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AgricultureAgricultural growth is much more impactful in reducing poverty as compared to other sectors- GDP growth originating in agriculture is at least twice as effective in reducing poverty as compared to growth originating outside agriculture.Since 1950, India’s population has grown by about 3 times, while the foodgrain production has increased by 5 times, and milk by 7 times. India is today a net exporter of foodgrains, and state holdings of grains have been increasing steadily (74 million tons in 2013). Despite these achievements, we need to realize that the growth in agricultural sector has remained stuck at about 3% p.a., even when the rest of the economy shows much higher growth rates. Also, size of an average landholding in India is only 1.15 hectares. These need to be remedied. Historical context and trendsShare of agriculture in national income has been declining: was 56% in 1947, and only 14% in 2013-14. This implies that the growth rate of agriculture has been much slower as compared to the overall growth rateShare of agriculture in employment, however, remains very high at around 55% (was 72% in 1947). This, combined with the fact that agriculture is supplier of food, fodder, and raw materials for a vast segment of industry, demonstrates that without growth in agriculture, growth in India cannot be inclusiveGiven the overwhelming reliance of the country on agriculture, land reform received top priority on the policy agenda at the time of independenceThe constitution left the job of bringing in land reform legislation to the state governments Four main objectives were:Abolition of rent-seeking intermediariesTenancy regulationImposition of land ceilingsConsolidation of disparate landholdingsAside from abolition of intermediaries, the rest of the reform initiatives have been unequivocally unsuccessful; also, given politically strong farmer lobbies now, it is unlikely that radical land reform will take placeDuring the 50s and 60s, most of the growth in agriculture came from increase in area; after that, productivity growth led agricultural growthDuring the first 3 FYPs (1950-66), the government’s reform focus was on institutional factors (land reforms), and public investments (irrigation, distribution systems). However, given the relative focus on industry, agriculture suffered (and grew only at about 2.1% per annum). Even though the focus was on industry, institutional reforms went a long way in improving agricultural productivity- during the first 3 FYPs (till 1964, excluding 1965), agriculture grew at about 3% p.a.; between 1891 and 1946, the average annual growth rate was only 0.4%Despite this high growth rate, given the massive jumps in population growth rates, food production did not keep pace with population growth. After independence, India invested heavily in capital goods and industrial plants, but given their long gestation periods, overall economic growth was slow, and consequently there was no surplus to invest in agriculture. Thus, in absence of investment and new technology, food production failed to keep pace with growing population, and from 1956 onwards India had to depend in food imports and aid from the west (the agreement signed with the US was called ‘PL-480’) Two wars in the 1960s, followed by two successive drought years in 1965 -66, and USA’s subsequent political arm-twisting in return for food aid, pushed India to aim for self-sufficiency in food grain production. This led to the ‘Green Revolution’The First Phase: 1966-72 (‘Green Revolution’ starts; focus of government reforms was on both input and output incentive policies, and public investment):With India’s production of wheat at around 10mt, imports had risen to about 7mtTo end dependence on food imports and aid, India decided to take a two-pronged approach: use of better inputs such as HYV seeds, chemical fertilizers, agricultural machinery, education programmes etc. to boost production, combined with incentives to farmers in the form of MSPs, better credit etc.; for the former, HYV seeds were adopted from Mexico, and for the latter, APC and FCI were set up in 1965Initially, the focus was on areas which had assured irrigation and other natural and institutional advantages, drawing from geography and colonial investment policiesFCI was mandated with 3 objectives: providing price support to farmers, procure and supply grains to PDS for distributing subsidized staples to economically vulnerable section, and maintain strategic buffer stocksThe HYV seeds were first distributed to well-irrigated states such as Punjab, Haryana, and Western UP, and were supported by input subsidies and public investments in fertilizers, power, irrigation, and credit (institutional credit doubled between 1968 and 1973)Similarly, output subsidies were provided in the form of MSPsThe results were miraculous:Between just 1967 and 1970, food production rose by 35%India was food self-sufficient by 1971-72, with imports falling nearly to zeroBy the 1980s, India was regularly maintaining huge buffer stocks, using food exports to pay back earlier loans, and issuing loans to food-deficit countriesImpact (increased food availability, decline in relative prices of food, employment generation in both agriculture and other areas, rise in wages