Unshackle the Farmers - Agricultural Reforms

It is said that our Policy framework has been based on the premise that the Agriculture /farmers need to be “subsidized₁” while the Industry must be “incentivized₂”.  

In reality, however the “Farmers have been subsidizing the rest of us, indeed the economy” wrote M S Swaminathan in his report on Indian Agriculture in 2006, 12 years ago.  The farmers are “Producers” who have almost nil control over the pricing of his/her produce.  

It must be said that the extant Agro-Policy stance has resulted in many Agro-revolutions; namely, Green Revolution- Cereals and pulses, White Revolution-Milk, Golden Revolution-fruits and vegetables and Blue Revolution-Fisheries etc. We have managed to improve the nutrition level of citizens (per capita basis) by many multiples, even as the population has grown four folds.

We have over the last 70 years travelled a long way from being a “PL 480 dependent” economy; our Agro-exports are now ~$40Billions, same as our centuries old, haloed Textile Industry.

The shrinking land holding sizes and poor investment in rural areas has increased the farmer /rural folk distress. Almost 70% of the households are landless or cultivate marginal holdings. We resort to frequent “farm loan waivers” and subsidies that are not liked by many influential sections of our society.  

The unshackling of the “animal spirits” of our Farmers and Agriculture has been held up by the fear of food inflation that forms a good part of household expenses, particularly of the vocal and well organized urban poor.  The per capita NVA for 2011-12 at current basic prices (base year 2011-12) is ₹ 1,01,313 for the urban areas and ₹ 40,772 for the rural areas," as per Finance Minister Arun Jaitley. The differential is 2.5 times in favor of Urban areas now (It must be noted that averages hide many issues).

The average surplus in rural India is ₹ 1413/month with ₹ 95/month being the lowest in Andhra. (NAFIS 2016-17 –Aug 2018). And indebtedness is ₹1.03 Lakh per rural household. 82.5% of Income is accounted for by Expenditure. The resulting savings rate of 17.5% is obviously inadequate to cover for “business risks” of Agriculture and allied rural activities, leading to chronic indebtedness and frequent need for “farm loan waivers.   

Our Agro-economic policies need an urgent re-set/re- orientation. Agriculture is also a “business” and this vital economic activity must be adequately supported, “incentivized” to feed our burgeoning numbers.  

The Price: Terms of Trade

Price is the central mechanism by which the value transfer takes place between parties and is central to improving the terms of trade and thereby social justice.

The GoI in June 2017, announced the Minimum Support Prices (MSP) based on recommendations by National Commission on Farmers (NCF) headed by M S Swaminathan; a Cost Plus formula. The Committee recommended the MSP be A2 (direct –out-of-pocket) +FL (family’s labor) + C2 (Indirect costs) marked up by 50%. However the GoI very quietly omitted the C2 and arrived at an MSP marginally higher than the existing ones, not disturbing the Terms of Trade (ToT) between Rural and urban economies.

Re-Set the Pricing Mechanisms   

The cost plus pricing (MSP) assumes that “all wheat” is same and therefore is inefficient mode of value realization. No “businessman” worth his salt uses Cost Plus to price his products, if he can.

The Amul model of transferring value to its constituent dairy farmers is a golden example to follow that was even recognized by our PM while inaugurating one of its value-adding plants in Anand, Gujrat. The member dairy farmers receive 70%+ of the street price of Milk thru price, bonuses and dividends. And the dairy farmers of India have returned the favors by making India the largest Milk –Producer in the World, for last 20 years.

Incidentally, this Amul Model has been followed by Kenyan Tea Industry to become the largest exporter of Tea in the World, in a span of 25 years.

Surely, the core principle of remunerating the farmers in relation to Street Price is transferrable to ALL agro-crops.

The Core Objective: Let’s set up Agro-pricing mechanism that ensures farmers/ producers get at least 50% of the “Street Price” in the nearest A or B class town. 

