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'Income support better than loan waivers': How to alleviate farm distress

In an interview on agriculture-related policies in India, Sukhpal Singh speaks about the need to make institutional credit available to small farmers, who are often tenants and hence without a title

Shreehari Paliath | IndiaSpend 

Illustration: Ajay Mohanty

Bengaluru: is a central issue in Indian politics today. The Bharatiya Janata Party-led central government has acknowledged its salience by announcing the scheme for small and marginal farmers in its interim budget, while the opposition Congress party has promised “minimum income” guarantees and if it comes to power.

Income support, as announced in the budget and by the state governments of Odisha (KALIA) and (Rythu Bandhu), is “definitely better than loan waivers”, says Sukhpal Singh, professor and former chairperson of the Centre for Management in Agriculture at the Indian Institute of Management, Ahmedabad. But India cannot afford to give cash payments to such a large population, he says, adding that waivers do not apply to landless and tenant farmers (because they do not have in the first place), and disincentivise farmers who repay loans on time.

Singh was a member of the working groups on agricultural marketing infrastructure and disadvantaged farmers of the erstwhile Planning Commission for the 12th Five Year Plan. He has advised the state governments in Punjab, Chhattisgarh, and Karnataka, among others, on agricultural marketing.

In an interview on agriculture-related policies in India, Singh speaks about the need to make institutional credit available to small farmers, who are often tenants and hence without a title; his perspective on loan waivers and income support; and, more generally, how the farm sector can be made viable.

One basic equation that an urban consumer cannot grasp is how a farmer gets paid Rs 1 per kg of, say, onions, when she pays Rs 20. How does the price rise 20 times with no benefit to the farmer? How can this situation be improved? And how does it work in other countries?

This has been a much-debated issue for some time now. Some part of this price gap between the producer and the consumer comes from the usual wastage involved in perishables, which can be of the order of 10% to 15% in vegetables.

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It is also due to the involvement of a large number of intermediaries between the producer and the consumer, and also the very high margins of supermarkets (30-40%), who have about 8-10% of the produce unsold at the end of the day.

More importantly, farmers sell only in wholesale, but most of the margins are in retail and semi-wholesale. Unless farmers get a foot in the retail market, they cannot expect a larger share of the consumer rupee as others also invest their time and energy in taking the produce to the retail buyer.

So, farmer benefit should not be measured in terms of producer share in the consumer rupee but in terms of whether farmers recover their costs and get a decent return on their investment.

The government can help by creating more market options for farmers, and making markets fair to farmers by lowering transaction costs. The government must also incentivise and collectives (such as producer companies) who have better bargaining power to sell in these markets, as well as to sell to larger buyers, large processors, exporters and supermarkets.

In other countries, the supply chains are much shorter and more efficient and there are farmers’ markets for perishable produce where they directly sell to consumers.

Agriculture policy-related issues are often blamed for contributing to the malaise in the farm sector. This is contrary to a section of public opinion that sees taxation-free income, free power and loan waivers as undue benefits. Can you explain some of the key policy issues that work against the Indian farmer’s interest?

There is no doubt that there are several policy distortions in the farm sector. First of all, there is no cohesive policy for this sector at the union level and in most states. Most subsidies, except fertiliser subsidy, are actually cornered by large farmers even though they are given in the name of small farmers.

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In fact, there are no policies specifically targeted at small farmers except priority-sector lending (banks must provide a prescribed share of loans to farmers) and micro-irrigation guidelines.

Inefficient markets and poor delivery of crop insurance raise farmers’ marketing and production risk. So, despite producing bumper crops, farmers lose money as they cannot sell it well. Besides, there is an interlocking of produce and input [in the form of credit] markets--arhtiyas (commission agents) who are supposed to facilitate purchase also lend money, which is illegal and exploitative. Most markets are in the clutches of arhtiyas and traders, whose lobbies are strong and do not allow farmers to sell directly to buyers or agencies.

While talking about farmers, we do not speak of tenant farmers and farm workers. Most of the latter are women. In fact, they are equally distressed but their concerns are not taken on board as there is a conflict of interest between land-owning farmers and landless workers, as seen in the crop holiday a few years back [when loss-making farmers decided not to grow crops at all] and the opposition to the Mahatma Gandhi National Rural Employment Guarantee Scheme from farmers’ unions and farmers in general.

