Agriculture

Agricultural growth is much more impactful in reducing poverty as compared to

other sectors- GDP growth originating in agriculture is at least twice as effective
in reducing poverty as compared to growth originating outside agriculture.

Since 1950, India’s population has grown by about 3 times, while the foodgrain
production has increased by 5 times, and milk by 7 times. India is today a net
exporter of foodgrains, and state holdings of grains have been increasing steadily
(74 million tons in 2013).

Despite these achievements, we need to realize that the growth in agricultural

sector has remained stuck at about 3% p.a., even when the rest of the economy
shows much higher growth rates. Also, size of an average landholding in India is
only 1.15 hectares. These need to be remedied.

Historical context and trends

 Share of agriculture in national income has been declining: was 56% in

1947, and only 14% in 2013-14. This implies that the growth rate of
agriculture has been much slower as compared to the overall growth rate

 Share of agriculture in employment, however, remains very high at

around 55% (was 72% in 1947). This, combined with the fact that
agriculture is supplier of food, fodder, and raw materials for a vast
segment of industry, demonstrates that without growth in agriculture,
growth in India cannot be inclusive

 Given the overwhelming reliance of the country on agriculture, land

reform received top priority on the policy agenda at the time of
independence

 The constitution left the job of bringing in land reform legislation to the
state governments

 Four main objectives were:

 Abolition of rent-seeking intermediaries
 Tenancy regulation
 Imposition of land ceilings
 Consolidation of disparate landholdings

Aside from abolition of intermediaries, the rest of the reform initiatives

have been unequivocally unsuccessful; also, given politically strong
farmer lobbies now, it is unlikely that radical land reform will take place

 During the 50s and 60s, most of the growth in agriculture came from
increase in area; after that, productivity growth led agricultural growth
 During the first 3 FYPs (1950-66), the government’s reform focus was on
institutional factors (land reforms), and public investments (irrigation,
distribution systems). However, given the relative focus on industry,
agriculture suffered (and grew only at about 2.1% per annum).

 Even though the focus was on industry, institutional reforms went a long
way in improving agricultural productivity- during the first 3 FYPs (till
1964, excluding 1965), agriculture grew at about 3% p.a.; between 1891
and 1946, the average annual growth rate was only 0.4%

Despite this high growth rate, given the massive jumps in population
growth rates, food production did not keep pace with population growth.

After independence, India invested heavily in capital goods and industrial

plants, but given their long gestation periods, overall economic growth
was slow, and consequently there was no surplus to invest in agriculture.
Thus, in absence of investment and new technology, food production
failed to keep pace with growing population, and from 1956 onwards
India had to depend in food imports and aid from the west (the
agreement signed with the US was called ‘PL-480’)

Two wars in the 1960s, followed by two successive drought years in 1965
-66, and USA’s subsequent political arm-twisting in return for food aid,
pushed India to aim for self-sufficiency in food grain production. This led
to the ‘Green Revolution’

 The First Phase: 1966-72 (‘Green Revolution’ starts; focus of

government reforms was on both input and output incentive policies,
and public investment):

 With India’s production of wheat at around 10mt, imports had risen to

about 7mt

 To end dependence on food imports and aid, India decided to take a

two-pronged approach: use of better inputs such as HYV seeds,
chemical fertilizers, agricultural machinery, education programmes etc.
to boost production, combined with incentives to farmers in the form
of MSPs, better credit etc.; for the former, HYV seeds were adopted
from Mexico, and for the latter, APC and FCI were set up in 1965

 Initially, the focus was on areas which had assured irrigation and other
natural and institutional advantages, drawing from geography and
colonial investment policies

 FCI was mandated with 3 objectives: providing price support to

farmers, procure and supply grains to PDS for distributing subsidized
staples to economically vulnerable section, and maintain strategic
buffer stocks
  The HYV seeds were first distributed to well-irrigated states such as
Punjab, Haryana, and Western UP, and were supported by input
subsidies and public investments in fertilizers, power, irrigation, and
credit (institutional credit doubled between 1968 and 1973)

 Similarly, output subsidies were provided in the form of MSPs

 The results were miraculous:

 Between just 1967 and 1970, food production rose by 35%
 India was food self-sufficient by 1971-72, with imports falling nearly
to zero
 By the 1980s, India was regularly maintaining huge buffer stocks,
using food exports to pay back earlier loans, and issuing loans to
food-deficit countries

