Very good analysis of India's agriculture system by Ram Kaundinya. I have always struggled with a outlining a satisfactory enough pathway to agricultural sector reforms. Here is only the latest attempt.
As a context, about 130-140 m farmers cultivate around 175 m hectares of land, of which over 60% is unirrigated and rely on erratic monsoons. Mechanization is limited and with perhaps not much (though not non-trivial) potential given the small and fragmented holdings. Farming is therefore not very productive and largely subsistence. A vast and entrenched intermediary network coupled with lack of storage infrastructure means that most of farm production is sold immediately at farm gate at lower prices in a post-harvest buyers market. Cropping patterns have been shifting, with riskier and more infrastructure dependent horticulture crop production recently exceeding food grains.
Given the aforementioned context, I see two major market failures.
1. Price signals are distorted by information and access barriers as well as intermediation layers. This means that the fundamental requirement for price transmission and resultant supply-demand balance is vitiated. The result is price gouging when crop fails and price collapses after good harvest. Given the role of global factors, price shocks, both positive and negative, are increasingly common.
2. Markets do not offer affordable instruments to hedge against the two biggest risks - weather-related events and price-shocks - which are both much higher than for most other major livelihoods. Such hedges are costly, inaccessible, and under-supplied.
This is compounded by the farmer's incapacity and cultural and psychological reluctance to respond swiftly to emergent information signals. And exacerbated by backward looking and reactive policy responses (the bigger increase in the Minimum Support Price for pulses and lower for cotton).
So what can public policy do? Some very general thoughts. The minimum would be to increase public investments in research and infrastructure - higher yielding varieties, irrigation facilities on an outcomes (irrigation potential actually realised) focused approach, storage facilities etc - and ease regulatory barriers - effective implementation of the APMC Act etc. Others would involve catalysis of markets in affordable access to upstream and downstream linkages, mechanisation (custom hiring centers etc), information flows, provision of credit, and so on. All these would require persistent and long-drawn work, not exactly the sort of activities a weak state is good at.
The more difficult ones involve de-risking agricultural activity and addressing the issue of property rights. There are no satisfactory answers in either case and the risk of moral hazard, with the former, is significant. We should strive to develop crop insurance as the primary risk-mitigation tool (away from an MSP) over a 10-15 year period. But in the short-run, some form of price support, including for some horticulture crops, may be unavoidable. On the latter, an even more difficult challenge, we should seek to clean/update land records and develop a practical regime for ownership and tenancy rights.