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Profitability in Agriculture and Inclusive Growth N.Srinivasan* Increasing profitability in agriculture through higher productivity has been an important goal in developing countries like India. It has become more relevant in recent years due to limited scope for expansion of arable land. Increasing yield to their technically highest level may be feasible, through adequate investment in infrastructure and technology i.e. irrigation, land development, storage, markets, etc. Besides appropriate pricing of inputs and outputs, availability of credit and extension services would facilitate access to available technology. A major theme emphasised by Planning Commission in its mid term review of the Tenth Five Year Plan is expanding inclusiveness of growth by creating market opportunities in the lagging sector of agriculture, in more and more States, and improving peoples participation on more and more favourable terms in the market
Table-1: Comparative Growth of Agriculture and Overall Economy. Years
Overall GDP growth rate
Agriculture and allied activities
1981-1991
5.74
3.84
1991-2001
5.64
2.72
2000-01 to 2004-05
6.00
2.24
These issues are more relevant in our country because 58 % of labour force is dependent on agriculture. The growth of value added in this sector has declined from about 4% during 1980s to 3% during 1990s and 2% in last five years as given in Table-1
(Source: Economic Survey, Government of India, Table S-10)
* Chief General Manager, NABARD, Pune Regional Office. This is based on the presentation made during the National Symposium on Farm Credit for Inclusive Growth at the College of Agricultural Banking, Pune on January 12, 2007. The papers are being published in a book form.
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A major concern is the relatively low growth in agriculture GDP as compared to overall GDP without significant reduction of labour force engaged in agriculture. It has widened the gap between per capita income of labour engaged in agriculture and non-agriculture sectors. A large number of rural households share a shrinking part of the national pie. In fact, the situation has worsened in recent years with 60% of rural households owning less than 1 ha, 12% households landless and 28% of rural households owning more than 1 ha (National Commission on Farmers 2006). Such an uneven distribution of income and assets has social and political ramifications for future.
Profitability and Viability Profitability may be defined as positive return to working capital and capital invested in various productive assets including land. In case of capital assets, profitability should ensure return of capital and also return to capital at rate equal to or exceeding the prevalent market rate of interest. As regards viability, the farm family must be in a position to generate a total net income that is sufficient to meet the expenses of the household and invest in future. In this context, the National Commission on Farmers in its 10 major goals for national policy for farmers mentions its first goal as to improve economic viability of farming by ensuring that a farmer earns a minimum net income and ensure that agriculture progress is weathered by the advance made in improving the income. Hence, inclusive growth refers to viability of even the smallest and the most marginal rural. Sustainability is the ability to generate positive net returns over a period of time, protecting the productive capacity of capital assets.
Trends in Income from Agriculture The index of agriculture income increased from 100 in 199394 to 151 in 2004-05. Sectors other than agriculture experienced an increase in indexed income from 100 to 234 over the same period. It indicates, ceteris paribus, widening disparity in income between agriculture and non-agriculture workers. The indices of Terms of Trade (TOT) in agriculture prepared by Commission for Agricultural Costs and Prices (CACP) and Directorate of Economics and Statistics are given in Table 2. As per CACP data, the TOT have been favourable to agriculture during 1990s up to 1995-96, however, after this period the TOT has turned unfavourable. The TOTs prepared by the Directorate of Economics and Statistics indicate that the terms are deteriorating from 94-95 onwards
till 2000-01. In the recent years, the prices of the inputs have not increased much as compared to the agricultural commodity prices. This suggests that the cause of unviability lies somewhere else. The influence of non-price factors, such as, public investment in agriculture, human development and institutional reforms are as important as price incentives, in inducing effective supply response (Rao and Gulati, 2005). The Planning Commission in its mid term review of the tenth plan observes that agriculture prices declined relative to prices not only of inputs, but also non-food consumer goods. As a result, purchasing power of agriculture income (current price GDP/consumer expenditure) decelerated more than GDP. Farm incomes not only show low per capita growth after 1996-97 but also exhibit increased variability.
