Thoughts on economics and liberty

Slim pickings – an article on Indian agriculture in The Economist, 14 July 2018

Slim pickings

The Economist, 14 July 2018

While appearing to subsidise farmers, the government is actually harming them,

INDIA’S farmers should be the happiest in the world. For decades governments have showered them with perks including a blanket tax exemption; subsidies on fertiliser, seeds, energy and water for irrigation; low-interest loans; cheap crop insurance; high tariffs to block food imports; and price supports for more than 20 crops. Lately, the authorities have become more generous still. Since 2014 no fewer than eight states have waived a total of well over $2 bn in farmers’ debts.

Narendra Modi, the prime minister, for whom elections loom, has promised to double farm incomes by 2022. Recently he announced a fresh bonanza. Sharply raising support prices for the coming harvest, he vowed that henceforth the government would pay growers 150% of the cost of their inputs, guaranteeing a healthy profit.

How can it be, then, that experts speak of a chronic and deepening crisis in agriculture, that polls show mounting rural anger and that farmers are protesting ever more forcefully? Last year, for instance, growers from Tamil Nadu in the far south mounted a dramatic sit-in near the parliament in Delhi, the capital. To underline their desperation some took off their clothes, others waved skulls and bones they said belonged to debt-burdened farmers who had killed themselves in despair.

Sadly for the 90m Indian households that rely on farming for most of their earnings, it is the bleak picture and not the rosy one that rings truer. Despite rising yields that have made India the world’s top producer of milk, pulses, cotton, jute, bananas and mangoes, as well as number two for both rice and wheat, farming still carries dangerously high risks and, for all but a fraction of cultivators, brings miserably low returns. Farm incomes average barely a third of non-farm incomes. Even though roughly half of all Indians still toil on the land, agriculture’s share of GDP has steadily shrivelled (see top chart).

There are many reasons for this. Since, land reform broke up big estates in the 1950s, even-handed inheritance laws have kept shrinking the size of farms. Since the 1960s the average landholding has withered from 2.6 hectares (6.4 acres) to 1.1 (see bottom chart) – about one and a half football pitches. In addition, heavy reliance on variable monsoon rains makes yields unusually volatile.

A third explanation is that all too often, farmers’ produce fetches miserably low prices. There were hopes that speedier in formation brought by the spread of mobile phones would help farmers make better decisions about what to plant, but just as often it has made too many farmers bet on the same crops. Last year the government of Telangana state suggested that farmers grow chili because the price was high; so many took the advice that it collapsed.

Indeed, in one way or another much of the government’s apparent helpfulness fails to help. The exemption from taxes, for instance, is less an incentive than a reflection of the reality that nearly all farmers earn less than the minimum taxable income. Taxes on the sale of land, in contrast, are hefty, which is one reason for the failure to consolidate landholdings. Subsidies have led to overuse of fertiliser, prompting soil depletion and water pollution.

Loans and crop insurance have tended to flow to better-off, more literate farmers, leaving others at the mercy of money lenders. Surveys show that in much of India, only a small proportion of farmers are even aware that such insurance exists. Most farm loans are short-term, suggesting they are widely used for household expenditures before harvest rather than investment. As for loan waivers, villagers at Puntamba in the state of Maharashtra say that eight months after filling in all the relevant forms, they are still waiting to hear from the bank. Needless to say, such state-ordained munificence is in any case not the ideal system of incentives.

Minimum prices also cut several ways. Though on paper they cover a range of commodities, in reality the government is able to act as a buyer of last resort for only a handful of crops—mainly rice, wheat, cot ton and sugarcane-and only in select locations. Its stockpiles are already too big and it lacks the administrative capacity to do more. Balasaheb Chouhan, a smallholder in Puntamba, says the paperwork for selling to the state is fiendish, and then typically there are week-long queues of farmers waiting to unload their goods, followed by weeks more of waiting to be paid. Most farmers prefer to sell for less to a private trader, but get paid promptly.

Price supports also encourage the cultivation of the few crops that the state really does buy. Rice, wheat and sugarcane are thirsty, a serious matter in a country with precarious supplies of water. The water table in Punjab, a state that soaks up an inordinate share of price-support subsidies, has been dropping by about a metre a year. There is also the uncomfortable fact that while the government has concocted elaborate formulas to come up with largely notional support prices, recent research sponsored by the OECD, a club mainly of rich countries, shows that for the past two decades even those prices have nearly always been lower than international ones.

In other words, even as the Indian government lavishes subsidies on farmers, it has also suppressed their earnings by hampering exports, through outright bans for some crops, as well as a failure to invest in the needed infrastructure and administrative caprice. Shifting rules on cows, for instance, have taken a big bite out of beef exports. Applying the same formula used to calculate state support to farmers in 22 OECD countries, the researchers found that, although India spends around $30 bn a year on direct aid to agriculture, it also deprives farmers of $40 bn, given the difference between international and domestic prices for the same crops. OECD governments spent the equivalent of 18% of farm income to support producers, on average. India, in effect, confiscated 6%. And where as OECD countries charged consumers roughly 8% of farm income by artificially raising food prices, India instead paid consumers the equivalent of 25% of farm incomes, not only by depressing crop prices but by distributing lots of subsidised food.

Not all that governments have done hurts farmers. Mr Modi’s has boosted investment in rural roads and electricity, which will help preserve more goods and get them to market. It has also pushed Aadhaar, a national identity scheme which should make it easier to target state benefits better. Some state governments have also responded to farmers’ needs more responsibly. Telangana, for instance, has introduced direct cash payments to landholders, a project that could lead to the phasing out of less efficient subsidies.

To make this work, however, the state had first to update and digitise its land register, a feat that remains a far-off prospect in much of India. Shoddy records are one reason why Indian farmers have largely not, as in other countries, simply sold up or rented out and moved to cities: they cannot prove title to their land. Because of the poverty of state education, they are also largely unqualified to do other jobs, and because of the government’s failure to promote other industries, there are few other jobs available anyway. “No one cares about us farmers,” says Raju Patil, who farms 4.5 acres in the state of Maharashtra. “Whatever we reach for, we get shit.”


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Sanjeev Sabhlok

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