 Impact (increased food availability, decline in relative prices of food,

employment generation in both agriculture and other areas, rise in
wages etc.):
 Through increase in agricultural yield, rather than increase in
acreage, India was able to maintain, once again, the high rates of
agricultural growth achieved since independence
 Rapid increase in marketable surplus of foodgrains (use of labour
per unit of output declined; initial yield improvements occurred in
areas that were already relatively well off)
 Decline in rural poverty- it declined by 10% between 1963 and 1973
 Small farmers, as a class, commanded more productive assets and
inputs per unit area of land that larger farmers. Thus, the Green
revolution was not only scale neutral, but also evolved an inverse
relationship between scale and productivity
 Led to increased rural incomes
 Apart from growth in agricultural employment, the revolution
generated non-agricultural rural and semi-urban employment, in
food processing, warehousing, marketing, transport, repairs of
agricultural equipment etc.

 The Second Phase: 1973-80 (government policies still focus on input

and output subsidies, and public investments):

 After a great run, two consecutive drought years followed in 1972-73,

and India slipped back into depending on food aid from the USA

 After the oil shock in 1973, fertilizer prices rose. To prevent a fall in use
of fertilizers, the government increased fertilizer subsidies, and also
provided huge subsidies for power usage in agriculture

 There was also a substantial increase in groundwater irrigated area,

aided both by public and private investment
  HYV seeds for rice were also used now, in addition to wheat; this,
combined with above mentioned subsidies, led to a rise in food grain
production from 1972-73 to 1979-80

 As a result, rural poverty declined by about 6% between 1972-73 and

1979-80

 The Third Phase: 1981-90:

 In this phase, India further consolidated its position as a food

independent nation, and when a really bad drought hit in 1987, we
were able to meet our food needs without any loss of lives

 As mentioned earlier, during the first phase of the Green revolution,

gains were mostly seen in Punjab, Haryana, Western UP, and parts of
AP and Tamil Nadu. However, beginning in 1980s, many poor states
such as Assam, Bihar, Odisha, MP, and West Bengal showed significant
growth, thereby reducing some of the regional inequality

 HVY technology spread eastwards, to Bengal and Bihar, which started

being rice-surplus

 However, in the rest of the country, Green Revolution ran out of

steam, given that it had now been a while since the introduction of
HYVs; as a result, to sustain growth in food grain production, input
subsidies were steadily increased

 Post-Reform Phase: 1991-present (there wasn’t a concrete reform

plan for agriculture as such, but it was thought reduction of
protectionism to industry would provide price incentives and increase
investment and output in the sector):

 (Post-reform phase can itself be divided into three distinct phases,

based on rates of growth of agricultural GDP)

 Since 1965, Indian agriculture operated under a strictly regulated

policy regime; internally, there were production controls, pricing
controls, and restrictions on private trading. Externally, there were
various barriers to export and imports of agricultural goods

 Also, the focus generally was on protecting industry; this created

adverse ToT for agriculture as compared to industry (industrial goods
in short supply => rising industrial prices), and made agriculture less
profitable

 Also, rupee was overvalued, thus creating an anti-export environment

for agriculture
 1991- 1996: Increase in agricultural GDP growth rate (≈ 3.7%
avg.), but minimal decline in rural poverty

The reforms in 1991 focused on liberalization of the economy; this

meant that industrial goods faced more competition, and hence
industrial prices reduced. Also, the boom in economic growth created
higher food demand, thus increasing prices of food grains. Hence, ToT
for agriculture increased

 However, this growth in agricultural GDP did not lead to a

significant reduction in rural poverty: rural poverty actually
increased to 43% in 1991, from a pre-reform level of 35-39%, and
again declined to about 37% in mid-1990s. Reasons:
i. The growth was mostly in the off-farm sector
ii. Much of the growth came from the services sector, which is
relatively skills-intensive, and hence couldn’t accommodate a
primarily agricultural workforce
iii. IMF conditions led to a general fiscal contraction, and thus the
state intervention was scaled back all around, including in
agriculture

 This notwithstanding, there was some increase in private

investment in agriculture due to increasing ToT, and this led to the
agricultural GDP growth at about 4% per annum between 1991-96,
as against 3% in the 1980s

 Exports rose (doubled between 1991 and 1996) because of

considerable reduction in import duties and devaluation of the
rupee; thereafter, declined

 1996- 2005: Slowdown

Slowdown in agricultural growth to about 2% p.a., and this slowdown

happened across the board (in all agricultural sub-sectors) and across
all regions

