Oped: Farm policy’s 3 dilemmas
If there is one thing that distinguishes the agricultural performance of the first Narendra Modi government, it is the collapse of nominal growth of the gross value added (GVA) component of agriculture.Updated: Jun 02, 2019 09:38 IST
Agrarian distress had emerged as a big narrative, and a possible spoiler in the re-election bid of the Narendra Modi government. With an overwhelming victory in the 2019 elections, the Bharatiya Janata Party (BJP) has conquered all possible headwinds the farm sector might have generated. However, this electoral victory should not be inferred as an indication that all is well in Indian agriculture. It will be better if the new government, with a much higher political confidence than its previous avatar, works towards resolving the problems in India’s farm economy with a longer-term vision as opposed to the fire-fighting it might have had to do before the elections. Doing this is not going to be easy. One school of thought is that the key to increasing farm incomes is technocratic reforms in input and output markets in the farm sector. Another emphasizes the political economy aspect of addressing the crisis in the agriculture sector. Here are three key areas where attempts to favour farm incomes can trigger contradictions, political or economic, for the government .
Terms of trade between farm and nonfarm sectors: If there is one thing that distinguishes the agricultural performance of the first Narendra Modi government, it is the collapse of nominal growth of the gross value added (GVA) component of agriculture. This is in contrast to the non-agricultural GVA, where the nominal component of growth has actually gone up in the last four years.
See Chart 1: Real and nominal growth break-up in agriculture and non-agriculture GVA
Why should nominal growth matter for agrarian distress? After all, economic growth comparisons are made in constant prices, as this factors out the effect of price changes over time on the value of output. However, constant price growth rates might not be the best measure of the well-being of people employed in different sectors of the economy. Here’s why.
In any modern economy, people employed in a given sector use their incomes (based on sale of their output) to purchase goods and services produced in other sectors. This also means that their ability to pay for such purchases depends on the relative price of the output in their own sector vis-à-vis other goods and services in the rest of the economy. This is what economists refer to as terms of trade between two sectors. For example, if apples and linen shirts were the only two commodities in the world, a sudden fall in price of linen shirts would make the apple growers better off without there being any change in the production of apples, as they can get more shirts by selling the same amount of apples. The reverse will hold true if the price of linen shirts went up. One of the biggest reasons for the recent crisis in the farm sector is that food prices have been growing at a much slower rate than non-food prices in the Indian economy. It is this difference in food and non-food inflation which has led to a collapse in nominal growth in agriculture.
See Chart 2: Food and Non-Food CPI This means that farmers have to (grow and) sell more and more to be able to afford the same bundle of non-agricultural goods they want to purchase. Unless there is a change in the current movement of food and non-food prices, it will take much higher growth rates in agriculture to even maintain the current purchasing power of farmers.
To be sure, the terms of trade problem in agriculture is easier to diagnose than solve. First of all, there is a debate on what is causing the decline in agricultural prices. There is a view which argues that India has a problem of excess in agriculture, and a glut in food markets has led to a reduction in food inflation. This view, if true, would warrant that agricultural policy is tailored towards either reducing agricultural production, and hence growth, or attaining a more aggressive push towards exports to prevent domestic food inflation from falling like it has been in the recent period. This author argued in an earlier piece that a squeeze on mass demand, rather than excess supply is to blame for the worsening of terms of trade for agriculture in the recent period (https:// bit.ly/2XjFc8O). The government should, sooner rather than later, try and resolve this debate and decide on the required policy intervention.
What also needs to be kept in mind is that the worsening of terms of trade for agriculture might actually have been politically beneficial for the current government. Food prices have a 46% weight in the Consumer Price Index basket, which is India’s benchmark inflation measure. While farmers might feel the pinch of low food prices, the rests of the population will actually find it to be a boon. Any policy intervention which tries to improve terms of trade for agriculture risks a political backlash due to higher inflation.
Reinventing Minimum Support Price (MSP) politics: MSP is often perceived as the best mechanism to guarantee remunerative prices to farmers in India. The government normally declares MSPs at the beginning of the sowing season, and, in principle, farmers can decide on how much of the MSP covered crop they want to grow. However, reality is far more complicated.
One of the biggest debates between farmers’ organisations and the government has been on the question of which cost concept should be used as the base while deciding on MSPs, which, the government now claims, guarantees a 50% return over the cost of cultivation. The previous government used the A2+FL measure to calculate MSPs while farmers wanted the base to be C2 instead of A2. The crucial difference between the two is that the latter includes the imputed rent of owned land. With growing urbanisation and farm-land becoming scarce, this is expected to grow at a faster rate in the future. However, the MSP policy has much bigger issues than the A2 versus C2 debate. At no point of time has the value of rice and wheat procured under MSP been more than 6% of the total GDP/GVA generated in agriculture.
See Chart 3: Share of MSP Procurement in Agricultural GDP
Even this limited relief is heavily skewed, with traditional Green Revolution states such as Punjab and Haryana accounting for almost half of the total procurement. With an increasing push towards direct cash transfers in the Public Distribution System, it is likely that government’s procurement requirements will come down drastically in the future. The current government will probably have to take a call on not just the quantum of MSP hikes but also the amount of grain procurement.
Here too, there are associated costs and benefits. A cash transfer approach is favoured on the grounds of lower leakages (read corruption), something which this government has repeatedly cited as one of its biggest achievements. However, any significant dilution of the MSP net could trigger unrest in areas which have enjoyed its benefits. This could also trigger abrupt changes in cropping patterns if farmers are unsure about returns without the assurance of MSPbased procurement.
The question of unproductive cattle: Most Hindus, except in states such as Kerala, are against beef-eating on religious grounds. Their religious outlook, however, is not accounted for in their cattle rearing practices, where maintaining unproductive cattle – cows which do not yield milk and male cattle which are increasingly becoming redundant for working on farms – is considered to be an economic burden.
This contradiction was historically resolved by India’s unorganised cattle market where Hindu farmers used to sell their unproductive cattle to traders, who without the former having to do it themselves, took them to slaughter houses. With cow slaughter becoming a big poll plank for the BJP to consolidate Hindu votes, both legal and extra-legal factors have created a major disruption in this market. Slaughter houses have been shut down in many places.
Also, cattle traders, including even those who do not indulge in trade for slaughter have been targeted with physical violence by vigilantes. These developments have been accompanied by anecdotal accounts of large-scale increase in stray cattle menace causing crop-destruction, in many parts of the country.
It is extremely unlikely that a BJP government will endorse the hidden market mechanism which was in place to dispose of unproductive cattle, lest it be seen as deviating from Hindu values. However, not doing this will have a direct material cost for the farmers. Farmers are being forced to increase vigilance on their fields to prevent stray cattle from destroying crops. This entails either hiring extra labour or putting in the time oneself. Labour costs, whether hired or imputed, have a significantly higher share in A2+FL measure of costs, which has been used by the government to justify MSP mark-ups, and also have a significantly higher share than animal costs in the cost of cultivation. They have been increasing over time. With an increase in the stray cattle menace, they can rise at an even faster pace. Unless a policy is put in place, which will require significant resources to take care of unproductive cattle, farmers are likely to face increasing difficulties in the near future.
See Chart 4: Share of animal and human cost in rice and wheat cultivation