Changes in real incomes from paddy and wheat farming in the last 5 years

This was first published in The Wire. Reproduced below with data tables.

The Prime Minister spoke of his “dream” of doubling farmer’s income by 2022 in a farmers rally in early 2016. Since then, the government has been on a publicity overdrive to show that it is working towards this goal. The goal was reiterated by the Prime Minister in his Aug 15 2018 speech. One is naturally tempted to ask how incomes have changed in the recent past.

The NITI Aayog has pointed out the difficulties in estimating changes in the income of farmers in general. The problem becomes tractable if one confines oneself to incomes from just two crops, paddy and wheat whose importance for farmer’s income will be apparent shortly. This analysis shows that real incomes from paddy and wheat farming have fluctuated in a narrow band and in the case of paddy at levels lower than prevailing 5-6 years ago.

The importance of paddy and wheat

Paddy occupies 23% of total cropped area and is grown in most parts of India while wheat covers another 16%. So between them paddy and wheat use nearly 40% of total cropped area (See Agricultural Statistics). Paddy and wheat are also grown by the largest number of agricultural households – 59% and 39% respectively – according to the NSSO 2013 survey.

Further, the government procures over 30% of the total crop in both rice and wheat at the Minimum Support Price (MSP) that it announces every year. Procurement on this scale at MSP should strongly influence the prices in the APMC mandis.

Income from paddy and wheat is thus of interest both because of the number and spread of agricultural households who depend on it and also because of the government’s ability to influence it.

Avenues for increasing income

Higher income can come from increased earnings and increased productivity. Earnings are determined by how much the price realized by the farmer exceeds the cost of cultivation. Productivity measures the crop produced per hectare.  Let us consider the question of productivity first.

Productivity estimates for the current decade (2010’s) are available in the latest Price Policy Reports of the Commission for Agricultural Costs and Prices (CACP). The Compounded Annual Growth Rate (CAGR) of productivity in wheat is negative at -0.63%. Wheat farmers need higher earnings just to hold on to the same income levels.

The productivity of paddy is increasing, but at a paltry CAGR of 0.9%. This amounts to a growth of 5.5% in 6 years, and, as we shall see is not enough to compensate for falling earnings of paddy farmers.

The hope of higher income therefore rests on higher earnings. To estimate earnings on paddy or wheat we need to know the average price realized by the farmer.

Average prices realized by farmers

The ‘average price’ we are looking for is the total realization by paddy (or wheat) farmers in the country divided by the quantity produced. It turns out that this data is embedded in the NationalAccounts Statistics (NAS).

The NAS records the output value of each major crop including paddy and wheat. Output value is calculated as the product of price and quantity produced where the price is expected to capture as accurately as possible the income that accrues to the producer.

The Central Statistical Organization (CSO) determines output value at district level using production data and average wholesale prices prevailing in APMC mandis during the peak marketing season. District level output values are aggregated to obtain state and national level values (National Accounts Statistics Sources and Methods 2012).

The output value of paddy (wheat) in NAS is then an estimate of the total realization of paddy (wheat) farmers. The ‘average price’ can be calculated using production figures from the Ministry of Agriculture and Farmers Welfare (MOAFW).

The charts below show the average price of paddy and wheat realized by farmers along with the MSP announced by the government.

Source: NAS 2018, MOAFW, Author's calculation

Sources: NAS 2018, MOAFW, Author's calculations

The charts show what is expected, that the MSP announced by the government indeed largely determines the average price realized by wheat and paddy farmers. With the exception of 2011-12, the average prices of both wheat and paddy have remained higher but within 6% of MSP.

However, what really matters for farmers are earnings rather than the average price or MSP itself. We first look at earnings on sale at MSP as this provides a clearer picture of government policy at work.

Nominal and real earnings at MSP

Nominal earnings at MSP are obtained by deducting the cost of cultivation (“A2+FL” costs in CACP terminology, available in their ‘Price policy reports’) from the MSP. Real earnings can be estimated by adjusting nominal earnings for inflation.

