Agriculture

Introduction
    The share of Agriculture in total GDP has declined to less than 16%,(from about 35% in the 1970s) while the share of Indian Agriculture in World has risen to around 10% of World GDP from agriculture ( from about 7.5% in the 1970s). This is primarily because the share of Indian GDP in World GDP has grown steadily since 1980 (after declining in earlier decades). However, there has been no change in the relative productivity of workers in agriculture. The productivity of Indian agricultural workers is half of the productivity of agricultural workers in the World, and has been so for decades. Agriculture remains the most heavily controlled sector, if we look at the entire supply chain from inputs to delivered output

Inflation      
       Historically food inflation in India generally goes up following a bad monsoon and returns to normal rates following normal monsoon and the restoration of agricultural production to its trend growth of about 2.5 per cent per annum.  This time around higher food inflation rates seemed to have persisted for an inordinately long time.  As we noted earlier agriculture is the only major sector that has seen little or no economic reform and import liberalization.  Consequently it has not benefited from many aspects of competition present in farming.  At the same time there have been three significant changes on the domestic demand side (that we had identified in 2008-09):  One is the doubling of the rate of growth of per capita income and its impact on growth of demand for food and its pattern (cereals to vegetables/fruit and milk products); second is the boom in urban land prices and consequently on real estate prices and rents.  The third is the increase in fuel prices and its effect on transport costs.  The first and third would tend to increase the cost of food at all levels and the second would tend to increase the gap between the retail and wholesale levels.

Policy Reforms
FDI in Agriculture

           The small fragmented supply chains cannot cope with the increased demand for basic and new higher level foods. We need a revolution in the food supply chain - particularly fresh foods (from farm to retail). Governments’ decade’s old plans for cold chain, package of inputs, credit, output markets have not worked, given the institutional setting and context that exists.  In fact the institutions have in many cases deteriorated relative to what they were 20-30 years ago, so that they are not able to cope even with normal increases, let alone unprecedented ones.The Fertilizer subsidy has distorted the nutrient balance, with excessive use of urea damaging the soil. The only option left is to try what worked elsewhere – competition through FDI in grocery retail.[1]  The entry of domestic large retail suppliers has made some difference in a few products and geographies.  We need a (food) retail revolution, to cope with the increased challenges.  A full fledged opening of FDI in retail is the only solution we have not tried.  As the retail sector has been opened up with numerous restrictions, we can allow 100% FDI without restrictions on FDI in retailing of food and agriculture products. 100% FDI could also be allowed in Rural-Agricultural Banking and Insurance.

Controls & Licenses
    
This needs to be complemented by reforms of the Agricultural Produce Marketing Committee Acts (APMCs) and the Essential Commodities Act (ECA), for farmers to get the full benefit of increased competition.[2]  Ideally both these Acts should be abolished. In the meanwhile many items can be removed from their purview, e.g. Fruits and Vegetables from APMC act and cereals from ECA. The model APMC Act formulated in 2003 could also be used as a basis for reform. The Froward Contract Regulation Act (FCRA) must be amended to permit trading in options. Forward trading is periodically blamed for price rises, despite the fact that every professional study has disproved this assertion. Similarly, the use of the ECA may produce some short term gains at the expense of great damage to farmers & consumers medium-long term interests.
    Agriculture is the only sector still subject to Ad hoc changes in quantitative restrictions(QR) on exports and imports.  These changes usually have the effect of "bolting the door after the horse has fleed," because of inter-departmental disagreements and delays in decision making.  We need a more predictable import-export regime for farmers that balance the needs of consumers and farmers on a permanent basis rather than lurching from season to season from one extreme to the other.
The manufacturing sector was moved from QRs to tariff protection during the 1980s, before tariffs were reduced progressively to 10% during the 1990s and early 2000s. The economic survey of 2007-08, proposed price bands with variable import tariffs and export duties outside band.  This would mitigate the effect of extreme high prices on consumers and of extreme low prices on farmers, while ensuring that the latter receive the right price signals to promote productivity and growth of production.

