Here are a baker's dozen verities about agriculture as an economic activity in India:
1. Agricultural product markets have historically been prone to excessive fluctuations. The limited depth and high concentration (of producers) of trade in agricultural staples (compared to total global production) is a major contributor to this volatility.
2. Limiting this volatility is a daunting challenge. For a start, cash crops are prone to even more volatility and therefore riskier. Even price signals from the previous crop/year merely amplify the volatility by creating annual cycles of gluts followed by scarcity. Further, cropping patterns are dictated by social and historical factors, and therefore resistant to change. The Econ 101 solution of crop insurance is both prohibitively expensive and extremely difficult to administer, and so not common even in developed countries.
3. Therefore farmers even in developed countries - remember the EU's Common Agriculture Policy, direct income transfers enjoyed by Rust Belt farmers in US, and heavily subsidised paddy farmers in Japan - enjoy large subsidies. The political economy of farming is the same everywhere, large subsidies in some form or other.
4. The overwhelming majority of farm sales in India (outside of Punjab and Haryana) are done at farm gate, are ungraded and unsorted, are transacted in cash and that too in instalments and/or with recoveries for other services, and to middlemen.
5. In the absence of access to adequate and timely credit, a critical requirement in a working capital intensive economic activity like farming, farmers have no choice but to rely on middlemen for credit and inputs.
6. Meaningful changes to each of these elements of typical farm sales can happen only as rural incomes increase and entrenched socio-economic realities undergo change. In weak state capacity environments, the ability of governments to support, much less expedite, such change is limited. So change is likely to be gradual.
7. In light of the aforementioned nature of farm sales (and the not-quickly-addressed weakness of contract enforcement), the ability of the system to adopt impersonal digital transactions and elimination of middlemen is limited. So, innovations using technology like eNAM have hard limits.
8. In any case, if evidence from agricultural markets across the world is anything to go by and especially given the socio-economic context of farming in India, disintermediating middlemen is perhaps too daunting. Besides, given the entrenched structural foundations of terms of trade along any agricultural value chain, even in the best case scenario, the incremental value capture accruing to farmers will be marginal. Furthermore, there is limited evidence of exorbitant markups by middlemen.
9. Even if the middlemen were to be eliminated, given the daunting co-ordination problems and small size of marketable surplus except among a small share of farmers, the large buyers will always rely on intermediaries as aggregators. So the multiple layers in the marketing system will remain.
10. On the issue of terms of trade, governments are forced to balance the conflicting interests of the large population of farmers who want to maximise their prices and an even bigger population of consumers who want cheaper foodgrains. This makes governments intervene with various forms of policy instruments like minimum support prices and price and quantity controls.
11. Effective resolution of the trade-off invariably requires either subsidising the farmers or consumers or both. Since the latter is more distortionary and fiscally unsustainable (beyond for food security reasons), governments are left with pursuing the less distorting and costly option of subsidising farmers.
12. India has 140 million hectares of farm land and 145 million farming households (including landless labour, it's more likely to be much more). Therefore, by accounting reality any equitable distribution of farm land leaves us with a world of very small average farm holdings.
13. India did not undertake land reforms, critical to create the broad-base required to undergo successful structural transformations. No country in the world has undergone successful structural transformation without land reforms and through market-based consolidation driven by contract farming. Nor has any country enjoyed sustained high growth rates without broad-based income growth and economic mobility among its dominant rural populations.
So where does this leave agriculture in India?
If we accept the above, couple of things emerge. Farm subsidy is unavoidable, and it is perhaps most efficiently done as direct transfers.
In terms of meaningful and quick enough change, the only possibility is through technological disruptions like the Green Revolution, involving higher yielding seed varieties.
As an alternative paradigm, one can point to Joe Studwell again in the context of agriculture in North East Asia. He writes about the land reforms in China, Japan, Korea, and Taiwan and their model of intensive cultivation on small plots,
It was, roughly speaking, to take available agricultural land and to divide it up on an equal basis (once variation in land quality was allowed for) among the farming population. This, backed by government support for rural credit and marketing institutions, agronomic training and other support services, created a new type of market. It was a market in which owners of small household farms were incentivised to invest their labour and the surplus they generated towards maximising production. The result was hugely increased yields in all four countries... Output booms occurred in conditions in which farming was essentially a form of large-scale gardening. Families of five, six or seven people tended plots of not more than one hectare...The list of time-consuming interventions is almost endless. One of the most effective is to start off seeds in trays indoors so that they are only put in the ground for the more rapid maturation process. Soil-bed temperature also greatly affects yields and can be regulated by using raised beds in temperate climates or pits in tropical climates. Compost is most effective when applied with diligence – high-yield fruit and vegetable gardeners deploy fertiliser on a plant-by-plant basis. Targeted watering (taller plants, for instance, tend to need more) and constant weeding also have a big effect on crop size. The most productive plots utilise an almost solid leaf canopy because close planting minimises water loss and discourages weeds; but this rules out access for machines. The use of trellises, nets, strings and poles – all set up by hand – maximises yields through ‘vertical’ gardening; a single tomato plant can produce 20 kg of fruit. Inter-growing of plants with different maturities saves more space (the cognoscenti place radishes and carrots in the same furrow because the radishes mature before the carrots begin to crowd them out; but then the radishes can only be harvested by hand). Equally, shade-tolerant vegetables like spinach or celery can be raised in the shadows of taller plants to ensure that no space is wasted; but again, this must be done by hand.
This is a hard act to pull off, given the intensity of agricultural extension services and behaviour change required.
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