etc.):Through increase in agricultural yield, rather than increase in acreage, India was able to maintain, once again, the high rates of agricultural growth achieved since independenceRapid increase in marketable surplus of foodgrains (use of labour per unit of output declined; initial yield improvements occurred in areas that were already relatively well off)Decline in rural poverty- it declined by 10% between 1963 and 1973Small farmers, as a class, commanded more productive assets and inputs per unit area of land that larger farmers. Thus, the Green revolution was not only scale neutral, but also evolved an inverse relationship between scale and productivityLed to increased rural incomesApart from growth in agricultural employment, the revolution generated non-agricultural rural and semi-urban employment, in food processing, warehousing, marketing, transport, repairs of agricultural equipment etc.The Second Phase: 1973-80 (government policies still focus on input and output subsidies, and public investments):After a great run, two consecutive drought years followed in 1972-73, and India slipped back into depending on food aid from the USAAfter the oil shock in 1973, fertilizer prices rose. To prevent a fall in use of fertilizers, the government increased fertilizer subsidies, and also provided huge subsidies for power usage in agricultureThere was also a substantial increase in groundwater irrigated area, aided both by public and private investmentHYV seeds for rice were also used now, in addition to wheat; this, combined with above mentioned subsidies, led to a rise in food grain production from 1972-73 to 1979-80As a result, rural poverty declined by about 6% between 1972-73 and 1979-80The Third Phase: 1981-90:In this phase, India further consolidated its position as a food independent nation, and when a really bad drought hit in 1987, we were able to meet our food needs without any loss of livesAs mentioned earlier, during the first phase of the Green revolution, gains were mostly seen in Punjab, Haryana, Western UP, and parts of AP and Tamil Nadu. However, beginning in 1980s, many poor states such as Assam, Bihar, Odisha, MP, and West Bengal showed significant growth, thereby reducing some of the regional inequalityHVY technology spread eastwards, to Bengal and Bihar, which started being rice-surplusHowever, in the rest of the country, Green Revolution ran out of steam, given that it had now been a while since the introduction of HYVs; as a result, to sustain growth in food grain production, input subsidies were steadily increased Post-Reform Phase: 1991-present (there wasn’t a concrete reform plan for agriculture as such, but it was thought reduction of protectionism to industry would provide price incentives and increase investment and output in the sector):(Post-reform phase can itself be divided into three distinct phases, based on rates of growth of agricultural GDP)Since 1965, Indian agriculture operated under a strictly regulated policy regime; internally, there were production controls, pricing controls, and restrictions on private trading. Externally, there were various barriers to export and imports of agricultural goodsAlso, the focus generally was on protecting industry; this created adverse ToT for agriculture as compared to industry (industrial goods in short supply => rising industrial prices), and made agriculture less profitableAlso, rupee was overvalued, thus creating an anti-export environment for agriculture1991- 1996: Increase in agricultural GDP growth rate (≈ 3.7% avg.), but minimal decline in rural povertyThe reforms in 1991 focused on liberalization of the economy; this meant that industrial goods faced more competition, and hence industrial prices reduced. Also, the boom in economic growth created higher food demand, thus increasing prices of food grains. Hence, ToT for agriculture increasedHowever, this growth in agricultural GDP did not lead to a significant reduction in rural poverty: rural poverty actually increased to 43% in 1991, from a pre-reform level of 35-39%, and again declined to about 37% in mid-1990s. Reasons: The growth was mostly in the off-farm sectorMuch of the growth came from the services sector, which is relatively skills-intensive, and hence couldn’t accommodate a primarily agricultural workforceIMF conditions led to a general fiscal contraction, and thus the state intervention was scaled back all around, including in agricultureThis notwithstanding, there was some increase in private investment in agriculture due to increasing ToT, and this led to the agricultural GDP growth at about 4% per annum between 1991-96, as against 3% in the 1980sExports rose (doubled between 1991 and 1996) because of considerable reduction in import duties and devaluation of the rupee; thereafter, declined 1996- 2005: SlowdownSlowdown in agricultural growth to about 2% p.a., and this slowdown happened across the board (in all agricultural sub-sectors) and across all regionsExports declined after having significantly shot up post 1991, largely because of East Asian Crisis and sharp reductions in global commodity prices2005- present: growth revivalFrom 2005 onwards, the rate of growth has hovered around 4% p.a. (the 12th plan period showed an average growth rate of 4% p.a., which was the highest ever for any plan period), as