Exports declined after having significantly shot up post 1991, largely

because of East Asian Crisis and sharp reductions in global commodity
prices

 2005- present: growth revival

From 2005 onwards, the rate of growth has hovered around 4% p.a.
(the 12th plan period showed an average growth rate of 4% p.a., which
was the highest ever for any plan period), as compared to the average
of around 2.5% p.a. growth between 1992 and 2002. Also, there has
been no year since 2005 when agricultural growth has been negative;
the variability in growth rate has also been minimal.
 A few characteristics of the growth revival:

 Geography: Most of this growth came from areas that have

traditionally been characterized by low-productivity and low-
irrigation, such as Jharkhand, Chhattisgarh, Rajasthan,
Maharashtra etc. Growth revival was weak in areas with high land
productivity and high levels of irrigation, such as Punjab, Haryana,
Western UP, West Bengal etc.

The clear lesson here is that without new technology, growth is

difficult to accelerate in areas with high productivity

 Growth since 2005 has been broad based, that is, the increase in
output hasn’t been confined to a few segments or commodity
groups; crops, fruits, livestock, fisheries; everything has shown an
upward trend.

There are some notable exceptions to this trend; particularly,

oilseeds didn’t show much growth, and India’s dependence on
oilseeds imports has been increasing, accounting for more than
50% of domestic use

 Growth has been driven by increase in productivity, rather than in

area under cultivation, or by change in area allocation among crops

 Exports: Apart from achieving self-sufficiency in food, India has

also emerged as a large exporter of agricultural goods; growth in
exports has been much larger than growth in imports

 Reasons for growth revival:

 Better prices: ToT improved, because of increase in MSP, in

procurement, in domestic demand, and increases in international
prices of agricultural commodities

 Higher use of inputs: Increase in use of quality seeds, fertilizers etc.

 Increased credit flow: Doubling of credit flow to agriculture within

a period of 3 years between 2005 and 2007 (MOST IMPORTANT);
also, by 2011-12, institutional credit supplied to agriculture turned
out to be 33% higher than the value of inputs used in agriculture
(a.c.t. 2004); this means that the proportion of credit requirement
of agriculture sector met by institutional sources has been
increasing substantially

 Increase in irrigation, and technology for drought proofing: % of

irrigated arable land increased from 20% in 1981 to 35% today
(mostly using groundwater);
  Capital formation: Gross capital formation in agriculture increased
to about 20% in 2010, as compared to an average of around 7% of
agri-GDP in 1994; Investments in on-farm and watershed
development projects

 Broad based growth: Greater diversification in crops grown,

fertilizers used, technologies adopted etc.

 Other initiatives:

 Increased budgetary support to agriculture related

departments (increased from about 12% of all development
expenditure in 2003 to 15% in 2008)
 Operationalization of a National Horticulture Mission, that
extended its programme beyond fruits and vegetables
 Agricultural extension system (application of scientific
research and new knowledge to agri practices through farmer
education) begun to be reformed, leading to extended
information reach

 Due to the above government initiatives, there was also a marked

improvement in private investment; although increase in public
investment was moderate, it aided significant increase in private
investment (which increased from its long term 10% level to about
14% in 2008, and stayed there)

 As the 12th plan document states, high growth in agriculture since

2005 is a consequence of much greater flexibility being given to the
states, and ensuring focus on filling yield gaps using existing
technology rather than pushing states to prefer new technologies
where there hasn’t been much success so far

The upshot of these measures has been a quantum leap in productivity

for nearly all crops.

Capital Formation in Agriculture

Capital formation in agriculture means investments in agriculture, both by the

government as well as the private sector (which includes agricultural
households). Examples of public sector capital formation would be investments
in major and medium irrigation, power, roads, markets etc., whereas private
capital formation would include minor irrigation, agricultural implements,
machinery, tools, transportation etc.

Among the four major heads of capital items (land, animal capital, farm
machinery, irrigation capital), the share of land is still close to 95%. As a country
develops, evidence shows that the ratio of land should decrease, as should the
ratio of animal capital, and that of irrigation and machinery should rise.
There is an intense debate in the country that says that capital formation in
agriculture has either been stagnating or falling since the 1980s, and it does not
augur well for the country’s agricultural growth prospects. People also point out
that public sector investments induce (‘crowd-in’) private sector investments in
agriculture: non-land capital stock (animal capital, farm machinery, irrigation
capital etc.) grew only by 0.72% between 1994 and 2007.