Paddy is brought to the market almost throughout the year except the monsoon quarter. So the average Consumer Price Index (rural) prevailing over the other 3 quarters (for example for 2016-17, the average of Q4 2016, Q1 2017, Q2 2017) is used as the deflator of nominal earnings to get real earnings at 2012 prices.

Chart 3 shows the nominal and real earnings of paddy farmers who sell their produce at MSP. It is useful to remember that 30% of the total paddy produced is sold at MSP. The results are surprising to say the least.

Source: MOSPI, MOAFW, CACP, Author's calculation

First, the government actually let nominal earnings of paddy farmers fall each successive year till 2013-14 by keeping increases in MSP less than the increase in cost of production. The margins over cost built into the MSP were reduced from 38% in 2011-12 to 27% in 2013-14. Fall in nominal earnings lead to a steeper fall in real earnings because of inflation. This was a deliberate policy of the government to lower earnings of farmers selling at the government procurement price.

In subsequent years, the government of the day fixed MSP’s to increase nominal earnings every year but the increase was just enough to compensate for inflation. Margins over cost built into the MSP remained at 28-29%. Real earnings of farmers selling paddy at MSP barely changed from 2013-14 levels.

Why did the government act as it did?

It had two major concerns in this period – burgeoning stocks of cereals and inflation. The stocks of rice with the government rose from 19.6 million tons in July 2009 to 31.5 million tons in July 2013, far in excess of the stock norms. Higher stocks meant higher costs and a higher subsidy bill for the government.

MSP’s were held down for some years till stocks of procured rice came down to more manageable levels - 21.7 million tons by 2015. Subsequent pricing policy aimed at avoiding inflationary pressures from any rise in cereal prices by keeping real earnings on paddy more or less constant.

 

Let us turn to wheat.

Chart 4 shows the nominal and real earnings in wheat when sold at MSP.  As wheat is harvested in April-May, the average CPI (rural) prevailing in Q2 (for 2016-17 the average of Q2 2017) is appropriate as the deflator to get real earnings at 2012 prices.

Source: MOSPI, MOAFW, CACP, Author's calculation

The government set MSP’s for wheat at levels which led to real earnings of farmers falling till 2015-16. The margins over cost built into the MSP fell from 110% in 2011-12 to 94% in 2015-16.

Just as in the case of paddy, the motivation for such pricing was the rise in the level of wheat stocks with the government. Wheat stocks went up from 32.9 million tons in July 2009 to 49.8 million tons in July 2012. The government engineered successive reductions in real earnings by fixing low MSP’s until stocks reached a manageable level of 30.2 million tons in July 2016.

Real earnings at average prices

We can now return to a consideration of real earnings at average prices which are indicative of the incomes of farmers as a whole from paddy and wheat.

The procedure followed is the same as for computing real earnings at MSP. Charts 5 and 6 show earnings up to 2016-17 using NAS 2018 data and the author’s projections for 2017-18 earnings based on the prevailing MSP.

Sources: NAS 2018, MOSPI, CACP, MOAFW, AUthor's calculation

 

Sources: NAS 2018, MOSPI, CACP, MOAFW, Author's calculation

After a steep drop till 2013-14, real earnings in paddy have moved up and down in a narrow band. In the case of wheat too, they have moved up and down in a small range.  

To sum up, an analysis of earnings on paddy and wheat sold at MSP over the last 6 years reveals the government’s main concerns while deciding increments in MSP.

In the initial period, the concern was to reduce stocks of grain with the government which had reached over 80 million tons in 2012. The strategy employed was to fix MSP’s at levels which would help bring down procurement and facilitate the sale of excess stocks in the market.

After stocks came down to manageable levels – around 55 million tons – in 2016, the main concern was to avoid stoking inflation. MSP’s were fixed at levels that would ensure that nominal earnings kept pace with inflation and real earnings remained at the same levels.

The governments hand in fixing MSP’s shows up in how real earnings at average prices have moved over these years.