compared to the average of around 2.5% p.a. growth between 1992 and 2002. Also, there has been no year since 2005 when agricultural growth has been negative; the variability in growth rate has also been minimal.A few characteristics of the growth revival:Geography: Most of this growth came from areas that have traditionally been characterized by low-productivity and low-irrigation, such as Jharkhand, Chhattisgarh, Rajasthan, Maharashtra etc. Growth revival was weak in areas with high land productivity and high levels of irrigation, such as Punjab, Haryana, Western UP, West Bengal etc.The clear lesson here is that without new technology, growth is difficult to accelerate in areas with high productivityGrowth since 2005 has been broad based, that is, the increase in output hasn’t been confined to a few segments or commodity groups; crops, fruits, livestock, fisheries; everything has shown an upward trend.There are some notable exceptions to this trend; particularly, oilseeds didn’t show much growth, and India’s dependence on oilseeds imports has been increasing, accounting for more than 50% of domestic use Growth has been driven by increase in productivity, rather than in area under cultivation, or by change in area allocation among cropsExports: Apart from achieving self-sufficiency in food, India has also emerged as a large exporter of agricultural goods; growth in exports has been much larger than growth in imports Reasons for growth revival: Better prices: ToT improved, because of increase in MSP, in procurement, in domestic demand, and increases in international prices of agricultural commoditiesHigher use of inputs: Increase in use of quality seeds, fertilizers etc.Increased credit flow: Doubling of credit flow to agriculture within a period of 3 years between 2005 and 2007 (MOST IMPORTANT); also, by 2011-12, institutional credit supplied to agriculture turned out to be 33% higher than the value of inputs used in agriculture (a.c.t. 2004); this means that the proportion of credit requirement of agriculture sector met by institutional sources has been increasing substantiallyIncrease in irrigation, and technology for drought proofing: % of irrigated arable land increased from 20% in 1981 to 35% today (mostly using groundwater); Capital formation: Gross capital formation in agriculture increased to about 20% in 2010, as compared to an average of around 7% of agri-GDP in 1994; Investments in on-farm and watershed development projectsBroad based growth: Greater diversification in crops grown, fertilizers used, technologies adopted etc.Other initiatives: Increased budgetary support to agriculture related departments (increased from about 12% of all development expenditure in 2003 to 15% in 2008)Operationalization of a National Horticulture Mission, that extended its programme beyond fruits and vegetablesAgricultural extension system (application of scientific research and new knowledge to agri practices through farmer education) begun to be reformed, leading to extended information reachDue to the above government initiatives, there was also a marked improvement in private investment; although increase in public investment was moderate, it aided significant increase in private investment (which increased from its long term 10% level to about 14% in 2008, and stayed there)As the 12th plan document states, high growth in agriculture since 2005 is a consequence of much greater flexibility being given to the states, and ensuring focus on filling yield gaps using existing technology rather than pushing states to prefer new technologies where there hasn’t been much success so farThe upshot of these measures has been a quantum leap in productivity for nearly all crops.Capital Formation in AgricultureCapital formation in agriculture means investments in agriculture, both by the government as well as the private sector (which includes agricultural households). Examples of public sector capital formation would be investments in major and medium irrigation, power, roads, markets etc., whereas private capital formation would include minor irrigation, agricultural implements, machinery, tools, transportation etc. Among the four major heads of capital items (land, animal capital, farm machinery, irrigation capital), the share of land is still close to 95%. As a country develops, evidence shows that the ratio of land should decrease, as should the ratio of animal capital, and that of irrigation and machinery should rise. There is an intense debate in the country that says that capital formation in agriculture has either been stagnating or falling since the 1980s, and it does not augur well for the country’s agricultural growth prospects. People also point out that public sector investments induce (‘crowd-in’) private sector investments in agriculture: non-land capital stock (animal capital, farm machinery, irrigation capital etc.) grew only by 0.72% between 1994 and 2007.We need to note that public sector capital formation in agriculture is of a qualitatively different nature than private capital formation. Public sector CF has long gestation periods, and thus the effects of this year’s public CF will only be seen after a considerable time lag of many years (up to a decade in large dams etc.). Thus, even though public GCF has a strong inducement effect on private