Nearly 61% of the farmers surveyed said they would prefer to leave farming if they found employment in the city, according to a 2018 CSDS report. Over 45 years to 2016, according to the agricultural census, the average size of the Indian farm has shrunk by more than half--from 2.28 hectares to 1.08 hectares. Plus, of 146 million farms, nearly 100 million are marginal, or smaller than one hectare in size. What policy measures could be taken to make farming a viable source of livelihood for the majority of Indian farmers?

Empirical evidence shows that the size of the farm is not an issue, neither in terms of yield nor profitability. China, with its average farm size being half of India’s average, has average yields double of India’s. Studies based on secondary (National Sample Survey) data also show that small farms are the most productive in India in terms of value of output per unit area.

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It is a different matter that given the cropping pattern on most of the small farms, as indeed all farms, in India, the income from such farms may not be enough to provide a decent livelihood for all family members of the households. [This is because small and marginal farmers grow low-value crops such as wheat and paddy, which are land-intensive and get minimum support price, which is inadequate; and also because their yields are low.] But you cannot fault farm size for that. To me, it is not the size of the farm but what you do on it, how, how much, for whom, and why that matters.

In our study, “Replicating Small Farms, Prosperous Farmers in India: Lessons for Policy and Practice”, we found millions of small farms in India (up to 5 acres in size) that have a cropping intensity of more than 300% and make a few hundred thousand rupees in net profit per acre per year. This showed that what is needed is access to investment resources for such farms--formal credit at low interest rates--and other public investments such as in irrigation and markets.

There is no need to tinker with the farm size or promote co-operative farming. There is a need for aggregation to deal with markets that are large, ruthless and standard-driven, to help farmers buy and sell through groups and producer companies.

In the November 2018 Kisan Mukti March in Delhi, one of the demands was that “the government should write off all outstanding agricultural loans of the farmers from all sources including institutional and non-institutional loans”. Between April 2017 and December 2018, eight states wrote off a total Rs 1.9 lakh crore in farm loans. Agricultural indebtedness is a problem, but at the same time have fiscal implications and political benefits. Your comments?

Loan waivers may be seen as temporary relief measures but the problem with this measure is that it is not fair to those large or small farmers who repaid on time. Further, in most states, landless and tenant households are being excluded on the pretext of [lack of] land titles, which is the basis for such waivers.

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Small, marginal and tenant cultivators need better access to institutional credit to not just lower the cost of borrowing but also to get them out of the interlocking of credit and produce markets that has led to over-pricing of inputs and under-pricing of output, leading to indebtedness. The arhtiyas’ engagement in moneylending is completely illegal and informal as they are licensed only to deal in produce as facilitators or buyers.

State governments such as in Telangana and Odisha are providing for farmers. Now, the Centre has also announced income support for small and marginal farmers. Is this the way forward to alleviate How do you assess these initiatives and their viability?

It is definitely better than loan waivers as it is more equitable and widespread in its reach, though in it leaves out tenants and landless households. Further, in it is called a farm-investment scheme, but is being given for two seasons even though the cropping intensity (number of crops on a piece of land in a year) is 1.5 crops on average because it is an arid state.

So, it is partly being given for even not producing anything. KALIA in Odisha is much better as it covers all rural households including the landless and provides substantial support per household.

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That makes it similar to universal basic income (UBI) in a sense. I am of the view that India cannot afford to give cash payments to its large population unless all subsidies are merged into such income-support programmes. Further, removing some subsidies may affect farm production levels as what is considered essential support by the government may not remain so. We have alternative institutions such as producer companies and NGOs to take up that role to some extent.

“The model and Livestock Contract Farming and Services (Promotion and Facilitation) Act, 2018, opens up agricultural markets to contracting agencies without adequate safeguards for farmers,” you wrote. How does it affect small and marginal farmers and is it a step down from the Market Committee (APMC) Act? What were the problems with APMC that the model law tried to correct? What could have been a better solution?

In fact, there was no need for a separate law on contract farming as it has been going on under the amended APMC Act since 2003 without much conflict of interest. There is a bigger conflict of interest in the provision of private wholesale markets under the APLM Act, but that has not been taken out of its purview.

A separate Act on contract farming is more of an escapism from reforming the APMCs. The new model Agricultural Produce and Livestock Marketing Act, 2017, and the model Contract Farming and Services Act, 2018, focus more on facilitation and promotion rather than regulation. They aim at opening agricultural produce markets to give buyer choice to farmers, which is a good thing, but they fall short on farmer interest protection. For example, there is no provision for group contracts in the contract farming Act to make it inclusive of small producers who are generally excluded from such arrangements.

