Shreehari Paliath interviews Prof Ramakumar

[Prof. R. Ramakumar is an economist at the School of Development Studies at the Tata Institute of Social Sciences, Mumbai. In this interview, he highlights the issues with the controversial farm bill, India’s agriculture economy and the structural problems it faces.]

Shreehari Paliath: India’s economy is set to revive owing to the growth in agriculture, Nirmala Sitharaman, finance minister, is reported to have said. Further, a finance ministry release noted that the agricultural sector “remains the foundation of the Indian economy and with a forecast of a normal monsoon, should support the rebooting of the Indian economy”. But the contribution of agriculture to the gross value added (GVA) has decreased from 18.2% in 2014-15 to 16.5% in 2019-20. What is your assessment of the government’s claim?

R. Ramakumar: To begin with, we need to understand the place of agriculture in the Indian economy. Its contribution to the GVA has come down to about 15%. As a result, ceteris paribus [all other things being constant], even if agriculture grows by 6% per annum, it would contribute only about 1 percentage point to the overall GDP [gross domestic product] growth rate. Of course, such an estimate is based on two assumptions. First, the share of agriculture in the GDP remains constant at 15% and secondly, the average inter-sectoral multipliers remain constant. [Inter-sectoral multipliers imply, e.g., the increase in non-agricultural demand for every unit increase in agricultural income.]

Now, in 2020-21, the share of agriculture in the GDP may rise marginally due to the decline in industrial and services sectors. Further, the multiplier effect of agricultural growth on the non-agricultural sectors may be higher than in a normal year. These two factors are positives. Yet, I would continue to hold on to the point of 1 percentage point contribution for a specific reason. The reason is that there were strong counteracting tendencies against these two positives in the form of a fall in the incomes of farmers, dairy producers, poultry producers and rural labourers.

Let me try to address this in another way. In India, roughly 68% of the population lives in rural areas; about 43% of the workforce is in agriculture and allied sectors, 55% of consumption expenditure comes from rural households; about 46% of the GDP comes from the rural areas; and about a third of savings come from there. Agriculture also contributes roughly half of India’s rural income. So, growth experienced in one-half of the rural economy cannot be irrelevant to overall growth prospects. However, we should also be aware of the fact that rural unemployment rates rose sharply to 22.8%, 21.1% and 9.5% in April, May and June 2020. Even in August 2020, rural unemployment rates were higher than in February 2020 or August 2019. This resulted in a shrinkage in the incomes of the other non-agricultural half of the rural economy. I am not saying this would cancel out the impact of agricultural growth, but it certainly is a strong counteracting factor. This is why I remain unimpressed by the “agriculture as the silver lining” claim.

SP: The government has passed two bills–Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, and the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020–while the third [ECA] is set to be placed in the Upper House of Parliament. Farmer protests that started in Haryana and Punjab against the new bills are spreading to other states. They fear that corporates will dominate agriculture dealings, and that procurement will become the responsibility of state governments, which are cash-starved. How do you view the bills and the response to it?

RR: There were three bills tabled by the central government (these were earlier issued as ordinances). The first was related to amending the ECA to allow the removal of food stock limits for traders. I have had genuine concerns over the way in which the ECA has been misused in the past. But I also believe that government procurement should be expanded to more areas and crops, larger public investment should flow into the creation of modern farm storage structures and that these storage systems should be efficiently aligned with the universalisation of the public distribution system (PDS). This should be a component of India’s “farm-to-fork” strategy. In such a path of policy, the ECA as a legislation is less relevant.

However, the government’s policy direction appears to be different. Public investment in farm storage and warehousing has been stagnant, if not falling. The government is leaving the sector open to investment by large, private, multinational agri-business players. Here, its argument is that the ECA is the reason why less private investment is flowing into the warehousing and storage spheres. This is why they argue for the amendment to the ECA. I believe that this viewpoint is flawed in the Indian context, where small and marginal farmers predominate. Amending the ECA, particularly given the reason why the government wants it amended, may end up weakening the bargaining power of small and marginal farmers and increase the stranglehold of large agri-business in agricultural marketing. The government would also lose control over the only instrument of intervention it had in the past to prevent distortionary actions of traders like hoarding.