Table 2 Terms of Trade in Agriculture Year
CACP Base TE 1980-81
DE&S TE 1980-81
1980-81
100
1981-82
95
88.7
1982-83
97
91.4
1983-84
98.9
91.6
1984-85
98.5
93.9
1985-86
94.4
93.6
1986-87
97.7
95.7
1987-88
99.5
97.4
1988-89
98.7
98.3
1989-90
99.1
99.4
1990-91
103.1
101.9
1991-92
106.2
105.6
1992-93
99.2
103
1993-94
104.1
103.6
1994-95
105.2
106.6
1995-96
103.3
105.3
1996-97
93.1
103.1
1997-98
91.7
105.6
1998-99
95.6
105.2
1999-00
95
102.7
2000-01
101.2
(Source - CACP, MTA of X plan, Planning Commission)
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Crop-wise Input Output Ratios The crop-wise productivity and input-output ratios have been worked out for crops grown in Punjab. It shows that wheat and paddy combination is giving maximum returns per ha and the input-output ratio is higher for these crops as compared to other millets, pulses and oilseeds. Therefore, the areas with lower allocation of acreage under wheat and paddy may have relatively less income than the all India average.
Table 3 - Input Output Ratio: Comparison Among Crops (2001-02) Crop
Gross returns (Rs./ha)
Variable cost (Rs./ha)
Net returns (Rs./ha)
Output/Input
Wheat
30,016
11,665
18,351
2.57
Paddy (Rice)
29,792
16,921
12,871
1.78
Sugarcane
68,750
50,120
18,830
1.37
Gram
14,900
5,663
9,237
2.63
Linseed
17,100
8,013
9,087
2.13
Barley
18,100
9,084
9,016
1.9
Arhar
13,650
6,948
6,702
1.96
Cotton (A)
21,362
15,125
6,237
1.41
R&M
136.1
9,248
4,362
1.47
Basmati
19,400
15,906
3,494
1.21
The Table 3 shows that the highest Maize 13,590 12,180 1,410 1.11 financial returns per ha and the best Cotton (D) 15,124 14,042 1,082 1.07 input-output ratio is achieved in Moong 9,080 8,000 1,080 1.13 wheat followed by paddy. It is to Groundnut 12,080 11,422 658 1.05 be noted that even the net financial returns from sugarcane amount to (Source: Dept. of Economics, PAU, Ludhiana as reported by Dr. H S Shergill, 2006, only Rs.9715 per crop season (of table 5.1, page 23) half year). The other crops that yield reasonable financial returns are gram, linseed, barley, though machinery. These costs relate to i) failure in infrastructure, their absolute income is much less as compared to wheat ii) delay in receipt of subsidy, iii) delay in the delivery of and paddy. In case of pulses and oilseeds, the returns are at services, iv) lack of quality inputs, v) under financing by banks, the minimum. The dry land crops show much lower returns and vi) the procedural complexities. Each of these tends to than irrigated crops. This clearly brings out the difficulties increase the level and duration of efforts of the farmers to faced by dry land farmers in generating viable incomes. access the quality services at the appropriate time. In some
Farmers Response In a recent survey, it was revealed that 40% of farmers want to quit farming. Lack of viable alternative has kept them in farming. There have been periodic and persistent requests for relief from cultivators. Even those cultivating commercial crops like sugarcane, cotton and plantation crops have been demanding relief. The existence of the people in dry land areas is marginal; even those who have large land holding, fall into transient poverty whenever monsoons fail. Suicides have been resorted to as a distress response in the extreme.
Hidden Costs A number of hidden costs that make agriculture are rarely recognised and computed. The farm models in agriculture are designed on the basis of standard costing norms. But there are invisible and hidden costs in carrying out agriculture that tend to distort the farm models adopted by the official 20
cases, the farmers have to substitute the low cost resources with a much higher cost resource on account of delays and complexities. Since these costs rarely enter the farm models, the losses inherent in carrying out farming operations do not come to the surface. The normative costs associated with credit, fixation of support prices, subsidies for investments, etc. ignore these costs and thereby impact profitability at farm level.
