PM Kisan is fine, but raise investment to make farming sustainable

Just ahead of the 2019 general elections dates announcement, the prime minister launched the centrally sponsored ‘Pradhan Mantri Kisan Samman Nidhi’ (PM-Kisan) scheme of Rs 75,000 crore for small and marginal farm families.

PM-Kisan is fine, but raise agri-investment to make farming sustainable
PM-Kisan is fine, but raise agri-investment to make farming sustainable

By Ashok Gulati & Ritika Juneja

Just ahead of the 2019 general elections dates announcement, the prime minister launched the centrally sponsored ‘Pradhan Mantri Kisan Samman Nidhi’ (PM-Kisan) scheme of Rs 75,000 crore for small and marginal farm families. On February 24, 2019, from Gorakhpur in Uttar Pradesh, he transferred the first installment of Rs 2,000 each (out of `6,000 per annum) into the bank accounts of 1.01 crore farm families, amounting to `2,021 crore. By March 9, 2.6 crore farm families had, in totality, been given `5,215 crore. The target is to cover about 12.6 crore beneficiary farm families by the end of March 2019.

Although the amount involved per family is too little, and coming too late, direct income support (DIS) marks a beginning of a new policy direction. It can reach about 86% of farm families compared to loan waivers that can benefit only a maximum of 30% of peasantry and a higher MSP policy which can benefit a maximum of only 10-15% of peasantry. However, at this stage, one does not know whether PM-Kisan is just for one year or is likely to continue for the next few years. If it is just for one year, it is more a bait for votes than a genuine step towards improving incentives for farmers in a more predictable and structured manner.

Similar moves towards DIS for farmers have been made by a number of states, especially Telangana (Rythu Bandhu scheme), Odisha (KALIA scheme), West Bengal (Krishak Bandhu), and Jharkhand (Krishak Aashirwad Yojana). Each one has its pros and cons, and can be improvised in due course. But we welcome all of these, especially if they continue for at least 3 years towards alleviating farm distress.

In any case, it may be worth pointing out that such a policy of DIS is not a substitute, but a complement, to agri-marketing reforms on the one hand and raising investments in agriculture on the other to make Indian agriculture more productive, competitive, inclusive, and sustainable.

One of the key variables that influences the performance of any sector in the medium- to long-term is investments and capital formation in that sector.

The attached graphic suggests that gross capital formation (public plus private) in agriculture, forestry and fishing (GCFA) as a percentage of agri-GDP (in current prices) dropped to its lowest level of 6.6% in 1994-95 but gradually increased thereafter, touching a peak of 18.2% in 2011-12, and then started declining and stood at 13.8% in 2016-17. With incremental capital output ratio (ICOR) hovering around 4:1, this level of investment cannot give more than 3-3.5% growth rate in agriculture, and can never double farmers’ incomes by 2022-23, an ambitious target set by the prime minister. Another interesting fact that the graphic shows is that, of the total capital formation in agriculture, the share of public investments has gradually declined from 43.2% in 1980-81 to 18.8% in 2016-17 at current prices and, consequently, the share of private sector investments in agriculture has risen.

While share of private investments in agriculture is overwhelming (81%), they need the right incentives to go up further as a percentage of agri-GDP.

This is critical if the annual growth rate in agri-GDP is to be put on a sustainable trajectory of 4+% range. The incentive structure in Indian agriculture, however, is perverse. For the triennium ending 2016-17, the Producer Support Estimate (PSE), a measure that captures farmers’ incentives from the output price front as well as budgetary allocations for input subsidies or any income support, was negative to the tune of 6.4% of gross farm receipts. In contrast, China and OECD countries had PSEs of 15.5% and 26% respectively, as per OECD estimates released in 2018.

Looking at these figures, it appears that the income support of `75,000 crore that the PM has announced under the PM-Kisan scheme is only a small step to improve incentives for farmers. A more sustainable solution will be to carry out large-scale reforms in agri-marketing and trade policies, along the lines of GST with states, and incentivising the private sector to build more efficient and inclusive value chains for agri-commodities from the farm gate to consumer end.

The first step in that direction will be to change the policy mindset, and eliminate the in-built consumer bias in our food and agri-policies. This requires stopping subsidising consumers by suppressing food prices through archaic laws of the 1950s (such as the Essential Commodities Act, 1955). As per OECD, the Consumer Support Estimate (CSE) for India for the period 2000-01 to 2016-17 is about `3.13 trillion lakh crore per annum at 2017-18 prices, and about 81% of this comes from farmers who cannot realise best prices for their produce due to restrictive trade and marketing policies.

Further, the food subsidies of `1,84,220 crore as provisioned in the current budget (plus a minimum of `1,20,000 crore of pending FCI bills) need to be revisited to target them towards the bottom 20-25% of the population rather than providing 90% of the subsidy to 67% of the population. This would then provide a level playing field to farmers, improve their incentives, and propel private investments in agriculture, taking a step towards augmenting farmers’ incomes on a sustainable basis. The investments need not be restricted to just augmenting agricultural production but also can be towards fixing the sector’s marketing infrastructure, logistics, as well as the linking of production by farmers’ groups to organised processing and retailing with a view to minimising market risks, saving wastages, and augmenting farmers’ price realisation.

Gulati is Infosys chair professor for agriculture and Juneja is consultant at ICRIER

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