ReformingIndian Agriculture

INDIAN COUNCIL FOR RESEARCH ON

INTERNATIONAL ECONOMIC RELATIONS

AUGUST 2019

Ashok Gulati

Devesh Kapur

Marshall M. Bouton

CENTER FOR THE ADVANCED STUDY OF INDIA

REFORMING INDIAN AGRICULTURE

Ashok Gulati

Infosys Chair Professor for Agriculture

Indian Council for Research on International Economic Relations (ICRIER)

New Delhi

Devesh Kapur

Starr Foundation South Asia Studies Professor and Asia Programs Director

Paul H. Nitze School of Advanced International Studies (SAIS)

Johns Hopkins University, Washington, D.C.

Senior Fellow, Center for the Advanced Study of India (CASI)

Marshall M. Bouton

Acting Director & Visiting Scholar

Center for the Advanced Study of India (CASI)

University of Pennsylvania

A CASI Working Paper jointly produced

by the Center for the Advanced Study of India

and the Indian Council for Research on International Economic Relations

August 2019

ACKNOWLEDGMENTS

This Working Paper on Reforming Indian Agriculture is the product of the coming

together of three scholars from different institutions under the auspices of the Center for

the Advanced Study of India (CASI) at the University of Pennsylvania. Dr. Ashok Gulati,

Infosys Chair Professor for Agriculture at the Indian Council for Research on

International Economic Relations (ICRIER), New Delhi, was visiting CASI as

Distinguished International Fellow when this idea was conceived. Dr. Devesh Kapur,

Starr Foundation Professor of South Asian Studies at the Johns Hopkins University

School of Advanced International Studies and Senior Fellow and former director of CASI,

and I later joined with Dr. Gulati to write this paper. I am grateful to Drs. Gulati and

Kapur for making this a productive and rewarding experience. I also wish to acknowledge

the excellent work of Alan Atchison, CASI’s Senior Publications Editor, in bringing the

paper to publication.

Marshall M. Bouton

Acting Director & Visiting Scholar

Center for the Advanced Study of India

University of Pennsylvania

ABOUT THE AUTHORS

ASHOK GULATI is the Infosys Chair Professor for Agriculture at the Indian Council for

Research on International Economic Relations (ICRIER), New Delhi. Previously, he

was Chairman of the Commission for Agriculture Costs and Prices (CACP), Government

of India. He also served as Director of the International Food Policy Research Institute

(IFPRI) for more than ten years. He is also on the Central Board of Directors of the

Reserve Bank of India (RBI), National Bank for Agriculture and Rural Development

(NABARD) and National Commodity and Derivatives Exchange (NCDEX). He has

authored fifteen books and several research papers on Indian and Asian agriculture. He

is a prolific writer in the media on agri-policies; his current column “From Plate to

Plough” runs in The Indian Express and The Financial Express. In 2015, the President of

India honored him with the “Padma Shri” award.

DEVESH KAPUR is the Starr Foundation South Asia Studies Professor and Asia Programs

Director at the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns

Hopkins University, Washington, D.C., and a Senior Fellow at the Center for the

Advanced Study of India (CASI). From 2006-18, he was the Director of CASI, Professor

of Political Science at Penn, and held the Madan Lal Sobti Chair for the Study of

Contemporary India. His research focuses on human capital, national and international

public institutions, and the ways in which local-global linkages, especially international

migration and international institutions, affect political and economic change in

developing countries, especially India. He is the author of several books, most recently

The Other One Percent: Indians in America (co-authored with Sanjoy Chakravorty and

Nirvikar Singh), published in October 2016 by Oxford University Press.

MARSHALL M. BOUTON is Acting Director & Visiting Scholar at the Center for the

Advanced Study of India (CASI) at the University of Pennsylvania, and is a past Chairman

of CASI’s International Advisory Board (2004-12) and a member of the Board

continuously since 2003. He is President Emeritus of The Chicago Council on Global

Affairs, having served as its President from 2001-13. A nationally known expert on India

and Asia, Dr. Bouton came to The Chicago Council from the Asia Society, New York, where

he was Executive Vice President from 1990-2001. He is the author of Agrarian

Radicalism in South India (Princeton University Press), co-author of The Foreign Policy

Disconnect: What Americans Want from Our Leaders But Don’t Get (with Benjamin I.

Page, The University of Chicago Press), which was awarded the American Political Science

Association Gladys M. Kammerer Book Award in 2007, and Editor/Co-editor of several

editions of India Briefing (The Asia Society with Westview Press/M.E. Sharpe).

EXECUTIVE SUMMARY:

REFORMING INDIAN AGRICULTURE

Following an overwhelming election victory, Prime Minister Narendra Modi’s new

government has a golden opportunity to bring about historic reforms in the agricultural

sector to improve farmer livelihoods and national food security. The sector affects the

economic well-being of half the Indian population and the access to affordable and

nutritious food for all Indians. Fundamental reforms can achieve sustainable and broadly

distributed agricultural growth that will add to India’s GDP, increase export earnings,

help conserve increasingly scarce resources of land and water, and enable the more

orderly movement out of agriculture and into other productive sectors.

Reforms in four areas should be the priority if Prime Minister Modi’s bold goal of doubling

farmer incomes is to be accomplished in the coming years. First, the focus of agricultural

policies must shift from production per se to farmers’ livelihoods. Second, policies to

improve the allocation and efficiency of land and water are essential if the critical

resources of water and land are to be conserved. Third, reforms are needed to help

farmers cope with the growing risks of weather and price volatility. Fourth, agricultural

markets must be opened to greater competition and provided with better infrastructure

if farmers are to realize better returns for produce while ensuring nutritional security for

low-income consumers.