EXIM Policy

  Agriculture is the only sector subject to Ad hoc bans on import and exports. These bans and their removal always come too late to benefit the farmer, usually benefiting some favored intermediary. The consumer is usually saved from the worst excesses. The farmer can only benefit if there is a stable regime of import tariffs and export duties on the basis of which he can plan future crop patterns and investments for productivity improvement. The Government should announce its intention to eschew import-export bans (in future) and replace QRs with tariffs and duties. Then these tariffs and duties should be gradually and progressively reduced over next five years. The NITI Ayog should set up a task force to work out a structure of import tariffs & export duties which would balance the interests of farmers and consumers. A price band approach could be used for selected crops that are critical for livelihood. 


Crop Productivity

  GM crops have played an important role in productivity improvements in many crops across the World during the last decade.  This process has been sabotaged by vested interests in India.  It needs to be freed from political control and agitational derailment and subject to well established, objective, scientific processes and methods by vesting full authority in the Genetic Engineering Approval Committee (GEAC).  GM crops must be deleted from the list of hazardous substances in the Environmental Protection Act, 1986 and the dichotomy between Central (Environmental protection) and States (Agriculture) powers must be resolved to enforce uniformity of safety rules for testing & planting of GM crops.
[3]


Agricultural Land
     There are a plethora of restrictions and controls on buying and selling of land and on leasing in and out agricultural land. The time has come to eliminate most if not all of these restrictions, except in carefully defined tribal areas and reserved forests. The center and States should sit together and agree on the geographical areas where some of these restriction may still be useful in protecting tribal livelihoods and preserving forest cover.

Sugar Industry
     The Sugar industry should be completely de-controlled, instead of tinkering with the release mechanism. The biggest threat to the industry is State Advised Prices (SAP) for sugar cane, higher than the Minimum Support Prices (MSP) calculated by the Central Agricultural Prices Commission. Even though the distinction between MSP & Procurement price has long been forgotten, MSP is based on a quasi- rational calculation of costs of sugar cane cultivation and differences in sugar content, ignoring the fact that sugar is a water intensive crop crop, grown in regions with depleting underground water reservoirs.  For States to ignore these facts and set SAP even higher than MSP is a recipe for destroying the sugar industry. Whenever the industry is on the verge of going under, the Industrialists and the States implead the Central govt to save the industry. This the Central government inevitable does in the name of the farmers, at great cost to consumers and/or the Public Sector Banks or/and the central budget. In the most recent incident import duties on sugar were raised from 10% to 40% and PSBs forced to give loans that could easily become non-performing assets (NPAs).  The central government government must completely De-license and Decontrol the sugar industry and make it clear to States that they wont intervene if a State bankrupts the industry in its State by setting SAP above MSP.

Fertilizer industry
   The fertilizer subsidy is a mix of subsidy to industry and to farmers. At times most of it is effectively a subsidy to industry and at other times mostly to farmers. 
Fertilizer industry should be decontrolled, and imports freed with an import duties set at 10% like for all other imports.  An appropriate fertilizer subsidy should be calculated per cropped area and the subsidy transferred directly to small and medium farmers through a UID linked mechanism related to cultivated land area. A smart card system could be used to combine all subsidies (eg on elecricity, water, health, education) into a single multi application smart card (MASC/ISC)[4]

Rural Development
Complementary actions detailed under Rural will help strengthen the supply chain.

[1] Because of local and regional tastes, there is a stronger inherent/natural incentive for large marketers to build domestic supply chains for food/grocery items. Thus it may be better to focus initially on allowing 74 per cent FDI in grocery/food retail as against 51 per cent FDI in general retail (including grocery), if the primary objective is to build an efficient food supply chain that benefits farmers and consumers.

[2] E.g. delisting of perishable commodities like fruits and vegetables and new nutritional items like soya, from schedule 1 of APMC Acts.  For poorer/less developed States/regions to benefit fully we also need a road grid connecting every village and a sustainable water/irrigation grid in every block.

[3] Bhaghirath Choudhry, "Regulatory Options For Genetically Engineered Crops in India," Plant Biotechnology Journal, February 2014.  http://onlinelibrary.wiley.com/doi/10.1111/pbi.12155/pdf 

[4]  https://sites.google.com/site/chintan1997reg/institutional-reform/uid

Comments