages and prices spiral upwards. The big difference is that plentiful crop production is now the new normal. 
 
Exemplifying this new normal is the surplus in sugar production in 2017-18 due to record cane cultivation in states like Uttar Pradesh. As a result, sugar prices have crashed and mills have run up huge arrears in cane payment to farmers amounting to Rs 220 billion. The farmers grow more cane as state governments like Uttar Pradesh recommend higher state-advised prices than the union government’s fair and remunerative price. Thanks to this political fixation of prices, farmers are likely to grow even more cane in the next sugar season in 2018-19. Their distress will intensify if the mills cannot pay when sugar prices crash.
 
Growing farmer discontent has electoral consequences – as the NDA government discovered to its chagrin with its defeat in a Lok Sabha bypoll in Kairana in western Uttar Pradesh, a constituency dominated by angry sugarcane farmers. Motivated in large part by this setback, the NDA government recently announced a Rs 70 billion sugar package to enable the mills to pay the farmers: Sugar prices were to be propped up through creation of a buffer stock and a minimum support price. But how can such prices hold when sugar surpluses are only set to grow over the foreseeable future? 
 
Besides sugar, the state heavily intervenes in Indian agriculture by providing minimum support prices (MSPs) for wheat, rice and major crops. However, in recent years, these MSPs have failed to keep pace with rising input costs of crop cultivation,  making far ming increasingly unviable. The NDA has also committed itself to providing MSPs that are one-and-a-half times production costs. But it doesn’t have the fiscal space to do so as farmers want a broader definition of costs to include rentals on owned land, interest on owned capital, paid-out costs and imputed value of family labour. 
 
Protesting farmers are sceptical whether the NDA government can improve their incomes. They have been bypassed in the growth process. A good proxy for real income is gross value added, which is the nation’s output minus the cost of inputs and raw materials adjusted for inflation. This rose by 6.5% in 2017-18 while the incomes of those who live off the land in agriculture, forestry and fishing – one in two working Indians – grew by 3.4%. The real challenge ahead for the NDA is to address the stagnant farm incomes, if not doubling them by 2022 as it had earlier committed to. 
 
(The author is an economics and business commentator. He can be contacted at nchandramohan@rediffmail.com )

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