In simple terms, moving away from plain populism, subsidies and support to agriculture need to be better targeted, catering to the real requirements of the farmers.
A Commission for Agricultural Costs and Prices (CACP) study done by Ashok Vishandass with B Lukka, called Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s, can be the bedrock for policy formulations going ahead.
According to the study, for various crops under minimum support price, labour accounts for 30% of the cost of production, followed by land at 27%, capital cost and other inputs 19% each, and fertiliser just 5%. Clearly, the support measures need to be attuned to this composition. What is the logic of R1 lakh crore worth of fertiliser subsidies every year if its contribution to the cost of production is a mere 5%
To begin with, let us focus on the largest factor, the labour cost, which has witnessed high growth in recent yearswages grew at 6.8% per annum during FY08-12.
It is but natural that to cope with the rising labour cost, farmers have no other choice than to go for increased farm mechanisation. The government needs to chip in here as a higher level of farm mechanisation has several other benefits besides helping the farmers tackle labour costs. It will raise labour productivity, increase profitability, and will make agriculture more competitive. This would also be one of the better ways for reducing rural poverty. The study rightly points out that igniting the whole process may require some capital subsidies in the beginning.
In any case, MSP increases in the last few years have enhanced returns in agriculture in a big way and the government is now in the process of shifting to per acre subsidies for bringing in changes in the cropping pattern, which is still dominated by rice and wheat.
The CACP study estimated the gross value of output per hectare less cost of cultivation, defined as gross returns, during three periods (FY01-FY04, T1), (FY05-FY08, T2) and (FY09-FY11, T3).
Of the 22 crops analysed, 8 crops (wheat, barley, tur, lentil, rapeseed & mustard, sesamum, cotton and sugarcane) posted more than 100% gross returns in T3. It was between 50% and 100% for 10 crops (paddy, maize, bajra, gram, urad, moong, soybean, safflower, nigerseed and jute). And between 40% and 50% in case of 3 crops (groundnut, ragi, jowar). Sunflower was the only crop reaping returns less than 40%.
But what is seen as driving the returns the most Not surprisingly, the analysis shows that it is the technology (irrigation) and fertiliser use. Then, there is an intricate relationship between the irrigation facilities and fertiliser use.
Irrigated tracts of land give higher returns and these are also the areas where fertiliser usage per hectare is significantly higher. What this means is the farmers not having access to irrigation facilities are utilising lesser amount of fertiliser subsidy, and the fear that fertiliser price hike or a reduction in fertiliser subsidy would go against poor farmers is a farcerich farmers are cornering the fertiliser subsidy, not the poor ones to which it is supposedly targeted. So, it is not hard to understand why hiking fertiliser prices is such a sensitive issue. In reality, however, with fertilisers share of the production cost limited to only 5%, the impact of an average price hike of 10% would be less than 0.5%.
Indeed, it would be a good idea for the new government to immediately start diverting portions of fertiliser subsidy for the creation of irrigation infrastructure.
Besides bringing in equity in the government spending on agriculture, it will also contain the real cost of production and make Indias produce globally competitive.
If the new governments first full budget starts this exercise in right earnest, it would be a critical move towards making agricultural profitability sustainable.