Agriculture is a state subject but where the Central government has had—and will

continue to have—a large role. Reforms can only succeed if the Central and state

governments work closely together in a spirit of “cooperative federalism.” Many of the

important levers of change—water, power, irrigation, extension, agri-markets, etc.—are

controlled by the states. Going forward, it would be helpful if the government created an

Agri-Reforms Council on the lines of GST Council for a somewhat longer term than is

currently done (for two months).

The focus for the Government of India will need to be twofold: actions that it can

unilaterally take to raise agricultural incomes; and second, actions to influence state

government efforts to improve agriculture with its sustainability at the core. The steps

listed should be thought of as a package, which will have an impact if most are

implemented and not one or two in isolation.

 Reduce cereal procurement and keep MSP price increases for rice and wheat below

inflation, and not exceeding border prices, while encouraging the private sector to

develop robust markets in less water intensive crops like pulses and oilseeds by

removing controls on stocking, trading, exports, etc. This will also have a beneficial

impact on depleting water tables in certain regions, notably in north-west and

southern India.

 Implement income transfers scheme for farmers in tandem with reductions in the

subsidies for power, water, and fertilizer that distort incentives and hinder change.

This will have large positive environmental effects and help toward better natural

resource management. Keep the real prices of subsidized grains under the National

Food Security Act, 2013 and link them to the MSP to incentivize the production

and consumption of non-cereals.

 Scrap the Essential Commodities Act and other laws designed fifty years ago for

conditions of scarcity. Those conditions of scarcity have long since disappeared.

India is trying to cope more with the problems of surfeit than scarcity.

 Focus on income from livestock to help marginal farmers (<1 ha). Change laws and

more importantly the political and social climate that have been so detrimental to

the livestock sector lately.

 Eliminate or reduce dramatically export restrictions and export taxes on

agricultural products. Trade policies that have been arbitrarily and pro-cyclically

imposed (increasing tariffs and import restrictions when world prices come down,

and imposing export bans and taxes when domestic prices rise)—must become

stable and predictable by setting “trigger levels” well in advance.

 Accelerate the effort to create a single agricultural market by introducing assaying,

grading, setting standards, bringing “Uber-type” logistical players on e-platforms

to move goods from one region to another, and setting dispute settlement

mechanisms so that farmers and farm organizations can transact with any buyer,

anywhere in India, and at any time of their choosing.

 Support the creation of public mandis as a viable alternative to private trade. Most

importantly, across the board, increase marketing options available to farmers

while subsidizing market infrastructure improvements.

 End support for the rehabilitation of inefficient urea plants and create a plan for

closing the most inefficient plants.

 Incentivize the passing of state laws to allow easy leasing/renting of agricultural

land and relax restrictions on conversion of agricultural land for other purposes.

At present, these restrictions keep the value of agricultural land low and raise the

barriers to exit from agriculture.

Finally, even as these reforms are undertaken, it needs to be recognized that growth and

employment opportunities outside agriculture are critical for long-term improvements in

farmers’ incomes. Relentless population pressures have meant that most Indian farms are

too small to provide viable incomes. The long-term future of Indian farmers

fundamentally depends on getting many people out of farming. Ironically, that future will

come about more reliably if policies to improve agricultural production and incomes are

pursued today.

REFORMING INDIAN AGRICULTURE

The landslide victory of the Bharatiya Janata Party (BJP), led by Prime Minister Narendra

Modi in India’s recent Parliamentary elections, offers an opportunity for fundamental

economic reforms to achieve high growth and improved livelihoods across the country.

India’s agriculture sector is one of the areas with the greatest potential for wide-ranging

reforms affecting the largest number of Indian families. Prime Minister Modi himself

recognized the need and opportunity in the BJP’s election manifesto when he stressed, “I

am extremely passionate about doubling farmer income…,” signalling the goal he set in

2016 would be at the top of his second-term agenda.

Given the many challenges facing the new government, why should agriculture and food

be a top priority? First, agriculture affects the economic well-being of nearly half the

Indian population. More Indians depend directly or indirectly on agriculture for

employment than on any other sector. Eighty percent of India’s extremely poor people

live in rural areas and most of those are marginal farmers, farm laborers and their

families. Second, agriculture holds a key to reducing India’s double burden of under- and

over-nutrition, directly affecting public health and worker productivity. Third, agriculture

has the potential to spur, rather than be a drag on India’s overall GDP growth. Agricultural

growth of four plus percent is achievable with the right reforms and would add at least a

percentage point to GDP, increase exports and improve India’s trade deficit. Fourth,

agriculture is India’s biggest renewable natural resource. India’s vital land and water

resources on which farmers and food production depend, must be utilized more

sustainably, especially in the face of mounting scarcity, environmental degradation, and

climate change.

Finally, history tells us that economic transformation in developing nations is propelled

by increases in agricultural incomes underpinning industrial growth. China’s growth

story began with rapid agricultural growth made possible by dramatic economic reforms.

Rising farm productivity and incomes enable the movement of labor out of agriculture,

provide greater demand for industrial and consumer goods and further ensure that wage

inflation is low. The first is critical for long-term increase in farmer incomes in India, as

land fragmentation means that many Indian farmers are farming in plots of such small

sizes (especially those below 1 ha), that even doubling their incomes would leave them

with meager earnings.

In this paper, we examine four areas that can contribute to the government’s goal of

doubling farmer incomes. First, we consider how the shift in policy focus from production

per se to farm incomes can be best accomplished. Second, we focus specifically on policies

that can improve the allocation and efficiency of the two key factors of production—

natural resources that are so central for agriculture but are increasingly binding

constraints, namely land and water. Third, we examine reforms to help farmers cope with

the growing risks in agriculture from sudden changes in policies, weather variability and

price volatility, all of which have put great stress on India’s farmers in recent years.

Fourth, we examine how markets for agricultural products can be improved to provide

farmers with better prices for their produce while ensuring nutritional security for low-

income consumers. We conclude with some thoughts on the links between agriculture

and the wider economy.