Earnings on both paddy and wheat have fluctuated in a narrow band, and in the case of paddy, at levels lower than prevailing 5-6 years ago. Given that a large majority of farmers grow paddy and/or wheat and that nearly 40% of cropped area is used for these crops, one has to conclude that increasing farmer’s income has not been high on the government’s agenda at least till this year. 

References to this article:

Mumbai Mirror piece - Oct 3, 2018

Will corporate India come to the rescue of India’s farmers?

This piece has been published in India Together under the title "From mandi's to markets: Will this round be any better?"

Farmers across the country are extremely agitated.

A quick scan of just the English language media – which typically does not show much interest in rural India – reveals the numerous protests in which they have taken part, among the recent being the long march to Mumbai by tens of thousands of farmers. More protests are expected in the coming days.

Common to all the protests are the demands for a complete loan waiver and fair prices for farm produce. As an earlier piece explains, the returns to the farmer are barely sufficient to sustain him and often below the cost he incurs. At the same time, wholesale traders bringing the farmer’s produce to the consumer enjoy hefty margins unjustified by the value they add. The market has failed the Indian farmer and this is at the root of the farm crisis.

How is this situation to be remedied? There are two diametrically opposing views.

One view is that the state must accept responsibility for the well being of the farmer and weigh in on the side of the farmer to compensate for the fundamental asymmetry in the economic standing of farmers and traders.

The other view derives from an unquestioning belief in the efficacy of the free market. It is useful to consider this in some detail because of the influence it has on policy makers.

The free market vision

‘Free marketers’ believe that state interventions and controls in the agriculture market have distorted prices. Freed from these, the market itself would enable true price discovery and improve the terms of trade for farmers.

The specific interventions that India’s free marketers would like to see ended are the state declaring Minimum Support Prices (MSPs), procuring grains and pulses, regulating wholesale trade with farmers, controlling stocks with traders and controlling exports.

But this is not all. The free marketers would like the state to “free” land markets too so that farm land can be sold or leased freely. This would enable aggregation (by buying or renting) of farm land into large farms. An editorial in Livemint (Mar 21, 2018) lays out the wish list of the free marketers in full.

The United States is possibly the inspiration for these free marketers.

The US has 2.1 million farms compared to India’s 90 million. Just 8% of farms that are >1000 acres in size account for 70% of overall farmland (US Census of Agriculture). The large farm sizes are possible because 40% of farmland is leased. In the US, the agricultural supply chain is dominated by massive companies such as Cargill, ADM and Bunge whose operations range from global trading in agricultural commodities to transforming crops into packaged products for supermarket shelves.

In the world of agriculture envisioned by the free marketers, India would have far fewer farmers and a large fraction of agricultural land consolidated into large farms. Corporations trading in and processing food would be directly able to deal with farmers and the government would have no influence or control on the price of agricultural commodities.

But how would the farmers ousted from agriculture find alternate livelihoods when there are no jobs even for the youth entering the labour force? The free marketers will not be bothered by such questions.

While the present Indian government does not want to give up its ability to influence price and availability of agricultural commodities (by doing away with MSP, procurement and export controls), it has bought into the prescriptions of the free marketers to dismantle existing regulations governing wholesale purchases from farmers. Before delving into how this is driving policy, a brief introduction to the existing agriculture supply chain structure will be useful.

Mandis and their regulatory capture

The wholesale purchase of produce from farmers in India is governed by the Agricultural Produce Marketing Committee (APMC) Act. Agriculture is a state subject and each state has its own version of the law based on the template put out by the centre.

According to the APMC Act, wholesale transactions between farmers and traders must take place in designated market yards (mandis) and follow certain rules. These yards have been established throughout the country in agricultural production centres. The yards are managed by an elected authority with government supervision.

The concerns of this law can be better understood when seen in the context of the 60’s and 70’s when the APMC’s were set up. Small farmers were extremely vulnerable to being cheated by agents who would purchase their produce locally in the village. In the APMC yards, farmers got a better feel for the price. The sale of produce under public scrutiny brought a level of protection against being cheated on weights and measures and price. The APMC markets were clearly an advance on the situation prevailing earlier. Most trading shifted to the regulated mandis though there is still a significant fraction that takes place in the villages.

