The traditional functions of the agriculture departments in the different states have been confined to extension services that involve soil testing, crop selection and crop management advice, setting up of demonstration plots, supplying seeds, fertilizers and farm equipments at subsidized rates, and implementation of the various government schemes and missions. While many of these continue to be relevant and important, the time may have come for going beyond these activities and bringing about a paradigm shift in our agriculture policy framework.
Let me re-fresh the cliched story about the problems faced by farmers. For a start, the farmers make their crop choices without access to the latest market information. In the absence of formal credit sources, he has to borrow at usurious rates from the local moneylender. There is precious little by way of extension services, and he continues his traditional farming methods. Once the crop is harvested, since he has no access to latest price information and storage facilities, the farmer has to perforce sell off his produce to the local middlemen at the lowest price.
Under the re-defined policy paradigm, the four dimensions of agriculture policy will involve access to - adequate and timely credit, extension services and market information, forward linkages like storage facilities and markets, and risk mitigation mechanisms like commodities markets.
It is imperative that our agriculture policies make the issue of access to formal credit mechanisms a central concern. In recent years, while the nationalized banks have become more aggressive in their agriculture sector lending, it still retains the impression of being a target driven activity. The massive and growing market in informal money lending at usurious rate only underlines the fact that contrary to popular perception, farmers are credit worthy and willing to repay their loans. But the recurrent loan waivers have created a moral hazard, making banks wary of agriculture sector lending.
It is therefore important that government policies eschew such bad practices and incentivize the development of an active farm sector lending market. A quantum leap can be made in providing access to farm credit by issuing Kisan Credit Cards and expanding the network of ATM centers in rural areas. Taking a cue from the impressive strides made in bank linkage lending to women Self Help Groups (SHGs), a major campaign should be initiated to form farmers groups.
The entry of big box retailers into the food procurement chain has dramatically altered the scenario and opened up massive opportunities for farmers. One of the biggest challenges for our agriculture policy is to leverage these opportunities to benefit them. These big retailers and others in the fast food business incur huge transaction costs in accessing farm produce from the farmgate. Instead of dealing with individual farmers and middlemen, it is in their interest to assist farmers groups and co-operatives produce agriculture commodities of the specified standards and thereby have access to assured supply of good quality. By dealing directly with the end-user in the procurement chain, the farmers get a much higher price for their produce.
While Public Private Partnerships (PPPs) have become the flavour of sectors like infrastructure, it is rarely ever mentioned in the context of agriculture. But fortunately, the recent developments like nation-wide commodities exchanges and the entry of organized retailers presents numerous opportunities for PPPs.
The entry of organized retail should be utilized to incentivize the development of a formal market along the entire agriculture supply chain. There are big profit opportunities for the private sector in agriculture services like providing extension activities, market information, storage facilities and even commodities derivatives broking.
Agriculture policies should encourage the setting up of cold storages on PPP basis. For example, government can provide vacant land in villages through a formal and transparent tendering process to private developers, who will in turn develop cold storages and share the storage space with the Government or the local farmers co-operatives or farmers groups. These new storage facilities can be linked up with the existing government and private facilties to create a nationwide network of storage facilities that can service the commodities exchanges.
The spread of information communication technologies like Internet and the mobile phones should be leveraged to benefit the farmers. There have been numerous successful examples of private companies like ITC, through its famous e-choupals, and now Reuters, selling extension services and market information to farmers. The agriculture department should work towards scaling up these experiments and put in place policies that incentivize private participation in the agriculture services market.
The utility of the new commodities futures market in India has so far been limited to being another source of financial investment and speculation, rather than being a platform for farmers to hedge their risks. The overwhelmingly large portion of contracts are speculative in nature and conclude in cash settlement, rather than any physical delivery settlement.
The Agriculture department should encourage farmers to access the futures market, either individually or more realistically through farmers groups and other existing co-operative societies. Market makers like broking houses can be encouraged to set up shop, initially in some districts, and help the farmers access the futures markets. Just as the eighties and nineties saw off a revolution in equity ownership among the Indian middle class, we now need a similar revolution in farmers participation in commodities derivatives.
The government should encourage the expansion of trading centers and terminals of the major commodities exchanges in districts across the country. A large-scale and intensive Information Education Campaign (IEC) should be launched to accquaint farmers with futures trading contracts, and trading processes and agents like brokers and margin requirements. Farmers need to be made aware of maintaining commodity standards and specifications and adhering to their contractual obligations.
It is also important that the farmers have access to clearing houses that stand guarantee for their futures contracts. The exchanges can be encouraged to set up their local centers in a few high volume districts and local banks can be encouraged to perform the clearing house functions in other places. Government agencies like the State Warehousing Corporation or even vibrant co-operative societies too can act as clearing houses.
In a different way, the commodities futures and options markets perform the role of the Minimum Support Price (MSP) by providing the farmers a platform and instruments to hedge for an assured high market price for their produce. These markets help in fixing a market determined MSP, which while hedging farmers against losses also signals priceless market information well in advance thereby enabling farmers make more informed choices about their crop selection.
This MSP will take the form of a series of futures contracts spread out across the country, and based on the needs and requirements of individual or groups of farmers. It will also open up the possibility of farmers getting prices in excess of the government assured MSP. In the initial stages, the Agriculture department should intensively focus on advising farmers in enetering into beneficial futures contracts.
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