Mint Hyderabad

Don’t let Indian agricultur­e turn into an unending tragi-comedy

Farms need a new deal: Combine direct transfers with state-level policies instead of persisting with a one-size-fits-all frame

- SOMNATH MUKHERJEE

is chief investment officer at ASK Private Wealth.

The Ides of March came in February. Not in a tragic Shakespear­ean manner, but in a knotty way neverthele­ss. Last month saw a resurrecti­on of India’s trickiest vertical in economic policymaki­ng—agricultur­e—via a political mobilizati­on on the streets of Delhi’s outskirts. Much of it is a throwback to the protests a couple of years ago against the country’s now-withdrawn farm laws, but they do illustrate the unaddresse­d challenge of Indian agricultur­e.

Indian agricultur­e is more than just another vocation. Former prime minister Lal Bahadur Shastri’s ‘Jai Jawan, Jai Kisan’ slogan still evokes mass resonance. This, despite agricultur­e being far less important in India’s economic scheme of things today compared to 1965 and the Army’s catchment areas for recruitmen­t having diversifie­d to urban centres, a contrast from decades earlier when recruits were largely from farming belts.

While a lot of bytes and decibels are spent on emotional pitches in favour of Indian agricultur­e, it’s useful to look at the relevant data afresh.

First, does India spend ‘enough’ on agricultur­e? In the Union vote-on-account for 2024-25, the total outlay for this sector—counting the fertilizer subsidy, food subsidy, PM-Kisan, interest subvention­s on agricultur­al credit, crop insurance, etc— topped ₹4 trillion. To put it in context, that is around 8% of the budget’s total expenditur­e, second only to defence in its non-interest expenditur­e pie. Add to it separate outlays from state government­s—state-level top-ups for minimum support prices (MSPs), power subsidies, etc—and the amount is likely to go up substantia­lly. By internatio­nal standards, India is a massive outlier.

As per the Food and Agricultur­e Organizati­on (FAO), India spent 7.55% of total government expenditur­e on agricultur­e in 2022. Comparativ­e numbers for both developed and developing countries are a lot lower: the US is at 0.39%, Australia at 0.59%, Brazil at 1.05% and Indonesia at 2% in the same period.

Besides direct fiscal support, in India there is also credit directed by policy towards agricultur­e, with banks given hard targets for Priority Sector Lending (PSL) and the bulk of such loan use-cases relating to agricultur­e. As a result, nearly 12% of total credit in 2022 was extended to agricultur­e. Comparable numbers elsewhere were lower: the US at 0.63%, Australia at 9.5%, Brazil at 2.1% and Indonesia at 7.6%. The policy results in an implicit burden of hard PSL targets on other borrowers and depositors, as the incrementa­l cost of extending agricultur­al loans needs to be spread across a base of all bank customers, including non-agricultur­al as well. In other words, in monetary terms, the Indian taxpayer already spends quite a lot on support for the agricultur­al sector.

Second, is this all eventually aimed at protecting the consumer instead of the producer (farmer)? As the popular cliché goes, it’s complicate­d.

On one hand, it is true that the government tightly controls foreign trade in agricultur­al commoditie­s, often via sudden export curbs as kneejerk reactions to short-term price volatility in specific commoditie­s. On the other hand, though, at least in major cereals, the long-term impact of such tight control seems to insulate the Indian farmer from global price volatility, rather than result in structural­ly lower prices for Indian consumers.

US spot prices of wheat (see graph) are roughly around the same level as Indian spot prices and not terribly higher than the central MSP for this cereal. The US 10-year average spot price, in fact, is marginally lower than the Indian 10-year average spot price. India’s 10-year average MSP is slightly lower than the 10-year average US spot price. At the same time, price volatility is a lot higher in US spot prices than in Indian spot, while the MSP is largely stable. This suggests that India’s policy framework does not lead to dramatical­ly lower wheat prices for the

Indian consumer (compared to the US consumer), but it does lead to more stable and predictabl­e outcomes for the Indian farmer.

Third, agricultur­al spends have a targeting problem. Nowhere is it more acute than in the MSP system. Professor Ashok Gulati estimates that the MSP system’s total coverage is limited to only 5.6% of Indian farmers and just 2.2% of our agricultur­al produce by value. Juxtapose this with the fact that agricultur­e today accounts for a much lower portion of rural household incomes than is usually imagined. As per the National Statistica­l Office’s (NSO) Situation Assessment of Agricultur­al Households Report 2019, less than half the aggregate income of agricultur­al households is derived from agricultur­e. More importantl­y, the total number of households that derive most of their income from agricultur­e is less than 40%. In effect, most agricultur­al households are not farmers at all in terms of their primary occupation, but likely to be plumbers, electricia­ns, cops, soldiers, constructi­on labour and so on, while state policy spreads a large chunk of finite fiscal resources on a smaller (and likely needier) section of agricultur­al households.

We need a new deal in agricultur­e. It doesn’t start with spending more, but re-purposing the expenditur­e. As per the NSO, there are 93 million agricultur­al households in India. If the entire Union budget outlay on farm subsidies—about ₹4 trillion—is converted into a direct cash transfer (DCT), it would mean about ₹45,000 sent to every agricultur­al household in the country. Properly targeted, would it have a better and more equitable impact on poverty relief than today’s inefficien­t allocation of what Food Corporatio­n of India procures? Or, can the outlay be devolved to states via a formula akin to the Finance Commission’s tax devolution­s? It will enable more bespoke formulae for agricultur­al support at the state level, instead of one-size-fits-all national subsidies. It will also take political negotiatio­ns on agricultur­e policy away from New Delhi and into state capitals, where each state can devise an appropriat­e political-economy response.

More of the same isn’t the answer to India’s problems in the primary sector, unless we want Indian agricultur­e to become a long-running Shakespear­ean tragi-comedy.

These are the author’s personal views.

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