Thursday, May 3, 2018

The market has failed the Indian farmer

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: ). 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 70th 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

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.

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