Farm sector economics in India

Continuing from yesterday (see here)

Before planning for any reform in the India's form sector, it is critical to understand the key characteristics of the India's farm sector. To be successful, any strategy, plan, policies and programs must be in congruence with such characteristics. Unfortunately, most of the policy initiatives and programs implemented in past couple of decades have not been congruent with the characteristics of the farm sector.

The following are some of the typical characteristics of the India's farm sector which have been hindering the growth and profitability of the sector and large proportion of population associated with the farming and allied activities.

Farm sector of India

As per the 6th Economic Census (2014) and Agriculture Census of India (2017), and NSSO (2013) data the following are the broad contours of the farm sector of India:

Non-farm activities

1.    There are about 3.5cr rural commercial (non-farm) establishments in India. Out of these only 1.3cr are engaged in agriculture related activities (excluding crop production and plantation).

A visit to 10 typical Indian villages will tell you that these establishments primarily include small shops, auto and farm equipment dealerships, services (tailor, auto repair, salon, telecom, medical, coaching, financing, etc.) and petty artisans like potters etc. Livestock constitutes 87% of economic activity in the farm sector

What is important to note is that over 60% non-farm commercial establishments are directly impacted by farm sector, even though farm sector contributes about 15% to GDP.

About two third of all rural households have farming as their principle source of income.

2.    About two third of these establishments are run without any hired worker (Own Account Establishments or OAE). Meaning the households manage the business themselves, mostly from home (36%) or without any fixed structure outside home (18%), e.g., from a cart, vehicle or on pavement. This segment is characterized by huge under-employment, disguised unemployment, low productivity and negative side effects like child labor, pollution, non-compliance with civic rules etc.

3.    The period between 2005-13 saw a massive jump of 56% in OAEs. This was incidentally the period of highest growth for Indian economy. Labor intensive construction in particular recorded very high growth during this period. MNREGA also started during this period. I believe this trend continues after 2013 also.

In my view, most of these OAEs added during 2005-13 were not voluntary. These were direct outcome of diminishing employment elasticity of growth, acquisition of large tracts of agriculture land for infra projects thus rendering a large number of farm labor jobless, at a time when number of people joining workforce is accelerated.

4.    Fewer than 2mn establishment are engaged in handicraft/handloom sector employing about 4mn people. About 80% of these establishments are OAEs.

If we browse through the headlines since 2013, the governments have made significant efforts to damage these sectors, e.g., through encouraging large retail formats and impeding beef trade etc. There is no evidence of any incentive or promotion for Mobile telephony related retail trade activities which have inarguably been the largest provider of incremental employment in past one decade.

Farming activities

The farming sector in India is characterized by (a) small holdings; (b) low productivity and (c) landless farmers.

1.    During FY11 and FY17, the total operated farm area has decreased from 160million hectare to 157.872million hectare; number of holdings have increased from 138.35 million to 146.45 million and the average holding size has decreased from 1.15 hectare to 1.08 hectare. For the context, the average farm size was 2.4hectare in 1971.

2.    The number of small and marginal farmers is rising consistently. UP, Bihar, Maharashtra and MP account for 45% of operational holdings. Bihar has the highest percentage of marginal and small holdings, followed by UP.

3.    14 out of 36 states & UTs account for 91% of the total number of holdings and 88.19% of the operated area. A large majority of states are thus relatively less relevant insofar as the policies and programs relating to farm sector are concerned.

4.    The marginal and small holdings (0 to 2 hectare) account for 86% of total holdings, covering about 47% of the operated area. Medium (2 to 10 hectare) holdings are 13.3% covering 44% of the operated area. Large holdings (above 10 hectare) are merely 0.57% covering 9% of the operated area.

5.    The more important and worrying statistics however is that there are over 100mn Marginal Farmers, with average holding of 0.38 hectare (0.9 acre) accounting for almost 68% of the total farmers. These farmers mostly do sustenance farming, and under no circumstances can earn decent two square meals from farming activity alone. 100mn farm holdings means about 400mn population, assuming an average family of 4. Marginal farmers with average land holding of 1.4 hectare are another 18% or 25mn.

About 47% of the total operated area is covered by these small and marginal farmers. The uneconomical size of holdings, which are getting further divided with the death of each farmer, ensures low productivity, poor financial conditions, no investment capacity and perennial debt in many cases.