GCF, the effect is seen with a considerable time lag. In any case, the observed declining trend in public GCF is due to rising subsidies, growing opposition to big dams (environmental concerns), diversion of resources to other sectors of the economy etc. Since the 1980s, while public GCF has been falling, private GCF has been rising, but hasn’t been enough to cover the shortfall in public GCF. This has adverse consequence for overall agricultural productivity.Policy suggestions:Evidence shows that long-term public investment in capital projects will give rise to more than double the rate of return from subsidies. Gradual withdrawal of state subsidies for irrigation, water, electricity, fertilizers, pesticides etc. would provide a large pool of resources for public investmentsThere are wide regional disparities in agricultural development; investments in backward states will have greater productivity enhancement effectTo stimulate private GCF, alongside public GCF, there is an urgent need to prioritize institutional credit, favorable terms of trade, flow of technology, farmer education, and appropriately targeted subsidies, as these have a strong positive effect on household-level investments Shifting patterns of food demandThere is currently a significant imbalance between emerging food consumption and production patterns in India Producers are focusing on foodgrains, which leads to buildup of stocks, while consumer are moving towards edible oils and pulses, leading to imports. Average per capita consumption of foodgrains has shown negative growth => consumers moving towards high-value commodities) MSP policy should be rationalized in light of this (however, keep in mind that cereals account for a major fraction of daily calorific consumption, and hence should always remain a focus area)Future growth in agriculture will come from high-value segment: There has been significant shift towards producing high-value commodities such as fruits and vegetables, livestock, and marine products. Share of such high-value commodities in total value of agriculture stands at about 47%Given modernization and lifestyle changes, consumption of processed and semi-processed food is also risingFood processing sector in India is at a very young stage (only about 8% of the produce is processed, as against about 80% in developed countries)Secondary agriculture sector (encompassing all activities that add value to primary agricultural commodities) has immense untapped potential; aside from food processing, the demand for agro-bio resources to supplement depleting natural fuels is also risingDue to this shift in preferences in the post-reform period, there has been a discernible shift in the allocation of resources in agriculture away from cereals, and towards dairy farming, poultry, edible oils, meat, fish, fruits etc.Most of these enterprises are labour intensive, and suited to small holders, thus lead to a rise in wage employmentEnvironment friendly, as they use less water and fertilizers There has also been diversification in production in favor of horticultural crops, which is a direct consequence of the establishment of the National Horticultural Mission. Acreage under fruits and vegetables has been increasing, and average rate of growth in total production of horticultural products has shot up to 6% per annum; India has become the largest producers of horticultural products in the world(Get estimates of shares of different kinds of food in total production- eg, fruits and vegetables account for about 28% of total produce, and about 6% of total cropped area; foodgrains occupy 60% area, but account for only 43% of total value of output)This shows that for per unit of land, value of output from fruits and vegetables is about 5 times that of the food grainsReforms: the 3 I’s- Incentives, Institutions, and InvestmentsAs mentioned before, while the growth in agriculture (around 3.6%) since 2005 remains impressive as compared to before, in absolution, the agricultural growth rate needs to be much higher to ensure inclusive growth. Some of the factors holding agriculture back are:Lack of a coherent national agricultural policy until recentlyRelatively higher focus on industry since independenceTrade restrictions and protectionism: given that there were considerable restrictions on movement of agricultural good in and out of the country, exports could not be used as a means to spur domestic production (also, overvalued rupee). While these do not hold today, the excessive focus on price subsidies needs to be rectifiedThere are basically eight areas which need focused reforms in the short and medium terms: price policy, subsidies and investments, land issues, irrigation and water management, research and extension, credit, domestic market reforms, and export sector reformsPrice Policy: Main price intervention from the government comes in the form of MSPs and CIPsInitially, after the MSP was introduced in late 1960s, the focus was always on maintaining a balance between the interests of consumers and producers; however, the government realized the importance of public investments in non-price interventions as well, and the regime was of low cost of production, and low MSPs (low input and low output costs)In 1990s, the trend began to move in the direction of higher MSPs, to the