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The APLM Act still gives a central role to arhtiyas, even providing for payment to farmers through them. This is completely avoidable as now buyers can buy directly from farmers and many government agencies have been keen to buy directly and pay directly. Further, there are many alternative agencies such as primary agricultural co-operative societies (PACS), producer companies and others that can facilitate selling and buying between farmer and buyer (and are doing so in some states). In fact, it is a ripe time to abolish the system of arhtiyas (as did in 1985), but the model Act strengthens this outdated institution.

Over 16 years to 2017-18, overall procurement of rice and wheat by government agencies for the central pool has been 31% and 27% of production, respectively, according to an agriculture committee report presented in the Lok Sabha (lower house of parliament) on January 3, 2019. Low procurement affects incomes, especially of small and marginal farmers. What are the challenges and solutions for procurement given the recent record-setting production of food grains?

The procurement of food grains at minimum support price or MSP [government procurement price] is restricted to only a few states and a few crops, and that is why only fewer than 10% of farmers get its benefit. It is not enough to procure large volumes. To make MSP-based procurement fair and equitable, there is need to fix the ceiling per acre for each farmer as is the case in [where a 15-quintal-per-acre limit has been fixed for paddy procurement]. Further, payments need to be made in time and quality norms enforced so that those who produce quality output get a better price.

We also need to move away from focusing on just two crops and include crops from dryland regions, as well as decentralise procurement as is happening in and other states where PACS are procuring at the village level. This lowers the transaction cost for farmers. Also, farmer producer companies need to be given this role rather than involving large-scale private traders/companies as proposed by Niti [Aayog] recently.

India plans to double agriculture export to more than $60 billion by 2022 as part of doubling farmers’ income. Although “all the measures proposed in the Agriculture Export Policy are compatible with World Trade Organisation (WTO) norms", according to this report, do you think an increase in government procurement price may be in conflict with India’s WTO commitment? What are the challenges that persist?

Though it is a constraint, it can be managed by some other trade-off. The more important issue is whether India can offer and sustain higher prices of crops under MSP if it is backed by effective procurement across all crops and regions. MSP is not the way to double farmer income. More market channels and efficient markets are the only sustainable way to do it, besides reducing cost of production in the short- and medium- term.

Ministers in the union cabinet such as Arun Jaitley and Parshottam Rupala have said that the ‘farmer producer organisations’ (FPO) model can help double farm incomes. Given the issue of infrastructure and training to handle matters of finance and access to finance, do you think FPOs are sustainable and scalable across the country?

FPO is too broad a term to use for such entities. What is being encouraged is the farmer producer company, which is more business-like because it is totally farmer-owned and -controlled.

But, the targets by government and other agencies are leading to their quick setting up without the necessary spadework and due process of building a collective.

They are very promising structures as they can help reduce the cost of production and realise better prices for farmers, by improving buying (of farm inputs and services) and selling (of farm and allied produce, and other value-added products). But they are not a quick-fix; they take time to build and perform because they work in situations of market failure and have to compete with various other players in the same market despite being collectives. This makes it doubly difficult for them to succeed. But, there are encouraging signs and the government and development agencies have come forward to help. I am of the view that if this structure does not deliver, there are not many alternatives left for small and marginal farmers.

Given that there are legal issues with land leasing, what are some possible solutions?

The Model Land Leasing Act proposed by the Niti [Aayog] provides for opening up the farm land leasing market to all kinds of players. But I am not sure that is the way to go as it can lead to further concentration of land control in fewer hands, where only some, more resourceful farmers benefit from the various farm policies of the central and state governments. Many small and marginal farmers may be left jobless as has been the case with reverse tenancy [when small landowners lease their land to large landowners as rent is higher than income from farming] in and other parts of India over the last three decades.

Unless landless, marginal and small farmers are encouraged and enabled to lease-in land and do farming with credit and other types of support, a liberal land-leasing policy may prove counterproductive given the widespread landlessness in rural India. Just as there are ceilings on owned land, there should be ceilings on leased land so that liberalised land leasing in the name of small farmers does not end up encouraging corporate farming.

Republished with permission from IndiaSpend. You can read the original article here

First Published: Thu, February 07 2019. 08:20 IST