The second bill [Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020] was related to removing inter-state trade barriers in agriculture, allowing farmers to sell outside the APMC [Agriculture Produce Market Committee] markets and promoting private markets and e-trading. This policy is very contentious. To begin with, agriculture is a state subject, and it is the right of states to legislate in the domain of agricultural marketing. The COVID-19 crisis should not be used by the central government to attack the federal principles of our country. The central government should create spaces for increased cooperation with states, and not open new avenues of fighting with them over what are rightfully states’ matters. According to the NITI Aayog, even if agriculture is a state subject, inter-state trade falls in the Union list. But sale in APMC markets has nothing to do with inter-state trade. So, this argument doesn’t hold water.

The APMC mandis have existed in India for over 50 years now. These markets were originally established in the 1960s and 1970s to ensure that farmers are not discriminated against by traders. As such, they played an important intermediary role in agricultural marketing during and after the Green Revolution. This intermediary role is founded on trust and networks built up over many decades between the farmers, the Mandi Boards and the government. For instance, farmers feel reassured that they will not be cheated in the APMC markets. Rules exist to ensure that if a trader does not pay the farmers within a specified time period, the trader can be suspended from trading.

Indeed, issues exist with the APMC markets. In many cases, traders and commission agents exploit the farmers by colluding or charging high commission rates. These are problems to be dealt with as part of a gradual reform of the APMC framework.

However, instead of reforming the APMC market system, the attempt here is to throw the baby out with the bathwater. It appears the government wants to weaken the APMCs to a point of irrelevance. The plan has three major features: (a) the legalisation of contract farming, (b) legalisation of direct purchase of agricultural produce from farmers by global retail chains bypassing regulated markets, (c) and permission for private players to open and control new agricultural markets. It is argued that farmers would become free to sell their produce to buyers of their choice and would obtain a higher price than before.

First, there is no evidence that amending the APMC Act will, by itself, improve farmers’ price realisation. For instance, traders pay a commission to the Mandi Board now. Will this commission be passed on to farmers in the form of higher prices if the APMCs cease to exist? Hardly. There will be new transaction costs that would arise for private players attempting direct procurement from farmers. It is also very much possible that such transaction costs may exceed the existing Mandi taxes.

Secondly, APMC mandis are not easily replaceable in rural India. Anyone who has walked through an APMC market would know that for a private market to begin dealing with that quantity of produce is simply unrealistic. If APMC markets are weakened, and very little of private markets replaces it, there will be chaos. There will be a huge void in agricultural marketing, which might open up the field for acute exploitation and harassment of farmers by completely unregulated traders.

Thirdly, take three different examples of state-level experiences. Kerala never had an APMC Act. But that has not led to any major inflow of private investment into rural markets in the state despite its high-value, export-oriented cropping pattern. In fact, it is the Kerala government that is establishing rural markets across the state to help farmers. Bihar nullified its APMC Act in 2006. Here again, there is no evidence of any major private investments in marketing. Maharashtra has already done what the bill wants. In 2016, the state government delisted fruits and vegetables from the ambit of its APMCs. Then, it issued an ordinance in October 2018 to amend the Maharashtra Agriculture Produce Marketing (Development and Regulation) Act, 1963, to allow free trade of food and animal products outside the mandis. Thus, the jurisdiction of the market committee was strictly limited to principal market yard, sub-market yard and market sub-yard, freeing up all spaces outside these for private transactions. But these too have not led to any emergence of private investments outside the APMC mandis.

Now, Harsimrat Badal, minister of state for food processing industries, has resigned in protest against the bills. I hope the government will read the writing on the wall, and step back.

SP: Much farming in India is small and marginal, and subsistence-based. There is a concern over how aspects of pricing and contracts, particularly if disputes arise, are going to be arbitrated and resolved with the introduction of new bills. How do you see the role of the State (Centre and states) after the introduction of changes?

RR: This question relates to the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020. On the one hand, the upside of contract farming is that the commitment of the company to buy the farmer’s produce at a predetermined price reduces apparent price risks for the farmer. This is a positive. But the story doesn’t end there.

Experience shows that companies often violate the contract. In case of adverse market conditions at the time of actual purchase, the companies either refuse to buy the farmer’s produce or agree to buy only at a reduced price. On paper, they cite a range of reasons for rejecting the farmer’s produce, such as the poor quality of the farmer’s product. Such stalemates result in considerable losses to the farmers.

