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Rebooting the idea of the farm economy

LiveMint logoLiveMint 20-08-2017 Anil Padmanabhan

Addressing the annual general meeting (AGM) of ITC Ltd last month, chairman Y.C. Deveshwar signalled to shareholders of the company that future fortunes lay in exploiting the opportunities that would be thrown up by the impending fundamental transformation of Indian agriculture. 

In an insightful speech titled “Adding value to agriculture”, Deveshwar made an observation: In future, he said, the farmer instead of selling what they produce would grow what the consumer needs. 

Indeed, he is flagging an important shift. It will, for one, begin reversing the burden of risk, which at the moment is overwhelmingly weighed against the farmer. Effectively, this is like hitting the reset button on the idea of the Indian farm economy: instead of being supply-side driven, it will be led by demand. 

Needless to say, this will radically rework existing relationships within the farm sector and of it with the rest of the economy too. In short, the ecosystem around Indian agriculture is poised for a fundamental makeover—with the market replacing the government as the dominant agent of change. Only logical that this raining of change will leave the associated politics untouched.

Implicitly, Deveshwar is arguing that the Indian farmer is ready to undertake this transition. The reality on the ground is that this is already happening. 

The best example to highlight this transition is the remarkable story of Indian horticulture. It has over the last decade and more, rapidly taken root and has in fact displaced foodgrains in the agrarian economic framework in terms of output. Between 2001-02 and 2016-17, horticulture production doubled from 146 million tonnes (mt) to 295mt, while foodgrain rose from 213mt to 273mt.

This structural change has been in response to the policy incentives as well as shifting consumption patterns as India traded up—data from the National Sample Survey Office (NSSO) reveals that as incomes have grown, the share of cereals in consumption has decreased, while that of fruits and vegetables has grown. Census 2011 revealed how India is materially much better off than before—something also captured in the steep fall in poverty levels from nearly 40% at the turn of the millennium to about 22% as per the latest estimates. 

But what is overlooked is that the farmer has been ahead of the curve and that the required ecosystem to support a market economy in farming has been slower to emerge. Consequently, the risk-reward ratio continues to be skewed against the farmer. 

A study by the Central Institute of Post-Harvest Engineering and Technology (CIPHET) reveals how on an average a 10th of the horticulture produce is wasted. In the case of guava, wastage is estimated at nearly 16% of the total produce in 2015. Clearly, this is not sustainable.

A policy response has already emerged: liberalizing investment norms, including allowing 100% foreign direct investment (FDI) in food processing industries. The onus is now on the private sector, as Deveshwar rightly points out, to make the best of the opportunity.

But this addresses only part of the risk being borne by the farmer. There is at the moment almost no cover for the price risk. Not only do none of the horticulture crops get covered by the minimum support price (the insurance floor price the government promises) price hedges like commodity options are yet to be made available to the farmer.

This serious shortcoming in addressing price risks has to be addressed at the earliest. In fact, it is one of the key factors contributing to the ongoing rural distress—the downside price risks in times of production exceeding demand is falling entirely on the farmer.

The good news is that after a long time, the farm sector has come to occupy centre stage in national politics. The bad news is that this is largely because of the persistence of rural distress. The consequent binary discourse is focusing the debate on the crisis instead of seeking solutions to address the root of the problem.

The onus is on Prime Minister Narendra Modi-led National Democratic Alliance (NDA) to explore out-of-the-box solutions; the experience with demonetization suggests an appetite. Will they then employ their newly earned social capital (by expanding their national electoral footprint to an agrarian state like Bihar) in pushing politically risky but economically expedient move of hitting the reset button on Indian farming?

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus.

Respond to this column at anil.p@livemint.com

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