1. Doubling Farmers’ Incomes (DFI)

India’s agriculture policies have had multiple mandates including a production

imperative (national food security), a consumer imperative (keeping food prices low for a

large low-income population), and a farmer welfare imperative. The tensions between

these mandates have resulted in costly, contradictory policies whose costs have been

increasingly borne by farmers, the government purse, and the natural environment. The

new focus on improving farmer incomes is a welcome departure and throughout this

paper we are guided by this shift, believing that must now be the lodestar of India’s

agricultural policies.

There are several distinct policy options for increasing farmer incomes:

i) Subsidizing input costs (such as water or fertilizer) to decrease production costs

ii) Increasing yields through better farming practices and timely availability of

quality inputs, especially high yielding seeds and water

iii) Increasing output prices, through MSP and public procurement

iv) Getting a greater share of the marketing surplus for farmers

v) Improving the terms of trade between agriculture and non-agriculture

vi) Augmenting non-crop related agriculture income

vii) Providing direct income transfers to farming households

In April 2016, the government set up the “Committee on Doubling of Farmers’ Income”

(chaired by Ashok Dalwai), which issued a comprehensive 14-volume report in September

2018. The Committee estimated that the income of an average farm family in 2015-16 was

Rs 8,059 per month, and the objective was to double it to Rs 16,118 per month by 2022-

23 in real terms (after discounting for inflation). This required a growth rate of 10.4

percent per annum for the next seven years until 2022-23. The Committee also looked at

previous NSSO surveys on farm incomes for 2002-03 and 2012-13 and projected the data

through 2015-16 based on overall growth trends. It found that farmers’ real incomes grew

by 3.6 percent per annum during this period. The Committee also found that the agri-

GDP growth rate also hovered around 3.6 percent during that period, indicating that

farmers’ incomes increased broadly in line with the growth in agri-GDP.

While we don’t have data on farmers’ incomes after 2015-16, given growing farmer

distress, it is unlikely to have increased more rapidly than at the earlier pace of 3.6

percent. While the goal of doubling farmers’ incomes by 2022-23 is very unlikely (at least

if the source of income is solely agriculture), a combination of increases in farming

income, non-agriculture farm income, off-farm income, and income transfers, can

achieve this goal in the near future.

Before we spell out what we conclude are some of the core elements of policy, we should

highlight one additional piece of information. The National Bank for Agriculture and

Rural Development (NABARD) conducted a Financial Inclusion Survey (NAFIS) of

farming and non-farming rural households (HH) for the agricultural year July 2015-June

2016. The report (released in 2018) found that an average farming HH in 2015-16 had an

income of Rs 8,931 per month, about 10 percent higher than the estimates in the Dalwai

Committee Report (DCR) (due to differences in the sampling frame and definitions of

farming HH). For our purpose, we compare farmers’ incomes from the three main sources

(NSSO 2002-03; NSSO 2012-13; NAFIS 2015-16) and estimate their level, growth, and

composition patterns to establish trends before laying out policy options. Figures 1 and 2

present these levels, trends, and composition in farmers’ HH income.

Figure 1. Level of average farming HH income in 2015-16 (Rs) and compound

average growth rate in real incomes of farming HHs between 2002-03 and

2015-16 (%)

Source: NSSO 2002-03), NSSO 2012-13), NAFIS (2015-16)

23133

8931

6668

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Farmers' Income in (Rs.) 2015

-16

Absolute Monthly Farmers' Income in 2015-16 Growth Rate (2002-03 to 2015-16)

Figure 2. Sources of average farming HH Income, all India (%)

Sources: NSSO (2002-03); NSSO (2012-13); NAFIS (2015-16)

It may be noted that according to NAFIS (2015-16), the average farming HH income at

the all India level was Rs 8,931 per month (a notch higher than estimated by the DCR).

This varied between Rs 6,668 per month in Uttar Pradesh to a high of Rs 23,133 per

month in Punjab, a ratio of almost 3.5 times. The overall compound average growth rate

(CAGR) in real incomes (at constant prices, nominal incomes deflated by CPI) was 3.7

percent at the all India level (similar to the 3.6 percent estimated in the report of the

Committee on Doubling of Farmers’ Income), and it varied between -2.3 percent in

Jammu and Kashmir to high of 8.4 percent in Odisha, with UP at 3.9 percent. It may be

important to note that where levels of incomes are low and agriculture productivity much

below the frontier (like in UP, Bihar, Odisha, Jharkhand, etc.), it is easier to increase

growth rates significantly.

But what is more important for policy purposes is to note the sources (composition) of

income of average farming HHs. Figure 2 shows that the income coming from cultivation

and farming of livestock constituted about 50 percent of average farming HH’s income in

2002-03, which went up to 60 percent in 2012-13, but then dropped significantly to just

43 percent in 2015-16. This sudden drop could be due to some variation in the NAFIS

sample selection but more likely 2015-16 was a severe back-to-back drought year. In such

a drought year, when cultivation underperforms, farming HHs depend more on wages

and salaries either by working on others’ farms who may have irrigation facilities or

outside the farming sector.

The reality is that income from agriculture alone will be small for the majority of Indian

farmers. India has far too many people (45 percent of the workforce) currently in

46%

48%

35%

12%

39%

32%

50%

11%

10%

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30%

40%

50%

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70%

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2002-03 2012-13 2015-16

Sources of Indian farmers’ incomes

Cultivation Livestock Wages and Salaries Non-farm

50%

60% 43%

agriculture compared to its contribution in GDP (only 15 percent). Global experience

shows that as the economy grows, people move out of farming (migrating to urban areas)

and for those who remain, the share of non-farm income increases in farming HHs.

Employment and income opportunities increasingly come from small scale industry

(Town and Village Enterprises in the case of China), labor intensive manufacturing, and

the construction sector, including housing.