Differentiation:  The current price setting mechanism does not adequately account for the quality, grade or market conditions. Every district from Kanyakumari to Kashmir must be producing different commodities, as per its agro-climate and different grades /types /genus, and at different times of the year; The Street Price would vary /fluctuate accordingly, in the neighborhood areas.

Determining Street Prices:  Therefore, the District Administrator (renamed DM or DC, to change the colonial –era mind-set of the “collector”) heading a district level Agro-Experts and stakeholders’ committee (with linkages to and taking inputs from CACP and Min of Agriculture, GoI & Farmers’ Producer Organizations, and Supermarkets, NGOs etc.) in their monthly meeting deliberate on the upcoming crops, grades and volumes in the benchmarked A & B towns.

 The committee then fixes the buying rate from Farmers for the next month that is at least 50%-70% of “Street Price” (SP).  The CACP and the GoI declare the seasonal (A2+FL+C2) costs. Let’s add only 25% (not 50%) to arrive at the Cost+ price (called CP).  

The District Committee sets the Buying Rate (Dist BR) for the month at greater of the two, for different crops/produce and its grades, coming to Mandis that month. 

The farmer’s recovery %age may be increased thru buying price, bonuses and dividends etc. over time.

There must be a district level data publishing system and an index can be developed to be the basis of a competition between districts. 

Payments to Farmers:  

Inordinate delays in payments for the produce sold are major factor in Farmer distress, as it forces him to borrow for consumption which is very difficult to service – Farmer distress.  

Let’s trade the 25% mark-up foregone as per MS Swaminathan formula for this very important issue i.e. Payments: On-the-Spot payment.  

All incoming produce must be bought at the “Dist BR” by ALL agents, Govt or Private, on arrival. The Buyer will issue a Warehouse receipt that the farmer takes to the Bank at the Mandi. Farmer gets the Credit (or cash) and the Buyers Working Capital Limits/accounts are debited.  

Having realized a good price and received cash, he is not compelled to borrow for consumption. It may be noted that the cash- cycle of farmers is more than 3 months, from buying inputs to receiving cash for output.  (This needs to be mitigated in the Next Steps – FPOs and Advances from buying agencies against contract to supply produce)  

Buying Agencies:

Banks will have an active role in this process. Banks will lend to all buying agents including Govt agencies. The Collaterals will be stronger:  The crops purchased (warehouse receipts) and assets of the agents and guarantees from Govt agencies will be held by banks. All Mandis (APMC) have many godowns and storage facilities

Banks will send a daily statement of purchases to the DA office / Agri-committee, validating the purchase price being at or above “Dist.BP” and associated control data.  

Selling / Offloading:

The stock-holding agencies and the marketing chain have 100% (SP less BR) mark-up to manage their costs and profits. The Mandis may conduct weekly auctions to which the local dealers and exporters can buy their needs. Such buyers, who are market savvy, can also be financed by banks. 

Now that the financing costs are to the Arhtiya /Agencies account the ‘Velocity of Supply chain” will increase, prices will tend to rise. The countervailing pressure by competing sellers will ensure some stability. And, above all, wastage in Godowns will not be in the interest of market agents. (Govt agencies may be given a corpus +Bank limits within which they must operate profitably. And send monthly reports to DA –Committee and controlling agencies.)

Investments in Rural Industries:

The market pressures for usage of / conversion of all residues/by-products will rise to contain overall costs of these market entities.  Policies to incentivize such usage /production will set in motion a virtuous cycle for ago-processing industries and rural employment.

This will transmit strong signal back to buying agencies and to farmers on the quantity and quality to be produced next season.

Now, Markets control the Export /import of agri-commodities with the Govt agencies playing an oversight role and intervene in emergencies- much like Market Regulators of any Industry. 

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Notes:

¹ “Subsidy” along with “reservation” – the urban middle classes feel that “we” are giving away as “dole” to lower classes what is not their due.

² Incentive is given to someone (obviously of upper castes), who deserves it, and will return the favor in spades, with a positive outcome.