Over time, traders have established their control over the regulated markets. That this has happened is not hard to understand if one takes into account the huge asymmetry in the economic standing of traders and farmers.

The market committees are elected bodies and APMC elections too are fought with political affiliations. Traders with their economic power and ties to the major political parties end up controlling the committees. Government supervision is weak at best and cannot stand up to the economic and political clout of traders. Traders can cartelize with ease and set prices for agricultural produce right in the face of regulations meant for farmer’s protection.

Farmers are unable to stand up to this cartelization. They lack pricing power as suppliers. Added to this, they are often beholden to traders who help them through the production cycle with short term loans, transport and storage. Though aware that prices are fixed, they have no option other than to play along.

Reforming the mandis through competition

The government acknowledges the cartelization that happens in APMC markets right under state supervision. However, it does not want to acknowledge this as a governance failure. Instead, in line with the thinking of the free marketers, it argues that what is necessary are alternate channels which can compete with the regulated APMC mandis for farmer’s produce. This competition, it is claimed, will lead to farmers getting better prices and more investment flowing into the agriculture supply chain. This is thinking is behind the new (model) agricultural produce and livestock marketing (APLM) Act of 2017 that the present central government has unveiled.

The Prime Minister was reported to have written to the chief ministers of states recently emphasising the need to “swiftly undertake market reforms of our decades old and restricted agriculture produce and marketing committee (APMC) architecture”. The government is clearly in a hurry to get the states to adopt the new law which will replace the APMC Acts.

The alternative channels to APMC markets for farmers are to be privately managed markets and farmer-consumer markets. But most importantly, large buyers such as firms engaged in food processing, large scale retail or exports will be able to bypass the wholesale markets and buy directly from the farmer.

Actually, all the above measures to “free” the agricultural market are old hat. Back in 2003, the then BJP government put together a ‘model’ regulation (APMC Act 2003) for allowing alternate channels in agricultural marketing and the Congress government notified the rules to go with the regulation in 2007.

26 states have since carried out modifications to their state specific APMC Acts in line with this model Act. Bihar has gone to the extent of getting rid of the APMC regulated markets altogether to allow free private play.

What has been the impact of these changes on the markets?

Private markets have been a non-starter. While a number of licences have been issued in Maharashtra and a few in Karnataka, Gujarat and Andhra, most licensees do not seem to be operating markets on the ground. It seems no one wants to invest in setting up market yards just to earn the market fee of 2% of transaction value.

Bihar too has seen no investment in private market infrastructure. As reported in the Hindu Business Line (Feb 8, 2015), trade happens in informal makeshift markets that have no facilities and no competitive price discovery; their only advantage seems to be the ease of access for farmers.

There are farmer-consumer markets in several states – AP, Tamil Nadu, Punjab, Haryana – variously named rythu bazar, apni mandi, etc. They have not made a difference as a whole as few farmers can afford to take their produce to these markets which need to be located near cities.

What about the ‘direct marketing licences’ issued to large firms to procure directly from farmers?

Maharashtra has been in the forefront giving licences to many large firms including Tatas, Aditya Birla, Reliance, Big Bazaar, ITC, ADM Agro and Mahindra & Mahindra. But as of 2016, their purchases represented only a tiny fraction of the total purchases from farmers - 1000 crore annually against 60-75,000 crore transactions in APMC mandi’s and 25,000 crore in village and other informal markets (Indian Express, July 21, 2016). Big retailers, it appears, prefer to recruit existing middlemen as their agents and buy in the APMC markets. This is not surprising, for which corporation would like to directly deal with lakhs of small farmers?

Pinning the hope on big corporations

The government is acutely aware of the failure of the previous reforms. There is no private investment flowing into public use infrastructure that can benefit the farmers. Neither is there any movement towards farmers getting fair prices. The government however argues that this is because private firms wishing to set up alternate channels still do not have a “level playing field”.

With this argument, the APLM Act 2017 goes beyond the earlier reforms to make things extremely attractive for private firms wanting to enter the agricultural supply chain.