It is therefore critical that the government create an enabling environment for people to

move out from farming to higher productivity jobs. While that will take time, there is

considerable scope for increasing non-agriculture farm income.

The foremost asset of the farmer is land. Our simple suggestion is that the GOI, in

association with state governments, should free up land markets, especially land lease

markets that can help provide farmers with steady income while maintaining asset

security. In remote dry areas, leasing land to solar or wind power companies could

provide farmers with far greater—and more steady—income than what their low

productivity farms ever will. In other areas, farmers may choose to lease land to factories

or commercial development. Currently, strict land laws ostensibly designed to help

farmers either lead to skirting the law or to unscrupulous land mafias preying on poor

farmers. Empowering the farmer to lease land (as opposed to selling land) through legal

changes and model contracts could help at least a section of Indian farmers who wouldn’t

mind leaving agriculture if they had viable income options.

Another possibility is a large scale program to distribute solar water pumps (also known

as photovoltaic water pumping) which, today, are operationally and financially

sustainable. In parallel, free/subsidized electricity should be terminated while at the same

time allowing surplus power from the solar powered pumps to be sold back to the grid,

which would help pay for the solar pump. For farmers, this becomes an extra source of

income, and at the margin, they have to decide which will fetch more income: selling

power to the grid or pumping more water for their farm.

A third option is to develop value-added uses of the large biomass of Indian farmers.

Bamboo for construction and other applications, rice husk and bagasse-based mini-power

plants, and ethanol from sugarcane and corn can all help augment farmer incomes in

sustainable ways while developing more dynamic local rural economies.

2. Supporting Indian Farmers the Smart Way: Moving from Subsidies to

Investments and Direct Income Support (DIS)

The most sustainable way to augment farmers’ real incomes over the long term is through

investments in productivity-enhancing areas, ranging from agri-R&D, irrigation to rural

and marketing infrastructure. Investments in increasing productivity can lower per unit

costs, make Indian agriculture more competitive globally, increase agri-exports, and

augment farmers’ profitability and incomes. A troubling feature of the last five years is

that Indian agri-exports have not only stagnated but declined from the peak of 2013-14

(Figure 3). While agri-exports more than doubled, from USD $18.4 billion in 2009-10 to

USD $43.6 billion in 2013-14, they dropped to USD $33.3 billion in 2015-16 and

recovered only to USD $39.4 billion by 2018-19.

Figure 3. Agri-exports under UPA-2 and Modi 1.0

Source: DGCIS

While robust agriculture exports will increase the demand for India’s farm output, and

hence, incomes of farmers, the reality is that whenever prices rise, the government has

chosen to ban exports to protect Indian consumers. This, coupled with the Damocles

sword of the Essential Commodities Act (ECA), has meant lower private investment in

export infrastructure such as warehouses and cold storage systems. Instead of protecting

consumers at the expense of farmers, the government should expand its repertoire of

instruments such as buying at market prices when prices rise and subsidize consumers if

it becomes politically necessary.

However, India needs to address the composition of its agriculture export basket.

Currently agricultural exports constitute 10 percent of the country’s exports, but the

majority of its exports are low value, raw or semi-processed, and marketed in bulk. The

share of India’s high value and value-added agriculture produce is less than 15 percent.

Today, India is the world’s largest exporter of water, which, as we note below, it can ill

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2018-2019(P)

USD Billion

Agri Trade Surplus Agri-Exports Agri-Imports

afford. While it should remove any restrictions on agriculture exports, it should also not

subsidize scarce inputs such as water to promote exports such as rice.

India spends significant public resources on agriculture, especially on subsidies for

agriculture inputs and price support (MSP) and procurement for certain crops. The range

and costs of subsidies for agriculture are extensive: fertilizer subsidies in the central

government budget for FY20 is around Rs 80,000 crores (with pending bills of fertilizer

industry at more than Rs 30,000 crores); power subsidy by states amount to more than

Rs 65,000 crores; subsidies on canal water is another Rs 25,000 crores plus; and

subsidies for crop insurance premiums and agri-credit are at interest rates of zero or

highly subsidized rates of 7 and 4 percent).

Subsidies are a policy instrument to achieve certain goals. Many of them were instituted

to incentivize farmers to take up the Green Revolution package at a time when raising

total food production was the key policy goal. Later, subsidies were seen as ways of

reducing the cost of production for farmers and thereby providing them with implicit

income transfers as well as a way to check food price inflation and protect consumers.

Today, it has become apparent that subsidies are inflicting significant damage on different

aspects of the economy, even as there are better policy options to achieve the

government’s own goals.

 Fertilizer subsidies have essentially subsidized many inefficient high cost fertilizer

plants and led to massive overuse of nitrogenous fertilizers, leading to damaged

soils and pollution of local water bodies. Excessive use of urea (urea prices in India

at about USD 80/MT are perhaps the lowest in the world) has led to increased

acidity in the soils even as they are highly deficient in micro-nutrients like zinc.

 Power subsidies have not only led to an alarming overuse of groundwater that is

poised to become one of India’s gravest challenges, but it has severely damaged the

health of power distribution companies and retarded the growth of industry which

is saddled with a high cost crucial input. States like Punjab have seen depletion of

ground water table at the rate of almost 1 meter a year and more than 75 percent

of blocks in Punjab are overexploited. It is an alarming situation, and India has

been extremely slow to recognize the magnitude and gravity of the problem. Future

generations will pay a very heavy price if the government does not act to address

this with utmost urgency.

 Credit subsidies like loan waivers have damaged the banking system, again with

negative spill-over effects on the rest of the economy.

 Output price supports in the form of MSP basically apply to only a handful of crops,

especially wheat and rice that are procured by the government in a handful of

states. Sugarcane pricing is forced on sugar factories, even when sugar prices are

low, leading often to large cane industry arrears (in March 2019, they touched Rs

30,000 crores) and causing disruption in the sugar sector.

