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Ensure better prices for farmers while taming food inflation

Over the past year and a half, discontent in the farming community has been rising across the country

twitter-logo Prosenjit Datta   New Delhi     Last Updated: March 15, 2018  | 20:45 IST
Ensure better prices for farmers while taming food inflation

Over the past year and a half, discontent in the farming community has been rising across the country. Farmer agitations have become more frequent. And while the Maharashtra farmers who marched from Nashik to Mumbai have gone back after listening to Maharashtra Chief Minister Devendra Fadnavis' promises, they have only temporarily suspended their agitation. Meanwhile, other agitations in other states are lurking just under the surface.

Despite two successive good monsoons, and the focus on farm packages and rural infrastructure in the past two Union Budgets, it is obvious that the lot of the farmer has not improved. Prime Minister Narendra Modi has more than once talked about his goal of doubling farmer incomes by 2022. But if he means doubling real income of farmers, that seems a very big target for two reasons. First, while farmer incomes in nominal terms have tended to double in six or seven years in the past because of inflation, studies show that real income of farmers takes up almost a decade and a half to double. Second, the latest Economic Survey by the Chief Economic Advisor to the Finance Ministry, Arvind Subramanian, estimates that farming incomes could reduce by as much as 25% in the not so distant future because of climate change.

Climate change, apart from rising input costs, reduced land holding size and unrenumerative prices have all hit farmer incomes. Much of the debate around how to improve the lot of farmers has revolved around minimum support prices (MSP), as per the recommendations of the M S Swaminathan committee, as well as loan waivers. But neither of them are sustainable or good for the long term.

A loan waiver is an unsatisfactory policy response for a number of reasons. First, it helps a relatively small slice of farmers - only those who own land and have managed to get a loan - and not for the majority of farmers, who don't own land or who do not have clear titles in their name and therefore cannot get loans from banks. (They borrow from money lenders, and therefore do not benefit from loan waivers). Second, even when announced, the loan waiver benefits do not reach the farmer immediately - it takes its own sweet time before it starts helping the farmer, and he might get into more debt in the meantime. And finally, a loan waiver is not a permanent solution - it can help once (even while it wrecks the state government finances) - but it does nothing to solve the long term problem.

The MSP issue is more tricky. The farmer's have long demanded MSP for all major crops in line with the Swaminathan committee recommendations that said the MSP should be fixed at 50% above the total expenditure incurred by the farmer, including cost of land (C2). Currently, the government takes total expenditure (input costs and cost of labour) without including the cost of land, which makes it worthwhile only for farmers who own their land. But MSP doesn't help all the farmers either. In practice, the government has not picked up enough produce at MSP, and quite often farmers have had to sell the bulk of their produce at lower than MSP costs. Also, the MSP directly affects food inflation - which was why the UPA policies to regularly raise MSPs sent food inflation through the roof. Even more important, MSPs cannot be revised year after year, as it would wreck the budget of the government. MSP also tends to skew cultivation patterns because it gives an incentive to farmers to keep producing crops with high MSPs.

The problem farmers face today is that they lose out in good times and bad. Crop insurance has not worked effectively during crop failures. And when there is good production, prices tend to crash in the Mandis, which in turn leads to selling of produce at less than cost.

What then is the solution? There are two aspects the government should tackle - and both are long term solutions. The first is production side issues - like better irrigation and technology for increasing yields. The more important one is the solution to fix the broken selling system. And that involves reforming the Mandi system, working on improving cold chain and logistics, and allowing corporates to buy in bulk from farmers. That would ensure farmers getting better prices while ensuring that food inflation remains in control.

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