Under existing law, states are territorially divided into market areas and the market committees constituted under the APMC Act exercise regulatory functions (such as collecting market fees) over their respective market areas. This also places certain constraints on the movement of agricultural produce across market area boundaries.  

The new law confines the role of these market committees to within the publicly owned mandis. Licensing and regulation of private firms and traders is vested with the state government and licensed entities can operate anywhere within the state.

The government claims that the new law by allowing the farmer to sell anywhere in the state and to whomever he chooses will help the farmer realize better prices. The fact is that farmers have difficulty transporting their produce even to the nearest market yard. It is the private firms and traders who will now have the freedom to buy anywhere and profit from arbitrage.

Further, while traders must still operate within private or public market yards, licensed firms can make their purchases in front of the existing market yards without any need for investing in private yards. They have to pay a market fee only 1/4^th of what is charged in the market yards. It is not clear by what logic this number was arrived at. There are also no transparency requirements imposed on them in respect of trades.

In summary, the APLM Act 2017 goes all out to help corporations entering the food chain to buy direct from the farmers by allowing them unfettered access to aggregation centres (the existing market yards) throughout the state for a token market fee, without having to invest in their own yards.

Will the entry of a new class of buyers help farmer producers realize a better price?

The fact is that the basic lack of pricing power among farmers does not change when they deal with corporations instead of traders. The experience of the last 11 years shows that corporations tend to merge into the existing supply chain at the last mile to the farmer. There is no reason to assume that the margins they make because of bringing in greater efficiency in the supply chain will be shared with farmers. Corporate India is not going to come to the rescue of India’s farmers.

The 2003 APMC reforms did not lead to any appreciable improvement in the lives of farmers; neither will the APML Act 2017 being pushed by the present government. These reforms are not about helping farmers realize better prices, but about opening up more opportunities for corporate India.

The market has failed the Indian farmer

This piece appeared in India Together under the title "The missing market for agriculture".

India’s farmers face an existential crisis. Dramatic protests, demands for loan waivers and mounting suicides are symptomatic.

Fundamentally, the crisis stems from the routinely low returns from agriculture even after a normal monsoon. Then there are risks to even obtaining these low returns. While drought or pest attacks can decimate returns, ironically, so can a bumper crop.

Markets are supposed to help find a price that works for both the producer and the consumer. Economic theory presupposes that a producer will produce something only if he can make a profit by selling it in the market at the prevalent price. This does not seem to apply to the Indian farmer.

A few examples will illustrate.

The struggle to recover cost

Take Maharashtra, a hotbed of farmer’s protests. The Indian Express (Apr 15, 2018) reports that in Maharashtra with the exception of Soyabean all commodities are trading below the Minimum Support Price (MSP) fixed by the government.

Farmers sell their produce mainly in yards of designated agricultural markets. The government run ‘agmarknet’ portal provides price information from agricultural markets across the country on different agricultural commodities. A visit to the portal shows that the market price of food grains, oil seeds and pulses is routinely below MSP.

Tracking the details of a specific commodity provides more insight. 

Tur (Arhar) dal is an important part of the diet in both South and North India. Production is insufficient to meet local demand and India regularly imports Tur. Karnataka is a major producer with Kalaburgi district accounting for most of the produce. The harvest is brought to the wholesale markets starting January. The MSP has been set at Rs 5450/quintal by the central government, while the state government has fixed a higher support price of Rs 6000/quintal, making good the difference from its resources.

Following a relatively good monsoon, the ‘modal’ prices registered at the wholesale market in Kalaburgi in Jan 2018 were in the Rs 4100-4200 range. Transactions happen over a price spread around the ‘modal’ price and there will be many farmers getting lower than the reported ‘modal’ price.

What does it mean to get a price below MSP?

The MSP declared by the government is based on the recommendations of the ‘Commission on Agricultural Costs and Prices’ (website: https://cacp.dacnet.nic.in/ ). The Commission is asked to recommend the MSP based on the total cost of production including input costs, labour and capital employed as well as other considerations such as demand and supply, inter-crop parity, etc. 