To be politically feasible, any solution to the subsidies crisis would need to address three

policy goals:

 Supporting food security and farm output

 Increasing farmers’ incomes

 Maintaining stable food prices

The solutions would need to:

a) Free up input prices to market levels, or charge at least full cost pricing for

fertilizers, power, agri-credit, and canal waters fees.

b) Earmark the resulting savings for expenditures on:

a. Agri-investments in agri-R&D, irrigation, marketing infrastructure,

building value chains by involving farmer producer organizations (FPOs)

and linking farms to organized retail, food processing, and export markets.

b. Direct income transfers to farmers’ accounts leveraging the trinity of Jan

Dhan-Aadhaar-Mobile (JAM)

Such shifts will curb leakages in the system, reduce inefficient use of scarce natural

resources, be neutral between chemical-based agriculture and organic agriculture, help

support sustainable use of scarce water supplies, and improve rural income inequality

since larger farmers obtain a much larger fraction of current subsidies.

The government has already accepted the idea of direct income support (DIS) to farm

HHs through its recently announced PM-Kisan (Kisan Samman Nidhi) scheme, whereby

all farming families will receive Rs 6000/- per annum. This new direction in policy

towards DIS is greatly welcome and a potential game-changer, but it would be truly

transformative for the better only if the input subsidies are also put on this platform and

prices of those inputs set free. That will go a long way in promoting greater efficiency in

the use of natural resources, and be more equitable and environmentally sustainable.

3. De-risking Agriculture

Indian agriculture is often labeled as a gamble in nature. The monsoon failures in the past

have often driven the farmers to distress and put the country in a precarious situation.

The back-to-back droughts of 1965 and 1966, when foodgrain production dropped by a

fifth (17 MMT) between 1964-65 and 1965-66, is a grim reminder of the precarious past.

Nearly four decades later, the drought of 2002-03 saw a decline of food grain production

by 38 MMT—more than double than the debacle in the mid-1960s. But thereafter, Indian

agriculture emerged as much more resilient to the droughts of 2009-10 and then back-to-

back droughts of 2014-15 and 2015-16, preventing large drops in production. Irrigation

investments, along with some buffer stocking for basic staples, helped India overcome

any challenges on the food security front.

The core challenge of low incomes facing Indian farmers is compounded by the volatility

of incomes. Farming, more than almost any other major economic activity, faces a host of

risks. Managing these risks is critical to ensure sustained increases in famer incomes.

A. Production Risks

These largely stem from the vagaries of nature, ranging from rainfall volatility (floods and

droughts) to hailstorms on the one hand and pests and plant disease on the other, all of

which affect both the quantity and quality of commodities produced.

On the supply side, the key policy to address rainfall volatility is, of course, irrigation.

While there is a need to increase the coverage of irrigation and overall water storage

capacity, building large dams and major canal networks have often languished for want

of resources. The gestation lags are unduly long and costs per ha very high in some states,

especially Maharashtra. It would be better that irrigation investments focus on building

village level storage facilities, better surface irrigation management, and investments in

drip irrigation, tile drainage, trap crops, etc. that can give results in a relatively short

period of time.

The need to create local water storage capacity is manifestly apparent. The government

can incentivize this by steering NREGS to build and maintain local water storage facilities

in each panchayat. There is also great need for institutional reforms on surface irrigation

management, especially last-mile connectivity that needs to move out of irrigation

departments to farmer-managed water users associations. Irrigation systems are much

better managed when the principal user—the farmer—has a strong sense of ownership.

Farmers are more willing to pay for irrigation services and for repair and maintenance of

distribution systems if the water reaches their farms. The potential of drip irrigation

applications is estimated at 27 million hectares, but famer take up will be slow unless the

cost of water reflects its long-term scarcity value.

However, improving the supply side will go only so far unless there is much greater

attention on water demand management. Inefficient and misuse of scarce water will

continue unless water and power are appropriately priced. Policies should incentivize

less-water intensive crops, as well as seed varieties that are more tolerant of water

stresses. There are two problem crops that gobble up more than half of India’s irrigation

water—rice and sugarcane. Rice in Punjab and sugarcane in western Maharashtra need a

special focus, with a medium-term plan for diversification to low water-guzzling crops

such as maize, oilseeds, and pulses.

The provision of free electricity and the dangerous decline of groundwater levels are

inextricably interlinked and together shape crop choice, which is amplified by

government procurement patterns. They cannot be addressed piecemeal. The

government must first simply stop any public procurement of water intensive crops (rice,

sugarcane) in any block where the water table is falling. Instead, it should sharply step up

procurement of crops like pulses and millets that are much less water intensive, as well as

have high nutrition value and encourage the private sector to buy and store these by

abolishing/pruning the ECA. Free electricity should cease and be replaced by cash

transfer programs. The latter should be a replacement for the former and not an addition.

Since free electricity is provided by states, but procurement is largely done by central

agencies, the central government needs to condition its procurement on the states ceasing

to supply free power to farmers.

However, the production risks facing Indian agriculture are becoming more daunting

with climate change. The predictions of IPCC for India are that it will face greater

frequency and intensity of droughts and floods—droughts in Deccan plateau states of the

west and southern peninsula and floods in the Himalayan foothills from melting glaciers

in the Himalayas. With temperatures rising by one degree Celsius, estimates are that

wheat production will drop by at least 5 MMT, and if temperatures rise further beyond 2

degrees C, the losses will increase more rapidly.

Most concerning for India is the large uncertainty of the effects of climate change on the

Indian monsoon—the lifeblood of the country. While advances in climate modelling have

improved understanding of the monsoon from year-to-year, even today, meteorological

models remain poor at predicting the monsoon’s weather more than a few days out. More

concerning, there is little consensus on how well the models which best capture the effects

in the 20th century will work in the hotter 21st century. Monsoon meteorology’s big

challenge will be to improve predictions of intra-seasonal shifts together with improving

models of changes in global climate. Given how much is at stake for Indian farmers, India

needs to make concerted efforts toward building a strong scientific base in monsoon and

climate modelling.