Policy - bred Causes Several reasons for low profitability of agriculture have their roots in State policy. For example, the policy on land tenancy and ownership has pushed up the cost of leasing and has driven the market underground. Without effective grievance redressal mechanisms in case of disputes, the land policy has made the relationship between the owner and tenant extortionate from either side.
CAB CALLING l January-March, 2007
The overall slant of agricultural policy has been on inputs and supply of a variety of goods and services, such as, seeds, fertilisers, technology. By failing to focus on markets, the policy has impacted the profitability of agriculture and made the farmers dependent on subsidized inputs supply rather than on the market for remunerative prices. Through a combination of state and credit policy, overall production growth was targeted rather than farm incomes. The state intervention in agriculture has tended to benefit irrigated farms and large holdings as these are better placed to use the inputs offered. On the other side, the socio-political need for keeping the consumer prices low and providing cost effective access to food has ensured that the farmers did not benefit from higher prices possible in the markets. Procurement and marketing especially in cereals has been managed by the state in the same manner in the interest of consumers and thereby restricted gains to the farmers. The subsidies given by the benevolent state seeking to reduce input cost has led to distortion in the market and encouraged misuse and misapplication of inputs. The review over the last four decades of the farm policy and the policy of inputs leads one to feel that farmers security has become a casualty to the interests of food security. The policy of encouraging shortterm loans in agriculture on the part of banks has restrained the private sector from making optimum long-term investments in improving the productivity and asset quality.
Risks and Profitability
State. Such investments suffered when the promises were not fulfilled. For example, availability of power and energisation pump sets are clear issues for farmers trying to set up the irrigation facilities in their farms. There are many states in which the pending applications for power connection are fairly large and even after obtaining power connection the availability of power is erratic. The investments made in such cases have become partially or wholly infructuous. Often, subsidies are promised but delivered after considerable lapse of time. The farmers have to depend upon borrowings from elsewhere in order to complete the investment. During this period, the high cost of borrowing pushes up the capital costs and reduces profitability. Similarly, delayed supply of seeds and fertilisers is a commonplace occurrence that affects crop output and profitability. Quality of inputs especially in seeds impacts germination and consequently outputs. Non-maintenance of infrastructure created has a dampening effect of assured availability of services (power, irrigation, market). The leakages that take place in the delivery of the several promises made by the State and others strain the farmers budget as they have to bring supplementary resources from elsewhere at higher costs. If the performance matches promises on every good and service that is offered to farms, perhaps there would be more stability in farm income.
Technology and Transfer of Knowledge
The risks inherent in farming impact its profitability. Some of the major related risks are technology, credit availability and most importantly policy continuity. Increasing share of purchased inputs in Indian agriculture leaves it open to market risks of increasing costs. The absence of market based risk mitigation mechanism has made it difficult for farmers to use friendly and reliable insurance products. The existing risk products are limited both in coverage and appeal. This lack of risk coverage on the basic production efforts of the farmers at the individual farm level is compounded by lack of safety nets to secure their future. The State action in terms of risk mitigation is more evident in calamity relief rather than systematic management of risk.
Technology has been the corner-stone of green revolution during which quantum jump in food grain productivity was evidenced. But today, if we compare the productivity of Indian farms with those obtaining elsewhere in the world, we find that our productivity is lower in every major crop. Why has technology not been able to improve productivity beyond a point? It may be due to the fact that farm viability has not been made an objective in technology development. Even after 50 years of intensive work, there is no mainstream farming solution for dry lands that is sustainable. The technology transfer mechanisms are weak with a significant proportion of farmers willing to use press and media as source of credible information rather than the extension workers. The universities have not emphasised linkages with farms.
