Budget 2024: What Ails India's Farm Sector

It’s been a tradition with finance ministers to refrain from announcements involving large financial outlays when their governments are on their last legs and to seek a vote on account for meeting essential expenditure till a new government takes over and presents a regular budget. Jaswant Singh, finance minister in Atal Bihari Vajpayee’s government, honoured that practice in the interim budget of February 2004.

In presenting the interim budget in February 2009, Pranab Mukherjee, finance minister in the Manmohan Singh government, said, “Constitutional propriety requires that new government formulates the tax and expenditure policies” for the next financial year. Aware of this limitation, and with an eye on elections that year, Finance Minister P Chidambaram had announced in his 2008 budget a complete waiver of overdue loans of small and marginal farmers costing taxpayers Rs 65,000 crore.

In the 2014 interim budget, the convention was observed and finance minister Chidambaram only recounted the achievements of the UPA government. He held out some promises should the government be returned to office.

But Piyush Goyal, who took over as finance minister after the demise of Arun Jaitley, gave the convention the miss in the interim budget of February 2019. The vote on account had a major announcement: PM-Kisan which provided income support of Rs 6,000 per year in three quarterly instalments to each farmer with less than five acres of land. It was back-dated to December 2018, so that the first instalment of Rs 2,000 could be paid before the general election.

Some economists say that income support is better than price support, that is, subsidies on inputs. Subsidies result in wasteful use of inputs like fertilisers, electricity and water and harm the environment. They want inputs to be market priced and farmers to get income support. But income support, if linked to land ownership, will not benefit all cultivators. A national sample survey published in 2014 put the share of leased holdings at 34% in Andhra Pradesh, 25% in Punjab, 21% in Bihar, 17% in Odisha, and 14% each in Tamil Nadu and West Bengal. For tenant cultivators to get the benefit, the leases will have to be formal and landowners will have to be assured that the lease agreements will not be used to dispossess them. Phasing out subsidies and replacing them with income support will also need a consensus between the centre and the states, like the one that enabled implementation of the goods and services tax.

Even if the centre is convinced, it may not have the appetite to pursue such a big-ticket reform as its move to create a competitive market for agricultural produce by permitting cess-free purchases outside the regulated markets backfired and was met with a yearlong protest in 2021 by Punjab, Western UP and Haryana farmers.

Even with income support, cultivators would need to be assured of remunerative prices. Emboldened by the success of their protest, the farmers unions of northwest India are demanding minimum support prices as a legal guarantee. Virender Latther, a Karnal-based agricultural scientist and prolific commentator on agricultural issues, says a legal guarantee would compel even private traders to buy produce at MSP. Sugar mills, for instance, are obligated by law to buy cane at the ‘fair and remunerative price’ set by the centre. But they have a history of defaulting on cane payments. In the case of other agricultural produce, it’s hard to compel traders to buy at prices set by the centre, if those rates are above market prices—as has often been the case since 2018. MSP now has to be 50% above the paid out cultivation costs of a crop and the imputed value of family labour.

Agricultural economist and NITI Aayog member Ramesh Chand and NITI Aayog consultant Jaspal Singh have said in a paper about preparing agriculture for the next 25 years that MSP is needed to protect farmers from gluts, malpractices and market inefficiencies. But legally guaranteed MSP would make farmers produce regardless of demand. Open-ended procurement of all 22 crops for which there is MSP, would be financially ruinous for the government.

Chand and Singh propose a mix of MSP and price deficiency payments to incentivise crop diversification. In PDP, the government does not itself procure. It pays farmers the difference between the price they get at mandis and the MSP. This has been tried for a few crops in Madhya Pradesh and Haryana, though there are reports of traders gaming the system.  

MSPs and PDPs do not come within the remit of the budget but skew budgetary allocations. Too much of the outlay for agriculture is consumed by food and fertiliser subsidies. That leaves less for investment in say weather-risk-mitigating irrigation. The paper cited above says subsidies have had a 7% share of agricultural GVA in the last decade, while the share of public investment in agriculture has been around 2%.

The paper also says that consumer demand has been stronger in pushing agricultural growth than government support. Because of this, growth has been higher in fruits and vegetables, fisheries, dairy and poultry. These get little government support unlike wheat and rice. States that have aligned their agriculture to consumer preferences (which is shifting away from rice and wheat) have earned more per acre than Haryana and Punjab which are cereal dependent.

The other issue that should concern the finance minister is the increase in the share of the workforce engaged in agriculture. After falling from 54.6% as per the 2011 census to 42.5% in 2018-19, it rose in the next two years and was 46.5% in 2020-21, before declining to 45.5% in 2021-22. This calls for policies to quicken economic growth so that those unproductively engaged in agriculture can find more paying work in other sectors. The increase in agricultural workforce has impacted rural wages too. As the economist and activist Jean Dreze pointed out in an article, wages adjusted for retail inflation have grown by just 0.9% a year for male agricultural workers and 0.3% for non-agricultural labour between 2014-15 and 2021-22. While overall GDP growth is strong, we also need polices that drive wage growth.