relative exclusion of non-price interventions (high input and high output costs); consequently, public investments in irrigation, research and extension, and other infrastructure went downDue to this excessive reliance on price policy, yields kept on going down, and production costs kept going upEven currently, MSP is linked to cost of production, thus, there isn’t adequate incentive for the farmers to switch to cost saving technologies. Use of labor saving farm implements needs to be promoted. Similarly, current price policy favors cereals, this distorting productionAnother reason for high and increasing MSPs is politically strong farm lobbies- in years of bad harvest, the government has to ensure that MSPs are increased to tide the farmers over, otherwise imports from the open market would rush into the country; similarly, when global prices are high, the government needs to ensure high MSPs to avoid food rushing out of the country. Once MSPs are raised (looks like it happens no matter whether international prices are higher or lower), rolling them back comes at a huge political costMSP was designed to save farmers from the vagaries of wide fluctuations in market prices, and was intended to cover the production costs for farmers. However, it has now become a de-facto procurement price. This is a problem, as the MSP instrument was meant to be used in freak years, while procurement is an annual activity (for replenishing PDS stocks). The two need to be de-linked, and the procurement price should be allowed to fluctuate as per market conditionsMSP should be used only as a price-stabilization mechanism, and not as an income guarantee mechanism to the farmersCounter view (also see ‘Food Inflation’ section): MSP are calculated on the basis of demand and supply forces of the crop, it’s production, domestic and international prices, inter-crop price parity, ToT between agri and non-agri products, and likely impact on consumers. Thus, given that cost of production has escalated sharply for most crops during the last three years, the rise in MSPs isn’t surprising. As an example, it can be seen that cost of production for paddy in 2012 was about 53% higher than in 2008, while the MSPs have only risen by 20%. Critics of MSPs often fail to highlight the production impact of a delay in such hikesThe problem with the above approach of low MSPs are two-fold: first, low output prices (low MSPs) work as "brake" on the production incentives while input subsidies act as "accelerator", and one does not know fully whether the production incentive system is moving forward, or backward or stationary; and secondly, extremely low prices lead to misuse of scarce resources, particularly when targeting is poor. So the efficiency losses mount. The benefit, however, especially in case of output pricing, is that they can be targeted towards selected commodities. For example, if one wants to promote production of wheat and rice, higher MSPs for those crops can be designed and procurement operations widenedSubsides v/s Investments: Capital-output ratio in agriculture is around 4:1Public investment in agriculture declined steadily from the 6th to the 10th plan, and what expenditure did occur was on subsidies, not on investmentsFocus areas should be investment in creating infrastructure in terms of irrigation, roads, markets, storage facilities, rural electrification, and R&D, instead of price subsidiesReturns on investments are about 3 times higher as compared to subsidiesReturns from public investments to agriculture are highest from R&D, followed by rural roads, education, then irrigation, and lowest from fertilizer subsidiesAlso, public investments form only 25% of all investments in agriculture (75% private); thus, need to further incentivize private investments in agricultureLand Management: Prevailing MSPs and input subsidies have encouraged inappropriate use of fertilizers and water, and have hindered production of crops not covered under MSP Tenancy reforms are urgently needed, so that land leasing can become easier85% of all farmers in India are small and marginal farmer (with average size only about 2 hectares); they should be provided more access to institutional credit at affordable rates, training and capacity building etc.(It is interesting to note that the international experience shows that small farm size is not a constraint to agricultural growth, if structural hindrances are taken care of)Irrigation and Water Management: Major concerns: decline in real investment, thin spread of investment, low recovery of costs, decline in water table, and non-involvement of usersReforms needed: increasing and prioritizing public investment, augmenting groundwater resources, rational pricing of water and electricity, involvement of farm users in management of irrigation systems, watershed development and conservationAgricultural Market Reforms: In face of the difficulty of ensuring constantly rising prices, one way to maintain price or profitability incentive to farmers is to increase their share in final prices paid by consumers and other end usersIn many states, agricultural markets are underdeveloped, lack basic infrastructure, charge very high taxes and commissions, and farmers have to sell even rice and wheat at much below MSPBecause of market imperfections, there is a strong