Disease risks are best managed by encouraging crop diversification and crop rotation. The

fixation on two cereals, and the resulting mono-cropping increase pest and plant disease

susceptibility, which, in turn, increases the spraying of expensive (and hazardous)

pesticides, evident in the increase in cancer incidence in rural Punjab.

Income losses due to production risks emanating from natural shocks are best addressed

through crop insurance, which stabilizes incomes during times of loss. The Pradhan

Mantri Fasal Bima Yojani has been a worthy initiative, requiring all farmers taking an

institutional loan to take insurance coverage under this scheme. Between kharif 2016 and

rabi 2018-19, 115 million farmers enrolled in the scheme, of which nearly three-fourths

had taken institutional loans.

Almost 90 percent of the premium subsidy is given by the government (equally shared by

the centre and the states). But the scheme has faced teething problems and after a rapid

rise, the coverage has in fact declined. The states are largely to blame with reports of

manipulation of crop-cutting experiments, tardiness in providing their share of premium

subsidies (leaving the farmer effectively uninsured when afflicted by shocks), and delays

in payment of compensation due to hurdles in damage assessment and disbursal of

compensation.

The implementation challenges can be addressed. Some of the steps taken by the central

government—imposing a 12 percent penalty on insurance companies if the settlement

takes longer than two months, and for state governments if they delay settlement beyond

three months of the due date—are very much in the right direction and could be tightened

further. However, it would be a severe mistake to make the scheme voluntary even for

those farmers who have obtained institutional loans. If fewer farmers are enrolled, it

would raise actuarial premiums, and undercut the large insurance purpose.

Technology today allows air-based (drone or satellite) surveillance that can provide close

to real-time crop damage assessment that can be overlaid with farm plots and their

owners, and can automatically make payments without multiple (and arbitrary)

bureaucratic layers. These technologies can identify each farm, monitor the progress of

crops on each plot on a weekly basis, and can be linked to the bank accounts and aadhar

numbers of each farmer, reducing the scope for manipulation.

In the long-term, production risks can only be addressed by much greater attention to

agricultural R&D, preferably by putting it in a mission mode. Improving Indian

agricultural productivity, which still considerably lags behind other countries such as

China, as well as creating resilience to the looming challenges of rising temperatures,

variable precipitation, water scarcity, and increases in pests and crop diseases, requires a

major thrust in agricultural science and technology.

A national mission could help overcome the weaknesses in existing institutions of

agricultural research and technology. This is one area where India could fruitfully

collaborate with some BRICs countries (especially Brazil and China), and on water-saving

technologies with countries such as Israel and Australia. For a start, the government must

fill senior vacancies at the more than 100 ICAR institutes, the majority of which lack a

director, a troubling testimony to how seriously policy makers actually care for building

India’s domestic research capabilities.

Finally, the government needs to be open to advances in science. There is lot of ongoing

research on drought-resistant seed varieties, both via normal selection processes as well

as through gene-editing. India needs to invest much more in this type of R&D than has

been the case so far. While it should promote organic farming based on the former,

curbing publicly-funded research and the use of GM crops will amount to a form of

unilateral disarmament, not only exposing Indian farmers to much greater risks, but also

to MNCs whose monopoly power will only amplify.

B. Market Risks

Market or price risk refers to uncertainty about the prices farmers pay for inputs or the

prices they receive for their farm output. Government policies have sought to address

input price risks by price controls, especially on fertilizers and power. Ironically, output

price risks are most acute precisely when farm output is good. Bumper harvests go hand-

in-hand with falling output prices and government policies have sought to address that

via price support (MSP) for outputs. And in an open economy, sometimes the price shocks

that emerge in global markets are imported into domestic markets.

Volatility in input prices is best handled through vigorous competition with many

suppliers—and, when needed, imports—so that monopoly rents are whittled away.

Competition policy is the best antidote to price risks, whether inputs or outputs. In the

next section, we address how agriculture output markets can be improved to benefit

farmers.

In addition, farmers need to organize by forming (or joining) marketing cooperatives such

as FPOs to enhance their bargaining power and get better prices for their produce. This

would also allow them to spread harvest and sales over the season by scheduling planting

and storage. Government needs to incentivize and regulate the development of FPOs, not

seek to form or control them directly.

C. Financial Risks

Financial risk results when the farm business borrows money and creates an obligation

to repay debt. Rising interest rates, the prospect of loans being called by lenders, and

restricted credit availability are also aspects of financial risk.

Despite the presence of a welter of government programs, official credit for agriculture

varies widely across the country. The introduction of Kisan Credit Cards has given farmers

working capital options, although efficient implementation is still some ways away. In

some cases, the financial cycle of banks does not synchronize with the agricultural cycle,

which leads to pressures on farmers to repay before harvest. Delinking the two would help

farmers.

Given the small size of most Indian farms and the need to increase mechanization and

raise productivity, steps should be taken to improve leasing and rental options rather than

purchasing machinery, equipment, or land.

An important source of financial risk is the government itself, in particular uncertainties

surrounding government actions. Export controls, sudden imports, and the level of price

support payments are examples of government decisions that can have major unexpected

impacts on farmer incomes.

Finally, good risk management depends on accurate information, which requires reliable

data. The rapid spread of smart phones means that IT-enabled farm services (including

market price data) from government and private sources, extension workers, and other

farmers, can now be disseminated rapidly, which should also help in managing risk.

4. Improving Agriculture Markets

Farmers’ income can improve substantially if they are able to capture a greater share in

the supply chain from farm-gate to consumer. For this to happen, farmers must have the

freedom to sell what they want, where they want, and when they want without any

restrictions on sale, stocking, movement, and export of farm produce. These will require

legal and institutional changes, major investments in market infrastructure and storage

(including cold-chain storage), and incentives for the creation and operation of

infrastructure by FPOs.