In many cases, farmers are unable to understand the fineprint in contracts, as they are printed in English. One may argue that the farmer can always seek legal redress, but experience shows that they cannot match the legal prowess of big companies with deep pockets. Contract farming by corporate players may also involve social costs. The National Commission for Farmers chaired by MS Swaminathan had discussed this issue in detail in 2006, and had noted three major impacts that a contract farming system may entail:

“The first is that the purchaser is quite likely to be interested in short-term gains/profit maximization and may, therefore, suggest practices, which in the long run are not good for the land/other assets of the producer. The purchaser has the option of ‘moving on’ after a few years of ‘exploitation’ of an area. The second issue relates to possible shifts in favour of export-oriented crops at the cost of crops providing basic food. The third is the preference for the larger producers in choice of partners by the purchaser, ignoring the small landowners. Such practices over a long time could encourage the small farmers to enter into sub-agreements with the larger farmers thereby adding a tier between the grower and buyer or to sell/lease out their land and work as labourers.”

Let me also draw your attention to a major ruling of the Supreme Court in M/S Nandan Biomatrix Ltd. vs S. Ambika Devi, which appears to have missed public attention in the midst of the lockdown. Ambika Devi was a small farmer from Kerala owning about 1.5 acres of land. In 2004, she entered into an agreement with Nandan Biomatrix and its franchisee Herbz India for the sale of safed musli, a medicinal crop, at a predetermined price. The company was to buy back Ambika Devi’s produce at a minimum price of Rs 1,000 per kg. But it breached the contract. Ambika Devi complained to the Kerala State Consumer Disputes Redressal Commission in April 2008 under the Consumer Protection Act, 1986. The company argued that the complaint will not hold under the 1986 Act, as it was a commercial contract between two free agents. But the Commission ruled in April 2008 that the covenants entered into between the parties were in the nature of both sale of product and rendering of service, and would indeed fall under the ambit of the 1986 Act.

The company took the matter to the Supreme Court. But the Supreme Court upheld Ambika Devi’s complaint, and ruled that “excluding such farmers from the purview of the 1986 Act would be a complete mockery of the object and purpose of the statute”. Thus, now, a farmer signing a contract farming contract is upheld as a “consumer” under the 1986 Act. This changes the picture completely. Does the bill take this ruling into consideration and factor in its full legal impact? No. This is a major omission.

The point is not to ban contract farming. That is not the demand, and you also cannot stop a farmer from entering into a contract with a company; this is a free country. The point is that the interests of the farmers should be held supreme in contract farming arrangements. A suggestion is that the government should sign every such contract as a third party, so that the companies cannot withdraw unilaterally from contracts citing flimsy reasons, or incorporate exploitative clauses into such agreements. But the bill doesn’t appreciate the need for such protective covers for farmers.

SP: Despite the suggested reforms, it seems unlikely that there will be a large number of private buyers for farm produce. What are the challenges of agriculture-related infrastructure for post-harvest support, and the investments needed?

RR: A lesson from COVID-19 is that we need supply chains resilient to shocks. The government’s plan has unreasonable expectations from the private corporate sector in marketing. There is no doubt that we need private investment. But given India’s specific agrarian conditions, the effectiveness of private sector investment depends on the extent of public sector involvement in aggregating farm produce on the ground.

Efforts of the private sector in aggregation are heavily constrained by the fact that India is a land of small holdings. For the private sector, the transaction costs of aggregating across millions of small farmers are not always viable. Farmer Producer Organisations can help in aggregation here, but their presence is not widespread. There are also attendant problems that private players face with regard to adequate availability, variations in quality and timeliness in supply. This is why most efforts of private retail players to buy directly from farmers, using rural collection centres, have not fully succeeded.

SP: Less than 20% of the paddy and wheat farmers sell their produce at MSP. How has the lockdown impacted farmers in terms of accessing markets when much of the produce is sold at prices lower than government guaranteed rates?

RR: The lockdown began when the harvest of India’s second agricultural crop season (rabi) had begun. The harvest of crops in March, April and May 2020 was adversely affected due to two reasons: the disruptions in the agricultural supply chains and the lack of adequate number of agricultural labourers, many of whom were migrant workers.

