1. Food prices rising, farmers getting low returns; here is why Centre must act now

Food prices rising, farmers getting low returns; here is why Centre must act now

To tackle low returns to farmers and rising food prices, strengthen the agri derivative market, introduce composite insurance and integrate agri-markets.

By: | Published: November 17, 2017 4:51 AM
Before peak arrival, farmers are agitated due to the fall in the prices of most of their products, even below the level of minimum support prices (MSP). (Image: Reuters)

By Barendra K Bhoi & CL Dadhich

Kharif harvests have started arriving in the market. Before peak arrival, farmers are agitated due to the fall in the prices of most of their products, even below the level of minimum support prices (MSP). On the other hand, CPI inflation is accelerating, partly due to an increase in food prices. Who is responsible for both producers and consumers being adversely affected at the same time? The food-price conundrum needs deeper understanding of the problem. Certainly, middlemen are responsible for the exploitation of both producers and consumers. There are several layers of middlemen operating in the agricultural value-chain in India. The Agricultural Produce Market Committee (APMC), as an integral part of the agricultural value-chain, procures farm products at a price that is sometimes much below MSP, particularly when there is a bumper harvest. Often. farmers hardly get one-third of the retail price. The urban consumers, however, pay a much higher price for the same product. A large share of retail prices of farm products goes to the middlemen. Competitive forces do not operate in the case of the agricultural value-chain. APMCs exploit both produces and consumers, thanks to collusion of traders. As a part of effective supply management, there is a need for government intervention to break the conundrum. In the medium term, there are five possible ways to resolve the problem: a) widening procurement operations to all crops for which MSP is announced; b) strengthening derivative products to hedge price risks; c) introducing composite crop insurance to cover both crop failure and market failure; d) integrating agricultural markets by revamping agricultural value-chain; and e) increasing farm productivity through investment and smart farming.

Widening procurement
It is not possible for the government to undertake procurement operations in case of all farm products as the logistics are just not available to do so. Procurement operations available for paddy, rice, wheat and, occasionally, pulses and sugarcane, are confined to a few states. Moreover, the public distribution system (PDS) in India is not efficient. As the Union government has a commitment to provide food security to a large section of the population, PDS is maintained by procuring only a few agri-commodities. Food subsidy continues to be large, with underlying implications for fiscal discipline. The fiscal burden may turn out prohibitive if procurement is undertaken in all crops for which MSP is announced.

Strengthening commodity derivatives
Theoretically, one can argue that forward/future trading of farm products provide a market-based solution to hedge price risks. Currently, there is forward trading for a few agricultural commodities. Commodity futures are being introduced. Derivatives are settled in cash and speculators and/or traders dominate the market. Farmers are conspicuous by their absence. Forward trading in India has not been very successful in hedging price risks of farm products for various reasons, such as the lack of deepening and widening of markets leading to speculation, lack of standardisation of products and poor warehousing facilities. As such, forward trading in all farm products may be difficult to introduce. Moreover, Indian farmers are not smart enough to take recourse to forward trading in commodities for the purpose of hedging.

Composite crop insurance
One of the welcome initiatives of the central government in this direction has been to introduce crop insurance under Pradhan Mantri Fasal Bima Yojana (PMFBY) to reduce the farmers’ burden in case of crop failure. Framers bear only small portion of the premium—2% for kharif, 1.5% for rabi and 5% for commercial and horticulture crops. It is yet to be fully implemented throughout the country. Moreover, PMFBY does not cover market risks. It is therefore suggested that distress sale of farm products below MSP may be covered under a composite crop insurance scheme so that farmers need not seek loan waiver when there is a market failure.

Integrating agricultural markets
In case of milk production in India, roughly about two-third of the retail price paid by the urban consumers goes to producers. This has been possible through linking rural supply to the urban demand through milk co-operatives. If white revolution has been successful through integration of markets, can it be replicated for other perishable farm products, like fruits and vegetables? In order to integrate wholesale markets relating to major farm products, the Union government set up the pan-India trading portal called e-NAM (electronic National Agriculture Market). The idea is to allow farmers to sell their produce to consumers directly, bypassing the middlemen. Incidentally, fruits and vegetables have been taken out of APMC control. The e-NAM experiment is yet to become effective. State governments may encourage farmers to form cooperatives, similar to milk cooperatives, to reduce the influence of middlemen. Unless the value-chain of agricultural products is completely revamped and remunerative prices are ensured to farmers through market mechanism and/or insurance coverage, demand for farm loan waivers—by no means a desirable solution—shall be a recurring phenomenon in India.

One of the major problems in Indian agriculture has been low productivity. The ultimate solution of the agrarian distress lies in improving farm productivity. This requires large investment in agriculture by the government as farmers may not be in position to do so given their financial condition. The Union government has an ambitious programme of interlinking rivers in India, which can strengthen irrigation and improve farm productivity in a big way. Rural infrastructure may also undergo a sea-change, under the combined effect of this project and the Gram Sadak Yojana. Smart-farming shall contribute significantly to the improvement in farm productivity. Science and technology, particularly use of digital technology, will play a bigger role in the efficient use of resources, linking of rural supply to urban demand, forecasting of weather, soil testing, crop planning and marketing of farm products.

Bhoi is former principal adviser & head of the Monetary Policy Department, RBI, and Dadhich is honorary secretary, ISAE

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