Factoring In: MSP no longer the mainstay of Indian agriculture

Fruit & vegetables, livestock, and fishing & aquaculture, among others, hold considerable promise; policy must factor this in

Factoring In: MSP no longer the mainstay of Indian agriculture
India also needs an export-oriented strategy.

By TV Mohandas Pai & Nisha Holla

The gross value output (GVO) of the agriculture sector nearly doubled from Rs 19 trillion in FY12 to Rs 37.2 trillion in FY19, at a compound CAGR of 10%. There is, however, wide variation in the growth of the various sub-sectors. While crops grew from Rs 8.1 trillion to Rs 12.5 trillion in the same period, other sub-sectors grew faster. The share of crops in the composition of the agriculture sector is steadily decreasing. In FY12, crops GVO was Rs 8.2 lakh crore, amounting to 43% of the agri-sector GVO; this had fallen to 33.8% by FY19. In fact, crops had the lowest CAGR among the major groups (6.3%), compared to fruits and vegetables (11.2%), condiments & spices (13%), livestock (13%), and fishing & aquaculture (17.6%). 

If these differential growth rates continue, the share of crops is estimated to decrease to 27.5% of the agriculture sector by FY 25. The livestock sub-sector in FY 19 is almost as large as crops, at Rs 11.5 trillion, while growing twice as fast at 13%. At this rate, livestock GVO may grow to Rs 23.9 trillion in FY 25—larger than crops. The fruits and vegetables segment is fairly large ( Rs 6 trillion, FY 19) and is growing rapidly at 11% CAGR. It is estimated to cross Rs 11 trillion GVO in FY25. Fishing & aquaculture is growing most rapidly at 17.6% and is estimated to cross Rs 6 trillion by FY 25. These trends signify a shift in Indian food habits, and that a larger share of farmer income is coming from rapidly growing non-crop sub-sectors that do not have a minimum support price (MSP). Farmers in these segments, reportedly, only get 30-35% of the final price. The scope for policy measures to increase farmer incomes by facilitating market linkages here is tremendous.

Looking at the GVO of various crop segments in India from FY 12-19, we see that cereals, growing at 8.2%, are the largest segment, with Rs 5.86 trillion GVO in FY 19 and consist of nearly half of the entire crop group (with a GVO of Rs 12.6 trillion). Most of these crop segments, cereals included, have MSP—farmers reportedly get 80-85% of the total price as MSP is marked close to the final market price. Clearly, crops are gradually becoming a smaller segment of the agriculture sector. In India, while the total agriculture sector GVO grew at a 7-year CAGR of 10%, crops grew by 6.3% and non-crop sectors grew at a combined CAGR of 12.4%—double that of crops. This dramatic change requires a comprehensive policy response that allows the agriculture sector to grow without being tethered to just crops. Thus, suitable policy responses will include more investment and focus on horticulture and livestock, along with improving market linkages to increase the farmers’ share of ultimate price. Better linkages between the farmers and other agricultural producers with the markets can be facilitated through agri-tech startups to enable the rapid increase in incomes and value-addition—their use has resulted in 20%-25% more income for farmers, instant payment via COD and UPI, low wastage, and other significant benefits. Agriculture sectors in various states must be studied to observe differences in composition. A state-specific strategy must be executed to improve farmers’ livelihoods. For example, the number of crop farmers in Punjab is quite high, but in Karnataka, the share of crops in the agriculture GVO is 34%. 

India also needs an export-oriented strategy. In 2021, the world economy was $94.8 trillion whereas India’s was $2.95 trillion. By orienting our agriculture sector towards exports, farmers could capture the world market—leading to a significant 32x expansion opportunity, compared to the domestic economy. India’s agricultural exports presently are around $50 billion. India must create a brand for fruits, vegetables and other products in global markets and the necessary supply chains. This requires back-end investment to train farmers in aggregation, grading, sorting, packaging, creating the required trust mark, and linking products to the export market. These linkages include certification agencies to ensure organic produce which obtains a higher price globally is accepted and trusted by overseas consumer markets. India needs a comprehensive agriculture export strategy accounting for all these factors. 

The overwhelming focus on MSP today, especially for rice and wheat, which was less than 16% of agriculture GVO in FY 19 and possibly lesser today, takes away from farmers the ability to grab the multiple opportunities available for rapid growth. As seen above, other agricultural segments are growing much faster. By mounting an appropriate policy response, India can pave the way for unprecedented growth in the sector, enabling our farming citizens to earn incomes closer to the national average and pursue their own differentiated strategies to maximise value.

The authors are respectively, chairman, Aarin Capital, and technology fellow, C-CAMP

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First published on: 23-03-2022 at 03:15:00 am