asymmetry in transmission of prices between retail, wholesale, and farm levelFor diversification of production, good infrastructure in the form of assured market, better road connectivity, cold storage, post-harvest technology etc. are required to attract private playersGiven the huge investments required private sector participation needs to be incentivizedIn 2003, an amendment was made to the APMC Model Act, which allowed direct transaction between the producer and the retailer in several states, through various institutional mechanisms such as cooperatives, producers’ associations, and contract farming; however, it’s implementation has been shoddy There is a need to implement the APMC model act, Warehousing act etc. and cut down on taxes and commissions on fresh produce to give a boost to high value agricultureTechnology Research and Extension: Given that area under production can hardly increase, we need to find ways to increase yield per unit areaPublic sector investment for agro R&D and education in India is only about 0.6% of the agri-GDP; this needs to be raised to about 1%, which is the international standard being followed by many developing countriesEstimates say that the direct contribution of quality seeds in total production is about 15-20% depending upon the crop, and it can be further used to about 45% if other inputs are used efficientlyCredit: In 2012-13, about 40% of credit requirements of small farmers come from non-institutional sources, sometimes at exorbitant rates as high as 30% p.a. (formal institutions charge around 6-15%); need to reduce the role of informal sector creditLand and credit markets are interlinked; improving the marketability of land will improve access of farmers to institutional credit There have been some improvements in flow of farm credit in recent past, but there hasn’t been much improvement in the share of small and marginal farmers; credit-deposit (CD) ratio of rural and semi-urban branches has been declining; indirect credit has been increasing; and there are significant regional inequalities in agricultureWe need to recognize that given the competing demands on public investment in agriculture, credit expansion can’t be sustained solely by the public sectorIn 2015, the RBI has re-defined norms for priority sector lending by banks; now, there is no distinction between direct and indirect agricultural lending, and the banks can meet their entire 18% obligation buy lending to companies that contribute to agriculture, build agri-related infrastructure such as storage etc.; small and marginal farmers have to be given 8%Export sector: Share of exports in total domestic production increased from about 5.6% in 2003 to 20% in 2012India is today a net exporter of foodgrains (In 2012, $40 billion of exports, $20 billion of imports, mostly in oilseeds and pulses)India is the largest exporter of rice, and second largest of meat and cotton Exports as a % of agri-GDP stand at around 13%, compared to only 5% in 1991The Balassa index, that measures export competitiveness, is 1.6 for agriculture, and only 1 for manufacturing products; thus, globally, our agriculture is more competitive than our manufacturing sectorIn light of this strong performance, a rational tweaking of the trade policies would is required. India should have an open-trade policy, and tweak this with mild duties (10-15%) whenever needed; this would be beneficial both for farmers and consumersClimate change: Rising soil degradation, depleting groundwater tablesNeed to promote collective action in climate change adaptation and mitigationFood inflation in the recent pastIn 2012 and 2013, food inflation had consistently been in double digits, as measured by official WPI figures. This mean that retail inflation, which is what matters to the consumers, would’ve been even worse (since food articles account for 24% of WPI basket, and about 50% of CPI basket). Given that food expenditure constitutes a large percentage of the budget of many Indian households (about 45%), high food inflation is detrimental. Food can be divided into two broad groups: primary food, and manufactured food (dairy, sugar, edible oil etc.). Primary foods account for about 60% of the total weight in inflation, and in recent years, the rate of inflation has been significantly higher for primary articles as compared to manufactured articles (which contributed only about 7% to price rise over the last decade). Thus, effective supply and management of perishable and seasonal primary food articles is of significant importance in controlling overall food inflation.Within the primary articles, more than 50% of the food inflation has emanated from the high value segment such as fruits, dairy, poultry etc., hinting that the demand pressure on these high value commodities is increasing at a rate that is higher than their supply. Also, food inflation has traditionally been much more volatile than non-food inflation, and has on average remained about 65% higher than non-food inflation since 2009. Thus, real prices of food (relative to non-food items) have been increasing in the recent past. Factor affecting food inflationCost-push factors: Wage rate of labour, input prices, and other managerial costs have been increasing- rural wage rate has been increasing at about 10% per annum since 2009 