There is growing evidence that farmers and traders across the country are capable of

integrating digital technology and online platforms into their marketing practices.

However, there must be a clear recognition that agricultural markets are highly specific,

diverse, and differentiated in terms of their structure and organization across different

agro-ecological regions and commodity systems. When farmers are able to access

multiple market sites, their bargaining power increases, not just in terms of selling price,

but also in other crucial ways such as lower commissions, more accurate weighment, and

faster payment.

Hence, regulatory reform to open up the current agricultural produce market committee

(APMC) mandi system to competition from multiple channels and sites of exchange—

including local traders, private corporations, co-operatives, producer companies, and

other physical and electronic spot markets—is exceedingly important. Farmers should

have access to multiple market sites, and especially to inclusive multi-buyer local

wholesale markets that operate around the agricultural year.

The introduction of E-NAM—an online trading platform for agricultural commodities in

India—is a step in this direction. However, its effects have been underwhelming due to

three major bottlenecks: time cost of transactions, quality assessment challenges, and

transportation logistics.

Farmers’ time is valuable. In the current system, farmers bring their produce to a mandi,

traders bid for the crop, the transaction is completed within an hour, and the farmer can

go home. Payment from the commission agent might happen later but the farmer does

not have to wait in the mandi for long hours. In the current version of e-NAM (Stage I),

open outcry auctions are being replaced by electronic auctions but traders are still not

allowed to bid across mandis.

Two points need emphasis. First, just because traders enter bids through a computer, this

does not increase competition—after all they can still talk to each other and collude. The

switch to e-auctions is not bringing in new traders to participate. Second, the market is

not allowed to clear until all electronic bids have been submitted for all lots of produce

that have been brought into the mandi for the day. This process takes anywhere between

six to eight hours and all the while, farmers have to wait in the mandi with their crop. It

also increases congestion in mandis. Hence, farmers prefer to sell outside e-NAM and the

uptake of a “good policy” remains low. The waiting time for farmers should be voluntary

and they should know the highest bid on their lot at any instant. Whenever they think

they have a good enough price, they should be allowed to take that offer and leave.

The real benefits of e-NAM will be realized when traders from any mandi can bid in any

other mandi (even one outside their state). The current plans are that in the 2

stage of

e-NAM, bidding would be allowed across mandis within a state and then in the 3

stage,

trades across mandis throughout the country would occur. However, this is unlikely to

happen unless a key constraint—reliable, real-time quality assessment—is addressed.

Traders in Chennai will only bid for paddy in a mandi in Bhatinda, if they know the quality

of paddy on sale. This differs by each lot of crop the farmer brings to a mandi. In the

absence of any reliable alternative mechanism for quality assessment, the traders have to

physically show up in the mandi and verify it themselves (or through a representative).

This means that even if mandis were electronically connected, trades across mandis will

not occur and markets will remain fragmented. The same constraints also force traders to

show up in a mandi (to physically verify crop quality) in the current stage of e-NAM. What

all this indicates is the dire need to fix quality standards and set up dispute settlement

mechanisms if the dispatched quality differs from what is shown on the computer while

bidding.

Finally, transportation is a major bottleneck. Suppose a trader sitting in Lucknow buys

100 quintals of soya bean from Harda mandi in MP. Who ensures transportation? The

trader may not have local contacts. Will the burden fall on the farmer? What if the

quantity bought was low or diversified across crops? Therefore, to integrate national

markets—and for farmers to get higher prices—it is important to have traders who can

arrange for quality assessment and transportation remotely. Remote bidding and quality

assessment can reduce transactions costs and increase competition, but bottlenecks in

the transportation sector will have to be addressed, perhaps by creating an Uber-like

transportation platform for trucking.

To help e-NAM perform to its full potential, the government needs to push the creation

of assaying, sorting, and grading infrastructure at the mandis. This will help reduce

variance in the quality of produce from mandi to mandi, and encourage retailers and

processors to procure through e-NAM. In addition, the government needs to ensure wider

adoption of electronic Negotiable Warehouse Receipts (e-NWRs) to help further

strengthen the market.

The Agricultural Produce and Livestock Marketing Act 2017 needs faster adoption at the

state level. Its recommendations, including single levy of market fee, single licences for

traders, and de-listing perishables from the ambit of the APMCs, will improve market

access and realization for farmers.

These gains will be limited unless accompanied by:

a) The removal of a host of statutory restrictions on commodity trade—whether on

sale, stocking, movement, or export—that governments indiscriminately impose.

b) Concomitant public investments in enhancing the system’s regulatory capacity,

dispute settlement mechanisms in e-commerce platforms, and core market and

logistics infrastructure.

It is certainly the case that the government will continue to play a role in the procurement,

stocking, and distribution of certain major commodities, but this should be done in a way

that works with—rather than against—markets.

Finally, it should be emphasized that markets cannot function effectively unless the

institutions governing agri-marketing in India, especially the Essential Commodities Act

and Agriculture and Livestock Produce Marketing Act, are changed to give full freedom

to the private sector to directly buy the produce from farmers, stock it as much as they

feel appropriate, and sell it anywhere in India or abroad. Only light monitoring of stocks

for information is needed for government policy, which can be done by registering

warehouses and asking them to file the stocks levels on a weekly basis.

5. Conclusion

This paper has argued that fundamental reforms are needed if rapid increases in farmers’

incomes are to occur in ways that are fiscally and environmentally sustainable. Given the

strong political mandate of the Modi government, and the large number of states where

the BJP is in power (either directly or through NDA partners), this is a golden opportunity

to put agriculture on a more sustainable and higher growth trajectory for the long term.