On the one hand, international trade was shut down. On the other hand, domestic trade was severely adversely affected. Farmers struggled to bring their produce to the market yards due to poor availability of transport facilities and restrictions on movement of goods. Even where farmers were able to transport their produce to the market, they needed an invitation or appointment slip from the Mandi Board, which slowed down the entire process of marketing and imposed costs on farmers. Many mandis refused to accept more than a specified quantity of produce per day. In the case of perishables, many farmers did not harvest their produce to avoid the costs of harvesting. Others were reported to be dumping their harvest of vegetables, fruits or milk.

In many states, wholesale markets either closed down or were operational only for two or three days a week. Many large private traders were also not operational during the lockdown because of disruptions in truck services. Trucks were in shortage. When trucks were available, truck drivers were not available as many had returned home before the lockdown.

These broken supply chains drastically reduced market arrivals of agricultural goods. In a recent paper, we looked at data for 15 commodities from the commodities database of the Centre for Monitoring Indian Economy, which puts together data from 3,289 markets across the country. We looked at the total market arrivals of paddy, wheat, barley, gram, pigeon pea, lentil, potato, tomato, onion, cabbage, cauliflower, peas, lady’s finger, banana and mango between two dates, March 15 and June 30, and for two years, 2019 and 2020.

We found that market arrivals of all crops, except maize, were lower in 2020 than in 2019. It was only in paddy, lentil, tomato and banana that market arrivals in 2020 constituted more than 75% of market arrivals in 2019. In the case of wheat, barley, potato, cauliflower, cabbage and lady’s finger, market arrivals in 2020 were between 50% and 75% of market arrivals in 2019. For the remaining crops, such as gram, pigeon pea, onion, peas and mango, market arrivals in 2020 were less than half of the market arrivals in 2019. In wheat, the most important rabi crop, only 61.6% of the arrivals in 2019 were recorded in 2020. The lowest ratio was recorded for onion, where only 38.4% of the market arrivals in 2019 were recorded in 2020.

SP: Although India produces enough food grains for its population, the agriculture yield per unit is much lower than other countries like China, US and Brazil in nearly six decades. What has been the challenge in increasing productivity and yield, and what are the solutions? What are the challenges India faces as government policy tries to move more people out of agriculture in India?

RR: India’s failure to ensure a structural change in its economy is a result of the failure of the State to transform its rural areas after Independence through land reforms, universal education and public investment. This needs to be noted at the outset. Every economically successful country of today had an agrarian transition in its initial phases of development. But not India. The absence of an agrarian transformation in India also meant that the home market for industrial goods remained poorly developed. Thus, the failure to develop agriculture and industry in India was interwoven as if in a vicious loop.

So, to begin with, poor productivity in agriculture is a reflection of the poor development of the agrarian economy itself.

The second aspect of the explanation lies in India’s poor investment in agricultural research and extension. Across the world, governments have been the leading investor in agricultural research, as it was considered a “public good”. In the developed world, public spending on agricultural research as a share of agricultural GDP ranges between 2% and 3%. But in India, public expenditure on agricultural research is less than 0.5% of the agricultural GDP.

In the 1990s and 2000s, private firms expanded their hold over agricultural research. But private sector research has never been considered a substitute for public sector research. Investments made by the private sector are primarily profit-oriented, and not farmer-oriented. Technologies of the private sector are suited to capital-intensive and high-value forms of commercial agriculture. Private sector research also focuses mainly on the development of herbicides, insecticides and technologies related to food storage, transport and processing.

Look at India. Private sector research is confined to a few crops, such as maize, sunflower, cotton, pearl millet, oil seeds and sorghum, where the expected profit levels are high. They are not interested in research on a range of crops critical to food security unless there are super-profits to be made. So as a general rule, private seed companies produce low-volume, high-value seeds with the focus on hybrids. The public sector, on the other hand, produces high-volume, low-value seeds, which are used by millions of farmers across the country.

This is a major challenge. How do we revive public agricultural research? How do we aim to increase public investment in agricultural research to at least 1% to 1.5% of our agricultural GDP?

Government involvement is critical in the research and production of seeds particularly because we need to increase the seed replacement rate in our agriculture. Certified seeds yield more than farm-saved seeds by about 20%. But who will produce better and more of such seeds? It has to be the public sector. But where is the required investment in public sector seed production and distribution?