We need to note that public sector capital formation in agriculture is of a

qualitatively different nature than private capital formation. Public sector CF has
long gestation periods, and thus the effects of this year’s public CF will only be
seen after a considerable time lag of many years (up to a decade in large dams
etc.). Thus, even though public GCF has a strong inducement effect on private
GCF, the effect is seen with a considerable time lag.

In any case, the observed declining trend in public GCF is due to rising subsidies,
growing opposition to big dams (environmental concerns), diversion of
resources to other sectors of the economy etc. Since the 1980s, while public
GCF has been falling, private GCF has been rising, but hasn’t been enough to
cover the shortfall in public GCF. This has adverse consequence for overall
agricultural productivity.

Policy suggestions:

1. Evidence shows that long-term public investment in capital projects will

give rise to more than double the rate of return from subsidies. Gradual
withdrawal of state subsidies for irrigation, water, electricity, fertilizers,
pesticides etc. would provide a large pool of resources for public
investments
2. There are wide regional disparities in agricultural development;
investments in backward states will have greater productivity
enhancement effect
3. To stimulate private GCF, alongside public GCF, there is an urgent need to
prioritize institutional credit, favorable terms of trade, flow of technology,
farmer education, and appropriately targeted subsidies, as these have a
strong positive effect on household-level investments

Shifting patterns of food demand

 There is currently a significant imbalance between emerging food

consumption and production patterns in India
 Producers are focusing on foodgrains, which leads to buildup of stocks,
while consumer are moving towards edible oils and pulses, leading to
imports. Average per capita consumption of foodgrains has shown
negative growth => consumers moving towards high-value
commodities)
 MSP policy should be rationalized in light of this (however, keep in mind
that cereals account for a major fraction of daily calorific consumption,
and hence should always remain a focus area)
  Future growth in agriculture will come from high-value segment:
There has been significant shift towards producing high-value
commodities such as fruits and vegetables, livestock, and marine
products. Share of such high-value commodities in total value of
agriculture stands at about 47%
 Given modernization and lifestyle changes, consumption of processed
and semi-processed food is also rising
 Food processing sector in India is at a very young stage (only about 8%
of the produce is processed, as against about 80% in developed
countries)
 Secondary agriculture sector (encompassing all activities that add
value to primary agricultural commodities) has immense untapped
potential; aside from food processing, the demand for agro-bio
resources to supplement depleting natural fuels is also rising

 Due to this shift in preferences in the post-reform period, there has been a
discernible shift in the allocation of resources in agriculture away from
cereals, and towards dairy farming, poultry, edible oils, meat, fish, fruits
etc.
 Most of these enterprises are labour intensive, and suited to small
holders, thus lead to a rise in wage employment
 Environment friendly, as they use less water and fertilizers

 There has also been diversification in production in favor of horticultural

crops, which is a direct consequence of the establishment of the National
Horticultural Mission. Acreage under fruits and vegetables has been
increasing, and average rate of growth in total production of horticultural
products has shot up to 6% per annum; India has become the largest
producers of horticultural products in the world

 (Get estimates of shares of different kinds of food in total production- eg,

fruits and vegetables account for about 28% of total produce, and about
6% of total cropped area; foodgrains occupy 60% area, but account for
only 43% of total value of output)

 This shows that for per unit of land, value of output from fruits and
vegetables is about 5 times that of the food grains

Reforms: the 3 I’s- Incentives, Institutions, and Investments

As mentioned before, while the growth in agriculture (around 3.6%) since 2005
remains impressive as compared to before, in absolution, the agricultural growth
rate needs to be much higher to ensure inclusive growth. Some of the factors
holding agriculture back are:

 Lack of a coherent national agricultural policy until recently

 Relatively higher focus on industry since independence
  Trade restrictions and protectionism: given that there were
considerable restrictions on movement of agricultural good in and out
of the country, exports could not be used as a means to spur domestic
production (also, overvalued rupee). While these do not hold today, the
excessive focus on price subsidies needs to be rectified

There are basically eight areas which need focused reforms in the short and
medium terms: price policy, subsidies and investments, land issues, irrigation
and water management, research and extension, credit, domestic market
reforms, and export sector reforms