In the case of Tur dal, the production costs for 2017-18 work out to Rs 4612/quintal and the recommended MSP is Rs 5450/quintal, 18% above production costs. When farmers get paid significantly less than the MSP, they may not even be recovering the cost of inputs.

Why the MSP provides no price support

The government appointed ‘National Commission on Farmers’ headed by the well known agricultural scientist, Dr Swaminathan recommended way back in 2006 that MSP should be fixed at 50% above the cost of production to allow for a decent margin for the farmer. The present government announced in the 2018 budget that it would fix MSP’s according to this recommendation. There is no clarity yet on how or when it will do it.

The MSP as it is currently fixed has barely enough margins built in for a small farmer to survive. However, the central government does not adequately support even this MSP.

Firstly, a commodity may have an announced MSP, but will not be procured unless it is also a commodity distributed through the PDS.

Secondly, the government places limits on how much can be procured on certain crops and procures selectively in certain regions. Returning to our example of Tur dal, because of these restrictions, each farmer in Karnataka can sell only a maximum of 20 quintals at MSP to the state agencies as reported in the Hindu (Feb 3, 2018).

Drilling further into government procurement reveals some of these details.

The NSSO survey of farming households, ‘Key Indicators of Situation of Agricultural Households in India, NSS 70^th round, Dec 2014’ (NSS70), reports the estimates of procurement by government and co-operatives at MSP and these are captured in the table.

Share of crop on sale procured by government and co-operatives at MSP (Data from NSS 70th round, 2014)
	%age of crop	%age of farmer beneficiaries
Sugarcane	52	39
Wheat	19	3
Paddy	14	4
Maize	9	1
Cotton	7	5
Groundnut	3	2
Onion	3	1

The table shows the  relatively high procurement in sugarcane, wheat and paddy. The procurement in commodities not appearing in the table including Tur dal was 1% or less of the total produce on offer for sale. These numbers provide an idea of commodities with some price support and commodities where MSP is just a number.

There is another number of interest - the percentage of farmers selling a particular commodity who are able to get the benefit of sale at MSP to government. From the table, it can be seen that this is always lower than the percentage of produce procured indicating that larger farmers have better access to government procurement.

The contrast between the percentage of farmers selling to government agencies and percentage of produce procured is particularly striking in the case of wheat, paddy, maize and onion. This is because procurement in these crops is concentrated in regions with large scale production where there are also large farmers specializing in the crop.

Punjab and Haryana currently account for nearly 50% of the paddy and 70% of the wheat procured. This means that even for commodities with price support, the support may be available only in some regions.  In February 2018, both paddy and wheat were selling below MSP in many markets of Karnataka.

The unjustifiable cost of intermediation

There is another revealing characteristic of India’s agricultural markets. This is the huge spread between the price realized by the farmers and the price paid by consumers. Returning to the example of Tur dal, in Jan 2018, while farmers were getting paid Rs 41/kg, consumers were paying almost double, Rs 79/kg in Bengaluru, according to the state civil supplies price monitoring cell.

This spread is not warranted by the value added by the middlemen in the agricultural supply chain. It means that the middlemen – primarily commission agents, traders and wholesale merchants – are able to control prices paid to the farmers and prices charged from consumers to their advantage. Farmer’s income falls well short of potential because of the high cost of intermediation.

Intermediaries corner the profits even when market prices are high because of supply shortages, denying farmers most of the upside in prices. Returning to the Tur example, following severe rainfall deficit in 2015, in Jan 2016, the retail prices in Bengaluru climbed to 170/kg. However the farmers with reduced quantities to sell were getting only a price of between 90-98/kg in the Kalaburgi mandi.

The returns below MSP to the farmer along with the high intermediation costs point to a market failure. The debt of the Indian farmer is a consequence. NSS70 estimates that small and tiny farmers - with 1 ha or less of land constituting nearly 70% of agricultural households - on average earned income less than consumption expenditure.  

