Indian agriculture needs smart investment

The government must ensure its budgetary focus on the sector is well directed

Veteran farmer leader Sharad Joshi, founder of the Shetkari Sanghatana, who passed away last month, swam against the tide for much of his career. A proponent of free markets, leveraging technology and infrastructural reforms in areas like water management, he was an outlier in an economy where state control in agriculture was the default wisdom.

He would have been guardedly pleased with the tenor of the government’s statements on agricultural reform in the lead-up to the 2016-17 budget. Chief economic adviser Arvind Subramanian and finance minister Arun Jaitley have both stressed the need for public spending on agriculture; the latter has singled out utilizing technology for maximizing yields, efficient use of water and giving farmers access to timely market information. But he would also, perhaps, have pointed out that much has been left unsaid.

Indian agricultural productivity is cyclical, with high growth periods routinely followed by a drop. The sector is currently in the latter phase; after annual growth rates of 4% across the 11th Plan period, it has been stuttering at 1.7% three years into the 12th Plan. That explains the renewed budgetary focus. And the government has taken cognizance of one of the major reasons—the dependence on the monsoons—with the Pradhan Mantri Krishi Sinchai Yojana. The plan is to extend irrigation cover to every farm and maximize water-use efficiency with an outlay ofRs.50,000 crore over five years.

Rural electrification is the missing link. According to the NITI Aayog’s Raising Agricultural Productivity and Making Farming Remunerative for Farmers report, India—classified as a water-stressed country as per international norms and sliding into water-scarce status—has created irrigation potential through existing infrastructure of 81% of its ultimate irrigation potential, estimated to be around 140 million hectares. Factor in regional variation and the unsustainability of the heavy dependence on groundwater—62% as of 2012-13—and the brute force approach becomes unsustainable. Improving efficiency via measures such as drip irrigation—also proven to improve yields—is far more tenable in the medium to long term. This is only financially sustainable with electric pump-sets—a difficult proposition as of now given the substantial shortfalls both in the scope and the reliability of electrification in rural areas across the country.

The NITI Aayog report also points to one of the most critical and long-running inefficiencies in the agricultural sector, the mandi system. The lack of rural infrastructure and constraints of the various states’ Agricultural Produce Marketing Committee Acts have created long supply chains and compelled farmers to depend on intermediaries, enabling cartelization. This has a cascading effect: farmers receive a low share of the rupee, leading to increased demands for minimum support prices and consequent food inflation.

There have been attempts to work around this. The centre’s Model APMC Act of 2003 provided a template for state governments to adopt. Only 16 have done so thus far, and the initiative suffers from ultimately working within the framework of the mandi system, flawed at its core. The establishment of a National Agriculture Market as an electronic trading portal, approved by the cabinet last year, has a better chance of being effective even with the mandias a back end by enabling farmers’ options for sale and access to markets. But here too, investment to enable transport and storage of produce is essential for the system to function—complicated by regulatory inefficiencies and dithering on foreign direct investment in multi-brand retail that have scared away private investment.

Entitlement spending like the Mahatma Gandhi National Rural Employment Guarantee Scheme and interest rate subvention on farmer loans can only ever be palliative measures; they are of questionable effectiveness at best. The bulk of the demand for MGNREGS funds this year has come from middle-income states, not those hit by drought. Both the Reserve Bank of India and Assocham, among others, have questioned the efficacy of farm loan subsidies. Most of the credit is absorbed by farmers with larger holdings, while the rest—two-thirds of farm holders have less than one hectare of land—continue to depend on money lenders, resulting in high levels of indebtedness.

If the government’s budget focus on agriculture is to have a real effect on the sector, the spending and reforms must address the underlying structural issues.

What agricultural reforms should the government focus on?