 Price Policy:
 Main price intervention from the government comes in the form of
MSPs and CIPs
 Initially, after the MSP was introduced in late 1960s, the focus was
always on maintaining a balance between the interests of consumers
and producers; however, the government realized the importance of
public investments in non-price interventions as well, and the regime
was of low cost of production, and low MSPs (low input and low output
costs)
 In 1990s, the trend began to move in the direction of higher MSPs, to
the relative exclusion of non-price interventions (high input and high
output costs); consequently, public investments in irrigation, research
and extension, and other infrastructure went down
 Due to this excessive reliance on price policy, yields kept on going
down, and production costs kept going up
 Even currently, MSP is linked to cost of production, thus, there isn’t
adequate incentive for the farmers to switch to cost saving
technologies. Use of labor saving farm implements needs to be
promoted. Similarly, current price policy favors cereals, this distorting
production
 Another reason for high and increasing MSPs is politically strong farm
lobbies- in years of bad harvest, the government has to ensure that
MSPs are increased to tide the farmers over, otherwise imports from
the open market would rush into the country; similarly, when global
prices are high, the government needs to ensure high MSPs to avoid
food rushing out of the country. Once MSPs are raised (looks like it
happens no matter whether international prices are higher or lower),
rolling them back comes at a huge political cost
 MSP was designed to save farmers from the vagaries of wide
fluctuations in market prices, and was intended to cover the
production costs for farmers. However, it has now become a de-facto
procurement price. This is a problem, as the MSP instrument was
meant to be used in freak years, while procurement is an annual
activity (for replenishing PDS stocks). The two need to be de-linked,
and the procurement price should be allowed to fluctuate as per
market conditions
 MSP should be used only as a price-stabilization mechanism, and not as
an income guarantee mechanism to the farmers
  Counter view (also see ‘Food Inflation’ section): MSP are calculated on
the basis of demand and supply forces of the crop, it’s production,
domestic and international prices, inter-crop price parity, ToT between
agri and non-agri products, and likely impact on consumers. Thus,
given that cost of production has escalated sharply for most crops
during the last three years, the rise in MSPs isn’t surprising. As an
example, it can be seen that cost of production for paddy in 2012 was
about 53% higher than in 2008, while the MSPs have only risen by
20%. Critics of MSPs often fail to highlight the production impact of a
delay in such hikes
 The problem with the above approach of low MSPs are two-fold: first,
low output prices (low MSPs) work as "brake" on the production
incentives while input subsidies act as "accelerator", and one does not
know fully whether the production incentive system is moving
forward, or backward or stationary; and secondly, extremely low
prices lead to misuse of scarce resources, particularly when targeting is
poor. So the efficiency losses mount. The benefit, however, especially in
case of output pricing, is that they can be targeted towards selected
commodities. For example, if one wants to promote production of
wheat and rice, higher MSPs for those crops can be designed and
procurement operations widened

 Subsides v/s Investments:

 Capital-output ratio in agriculture is around 4:1
 Public investment in agriculture declined steadily from the 6th to the
10th plan, and what expenditure did occur was on subsidies, not on
investments
 Focus areas should be investment in creating infrastructure in terms of
irrigation, roads, markets, storage facilities, rural electrification, and
R&D, instead of price subsidies
 Returns on investments are about 3 times higher as compared to
subsidies
 Returns from public investments to agriculture are highest from R&D,
followed by rural roads, education, then irrigation, and lowest from
fertilizer subsidies
 Also, public investments form only 25% of all investments in
agriculture (75% private); thus, need to further incentivize private
investments in agriculture

 Land Management:
 Prevailing MSPs and input subsidies have encouraged inappropriate
use of fertilizers and water, and have hindered production of crops not
covered under MSP
 Tenancy reforms are urgently needed, so that land leasing can become
easier
 85% of all farmers in India are small and marginal farmer (with
average size only about 2 hectares); they should be provided more
 access to institutional credit at affordable rates, training and capacity
building etc.
 (It is interesting to note that the international experience shows that
small farm size is not a constraint to agricultural growth, if structural
hindrances are taken care of)

 Irrigation and Water Management:

 Major concerns: decline in real investment, thin spread of investment,
low recovery of costs, decline in water table, and non-involvement of
users
 Reforms needed: increasing and prioritizing public investment,
augmenting groundwater resources, rational pricing of water and
electricity, involvement of farm users in management of irrigation
systems, watershed development and conservation

 Agricultural Market Reforms:

 In face of the difficulty of ensuring constantly rising prices, one way to
maintain price or profitability incentive to farmers is to increase their
share in final prices paid by consumers and other end users
 In many states, agricultural markets are underdeveloped, lack basic
infrastructure, charge very high taxes and commissions, and farmers
have to sell even rice and wheat at much below MSP
 Because of market imperfections, there is a strong asymmetry in
transmission of prices between retail, wholesale, and farm level
 For diversification of production, good infrastructure in the form of
assured market, better road connectivity, cold storage, post-harvest
technology etc. are required to attract private players
 Given the huge investments required private sector participation needs
to be incentivized
 In 2003, an amendment was made to the APMC Model Act, which
allowed direct transaction between the producer and the retailer in
several states, through various institutional mechanisms such as
cooperatives, producers’ associations, and contract farming; however,
it’s implementation has been shoddy
 There is a need to implement the APMC model act, Warehousing act
etc. and cut down on taxes and commissions on fresh produce to give a
boost to high value agriculture

 Technology Research and Extension:

 Given that area under production can hardly increase, we need to find
ways to increase yield per unit area
 Public sector investment for agro R&D and education in India is only
about 0.6% of the agri-GDP; this needs to be raised to about 1%, which
is the international standard being followed by many developing
countries
 Estimates say that the direct contribution of quality seeds in total
production is about 15-20% depending upon the crop, and it can be
further used to about 45% if other inputs are used efficiently
  Credit:
 In 2012-13, about 40% of credit requirements of small farmers come
from non-institutional sources, sometimes at exorbitant rates as high
as 30% p.a. (formal institutions charge around 6-15%); need to reduce
the role of informal sector credit
 Land and credit markets are interlinked; improving the marketability
of land will improve access of farmers to institutional credit
 There have been some improvements in flow of farm credit in recent
past, but there hasn’t been much improvement in the share of small
and marginal farmers; credit-deposit (CD) ratio of rural and semi-
urban branches has been declining; indirect credit has been increasing;
and there are significant regional inequalities in agriculture
 We need to recognize that given the competing demands on public
investment in agriculture, credit expansion can’t be sustained solely by
the public sector
 In 2015, the RBI has re-defined norms for priority sector lending by
banks; now, there is no distinction between direct and indirect
agricultural lending, and the banks can meet their entire 18%
obligation buy lending to companies that contribute to agriculture,
build agri-related infrastructure such as storage etc.; small and
marginal farmers have to be given 8%

 Export sector:
 Share of exports in total domestic production increased from about
5.6% in 2003 to 20% in 2012
 India is today a net exporter of foodgrains (In 2012, $40 billion of
exports, $20 billion of imports, mostly in oilseeds and pulses)
 India is the largest exporter of rice, and second largest of meat and
cotton
 Exports as a % of agri-GDP stand at around 13%, compared to only 5%
in 1991
 The Balassa index, that measures export competitiveness, is 1.6 for
agriculture, and only 1 for manufacturing products; thus, globally, our
agriculture is more competitive than our manufacturing sector
 In light of this strong performance, a rational tweaking of the trade
policies would is required. India should have an open-trade policy, and
tweak this with mild duties (10-15%) whenever needed; this would be
beneficial both for farmers and consumers

 Climate change:
 Rising soil degradation, depleting groundwater tables
 Need to promote collective action in climate change adaptation and
mitigation

Food inflation in the recent past

In 2012 and 2013, food inflation had consistently been in double digits, as
measured by official WPI figures. This mean that retail inflation, which is what
matters to the consumers, would’ve been even worse (since food articles account
for 24% of WPI basket, and about 50% of CPI basket). Given that food
expenditure constitutes a large percentage of the budget of many Indian
households (about 45%), high food inflation is detrimental.

Food can be divided into two broad groups: primary food, and manufactured
food (dairy, sugar, edible oil etc.). Primary foods account for about 60% of the
total weight in inflation, and in recent years, the rate of inflation has been
significantly higher for primary articles as compared to manufactured articles
(which contributed only about 7% to price rise over the last decade). Thus,
effective supply and management of perishable and seasonal primary food
articles is of significant importance in controlling overall food inflation.

Within the primary articles, more than 50% of the food inflation has emanated
from the high value segment such as fruits, dairy, poultry etc., hinting that the
demand pressure on these high value commodities is increasing at a rate that is
higher than their supply.

Also, food inflation has traditionally been much more volatile than non-food
inflation, and has on average remained about 65% higher than non-food inflation
since 2009. Thus, real prices of food (relative to non-food items) have been
increasing in the recent past.

Factor affecting food inflation

 Cost-push factors: Wage rate of labour, input prices, and other managerial
costs have been increasing- rural wage rate has been increasing at about
10% per annum since 2009 because of ‘pull’ factors such as MGNREGA,
construction sector etc.; at the same time, MSPs are also high.

