Agriculture under NDA: Of surplus, subdued prices, MSP boost and stress

While steps to improve production depressed prices, loan waivers have had the impact of stifling farm credit growth

Farmers in India have had a very peculiar journey under the five years of the current government. The matrix of some key indicators in the last five to seven years shows that the outcome has been mixed, with production touching record highs, while prices at record lows, much to their detriment. Most cultivators in the country faced consecutive droughts in the first two years, due to which production remained stagnant, and prices remained elevated or normal.

Faced with this situation, the government ramped up its support to the farm sector through budgetary and policy measures, but the results observed were exactly the opposite. Foodgrains, oilseeds and sugarcane are being produced in record amounts, and prices have been depressed to their lowest levels in a decade at least.

Coincident with this was the slowdown in investments in the farm sector even in the bumper crop year of 2016-17, though the silver lining is that growth in the sector has picked up. 

The reasons for this, experts have noted, are multifold. Apart from the policy boost for production and procurement through trade restrictions, factors such as subsidies, interest subvention, high minimum support prices, and the spate of farm loan waivers in 10 states since 2014 have also had an impact.

Agriculture and rural economy 

But looking at the larger rural economy that surrounds agriculture, rural economic activity seems to have picked up recently after a period of lull. Growth in the construction sector has been taken as a proxy for the same. The coupling of depressed wholesale food prices with a slowdown in the construction sector is the reason for rural distress, experts say.

This supposed distress faced by the rural populace has been compensated by the government in the form of houses, electricity, LPG and toilets, all of which saw a record distribution/beneficiary expansion in 2018.

As far as growth is concerned, that in the agriculture sector has been above three per cent for three years after two years of stagnation. In the construction sector, 2018-19 might witness an 8.9 per cent growth according to the first advance estimate, the highest since 2011-12. However, investments in both sectors touched their lows in 2015-16 and 2016-17.

The investment rate, or the ratio of gross capital formation to the gross value added in agriculture (at current prices) dropped from 18.2 per cent in 2011-12 to 13.8 per cent in 2016-17. That in construction dropped more sharply, from about 30 per cent in 2011-12 to 17.6 per cent in 2016-17.

The blow of record production 

The production and prices of food products in the most recent farm season tell a story of extremes.

Production of all classes of crops except cotton touched record heights in 2018. Though most of the sowing of major kharif crops had already happened before a record jump in their minimum support price (MSP) was announced, the intention of raising MSP to 1.5 times the cost of production was made clear in the February 2018 budget itself.

As a result, wholesale prices of major crops fell sharply in the immediate arrival season in October. Mandi prices of four major kharif crops—soyabean, maize, urad and bajra—in agriculture markets where they their arrivals are normally the highest fell sharply below the MSP. The difference between the MSP and realised price was the highest in recent years.

The current outlook for rabi season 2019 does not seem promising on account of reduced sowing in the season. The sowing in 2018-19 has been 5 per cent lower than the previous year, and 4 per cent lower than the normal.

Waivers deter credit growth

In addition to the low prices regime, another shock hit the farm sector in the last two years, that of farm loan waivers. Prime Minister Narendra Modi himself promised to waive off farm loans in Uttar Pradesh in his electoral campaign preceding the assembly election in March 2017. Seven states have started implementing waivers since. Experts and economists have a mixed opinion about the efficacy of the policy measure.

The UP farm loan waiver came into picture three months into demonetisation. From then on, credit offtake to agriculture has taken a visible hit.

Growth in farm credit remained above 10 per cent since the NDA government took over, and even touched 20 per cent for some months, according to Reserve Bank of India data. After demonetisation and succesive farm loan waivers in various states, farm credit has stalled below 10 per cent.

This suggests that investments in the farm sector might not improve very soon. However, even critics of the government, for example the former member of Planning Commission Abhijit Sen, agree, that the focus of policy debate on agriculture moved from production to incomes under the current government. The actual impact on incomes is still far away.