Fertile ground for more reforms

June 9, 2020 4:05 AM

In addition to the package, we need certain reforms. It is perhaps time to consider moving away from a price-based support structure for the farm sector and towards direct income support for farm hourseholds

The removal of restrictions under the Essential Commodities Act (ECA) is, by far, the most important measure.The removal of restrictions under the Essential Commodities Act (ECA) is, by far, the most important measure.

By CSC Sekhar

The package of measures for agriculture announced by the finance minister, as part of the third tranche of the stimulus package on May 15, is very encouraging. Many policy decisions that are long overdue have been taken. The removal of restrictions under the Essential Commodities Act (ECA) is, by far, the most important measure. This initiative should help attract private investment into agriculture, and help farmers of cereals, pulses, oilseeds, onion and potato, who were severely hampered so far.

The enactment of a central law to allow interstate trade is also positive, but states’ concerns need to be addressed for it to succeed. The third-most important measure is the setting up of a Rs 1 lakh crore fund for improvement of farm-gate infrastructure for post-harvest operations. Farmers of perishable crops should benefit immensely from this. Inclusion of all fruits and vegetables in the Operation Greens scheme should also help this segment. Extension of Rs 2 lakh crore credit to farmers of PM-KISAN, fishermen and animal husbandry; provision of Rs 30,000 crore of additional refinancing facility by NABARD; several measures for animal husbandry, fisheries, etc, are all positive steps for long-term growth of agriculture, if implemented well.

However, despite these long-term measures, some of the more immediate concerns have been overlooked in the package. The most serious problem, at present, is the severe hit to incomes of farmers and rural labourers. To this end, direct payments to farmers and MGNREGA active job-card holders would have been useful. Although farmers are provided such payments under PM-KISAN, the quantum of assistance is inadequate to cover the loss of income in the current rabi season and for meeting the expenses for the upcoming kharif season.

This is particularly true for farmers of perishable crops such as fruits and vegetables. Although the credit facility to PM-KISAN farmers may provide some relief, it will only cover the expenses for the next season and there will be some time lag before the guidelines are evolved. Direct transfers also have the additional advantage of kick-starting the demand in rural areas immediately.

The other important issue is of providing employment to the migrants returning to rural areas. With the upcoming kharif season, this labour force could be gainfully employed in agricultural operations. However, MGNREGA guidelines do not permit the labour to be employed on private lands. Although the allocation for the MGNREGA has been increased by Rs 40,000 crore in the sixth tranche (on May 17) of the stimulus package, the guidelines have not been revised. This may affect the employment under the MGNREGA adversely and needs to be corrected immediately.

Most of the long-term measures announced in the stimulus package relate to the product and credit markets. Complementary reforms in the factor markets are also needed to realise the full potential of the steps taken. These complementary reforms are not confined to agriculture alone, but cover the overall rural development strategy.
The first important reform is that of the land lease market. Tenancy reforms need to be implemented immediately to enable easier land leasing. States must be actively encouraged to adopt the Model Agricultural Land Leasing Act 2016. This will allow small and marginal farmers to augment their landholdings through leasing, thereby reaping the advantages of scale.

The second reform relates to the public support to agriculture. For a long time, MSP cum procurement has been the main plank of our public support programmes. In the current as well as earlier food crises in 1975 and 2008, India’s buffer stock system served the country exceedingly well. Considering the usefulness of this system and the volatility of international grain markets (rice), the MSP-procurement system may need to be continued for staple foodgrains and extended to pulses.

However, a different approach is needed for non-staple commodities, for which MSPs are announced with little or no procurement. Announcement of MSPs, without backing these up with procurement, is not an effective strategy. Sugar, pulses and cotton have some mechanisms in place, but have proven largely inadequate. The deficiency payments system devised for oilseeds and pulses under PM-AASHA in 2018 has also not yielded the desired results. Thus, a gradual movement away from a price-based support system to a direct income support system (to farmers) is desirable. Although PM-KISAN is currently attempting this, the scheme needs some improvements to be really effective.

At present, a uniform assistance of Rs 6,000 per annum is made to a farm family, which is not adequate. The quantum of assistance should be linked to the cost of cultivation in the region. Also, the payment should be delinked from marginal production (production in the current year), and only be based on average production of last three years. This will ensure a basic income to the farmer that is commensurate with costs but does not distort the market price. Direct income transfer is a better policy instrument to ensure a minimum income to farmers, compared to indirect instruments such as output price, which are mainly useful in resource allocation. In case of fiscal constraints, covering even half or two-thirds of the cost could be considered.

The plight of lakhs of rural migrants stranded in major cities across India during the lockdown period raises the question as to why so many rural labourers are in the urban areas in the first place. This underlines the need for reassessing our rural development strategy. Migration is not a very effective solution to alleviate poverty. The World Development Report 2008 shows that 81% of the worldwide reduction in rural poverty can be attributed to improved conditions in rural areas, and only 19% to migration. A holistic approach integrating agricultural growth, farm and non-farm employment is urgently needed to stem this large-scale migration.

A long-term and integrated vision for agriculture and rural development is conspicuous by its absence in India. This needs to change. At present, farm support, subsidies, rural employment programmes and the annual Budget pronouncements are usually ad hoc, based on immediate felt-needs. However, it is desirable that all such policies evolve out of a long-term plan for agriculture and rural development prepared for each geographic region (preferably a district). Medium/short-term action plans can then be drawn from this long-term plan.

There should be functional and financial convergence across the ministries of agriculture and rural development. The wage employment programmes (MGNREGA) and livelihoods programmes (NRLM) of the rural development ministry should be dovetailed with agriculture and related activities of the region, like irrigation, food processing, transportation, storage, etc. Rural infrastructure such as rural roads, market yards, procurement centres, milk collection centres and dal mills can also be built by synergising the functions and resources of these ministries under their various flagship programmes.

In conclusion, the measures announced are in the right direction for the long-term growth of the agricultural sector, but can be more effective if supplemented with direct transfers in the short-term and with a few structural reforms in the long-term.


The author is professor of Economics, Institute of Economic Growth, University of Delhi; csekhar@iegindia.org

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