because of ‘pull’ factors such as MGNREGA, construction sector etc.; at the same time, MSPs are also high. Domestic Production: Annual output growth of food commodities increased by about 4% during 2009-2012, but this didn’t calm inflation down. Thus, either the major increments did not enter the domestic supply market, or domestic demand increased at a higher rate than this. While this increase does not seem to have had a cooling effect on prices, the impact of drought years on food prices has been pronounced; thus, investments in irrigation and contingency planning could help control inflation during bad yearsGlobal Prices: Since 2003, global prices have increased significantly faster than domestic prices. Exports have thus been proving more lucrative than domestic market sales, and as a result, domestic prices have been increasing despite substantial reduction in domestic food production. Given that India’s trade policy is quite restrictive, these higher international prices show up in the domestic prices with a significant lag- for example, when global food prices erupted in 2007, India put a ban on exports of wheat and rice. While initially this meant low domestic prices, very soon MSPs had to be raised, and domestic prices rose. Thus, the spike in domestic prices around 2009 can be partly explained by this lagged effect of rising global prices since 2007 Demand-side factors: Population and per capita income has increased, demand has diversified towards high-value products, the marketing structure is inefficient (leading to wastage), and there’s tendency by some traders to hoard and create artificial shortagesFood management: Except for buffer stocks in rice, wheat, and sugar, there is no arrangement in the country to carry large inventories of other food items. Present restriction do not incentivize private sector participation, and FCI has been demonstrated to be inefficientPolicy option to control food inflation:Timely liquidation of FCI stocks to open marketsContainment of rising farm wages, leading to higher production costs. One way to do this would be to reform MGNREGA in such a way so that job seekers can be used as agricultural laborers, on a cost-sharing basis between the government and the land ownerGlobal prices are moderating; India should reduce high import duties Fiscal deficit must be contained to rational levels; subsidies such as fuel, food, and fertilizers need to be rationalizedReforming APMC, EAC, and general market conditionsRole of MSPs in food inflationThere has been a tendency to blame the recent hikes in MSPs for increasing food inflation. However, this might not be sound reasoning, because: In many states in the country, prices often go below MSPsIn an open-economy environment, simple rules of pricing require that MSPs should be close to export parity prices in commodities that we’re net exporters in, and closer to import prices in commodities that we’re importing; if we compare our MSPs with other South and South-East Asian countries, we fill find that we lie in the relatively lower band of prices (India’s MSP for wheat: $226/ tonne; Pakistan: $283, China: $388; similar for rice)MSPs should move in line with the increases in production costNational Food Security ActThe concept of food security encompasses not only making enough quantities of food available in the market through enhanced production or imports, but also making it economically affordable to the poor. The present schemes of food security policies are collated under the NFSA. The Act makes certain amount of food as a legal entitlement for 67% of the Indian population (75% in rural areas, and 50% urban). It encompasses the TPDS, entitlement of meals to pregnant women and lactating mothers and to children up to 14 years of age under WBNP (Wheat based nutritional programme) of ICDS, and the MDM scheme. It also provides cash transfers to pregnant women and lactating mothers under IGMSY.While the act is framed by the central government, the implementation is to be done by the state governments. The implementation of the act requires procurement of about 60 million tonnes of grains (2013), and is estimated to cost about 1.5% of the GDP, which is 14% of all tax revenue collected by the central government in 2013.TPDS: Accounts for about 90% of grains to be procured under NFSAProvides subsidized foodgrains to eligible households (5 kg of grain per person per month)Coverage is expected to be 67%; the official poverty estimates (Tendulkar method) show that the % below poverty line is 22%, thus the coverage might be excessive, and the identification of beneficiaries is delinked with povertyCIPs are frozen at Rs 3, 2, and 1/ kg for rice/ wheat/ coarse cerealsIn case of non-provision, the central or state governments are liable for a claim by any person entitled under the actBeneficiaries to be identified on the basis of 2011 SECCAs long as the state fulfill basic tenets of the NFSA, they are free to go beyond the provisions, and provide extra entitlements, cover a higher % of the population etc. if they feel there exists a need for thisNFSA suggests reforms in TPDS, such as doorstep delivery of foodgrains to TPDS outlets, application of ICT, transparency and accountability by means of disclosure of TPDS records, social audits, vigilance committees etc. NFSA’s operational