6.    There is huge variation in land holding pattern amongst states. For example, AP and TN have largest proportion of landless farmers (more than 50%): Bihar and West Bengal have largest number of marginal farmers (close to 60%), where Rajasthan has the largest share of large farmers. Same agri policy for all these states is bound to fail.

7.    The average monthly rural household income in India is about Rs6426 and average Monthly rural household expenses are about Rs6223. About 85% of households earn less than their expenses. About half of this income comes from cultivation and rest from other activities like labour (including MNREGA) and animal husbandry.

8.    Rural household spend about half their income to buy food.

9.    As per the last available NSSO data, the average per student annual expense for education in rural areas was Rs6788 in 2014. It had risen more than 2.5x since 2008 when it was recorded at Rs2461.

10.  The average hospitalization expense in rural areas is close to Rs17000 per case of hospitalization as per the last available NSSO data

11.  Doubling the farmers' income by 2x in 8years (2014-2022) means a nominal growth rate of 9% CAGR. There is little change in real rural wages over past five years. Rural wages are an important component of rural income and a key determinant of minimum support price for farm produce, the government might need to review its strategy.

 

...to continue on Wednesday, 27 May 2020

Farm Sector - Govt may need to do much more

The much publicized and even more widely criticized Rs20trn Self Reliant India economic recovery package has laid significant emphasis on the farm sector reforms. The following 10 key promises have been made as part of the package.

1.    Essential Commodities Act to be amended to enable better price realization for farmers by attracting investments and making agriculture sector competitive.

2.    A central law to be enacted to provide for inter-state trade and framework for e trading of agriculture produce.

3.    The government to facilitate appropriate legal framework for an enforceable standard mechanism for predictable prices of crops at the time of sowing (some sort of contract farming or forward pricing mechanism).

4.    Financing facility of Rs.1Lakh Cr to be provided for funding Agriculture Infrastructure Projects at farm gate & aggregation points (Primary Agricultural Cooperative Societies, Farmers Producer Organizations, entrepreneurs, Start ups, etc.)

5.    Rs 10,000 Cr. scheme to be launched for Formalization of Micro Food Enterprise (MFE). through Cluster based approach (e g Mango in UP, Kesar in J&K, Bamboo shoots in North East, Chilli in Andhra Pradesh, Tapioca in Tamil Nadu etc

6.    Rs20,000 cr support to be provided under the  Pradhan Mantri Matsya Sampada Yojana (PMMSY) for integrated sustainable, inclusive development of marine and inland fisheries. Rs11,000 cr to be provided for activities in Marine, Inland fisheries and Aquaculture and Rs9,000 cr for infrastructure including Fishing Harbours Cold chain, Markets etc. Provisions of ban period support to fishermen (during the period fishing is not permitted) and personal & boat insurance.

7.    Rs 13343cr to be provided for starting National Animal Disease Control Programme for foot and mouth disease and brucellosis.

8.    Animal Husbandry Infrastructure Development Fund to be launched with total outlay of Rs15,000 cr.

9.    Rs4,000 cr support for promotion of  herbal cultivation covering 10lakh hectare. Rs500 cr scheme infrastructure development related to integrated beekeeping development centres, collection, marketing and storage centres, post harvest & value addition facilities etc. 

10.  Operation Green proposed to be extended from tomatoes, onion and potatoes (TOP) to all fruits and vegetables i.e., (TOTAL)

Indubitably, these measures are important and desirable. It is totally redundant to debate whether these are new measures or part of the work in progress as part of the plan to double farmers' income within the stipulated period. The important point is that if the current crisis is leading the government to accelerate these long pending initiatives, we must welcome this.

However, the second question, which in my view may be more pertinent, is "whether these measures sufficient or we would need much more to attain the twin objectives of self reliant India and sustainably higher economic growth?"

I believe that these measures are important and required. But these will deliver the desired outcome, only if implemented with the many more structural reforms in the farm sector. I have shared my views on this issue before also. I would like to discuss these again in light of the recent developments, over next couple of days.

ABCD of workers' migration

A popular saying is that "the true character of a person is often revealed in the times of crisis". The crisis tests intellect, common sense, resolve, grit, emotions, beliefs, etc. of people, besides highlighting their strengths, weaknesses and vulnerabilities. This applies mutatis mutandis to various organizations and systems also.