Agriculture is a state subject but where the Central government has had—and will

continue to have—a large role. Reforms can only succeed if the central and state

governments work closely together in a spirit of “cooperative federalism.” The formation

of a committee of chief ministers on “Transformation for Indian Agriculture” is a welcome

step. Going forward, it would be helpful if the government created a more permanent

Agri-Reforms Council on the lines of GST Council.

Changes in policies will be piecemeal and half-hearted unless there are two fundamental

ideational changes. First, who is the main focus of agriculture policies: the consumer or

the producer (the farmer)? Second, farmers should not be patronized as helpless frail

creatures, but as entrepreneurs who need supportive institutional and policy frameworks

to thrive. The sad reality is that Indian farmers’ interests have been made subservient to

the interests of consumers. Unless farm policies put the producers’ interests foremost,

little will change in practice. Subsidizing the poor (or rich) consumer is not the

responsibility of the farmer.

The focus for the central government will need to be twofold: actions that it can

unilaterally take to raise agricultural incomes; and second actions to influence state

government actions to improve agriculture, remembering that agriculture is a state

subject and that many of the important levers—water, power, irrigation, extension etc.—

are controlled by the states. While the fate of agriculture will still largely be determined

by states and state-level politics, the Center can nonetheless initiate immediate actions,

many of which are, politically, not especially difficult. These suggestions should be

thought of as a package, which will have an impact if most are implemented and not one

or two in isolation. Thus, while cash transfers as income policy are a welcome first step,

by itself, that policy will be untenable unless accompanied by efforts to rationalize input

subsidies by putting them on a cash transfer platform and pruning them to the fullest

extent possible.

Other policy options for the central government include:

 Reduce cereal procurement and keep MSP price increases for rice and wheat below

inflation, and not exceeding border prices, while encouraging the private sector to

develop robust markets in less water intensive crops like pulses and oilseeds by

removing controls on stocking, trading, exports, etc.

 The implementation of an income transfer scheme for farmers must be

accompanied by reducing damaging subsidies in power, water, and fertilizer and

keeping the real prices of subsidized grains under the National Food Security Act,

2013 constant. To lock in rice at ₹3 per kg, wheat at ₹2 per kg, and coarse grains

(millet) at ₹1 per kg for perpetuity, no matter what happens to the state of the

world, has fostered a cereal tyranny that has deeply damaged Indian agriculture.

It may be time to revisit these issue prices and link them to MSP, say at least half

of MSP, and look to NFSA’s provision to revise them after three years of its

initiation.

 Laws that were designed fifty years ago for conditions of scarcity such as the

Essential Commodities Act—which provided the basis for restrictions on

stockpiling which have hurt farmers—must be scrapped. Those conditions of

scarcity have long disappeared. India is trying to cope more with the problems of

surfeit than scarcity.

 Income from livestock is most important for marginal farmers (<1 ha). Laws and,

more importantly, the political and social climate that have been so detrimental to

the livestock sector must be changed.

 Export restrictions on agricultural products must be eliminated and export taxes

must also be eliminated or reduced drastically. Going forward, trade policies that

have been arbitrarily and pro-cyclically imposed—increasing tariffs and import

restrictions when world prices come down, and imposing export bans and taxes

when domestic prices rise—must become stable by identifying the “trigger levels”

well in advance. The government must commit to that stability.

 Ongoing efforts to create a single agricultural market needs to be followed up so

that farmers and farm organizations can transact with any buyer, anywhere in

India, and at times of their choosing. Creating a common market does not mean

dismantling APMCs.

 Mandis are a public good and more mandis, especially public mandis, should

always remain a viable alternative to private trade. The idea is to increase

marketing options available to farmers. Subsidizing market infrastructure (such as

providing “electronic” weighing scales to villages and mandis) has and will have

positive externalities.

 Rehabilitation of inefficient urea plants must be stopped; and a plan for closing the

most inefficient plants drawn up. Fertilizer subsidies should be for farmers—not

for inefficient industries.

 Laws should allow for easy leasing/renting agricultural land. Unfortunately, these

changes can only be done by states, and the Center can only incentivize them.

Additionally restrictions on conversion of agricultural land for other purposes

should be eased. It keeps the value of agricultural land low, and sharply raises

barriers to exit from agriculture, thereby keeping farming fragmented and incomes

low.

India needs to start thinking about agriculture policies in the broader context of natural

resource management. India is a natural resource constrained country. These constraints

are becoming more severe due to massive increases in population and the greater

consumption that inevitably accompanies growth and income increases. But they are

being magnified by distortionary policies and will become even graver as the existential

threats posed by climate change become more manifest.

Land in India is scarce and its opportunity cost in low productivity agriculture is high. Its

unavailability for higher value-added activities, whether commercial or industrial, slows

down exit options, trapping them into ever more precarious lives. But perhaps the natural

resource that will be most impaired and poses the most peril for India’s future is water.

From declining water tables to contentious river-basin sharing to intermittent and poor

quality of water supply in urban areas, the crisis is not somewhere in the future—it is

already upon the country. Agriculture policies to discourage over-use and waste of water

are necessary not just for the viability of agriculture but for the country’s very future.

Finally, it needs to be recognized that growth and employment opportunities outside

agriculture are critical for long-term improvements in farmers’ incomes. Relentless

population pressures have meant that most Indian farms are too small to provide viable

incomes. Ironic as it may seem, the long-term future of Indian farmers fundamentally

depends on getting many people out of farming. The problem of small and fragmented

landholdings as a severe constraint on famer incomes has long been recognized. Indeed,

more than a century ago, one of India’s most influential thinkers argued that this problem

could only be addressed by creating employment opportunities in “non-agricultural

channels of production.” Thus, “strange though it may seem, industrialisation of India is

the soundest remedy for the agricultural problems of India.” That was B. R. Ambedkar,

writing in the Journal of the Indian Economic Society in 1918. With India’s population

having quadrupled since then, that solution is even more compelling today.