More thoughts on Indian agriculture

I had written sometime back about the corrosive effects of loan waivers arguing that such "assault on incentives" are far more pernicious than giving electoral freebies. 

India has witnessed and explosion of farm loan waivers in the last year or so as part of electoral politics in states which held assembly elections. And with the next election season on, the trend continues unabated. 

But this issue cannot be seen in isolation. It has to be seen as part of the entire agriculture eco-system in India. 

Actually agriculture is a pretty complex system and conventional market solutions have been shown to not work. Gluts and shortages are inevitable - bad weather is a risk; good prices lead to excess cultivation next year and resultant drops, and vice-versa; global supply shocks and resultant price fluctuations are always round the corner; poor storage and other forward linkages make farm sales the only option etc. Pain and suffering follows.

Developed countries, over decades, have sought to address this problem through less distorting approaches - mainly crop insurance and/or direct payments. It helped that they have good irrigation systems, farms are bigger, forward linkages are better, credit access simple, and markets are functional.

We have none of the positive conditions, and crop insurance and direct payments are both very expensive and run into problems of effective administration.

But we have this smorgasbord of inefficient and distorting things - subsidised crop loans and their recurrent waivers; procurement and MSP (which feeds into the PDS); fertiliser subsidy; free farm power; agriculture IT exemption; minor irrigation programs like PMKSY etc. Worse still, each one has generated its set of powerful entrenched interests, which reflexively gang up as a vocal electoral constituency whenever they are threatened. Making matters complex, it cannot also be denied that each one of these, in their very sub-optimal ways, contributes to mitigating, even if partially, the fundamental problem, and the resultant pain and suffering.

So we have a very bad self-reinforcing and perpetuating equilibrium. A chakravyuha, from which exits appear very daunting.

I have not come across anything satisfactory as a path out of this. Except the gradual process of development - build irrigation systems, transition people out of agriculture, consolidate farms, let linkages and markets develop etc - and the gradual introduction of things like crop insurance. In this dismal environment, doubling farm incomes may well be the government's most over-optimistic promise yet.

There may be just a few avenues to manoeuvre. Given that the crop insurance scheme is one of the government's bigger initiatives, and one of the most progressive (as well as efficient), I think it should actually spend more energies and resources on it. As experience from across the world shows, premium support will always entail big subsidies and this may be worth paying. Can the government also think of phasing out some of these other subsidies and phasing in more of crop-insurance support? For example, it could encourage states which are willing to do farm power metering and a low agricultural tariff (to start with), to be provided a much higher premium support subsidy.

But alternatively, there is some merit in reframing both the MSP and crop-insurance. Instead of government procurement (except, and only to the extent required, for wheat and paddy), the MSP should be announced and farmers should be given the differential between the MSP and the market price, as is being tried out now in Madhya Pradesh for onions.

Similarly, there is a compelling case to dispensing with crop insurance, with all its transaction costs and reimbursement delays, and making direct payments when the crop fails. After all, if the identification of farmers affected has to be done even with insurance and a major share of the premium will have to be subsidised to make the insurance payouts meaningful enough, then the supposed advantages of an insurance model compared to direct payments looks questionable.

Update 1 (01.01.2018)
This article has the description of the Madhya Pradesh's Bhavantar Bhugtan Yojana.