India Budget 2021: Farm policy at crossroads

Dubai - In the run-up to India’s Budget due on February 1, we first take a look at agriculture



By Karan Bhasin

Published: Thu 28 Jan 2021, 12:58 PM

Last updated: Thu 28 Jan 2021, 12:59 PM

The latest projections from the IMF have pegged India’s growth in the next financial year and the following one at 11.5% and 6.8%, respectively, because of Narendra Modi-led government’s quick and able response to tide over the economic challenges after the raging Covid-19 pandemic


Here is a growing anticipation around India’s budget, which is due on February 1. The general consensus is that the annual exercise may be high on reforms and may spell a roadmap for rapid economic recovery amid the raging novel coronavirus disease (Covid-19) outbreak.

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India’s growth recovery is likely to be robust and it will play an important role in global rebound of economic activities.

The latest projections from the International Monetary Fund (IMF) have pegged India’s growth in the next financial year and the following one at 11.5 per cent and 6.8 per cent, respectively, because of Narendra Modi-led government’s quick and able response to tide over the economic challenges after the raging Covid-19 outbreak.

A key component of these reforms is focused on the agricultural sector, which has been pending for long because successive governments have avoided them for the last two decades. It is important to understand the erstwhile agricultural policy, the new farm laws and the likely way forward in a bid to ensure farmers get a much needed favourable ‘new deal’.

India’s policy towards agriculture has been one that has been an outcome of the concerns of food security due to a rapidly expanding population while agricultural productivity in the country remained low.

Consequently, the country moved towards incentivising production of rice and wheat by offering minimum support price (MSP), which is the price at which government procures food grains from farmers. While MSP is announced on several commodities, public procurement primarily happens only for wheat and rice. This procurement is skewed in favour of Punjab and Haryana, as around two-thirds of buying occurs only from these two states. The reason for public procurement is also because of the other aspect of India’s policy – which is of the Public Distribution System (PDS) through which the government provides subsidised food grains to the underprivileged. The PDS was extended with the implementation of the National Food Security Act, 2013.

Under the erstwhile policy, agricultural transactions happened through the Agricultural Produce Market Committees (APMCs), which are government-regulated entities. These markets are the mechanism for trade in agricultural produce and the prime mechanism for purchase of food grains by the government. The erstwhile policy also restricts farmers from selling their produce across state borders. The new reforms create an alternative mechanism for private markets. It seeks to ensure that farmers now have a choice whether to sell at APMCs or private markets. The other two reforms pertain to contract farming and essential commodities Act. The first provides a legal framework for contract farming that protects the interests of the farmers while the latter will restrict government intervention in the sector by imposing quantity controls etc. The idea is to allow market forces to determine prices, which will give enough confidence to the private sector for making investments.

The government is trying to formalise the agricultural sector and ensure that farmers benefit from the distribution process which can then be used to support investments in a bid to enhance agricultural productivity.

It is clear that the raft of reforms is aimed at unshackling the agricultural sector and transforming it into a modern sector with greater space for private capital – whether of companies or of farmers themselves. This is one of the major reasons why India’s foremost agricultural economist, Dr Ashok Gulati, had termed these reforms as the 1991 moment, when the ground-breaking economic liberalisation was carried out, for the country’s farm sector.

However, many may be wondering that if these reforms are beneficial for farmers. Leading experts are wondering why only some select farmers are protesting? The erstwhile policy had created a set of agricultural elites, who were the large farmers from Punjab and Haryana and had a significant amount of agricultural surplus. They had extracted from small farmers exploitive pre-capitalistic production relations and the mechanism had led to a widening of the wealth gap.

However, the erstwhile policy has outlived its utility, as India no longer a food-deficit country. The protests stem from a special interest group that is focused on preserving a system of subsidies that benefits them even though it comes at the expense of the poor and marginal farmers from across the country.

This brings to the moot point: whether the reforms in the agricultural sector would leave these entitled farmers as worse off? No, these farmers won’t suffer, as they, too, get an opportunity to tap into production of crops such as avocados or dragon fruit that can fetch a higher price. They, too, can benefit from the new laws as it is difficult to find a buyer for avocados at the APMCs, but a retail corporation may be willing to procure the produce at an attractive price.

Besides, farmers with large landholding will gain a lot by entering into long-term contract farming, as they can ensure price stability over a sustained period of time. Even if farmers don’t receive subsidies, the new laws will create a system that will still benefit them far more than outdated erstwhile policy.

The new policy will benefit farmers across the country and not just a select few, which is key to social justice.

Existing subsidies have not been done away with. No wonder, a large farmer will enjoy the best of both worlds. India’s budget provisions must reflect the changes that have been made to the agricultural policy. Some of the expenditures need to be revisited. Agriculture must be the focal point for state governments. They should also foot the bill or share the burden of the subsidy bill, which is a tricky issue because of divisive politics.

But, as the government recognises that the erstwhile policy has not been effective, it must make amends to its expenditure profile. Fertiliser subsidy, which was at

Rs713.09 billion in the previous budget, can top the agenda.

Countries give subsidies agriculture across the world. However, India needs to move towards smart subsidies and cash transfers. The fertiliser subsidy should be revisited as a transfer to all the farmers per acreage of land or as a cash transfer up to a particular amount to be made given directly to all farmers. There is also a need to recognise the scope for organic farming. Excessive use of fertilisers must be discouraged.

Food, fuel and fertiliser subsidy work out to Rs2.27 trillion. This significant sum is over and above the allocation of the Pradhan Mantri Kisan programme, which serves as a model for moving towards cash transfers, or the subsidy support mechanism.

The MSP policy had two objectives: achieving food security and income support for farmers. Now income support can be given directly through cash transfers. It is important to ask whether the MSP policy be done away with and whether it is consistent with the new reforms that have been introduced by the government. A higher PM Kisan-like transfer will be much more efficient, equitable and will have a far greater impact instead of the MSP policy.

The present subsidy bill is found to be sufficient to design a targeted basic income programme that covers all poor, irrespective of rural or urban.

Such a policy will further result in greater choice for farmers and for the poor. While it will also get rid of problems associated with inclusion and exclusion of people from the erstwhile policy. Besides, such a programme will be far more effective as it will be equitable and benefit small farmers with limited marketable surplus.

A push towards greater role of markets combined with a direct subsidy to farmers for production and an extensive basic income policy for the poor can make India as a pioneer in its poverty alleviation. It will create a model that can be replicated by other developing countries.

The issue, which many have raised in regards to cash transfers, is that the public may not prefer the scheme. But the public may prefer it over food grains. This is a flawed argument.

The key finding was that most poor households wished for a greater amount of cash transfers, but they preferred them over food grains. Respondents revealed that their consumption pattern shifted towards high-protein and dairy products.

People preferred cash transfer as the scheme gave them the choice to choose a consumption basket unlike the consumption mechanism.

The smart subsidy policy will reduce the extent of wastage, corruption and discrepancy and will benefit marginal farmers.

The shift towards a greater role for private entities in the agriculture is a welcome move. This is the new vision for the agriculture sector. Smart subsides that allow for more fiscal room on account of efficiency gains must be duly considered.

Farmers must recognise that the fears of 1991 reforms have been proven to be ill-founded. Though the rest of the economy has prospered, the agrarian sector has been glossed over. It’s high time the agriculture sector made the most of the reforms and had its moment under the sun.

Let the upcoming budget unleash animal spirit in the farm sector.

Karan Bhasin is a New-Delhi based economist with research interests in political economy macroeconomics, monetary policy and new institutional economics.


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