Promise and Performance
Markets and Incomes
A significant contributor to the present state of farming is the tardy performance under the promises that are made to the farming community. Farmers across states have made several investments on the basis of promises made by the
Markets have been the weakest link in the chain that connects the farmers with incomes. Cost of accessing physical markets and the opacity of dealings therein have been adversely affecting the farming community. Marketing 21
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infrastructure and fair practices in the markets need to improve considerably. Lack of aggregation mechanisms for produce and lack of marketing mechanisms have prevented the small farmers from realising the best prices for their outputs. The support prices combined with procurement have distorted the market and have reduced the income realisation in the hands of farmers. The mid-term evaluation of 10th Five Year Plan has been critical about performance of both minimum support price and procurement mechanism. The policy of keeping private sector out of procurement and marketing operations has led to continued exploitation by the existing intermediaries in the chain. While different commodity exchanges have been set up, they tend to look towards organised trade rather the farming community.
Impact of Global Trade Globalisation of farming has already affected the Indian farmers with gluts in production across the world being transmitted to India in the form of lower prices of farm produce. Sugar, oil seeds, edible oils, milk and milk products, plantation crops and cotton are the prime examples of the impact of global markets on Indian farmers. The global shortages do not seem to produce high returns for Indian farms. Such shortages seem to benefit trade and industry more than the farmers. Export-Import policy is used by the government in case of domestic shortages and cool down the market to maintain consumer prices at lower levels to the disadvantage of farmers. While intensive negotiations are on over the issue of access to OECD markets for farm produce, the fact remains that the subsidies given to farmers in OECD countries was 2.6 times of the entire agricultural GDP of the year 2004-05. With subsidies in such large quantities available to the farmers abroad (as much as 40 to 60% of their incomes), how do the Indian farms compete in a global market is a big question. The non-trade barriers such as PSP requirements, country of origin, labour standards, quality standards and the like also reduce access to remunerative markets.
Silver Lining More reforms in agriculture have been visible in last two years. Agricultural marketing is being unshackled with entry of private sector and creation of new marketing infrastructure has been actively pursued. There are exciting developments in design of new risk mitigation products. The government has made the initial shift from providing subsidies to offering venture funding for enterprises in agriculture. There is greater tolerance and some encouragement for entry of private sector. 22
This should introduce greater efficiency and innovations. Corporate farming and contract farming practices that are currently gaining ground should improve the cultural and marketing practices to the benefit of farms.
Agenda for the Future If farmers have to remain efficient and get viable incomes, farm profitability should be clearly focused and enhanced. This calls for action from several players. First at the level of policy, there must be a shift in focus from inputs to outputs and markets. While the agriculture policy is needed to ensure growth of production, productivity, crop diversification and food security, what is more needed is a farm income policy that would ensure that farmers are in a position to implement the agricultural policy with profits. What needs to be clearly articulated is where consumer protection must end and farm protection should start. The protection needed by the poor and vulnerable sections of the population must be met through welfare measures separately and not achieved through depressing farm produce prices across the board. Public investment in rural infrastructure must not only be enhanced but also made very efficient. This results in reducing the cost of agriculture operations and widening the market. On the technology front, we must prioritise cost reduction and income enhancement at farm level. Even when all these are done, market failures are bound to impact farms. Safety nets for farmers to rescue them from market failures are imperative. The commodity exchanges should have a rural service obligation so that greater access to market for farmers and their associations are available. The trade policy on farm produce should strive for consistency and continuity so that investments made in farming do not become unviable. A dispute redressal mechanism that would address the issues relating to contract and corporate farming is necessary in the context of increasing coverage of such arrangements. A mechanism should be in place to compensate farmers for failures of technology and inputs. Eventually, the state has to shift from the hands-on project management approach in agriculture to a supervisory role where it sets standards and benchmarks for quality of services and ensures that service providers adhere to these standards. Income generation is an entrepreneurial activity. Less State and more private involvement could provide suitable conditions for enhancing farm incomes. More private sector initiatives must be welcomed in agriculture with necessary safeguards to prevent exploitation of farming community. n