Come to agricultural extension, which is so important for taking research findings to the farms. The effort of policy over the last two decades has been to convert agricultural extension from a “public good” to a “private good”. As a consequence, we have destroyed public agricultural extension in India. We tried to encourage the private sector and NGOs to “sell” information to farmers at a cost, but what have they contributed in these years? Close to nothing. The experience in Andhra Pradesh is rather striking in this respect. A government-appointed commission noted in 2004 that “the collapse of public agricultural extension services in the State has been one of the most important contributory factors to the generalised agrarian crisis”. The decline in the quality of the extension system and the weakening of the State Seeds Corporation led to a sharp rise in the sale of spurious seeds. Traders, who sold spurious seeds to farmers, were also doubling-up as moneylenders. Unsurprisingly, there were a large number of crop failures.

So, it is clear that a reversal of the slowdown in public investment in research and extension is a critical factor associated with the revival of India’s agricultural growth. I am not manufacturing this argument. An official report of the erstwhile Planning Commission in 2005 had concluded that the sluggish growth in Indian agriculture was due to “weakened support systems”, and in particular, “unresponsive agricultural research, nearly broken-down extension [and] inadequate seed production, distribution and regulation”.

SP: The return of migrants to home states due to the pandemic and good monsoon seem to have reported record sowing of monsoon crops. India has witnessed a glut in farm produce earlier leading to a price crash. Is that a concern under the circumstances?

RR: The phenomenon of return migration during the pandemic has had various kinds of impacts. The return of migrants was a major reason for the havoc in supply chains we witnessed. Truck drivers, loading and unloading workers, port workers, among others, were all largely migrant workers. According to an internal analysis of the government I have seen, districts in India that accounted for more than 50% of truck drivers in India were also those districts with large COVID-19 outbreaks or clusters. So, this is one side.

But in the rural areas, where these workers returned to, a different set of impacts were witnessed. First, many among them offered themselves for agricultural wage work in the villages. This may have helped farmers who were suffering from labour shortages due to the absence of migrant farm workers. Secondly, some of these workers may have taken up farming in hitherto fallow or uncultivated lands to ensure food security. This may be the reason why we see a rise in the area under kharif sowing in 2020-21.

But while these may have been ameliorating factors, there is no doubt that rural incomes fell this year. Markets arrivals, food consumption, farm gate prices and trade had all declined compared to 2019. This led to a fall in farmer’s incomes. At the same time, rural labourers were also adversely affected, as visible from the rise of rural unemployment rates after March 2020. So, rural demand might have shrunk significantly. This does not bode well for India’s economic revival.

SP: You wrote instead of front-loading the “instalments of PM-KISAN [Pradhan Mantri Kisan Samman Nidhi], the government should have doubled the payments to farmers from Rs 6,000 a year to Rs 12,000 a year”. How would you assess the scheme and the government’s decision to frontload payment due to the pandemic?

RR: Let me say at the outset that I have never been an enthusiast of the PM-KISAN scheme. I have written about it elsewhere. The larger problem with cash transfer schemes in agriculture is that they are cop-outs; an abdication of responsibility. Let us remember that the promise was to double farmers’ incomes between 2015 and 2022. In 2019, the PM-KISAN was an admission of the inability of the government to double the incomes of farmers. The government spends about Rs 75,000 crore per year for the scheme. This rather large amount could be productively invested in a number of spheres in agriculture and, over a horizon of five or 10 years, become a substantial investment leading to the overall development of agricultural infrastructure. Instead, narrow electoral considerations came to dominate policy making. This was unfortunate.

But now that we have a scheme, we could have used it to raise rural incomes by doubling the transfers or by frontloading all the three instalments to June-July 2020. But the government’s frontloading of the first instalment of Rs 2,000 in April 2020 didn’t help much; the farmers would have anyway received that instalment a couple of months later. In addition, the government has been delaying the payment of earlier instalments to a large number of beneficiaries. Some estimates show that the total existing arrears under the PM-KISAN scheme stand at about Rs 30,000 crore.

So, PM-KISAN is a poorly designed scheme on the one hand, and also an opportunity lost on the other.

(R. Ramakumar is an economist at the School of Development Studies at the Tata Institute of Social Sciences, Mumbai. He is the author of Note-Bandi: Demonetisation and India’s Elusive Chase for Black Money. He has also been serving as a non-ministerial member with the Kerala State Planning Board. His research interests include agrarian studies, agricultural economics, and fiscal policy in India. Paliath is an analyst at IndiaSpend. Article courtesy: IndiaSpend.)