 Domestic Production: Annual output growth of food commodities increased

by about 4% during 2009-2012, but this didn’t calm inflation down. Thus,
either the major increments did not enter the domestic supply market, or
domestic demand increased at a higher rate than this. While this increase
does not seem to have had a cooling effect on prices, the impact of drought
years on food prices has been pronounced; thus, investments in irrigation
and contingency planning could help control inflation during bad years

 Global Prices: Since 2003, global prices have increased significantly faster
than domestic prices. Exports have thus been proving more lucrative than
domestic market sales, and as a result, domestic prices have been increasing
despite substantial reduction in domestic food production. Given that India’s
trade policy is quite restrictive, these higher international prices show up in
the domestic prices with a significant lag- for example, when global food
prices erupted in 2007, India put a ban on exports of wheat and rice. While
initially this meant low domestic prices, very soon MSPs had to be raised,
and domestic prices rose. Thus, the spike in domestic prices around 2009
can be partly explained by this lagged effect of rising global prices since 2007
  Demand-side factors: Population and per capita income has increased,
demand has diversified towards high-value products, the marketing
structure is inefficient (leading to wastage), and there’s tendency by some
traders to hoard and create artificial shortages

 Food management: Except for buffer stocks in rice, wheat, and sugar, there is
no arrangement in the country to carry large inventories of other food items.
Present restriction do not incentivize private sector participation, and FCI
has been demonstrated to be inefficient

Policy option to control food inflation:

 Timely liquidation of FCI stocks to open markets

 Containment of rising farm wages, leading to higher production costs. One
way to do this would be to reform MGNREGA in such a way so that job
seekers can be used as agricultural laborers, on a cost-sharing basis between
the government and the land owner
 Global prices are moderating; India should reduce high import duties
 Fiscal deficit must be contained to rational levels; subsidies such as fuel,
food, and fertilizers need to be rationalized
 Reforming APMC, EAC, and general market conditions

Role of MSPs in food inflation

There has been a tendency to blame the recent hikes in MSPs for increasing food
inflation. However, this might not be sound reasoning, because:
 In many states in the country, prices often go below MSPs
 In an open-economy environment, simple rules of pricing require that MSPs
should be close to export parity prices in commodities that we’re net
exporters in, and closer to import prices in commodities that we’re
importing; if we compare our MSPs with other South and South-East Asian
countries, we fill find that we lie in the relatively lower band of prices
(India’s MSP for wheat: $226/ tonne; Pakistan: $283, China: $388; similar for
rice)
 MSPs should move in line with the increases in production cost

National Food Security Act

The concept of food security encompasses not only making enough quantities of
food available in the market through enhanced production or imports, but also
making it economically affordable to the poor.

The present schemes of food security policies are collated under the NFSA. The
Act makes certain amount of food as a legal entitlement for 67% of the Indian
population (75% in rural areas, and 50% urban). It encompasses the TPDS,
entitlement of meals to pregnant women and lactating mothers and to children
up to 14 years of age under WBNP (Wheat based nutritional programme) of
ICDS, and the MDM scheme. It also provides cash transfers to pregnant women
and lactating mothers under IGMSY.

While the act is framed by the central government, the implementation is to be

done by the state governments. The implementation of the act requires
procurement of about 60 million tonnes of grains (2013), and is estimated to
cost about 1.5% of the GDP, which is 14% of all tax revenue collected by the
central government in 2013.

TPDS:

 Accounts for about 90% of grains to be procured under NFSA

 Provides subsidized foodgrains to eligible households (5 kg of grain per
person per month)
 Coverage is expected to be 67%; the official poverty estimates
(Tendulkar method) show that the % below poverty line is 22%, thus the
coverage might be excessive, and the identification of beneficiaries is
delinked with poverty
 CIPs are frozen at Rs 3, 2, and 1/ kg for rice/ wheat/ coarse cereals
 In case of non-provision, the central or state governments are liable for a
claim by any person entitled under the act
 Beneficiaries to be identified on the basis of 2011 SECC
 As long as the state fulfill basic tenets of the NFSA, they are free to go
beyond the provisions, and provide extra entitlements, cover a higher %
of the population etc. if they feel there exists a need for this
 NFSA suggests reforms in TPDS, such as doorstep delivery of foodgrains
to TPDS outlets, application of ICT, transparency and accountability by
means of disclosure of TPDS records, social audits, vigilance committees
etc.

