Farming, India’s largest private sector, lacks the freedom successful businesses enjoy: surviving the bad years on the back of earnings in the good years. Through frequent trade barriers, distortion of price signals and controls in the name of the consumer, farmers have never been allowed to maximise earnings even in the good years. The current agitation reveals its human cost.
Government wants prosperous agriculture, but gains favour with voters when it lowers the price of food. Policies are ‘pro-farmer’, until the crops are sowed. Then they turn ‘pro-consumer’ by depressing agricultural prices. This forces farmers to pay an invisible, off-balance-sheet food subsidy. Eventually, the bad effects of price controls are fixed with farm subsidies and loan waivers.
Despite the high price of food, real income growth of farmers has actually declined in the last five years because earnings were below rural inflation. Cereals, oilseeds and pulses that provide a livelihood to most small and marginal farmers, were the least profitable compared to fruit and vegetables, spices, cotton and sugarcane.
The debilitated earnings and adverse terms of trade forced families to borrow from the village moneylender for day-to-day needs. There was no buffer for the seasons when crop prices are low or plantings fail. Farmers deserve better. Unlike other sectors, they face almost perfect competition. There are lots of sellers for each commodity and no single farmer is able to influence the price. The majority never reach regulated markets or formal value chains to receive the full value of their produce.
Farmers rarely receive more than 50% of the consumer’s rupee. Several studies have conclusively shown that processing accounts for more than half of the total cost build-up from farm to fork. Transportation (21%), bag and packing (12%), labour (7%), mandi fee and development cess (6%) contribute the rest. This explains why we continue paying.`150 a kg for tur dal at the kirana while the farmer sells in distress.
Farmers are hit even by retail price controls because the marketing costs (marketing, processing, wholesaling, distribution and retailing) are typically sticky.
Let’s say the retail price of tur is Rs 100, of which the marketing cost is Rs 50, and the farmer gets the remaining Rs 50. When retail price drops to Rs 90, the marketing cost remains Rs 50, leaving the farmer with only Rs 40. A10% fall in retail prices hits him by 20%, according to a study by the National Institute of Agricultural Marketing.
Not surprisingly, manpower and investor capital are fleeing agriculture for better returns elsewhere.
What is the solution? Food subsidy should be direct so that it doesn’t distort the market or create incentives for wastage. Competition and markets are even better tools against inflationary farm-to-consumer price spreads because they offer a win-win for consumers and farmers.
States must increase competition among traders through the National Agricultural Market and stop protecting inefficient processors. Farmers, too, will receive a higher share of the consumer rupee once marketing costs drop. In 2015, access to the Unified Market Platform in Karnataka brought farmers 13% higher prices and 9% more income, finds the Niti Aayog. Demand and supply need better coordination to avoid price spikes.
However,government must resist the temptation. The case against price control is not that the market always gets it right. But many buyers and many sellers do a better job than any central planner in figuring the hidden costs and indirect consequences.
In the long run, consumers and farmers would be better served if GoI focuses on stabilising the macro issues of market access, taxation, property rights and regulation so that the supporting institutions necessary for an efficient farm sector mature quickly. Trying to stabilise micro-level prices of each commodity leaves farm prey to economic depression.
Farmers have postponed consumption, explored the market place, invested capital, grown crops worth Rs 15 lakh crore, built a business, created 215 million jobs and accumulated stocks — long before earning a single rupee and assurance of any success, all in response to what they imagine consumers want. When prices are beaten down — through government action or buyer collusion — anger is inevitable. It is easy to blame the government for the agrarian unrest.
When we complain of the operation of the market as consumers, we are as much to blame.
Because farmers have no savings and, thus, no security, agriculture has become a fragile system that breaks under the slightest downside. Farmers need just returns to fulfil their role in producing food. India’s nutritional security depends on their entrepreneurial energy.