Changing Farm Strategies: From farm output growth to farm income growth

Over the years, there have been gradual, incremental policy steps that have been taken to raise agricultural production, both from the perspective of protecting consumer interests and keeping agriculture an attractive proposition for the producers. On both the sides, the margin for error has been narrow. And often this margin is determined by the rainfall in the short run. Good rainfall leads to bountiful harvest and scarce rainfall leads to inflationary pressures. Then, there are the policy shocks, whether it is the international trade, minimum support prices or input prices. The route from farm to the consumer is long and complicated. Protective policies for the farm sector are becoming as important as the policies to incentivise investments. The new output records should be viewed with the success achieved in reducing fluctuations in farm income.

The policy framework is becoming more comprehensive, adopting more efficient methods to deliver services. However, the ‘farm distress’ reflects the vulnerabilities of the farm enterprise. Farmers need to adopt new technologies, diversify production and market their produce to increase their income from smaller farms. There are risks of production and the markets. The performance of agricultural sector in the past three years has highlighted some of the vulnerabilities of the farmers. 

Agricultural output bounced back in 2016-17 after stagnation in the previous two years. The ups and downs in the output growth rates reiterate the significance of rainfall that provides water for agricultural production. A strong output performance by the agriculture and allied activities sector in 2016-17, posting an annual growth of 4.9 per cent in terms of value added in constant prices, led to expectations that the sector was gearing up for a sustained high growth. In fact, output of cereals, pulses and oilseeds were at record levels. However, the supply-demand balancing required the prices to decelerate unless there were other interventions that influenced this balancing. Export markets did not provide any significant push to the demand side as the value of the major agro-exports did not move very much in 2016-17. Procurement of cereals reached 60 million tonnes in 2016-17, about the same level as in the previous two years. Offtake was higher during 2016-17 and by May 2017, the foodgrain stock with the government had exceeded 52 million tonnes, higher than the levels seen during the month in the previous three years. 

The challenge of managing sudden increase in production was evident in the price conditions. The WPI for agricultural items including food processing manufacturing sector averaged only 1.6 per cent year on year basis for April-Nov 2017 compared to the same period in 2016. Although these aggregate numbers do hide details across commodities, at a broad level the output prices have not been remunerative. Prices of onion, potato and pulses were under downward pressure till the end of the financial year 2016-17 and this pattern is reversing somewhat in the case of onion and potato in the current financial year.

Rainfall remains critical to output performance for agriculture despite the impressive diversification into livestock production, horticulture and infrastructure that helps in moving the goods from producing centres to the consuming centres through the many distribution nodes and routes. Rainfall in 2016 monsoon season was 97 per cent of the long period average and in 2017 southwest monsoon it was a close 95 per cent of the long period average. There were indeed variations at the regional level and over the weeks during the monsoon period. This is in sharp contrast to the experience of the previous two years when monsoon rainfall was well below 90 per cent of the long period average. The target for foodgrain production in 2017-18 is 275 million tonnes, about the same as the estimated production in 2016-17.

Managing output growth to meet the consumption needs and at the same time keep the output growth commercially viable for the producers has become a policy challenge. Annual income from farming for majority of the famers, who also have small land holdings, is low. For instance, the cost of cultivation data show that a more remunerative crop such as wheat is estimated to give a net return of Rs 29,500 per hectare, on the average for three years ending in 2014-15, not counting expenditure on fixed assets. If the farmer takes three crops in a year with similar returns- not very likely, the income would be less than Rs 1 lakh per year. Even with increase in prices over the three years to the present, the increase in income would not be more than Rs 1.5 lakh per year, Of course, a Basmati rice crop would mean higher returns. Growing flowers near the cities will fetch far better returns. It is also possible that reducing marketing margins may increase farmer’s share in the consumer’s rupee although, consumer would also have a claim in this reduction in margin. But the average returns from farming alone would not be adequate for new investments, for the small farms. Even doubling farm income in this scenario would not lead to large investible surpluses and longer term productivity growth.

What is important is significant and steady improvement in the income of the farmers from farming to make farming an attractive occupation. While declining employment in agriculture may point to more attractive opportunities in other sectors of the economy, the differential in earnings would have to be significant to make room for farm size to grow and reduce commercial vulnerabilities of the farmers. The expected benefits of higher economic growth from rationalisation of the tax system, more efficient financial system will also have some positive spill-over impact on the farming system in the form of expansion in demand for the farm produce.

The policy strategies for the sector have emphasised agricultural insurance to protect against production risks, greater access to institutional finance, better access to technologies such as assessing the needs of soil nutrition, spread of more efficient water use such as drip irrigation, mechanisation and so on. The strategies have also highlighted the need for greater spatial integration of markets and better logistics infrastructure. But it is also important to help develop international markets for India’s farm output in the longer term. This will require investments in improving infrastructure for processing, storage and transport. Unless there is expansion in the demand for farm produce, increase in the farm income will be modest.

(The author is a Director at Madras Institute of Development Studies)

(Views expressed here are personal)