NFSA’s operational challenges:

 Biggest challenge is to ensure adequate supply of grains every year;

Indian agriculture is still rain-fed, and there are droughts almost every 5
years; production and procurement can fluctuate wildly
 Targeting: Based on the number of ration cards issued under TPDS, there
are already about 120 crore people benefiting from TPDS; this clearly
shows that a huge % of the cards are fake and need to be weeded out
 Such large scale procurement every year will strangulate private trade,
thus perpetuating existing market inefficiencies
 Support Reversal: Average cereal consumption in India is about 11 kg/
person/ month. NFSA will supply about half of it at subsidized rates.
However, given the high procurement levels by the government, whatever
grain is available on the open market will be considerably more
expensive; thus, people would end up buying the other half at a high price,
thereby negating the subsidy

Government Schemes for Agriculture

 Rashtriya Krishi Vikas Yojana
 This is a State Plan Scheme that seeks to provide the States and
Territories of India with the autonomy to draw up plans for increased
public investment in Agriculture by incorporating information on local
requirements, geographical/climatic conditions, available natural
resources/ technology and cropping patterns in their districts so as to
significantly increase the productivity of Agriculture and its allied sectors
 A State is eligible for funding under the RKVY if it maintains or increases
the percentage of its expenditure on Agriculture and its Allied Sectors
with respect to the total State Plan Expenditure

From the news

 Price Stabilization Fund

 Established by the Department of Agriculture and Cooperation
 Has a corpus of Rs. 500 crore
 Will support market interventions for price control of perishable agri-
horticultural commodities
 Will be used to advance interest free loans to state governments and
central agencies to support their working capital and other expenses on
procurement and distribution interventions for such commodities
 Both states and center would contribute equally (50:50) to this fund

 Crop damage in March 2015

 Untimely rains this March have destroyed over 170 lakh hectares of Rabi
crops in 14 states, causing damage of over Rs. 40,000 crores
 Compensation differs by state; some part is announced by the center, and
states provide top-up as they see fit

 Situation of Agricultural Households in India Survey by NSSO:

 About 85% of all agricultural landholdings are very small (less than 2
hectares)
 About 65% of GCA is rain fed
 Given the above two points, productivity is pretty low, translating to over
half the income of all agricultural households coming from non-farm
sources
 Over half of all agri households are heavily indebted
 About 40% access informal finance at usurious rates
 Wage employment, and not farming, is the principal income source for
over 50% of farmers
 Average monthly income is only Rs 6,500
 Awareness about MSPs and procurement is surprisingly low
 Over 95% of both paddy and wheat farmers don’t insure their crops
 Number of farmers has been dropping- is 9.5 crores in 2011, as compared
to 11 crore in 1991

 New Urea Policy:

  India’s annual urea production (there are about 35 manufacturing units)
has stagnated at 22 mt and the country has had to import about 8 mt to
meet domestic demand
 According to the new incentive structure for domestic urea units, the
Centre would reimburse the fixed cost incurred by the domestic units that
produce 100 per cent more than their reassessed capacity along with a
part of the variable cost
 However, this incentive would have to be less than the import parity price
of urea or whichever is less
 The assessment for the energy consumed would be based on a
combination of the previous new pricing scheme and average energy
consumed in last three years, and incentive will be given to domestic
manufacturers with their annual energy consumption to lower the carbon
footprint
 Alongside, transportation of P and K fertilizers will be made free
 The government says the new urea policy will increase annual production
by 2 mt and cut the yearly subsidy bill by Rs 4,800 crore
 Alongside this, the government has also reduced the restrictions on
production of neem-coated urea
 Using neem coated urea will not only increase crop yields but also
lower input cost to farmers
 It will also reduce imports of precious fertilizers as well as reduce
ground and soil pollution
 Presently India is using only 60 lakh mt neem coated urea which can be
increased to full demand of 310 lakh MT in the country
 Coated urea is costly by 5% compared to plain prilled urea but it
reduces Nitrogen loss by more than 10%, thereby incurring a net
savings of Rs. 13.5 per bag for farmers
 Due to higher nitrogen use efficiency, the use of nitrogen coated urea
can also eliminate import of urea resulting in huge foreign exchange
savings. Presently, India is importing about 71 lakh MT urea
 Additionally, farmers will also get advantage of better yield, less pest
attack due to less use of urea which will also ensure better NPK use
ratio and balanced use of fertilizers

PREPARE NOTES ON CHALLENGES FACING INDIAN AGRICULTRE

 Environmental degradation
 Excessive use of fertilizers and pesticides
 Improper irrigation practices leading to declining water tables, soil
erosion etc.