Increase in farmers’ holding power works better than price support

Updated: July 10, 2019 7:10:13 AM

Under the proposed alternative, farmers are enabled to hold produce in regulated warehouses with financial support from the government covering costs of holding them for a minimum of four months.

The second important challenge is ensuring the outreach of institutional financial services to rural areas so that the objective of connecting farmers to financial system is met. (Reuters File photo)The second important challenge is ensuring the outreach of institutional financial services to rural areas so that the objective of connecting farmers to financial system is met. (Reuters File photo)

By V Shunmugam & Tulsi Lingareddy

This continues our previous attempt to model a non-market intervention where in an alternate price support model that is both fiscally prudent and administratively feasible is proposed. The alternate model focuses on connecting farmers/farmer collectives (FPOs) with institutions that provide storage and finance. Our analysis of select crops and their prices during the arrival and lean season clearly indicates that improving the holding power will help farm incomes go up by 9-11% assuming that there is a policy support to carry this forward.

Under the proposed alternative, farmers are enabled to hold produce in regulated warehouses with financial support from the government covering costs of holding them for a minimum of four months. Farmers are expected to be connected to formal financial institutions through electronic negotiable warehouse receipts (eNWRs) issued by the Warehousing Development and Regulatory Authority (WDRA) regulated warehouses to meet immediate spending requirements by linking e-NWRs to Kisan credit card (KCC) accounts. This process, apart from enabling farmers to fulfil timely financial necessities, can be a potential step forward in the direction of digital payments and cashless economy. In terms of costs and fiscal burden, the proposed financial support from the government covering all costs involved in holding the crop output for four months is much lower compared to the spend in the existing price support model. Based on our indicative cost analysis, the rough estimate of financial support for holding the crop produce for four months is Rs 45,000 crore for select crops and about Rs 55,000-66,000 crore for all crops produced in the country assuming a marketed surplus of about 80%. On the other hand, the cost of current support stands at around Rs 1.52 lakh crore even if it covers about 80% of rice and wheat. With this alternate model, the Food Corporation of India (FCI) can limit its procurement operations, limiting storage needs and storage losses. In addition, FCI can make extra storage space available for enhancing the holding power of the farmers, earning rent in the bargain.

However, while the alternate model has the potential to bring down government support, there are two major challenges to effective implementation. The first is to bring in adequate storage capacity under WDRA norms so that the warehousing services providers, public or private, can issue eNWRs. The existing warehousing capacity in the country, at 158.5 million metric tons (mmt), is significantly lower than the required capacity of 252 mmt (@80% of 315 mmt of foodgrains and oilseeds produced annually). More than half of the existing storage capacity is used by FCI for storing foodgrain stocks in the central pool, leaving very limited space for other storage. Efforts to enhance storage capacity started about two decades ago with the Grameen Bhandaran Yojana (2001). But, the progress is limited, with addition of just about 57.6 mmt till the end of March 2018. The number of WDRA-registered warehouses is quite low, at 697, with an aggregate capacity of 7.91 mmt, concentrated in six states (MP, Rajasthan, Tamil Nadu, Gujarat, Maharashtra and Andhra Pradesh). Thus, efforts to expand storage capacity and bring all warehouses under WDRA are needed. It will also connect stored commodities to the formal financial institutions through eNWRs. It should happen simultaneously with development of quality-testing and certification agencies.

The second important challenge is ensuring the outreach of institutional financial services to rural areas so that the objective of connecting farmers to financial system is met. In this regard, it is disheartening to note that despite constant policy efforts, the outreach of formal banking services in rural areas remained low, with only 19% of total ATMs in the country located in the rural areas that serve 19,561 residents per ATM as against 2,104 residents per ATM in urban areas (RBI and Census Reports). Banking and regulatory efforts must also focus on enhancing other additional proven modes of connectivity to the farmers in remote rural areas such as business correspondents, mobile banking branches, etc. Existing bank branches may extend banking services to the rural areas, leveraging facilities and infrastructural assistance that may be provided by the local government institutions.

While we argue for holding power augmentation, it should be synced with farmers being empowered to take sowing decisions based on best possible market information about best possible prices. It is essential to augment efforts to collect authentic and exhaustive crop sowing, and growth status reports to feed the derivative markets and strengthen price discovery to provide advance guidance to the farmers on what to sow. Hence, agricultural market information services must be streamlined with provision of comprehensive and authentic information covering demand, supply and prices of all the crops. Public efforts shall also be focused on taking the market discovered crop prices to the farmers, leveraging current developments in ICT, besides strengthening the price discovery process through appropriate market-friendly and transparent policy regime.

This proposed model will be a win-win for all the stakeholders including the government. Besides, initiative such as Jan-Dhan can be leveraged under the proposed support model. The storage ecosystem development, if stimulated under this model, will generate additional employment opportunities for the rural workforce in construction and maintenance of warehousing, quality testing and grading/standardisation, and expansion of financial services. Further efforts, if taken to increase the POS availability at all rural commercial establishments, will provide an impetus to the efforts towards formalisation of rural economy.

Shunmugam is head (research), and Lingareddy is senior analyst, MCX (Views are personal)

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