In its Fiscal Policy Strategy Statement, the government has stated that its prime responsibility is “providing a safe and stable environment for the private sector to create wealth”. Agriculture is India’s largest private sector enterprise. But while it recognized the problems, the Budget stopped short of making agriculture an attractive investment for either private companies or farming households.
Even for consumers, there is something fundamentally flawed when the food subsidy bill is 2.5 times the total spend on agriculture and allied sectors. Had the Budget pushed for modern ways to deliver social services, it could have improved its balance sheet in one stroke.
Farming is an input intensive business that requires timely and cost-effective availability of land, seed, fertilizer, irrigation, machinery, credit and labour. If any of these inputs is missing or mispriced, the crop becomes uncompetitive in the market. The current fertilizer subsidy system, besides costing the exchequer Rs 70,000 crore annually, has created a black market where small farmers pay 60% more than the MRP, which incentivizes production inefficiency, and leads to over-use, depleting soil quality and damaging human health. Though urea consumption has risen over the last 15 years, no new factory has come, leading to rising imports. Neem-coating urea prevents leakage into the chemical industry but doesn’t solve the festering sectoral crisis. Similarly, price controls have disenchanted the private seed companies. This has left the field open for counterfeits and black markets.
Foreign companies are free to set up wholly-owned companies in the horticulture, animal husbandry, seeds, plantations, and agricultural services sectors. Yet, between 2000 and 2015, barely $1800 million FDI was received. Start-ups are keen to introduce specialized technologies and communication platforms. The Budget should have offered incentive, or at least assurance, to potential Indian and foreign investors that it would be easy to do business in agriculture.
To move beyond a subsistence existence, farmers largely invest savings in their land. Two consecutive droughts and bad harvests have put paid to that. Banks are not forthcoming with long-term credit. Of the Rs 9 lakh crore credit offered last year, the bulk were short-term seasonal loans. The trend needs to change even though the allocation has increased to Rs 10 lakh crore.
India has close to 2000 Farmer Producer Companies for aggregating harvests and increasing the bargaining power of members. The Budget could have offered incentives for FPCs that invest in improving productivity and connecting to markets. In short, more measures were needed to stimulate private investment in agriculture to produce wealth.
At the same time, government’s own spending, at Rs 56,992 crore, needs to accelerate and become more imaginative. Take irrigation. With half of the arable land under rain-fed agriculture, India practices energy-intensive “DG set-dependent” farming. The number of agriculture connections has increased from 13 million to around 19 million between 2001 and 2015. Over 18% of total electricity consumption and over 5% of total diesel consumption is used for irrigation. By incentivizing a shift to solar-powered micro irrigation, the Budget could have launched a virtuous cycle with far-reaching impact on food, energy, climate change, and water cycles. Maharashtra has already launched the world’s largest solar pump irrigation project.
The Rs 9,000 crore outlay on insurance will cover only 40% of the arable land. In any case, insurance premium is not a substitute for capital formation.
Connecting farmers to market is the right way to ensure that producers get a fair share of the consumer’s rupee. But the Budget stays on the beaten path with solutions such as a new model Contract Farming law and denotifying perishables from the APMC Act. There is no dearth of contract farming laws. They failed because they are tough to enforce. Similarly, if exiting APMC market yards was the solution, fruit farmers in Bihar would have been prosperous by now because the state has repealed the APMC Act. Instead, they are struggling to survive. Given the right market infrastructure, there would be no need for the government to connect farmers to food processing units. It would happen automatically.
The government is banking on the National Agricultural Market (e-NAM) as the platform for bringing together buyers and sellers beyond geographical limitations. Though e-NAM has officially connected 250 mandis, the basic legal frameworks, quality standards, payment clearing systems, and storage infrastructure that define a market are missing. Without these building blocks, e-NAM can’t be the bridge between spot and futures markets.
Exports have traditionally benefitted farmers. Since it has acknowledged the tough external environment, the government should helped promote commodity exports that have fallen 20%.
In contrast to agricultural spending, the food subsidy bill has ballooned to Rs 1,45,339 crore, or almost 1% of the GDP. Food subsidy is paid to the Food Corporation of India for maintaining the buffer stocks of wheat and rice and delivering to ration shops in selected states. The ballooning cost is another example of weak delivery and misallocation of subsidies by the state machinery that is eating into scarce government resources. To prove that it is fiscally prudent, the government should have announced modern market-based tools of procurement and public stocks management that go beyond ration shop automation and have proved successful in other nations.
The Economic Survey observes that the “embrace of markets” – even in the basic sense of avoiding intrusive intervention, protecting property rights, selling off unviable public sector assets, exiting from areas of comparative non-advantage and allowing producers and consumers to face market prices – is a “work-in-progress”. This is most true of agriculture. Farmers desperately need agricultural investment to generate wealth and jobs. Unfortunately, due to this intellectual hostility, successive governments have distorted the markets where the private sector operates best. And underinvested in the areas of public good where it should have been more active. The Budget is only one opportunity to set right both. Public policy can pick up where it leaves off.