The present crisis, for example, has highlighted the strong character of the common people of India who are usually financially insecure (poor), less educated (or illiterate), religious (and superstitious), and oppressed. Often derided by the elite as dirty and non-compliant, these people have shown amazing resilience and grit. They have bore the brunt of economic consequences of the disease; faced cruel apathy of the administration & state (and in some cases employers also); have been most vulnerable to fatalities due to COVID-19 infections; and still managed to stay peaceful and non-violent.

Thousands of them received animal like treatment from administration and law enforcement agencies. Millions of them have walked hundreds of miles on highways and rail tracks, in scorching heat with infants, old, infirm and sick family members, sometimes going without food for hours. Some accidents causing death of many migrant workers have been reported on the media. However, many deaths due to heat, starvation, fatigue, infirmities and other curable diseases may go unreported.

The heart rending pictures of their painful journey back home have been widely shared and mourned in media. The rhetoric on TV channels and social media did spur the politicians into action, but unfortunately the action on the ground has been abysmally inadequate and apathetic.

Our team traveled to some highways and towns of UP, one of the largest destination of the migrant workers returning back, to assess the extent of the problems and its socio-economic impacts. I would like to share some key takeaways as follows:

1.    It is estimated that more than 10 million migrants may eventually return home to the states like UP, Bihar, Jharkhand, Chhattisgarh, MP, Odisha, West Bengal and Rajasthan. These workers are returning from relatively developed states of Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh, Karnataka, Punjab, Delhi and Haryana.

It is expected that once the lockdown is lifted fully, significantly larger number of migrant workers may seek to return home. Most of these workers are unskilled or semi skilled; though it may include sizable number of skilled workers also.

2.    The central and state governments appear to have completely ignored these workers in their planning for the lockdown. No thought was spared for their survival and sustenance in a prolonged lockdown scenario. This adequately highlights the pseudo feudal structure of our governance system (a key weakness) and absolute mediocrity of our administrative machinery (a key vulnerability). The Chief Minister of UP has emerged as most popular politicians insofar as handling of migrant workers is concerned. Even though he started a little late and is not supported ably by the administration and bureaucracy, he still has managed to convey the message that he cares.

3.    The innocent, helpless, scared, hungry and tired migrant workers have been treated worse than animals. Many states have treated them as if they were illegal intruders from some foreign country. This highlights that our economic and governance model may still be colonial in nature.

4.    A significant number of migrants on roads we spoke to confided in us that they were planning to return home since past few years, but were not able to muster enough courage. They believe that with so many government schemes operative, two square meals with dignity & freedom is not a problem in villages. They find it better than living in urban slums like insects.

5.    After speaking with over 900 migrant workers on road, we can say with some confidence that:

(i)    A large number of migrant workers returning home may not easily go back to their previous place of work. Many of them may in fact never leave their homes for work. There could be at least the following five consequences of this trend:

(a)   Businesses, especially construction and textile, may be forced to invest more in technology and automation. Household relying on domestic worker may also be forced to invest in home automation for household chores.

(b)   Many labor intensive businesses like textile may have to either relocate their manufacturing units in the areas where adequate number of local labor is available.

(c)   The pressure on civic infrastructure in large cities and railways may ease. The multibillion rupees remittance industry may be a key loser.

(d)   The home states of these workers may be incentivized/forced to invest in industrial infrastructure and seek private investments to create ample employment opportunities close to home. This may be a big fillip to the "self reliant" India mission. Agro processing is one industry that may see exponential investment and growth.

(e)   The regional imbalances in India may gradually bridge, if the home states seize this opportunity and develop a good industrial infrastructure.

(ii)   The Agony, sense of Betrayal, Confusion and Disillusionment (ABCD) is ideally a fertile ground for emergence of communist movements. Given the democratic communist parties in India are totally marginalized, the fear is that the violent Naxal movement may spread out of the forests of central India. A strong strategic initiative to prevent such eventuality must be taken immediately. The forthcoming election in Bihar may display some reflections of this fear. Watch out for that closely.

(iii)  The expectation from, and reliance on, the government's cash, food and fuel provisions shall rise materially, especially in the rural and semi urban areas. The fiscal pressures may remain elevated for many years to come.

(iv)   The pressure on civic and social infrastructure of villages and semi rural (or semi urban) areas shall rise significantly. Administration need to gear up for this well in advance, otherwise we may have garbage, filth, and disease everywhere.

(v)    The migrant workers returning home after spending many years in large cities are carrying an entirely different culture with them. On the positive side we may see improvement in religious and superstitious practices. However, on the other side, we may see many indulgences creeping in the simple village life style.