challenges:Biggest challenge is to ensure adequate supply of grains every year; Indian agriculture is still rain-fed, and there are droughts almost every 5 years; production and procurement can fluctuate wildlyTargeting: Based on the number of ration cards issued under TPDS, there are already about 120 crore people benefiting from TPDS; this clearly shows that a huge % of the cards are fake and need to be weeded outSuch large scale procurement every year will strangulate private trade, thus perpetuating existing market inefficienciesSupport Reversal: Average cereal consumption in India is about 11 kg/ person/ month. NFSA will supply about half of it at subsidized rates. However, given the high procurement levels by the government, whatever grain is available on the open market will be considerably more expensive; thus, people would end up buying the other half at a high price, thereby negating the subsidyGovernment Schemes for AgricultureRashtriya Krishi Vikas YojanaThis is a State Plan Scheme that seeks to provide the States and Territories of India?with the autonomy to draw up plans for increased public investment in Agriculture by incorporating information on local requirements, geographical/climatic conditions, available natural resources/ technology and cropping patterns in their districts so as to significantly increase the productivity of Agriculture and its allied sectorsA State is eligible for funding under the RKVY if it maintains or increases the percentage of its expenditure on Agriculture and its Allied Sectors with respect to the total State Plan ExpenditureFrom the newsPrice Stabilization FundEstablished by the Department of Agriculture and CooperationHas a corpus of Rs. 500 croreWill support market interventions for price control of perishable agri-horticultural commoditiesWill be used to advance interest free loans to state governments and central agencies to support their working capital and other expenses on procurement and distribution interventions for such commodities Both states and center would contribute equally (50:50) to this fundCrop damage in March 2015Untimely rains this March have destroyed over 170 lakh hectares of Rabi crops in 14 states, causing damage of over Rs. 40,000 croresCompensation differs by state; some part is announced by the center, and states provide top-up as they see fitSituation of Agricultural Households in India Survey by NSSO:About 85% of all agricultural landholdings are very small (less than 2 hectares)About 65% of GCA is rain fedGiven the above two points, productivity is pretty low, translating to over half the income of all agricultural households coming from non-farm sourcesOver half of all agri households are heavily indebtedAbout 40% access informal finance at usurious ratesWage employment, and not farming, is the principal income source for over 50% of farmersAverage monthly income is only Rs 6,500Awareness about MSPs and procurement is surprisingly lowOver 95% of both paddy and wheat farmers don’t insure their cropsNumber of farmers has been dropping- is 9.5 crores in 2011, as compared to 11 crore in 1991New Urea Policy: India’s annual urea production (there are about 35 manufacturing units) has stagnated at 22 mt and the country has had to import about 8 mt to meet domestic demandAccording to the new incentive structure for domestic urea units, the Centre would reimburse the fixed cost incurred by the domestic units that produce 100 per cent more than their reassessed capacity along with a part of the variable costHowever, this incentive would have to be less than the import parity price of urea or whichever is lessThe assessment for the energy consumed would be based on a combination of the previous new pricing scheme and average energy consumed in last three years, and incentive will be given to domestic manufacturers with their annual energy consumption to lower the carbon footprintAlongside, transportation of P and K fertilizers will be made freeThe government says the new urea policy will increase annual production by 2 mt and cut the yearly subsidy bill by Rs 4,800 croreAlongside this, the government has also reduced the restrictions on production of neem-coated ureaUsing neem coated urea will not only increase crop yields but also lower input cost to farmersIt will also reduce imports of precious fertilizers as well as reduce ground and soil pollutionPresently India is using only 60 lakh mt neem coated urea which can be increased to full demand of 310 lakh MT in the countryCoated urea is costly by 5% compared to plain prilled urea but it reduces Nitrogen loss by more than 10%, thereby incurring a net savings of Rs. 13.5 per bag for farmersDue to higher nitrogen use efficiency, the use of nitrogen coated urea can also eliminate import of urea resulting in huge foreign exchange savings. Presently, India is importing about 71 lakh MT ureaAdditionally, farmers will also get advantage of better yield, less pest attack due to less use of urea which will also ensure better NPK use ratio and balanced use of fertilizersPREPARE NOTES ON CHALLENGES FACING INDIAN AGRICULTREEnvironmental degradationExcessive use of fertilizers and pesticidesImproper irrigation practices leading to declining water tables, soil erosion etc. ................
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