What farming needs: Risk mitigation
Its absence makes farmers less receptive to pro-market reforms which add to income uncertainty
At the heart of the debate on farm laws is the issue of the level of farm incomes. Income volatility is a key dimension important for farmers’ welfare, understanding their anxieties, and the success of a pro-market reform. The two main risks associated with farming are production risks and price risks. While production-related risks that come from weather, pests and disease are well understood, price risks induced by the market or policy are more subtle.
Market price realisation of agricultural produce is usually uncertain. When sowing, farmers have to guess the price their crops will get after four or five months when harvest occurs. After sowing, they have limited ability to change their decision. Price risks are exacerbated by policy. India abruptly changes export restrictions on crops like cotton and onion, often multiple times between sowing and harvest. Thus, farmers are unable to make informed decisions; when international prices are too high, export bans also keep farmers from making a profit.
Globally, governments provide farmers with various risk-mitigation instruments. In India, Pradhan Mantri Fasal Bima Yojna (PMFBY), the government’s crop insurance programme, deals only with production risks. It does not cover livestock. Enrollment remains low and operational challenges leave much scope for improvement.
To deal with price risk, the only real instrument that the government provides is procurement at minimum support prices (MSPs). When available, farmers use it to the fullest. In the 1960s, before procurement of paddy and wheat started, Punjab’s farmers grew many other crops like maize, bajra, pulses and oilseeds. Three decades of assured procurement has turned it largely into a paddy-wheat producing state.
Farmers understand the environmental costs of growing water-intensive crops. But they choose to grow these crops, as they minimise their ex-post risk, even if they don’t maximise their incomes or welfare of future generations.
When farmers don’t have access to public procurement, they mitigate risk by sowing low-value low-risk crops conditional on agro-ecology. Research has shown that India’s domestic market integration has increased income volatility and induced farmers to switch to lowerrisk crops. Consider the flood-prone areas of Bihar, where paddy crops get damaged due to monsoons. In unintegrated markets, this would increase local prices. Thus, farmer income, which is a product of prices and quantities, is stabilised. In integrated markets, a reduction in local production leads to inflow of paddy from neighbouring regions keeping prices stable. This is good for consumers. However, farmer incomes decline as their production loss is not offset by a price increase.
A single instrument, procurement at MSP, is being used to solve multiple problems — risk, remunerative prices, and food security. However, it is not the best solution. It cannot be made universal, is operationally challenging, and environmentally detrimental. Therefore, India needs a better plan. What are the elements that we need to consider?
First, to provide immediate relief there is a need to strengthen PM-Kisan (and its state-specific variants), especially in states where there is no public procurement. It should also be expanded to include landless farmers.
The second is the debate over removing various subsidies — MSP, power, fertiliser etc — and replacing it with an equivalent transfer. If the latter is done, then we must ensure that the basic PM-Kisan infrastructure works, and be cognisant about whether distribution chains of key inputs work and are competitive. The switch will, then, have greater acceptance. The production systems in Punjab and Haryana have gradually evolved as a response to the procurement systems that the government implemented for three decades. Overnight reversal is hard. Thus, farmers must be compensated for policy induced adjustment costs. These compensations will have environmental benefits when farmers switch from paddy to other crops.
Third, to insure price-risk, we can consider a procedurally simple version of the Bhavantar scheme to compensate farmers for losses from market price crashes. A price monitoring and market intelligence system is necessary for it to work. However, this should be a top-up over the basic income transfer to target extreme events. If governments still have to procure crops for the public distribution system, we should move toward a limited procurement regime, at market-linked price, spread across states, and include a wider range of crops. Governments must also resist the temptation to follow a countercyclical trade policy, banning exports when international prices are high.
Finally, there will be residual yield risks, especially given the climate crisis. Thus, additional insurance payments will need to be made when there are clearly visible weather or disease shocks in certain tehsils or districts — but this must be done in lieu of debt write-offs, not in addition.
In sum, certain principles are important. First, the reduction of existing subsidies should be gradual and begin after farmers are assured the digital infrastructure and supply chains work. Second, none of the above instruments are perfect but they complement each other. Third, taking into account what might be implementable in India.
The level and volatility of farmer incomes are intricately related. Uncertain incomes force farmers into debt and poverty. A credible risk mitigation strategy is necessary for a successful agricultural reform that will be acceptable to farmers as freer and integrated markets will make their incomes even more volatile.
The views expressed are personal