Unsurprisingly, 52% of agricultural households were indebted in 2013 with an average outstanding loan of Rs 47,000. Across farmers, 40% of the borrowing was from non-institutional sources such as money lenders, shop keepers etc, typically paying high interest.

The debt incurred by farmers is for buying seeds and fertilizer and other inputs, the working capital if you please, and to meet consumption expenditure. The low returns on average means that the farmer is never able to repay his debt. It also means that there is very little investment in agriculture.

Why the market does not work for the farmer

It does not require rocket science to spot the reasons for this market failure.

The basic hypothesis of the ‘market’ is that any producer will produce and sell only at a price where he makes profit. This unfortunately is not true for India’s farmers.

Firstly, there is the issue that is common to agriculture everywhere in the world. Unlike in industry where producers get continuous price signals and can react by stepping up (or down) production, farmers have no control over production once they have sown the seeds. The production cycle once set in motion has to be carried through till harvest irrespective of what price their produce will eventually fetch. Decisions on what to produce have to be made based on expectation of future price. If the expectation proves wrong, the farmer is faced with losses.

Coming specifically to Indian agriculture, there are tighter constraints. 

India’s 90 million agricultural households (as of 2013) work tiny pieces of land - 85% work less than 2 hectares - mostly lacking irrigation and dependent on rainfall. They have limited choice on what they can grow under these conditions. Soil type, rainfall, climate are the determinants. There are of course exceptions to this rule such as the farmers who have irrigation in the Punjab or the sugarcane belt of UP.

Farmers do not have the option to stop farming as they are mostly already in debt, there are no other job options available and the income from farming is essential for survival. This means that farmers will continue to produce the crops they have done season after season and in particular, try to increase production as the only way known to them to maximise income. At best, they will choose to grow crops (if they have do have a choice), based on expectation of future prices.

The lack of access of farmers to storage facilities means that on harvest, they have no other option but to sell even their non-perishable crops at whatever price they get.

Farmers as a whole have no pricing power, no ability to reduce production even if the sale of their produce is not profitable. They are also often beholden to the very traders with whom they trade for these traders would have helped them through the production cycle with short term loans, transport and storage.

In the backdrop of the fundamental asymmetry in the economic standing of farmers and traders, regulations intended to protect farmers interests do not work. Traders effectively control the regulated mandis, cartelize with ease and set prices. The farmers are aware of this but have no option but to play along.

Do farmers need out-of-the-box ideas?

How is this situation to be remedied? There are two diametrically opposite views.

In the view of what one may call the “free marketers”, what farmers need are alternate channels to the regulated mandis to sell their crops. With full freedom to sell to whomever they please, the claim is that farmers will be able to get the best prices. The hopes for establishing these alternate channels are pinned on big corporations.  

The BJP government put together a ‘model’ regulation for allowing alternate channels in agricultural marketing in 2003 and the Congress government framed the rules to go with the regulation in 2006. Most states adopted these changes in the following years.

We will defer a detailed discussion to a subsequent piece, but suffice it to say that 12 years after the wholesale agricultural market was opened up to corporate India, there is no appreciable change in the way the market functions or the returns that farmers get.

The fact is that the basic lack of pricing power among farmers does not change when they deal with corporations instead of traders. Also, there is no reason to assume that the margins that corporations make because of bringing in greater efficiency in the supply chain will be shared with farmers. Corporations are not going to bail out farmers.

The state therefore must intervene!  It needs to weigh in on the side of farmers so that they have better pricing power. This requires the extension of MSP to all major produce and active government procurement to ensure these price floors hold. This is the safety net the farmers need.

It requires small market yards and storage facilities that are easily accessible to the farmers. It requires use of technology and better governance of agricultural markets to inhibit cartels and bring transparency. It requires supply chains in the public sector to compete with the private supply chains.

But all this is well known.

Addressing policy planners at a recent meeting organized by the agriculture ministry, the Prime Minister was reported calling for “hackathons” in the IIT’s for out-of-the-box ideas to increase farm income. 

The ideas and schemes to further the interests of India’s farmers outlined above have been around for a long time. What is required is commitment of adequate resources and efficient implementation. That may also be described as good governance.