Focus on agriculture to revive Indian economy

The Minister of Finance will soon announce her budget measures. Once again, you can expect her to assure the country that all is well. It’s a song we’ve been hearing for years. Yet every year GDP growth has been dismal. (See table). Granted, GDP grew in 2021, but compared to the negative growth of 2020, we are actually back to 2019 levels.

So why should agriculture matter, since it contributes around 20% of India’s GDP?

There are three reasons for this.

First, with over 50% of India’s population in rural areas and tied to agricultural income, any increase in rural growth will translate into economic growth for the country. More importantly, it will boost per capita income growth – a more reliable indicator of national well-being for the common man.

Second, higher income in rural areas will translate into better purchasing power for a variety of items – from necessities to luxuries. This creates the demand that the industry needs. Without increased purchasing power from the 50% and above residing in rural areas, you will not have the quantum consumer demand that India needs.

Third, as study after study has shown, a rupee spent in rural areas results in faster growth than a rupee spent in urban areas. The ICOR (additional capital production ratio) for the rural sector is significantly higher than that of the urban sector. So you get more for your money by investing in agriculture.

Agricultural distress

The farmer is in great distress. Farmers have a higher suicide rate than most other industries. All the figures confirm this (see graph).

Small farmers remain terribly exploited | NACRS

The farmer often earns more by working in other enterprises, and even as a daily wage earner. He uses them to supplement his cultivation income. This is more true for small farmers than for large farmers. The budget can do a lot to improve this. But we will come back to this a little later.

United States and Agricultural Prosperity | www.nabard.org

Another factor to keep in mind is that with the exception of Punjab, where central funds are used to favor farmers, most of the states which were not dependent on central funds and where farmers held the Remote politicians did better than states where farmers wanted politicians to bail them out. Politicians have not yet realized that subsidies actually encourage the weak and penalize the strong. It makes the strong weaker. The government is one of the main causes of the impoverishment of farms. The story of the FCI (Food Corporation of India) should be enough to explain what happened. Same with oilseeds.

Finally, contrary to what politicians will tell you, importing agricultural products to cool rising domestic prices does not help the farmer or even the consumers. Only traders, often very close to politicians, benefit from it. When domestic prices rise, there should be an NDDB-like mechanism to cool prices, but without hurting farmers. When prices are high and imports are used, foreign suppliers also raise their prices. Traders are also not releasing domestic prices. The farmer loses due to cheap imports and being cut off as the main supplier to markets. The consumer loses because prices do not cool. On the contrary, the farmer will grow fewer commodities in the next season, leading to high prices and increased import dependence. It is not good for India.

Solutions

There are several things the government can do.

First, do not provide subsidies directly to farmers. Create a structure to identify well-governed Farmer Producer Organizations (FPOs) that drive agricultural commodity prices up a little year after year. This was done by the GCMMF (Gujarat Cooperative Milk Market Federation which sells dairy products under the Amul brand) and the NDDB. Let these organizations manage the subsidies (which can be created through a market development fund by importing subsidized agricultural products and distributing them in markets and using the surplus for farmer development. Or let them take surplus products, convert them into value-added products, and keep surpluses for market development Let these organizations decide a market price that consumers can afford, and slowly increase them year after year to ensure farmers that market prices will not fall.There are many other strategies, but these should be enough to get you started.

Second, prohibit the import of agricultural products by traders and political bodies. Leave that to the FPOs instead.

Third, rationalize taxes for the dairy sector. The current set of tax laws discriminate against the dairy sector. There is no cap for agriculture on non-taxable income, but there is a cap of 100 head of cattle in the dairy sector. Isn’t the dairy sector part of agriculture?

Evolution of national and international crude palm oil prices | CMIE; Care assessments

Fourth, allow farmers to lease their land to others. This way they are not bound by the crushing prices they get for agricultural products. However, they regain possession of their land of which they are sentimental. Allowing farmers to enter into contract farming but denying them the right to lease their land is a counter-productive decision and will harm farmers.

Fifth, create a fund that allows farmers with old cows to get Rs 20,000 for every old cattle that the government does not allow them to sell. You cannot create a law that hurts a farmer or denies him the right to dispose of livestock. Let the state take care of the old cattle and do what it wants. Always remember that a farmer buys a cow. He must then have the right to sell it to whoever wants to buy it. If such a sale is not authorized, the State must pay the farmer the cost of this livestock.

Sixth, allow farmers in border states to sell cattle to anyone who wants to buy them. Specifically, allow them to freely sell buffaloes, goats, poultry and anything (except cows). Once authorized, they become exports. It’s not contraband anymore. You don’t need to use Border Patrols to control contraband. If a farmer can sell poultry and fish, why not cattle?

Seven, never interfere with commodity trading. It takes a lot of time and effort for a commodity to become actively traded on commodity exchanges. Yet when trade becomes active, the government prohibits such trade on the specious grounds that it raises prices. What else does a market do but sell at higher prices? Otherwise, how will a farmer learn to find out next year’s prices and decide which crop to grow?

Finally, reactivate the WDRA (Warehousing Development and Regulatory Authority) to develop standards for the regularization of warehouses. Take all the warehouses that belong to the FCI (Food Corporation of India) and other government agencies, and bring them under the WDRA. Let FCI source its grain through commodity exchanges, not directly. This will create a uniform price for rain across the country, stop preferential buying. Establishing warehouses near the farmers will enable them to sell them through commodity exchanges using the warehouses as a temporary measure. This could empower the farmer.

Yet knowing how desperately the whole system loves to exploit the farmer in the name of supporting it, it is unlikely that such measures will be introduced. But reporting them is always helpful, lest some politician say, I did not know. Why didn’t you inform me?

(The author is consulting editor of the Free Press Journal. He tweets @rnbhaskar1)

Posted: Friday, January 21, 2022, 10:23 a.m. IST