This chapter deals with key structural issues facing Indian agriculture since Independence. In the context of federal fiscal relations as well as shared responsibilities towards agricultural development, it examines spending on capital formation and subsidies in agriculture vis-à-vis other economic sectors. It then deals with reforms in the subsidy regime (relating to both inputs and ouput) and the implications of the agri-marketing laws enacted in 2020, since retracted. The agriculture sector (including irrigation) has always received relatively lower priority in public expenditure. Morever, the spending bias has been more towards input subsidies rather than on investment, which may affect agriculture growth in due course. The institutional, price and legislative reforms and structural changes identified in the paper suggest that the agricultural sector requires handholding. The Government of India and state governments should work in tandem to accelerate rural infrastructure, target specific regions as well as small and marginal farmers for support, and create a competitive environment that stimulates investment, productivity and marketing efficiency. States should also be given more flexibility in drawing up action plans relating to the production and marketing of produce to encourage farmers and the private sector. A greater role for existing institutions in coordination and to ensure effective implementation of policies is called for.
An examination of India’s agricultural development since Independence brings to light the structural and institutional reforms that have been effected. The most significant advances were: consolidation of land holdings, public investment in agriculture and major and medium irrigation systems, improved prices and procurement policies and regulated marketing of agri-produce. In addition, the availability of institutional credit improved as a result of changes in the financial architecture comprising commercial banks, regional rural banks and cooperatives. The Food Corporation of India (FCI) enabled easy procurement of wheat and paddy at pre-announced minimum support prices (MSP), while the establishment of regulated wholesale markets facilitated the sale of produce under the Agriculture Produce Market Committee (APMC) Act, 1966. Stocking limits for cereals and pulses prescribed under the Essential Commodities Act (ECA), 1955 helped check hoarding. The government also enlisted agri-input companies to ensure uninterrupted supply of seeds, fertiliser, pesticides and other inputs to farmers at prices lower than their existing market rates, assuring them timely payment and compensation for any loss incurred.
The political unanimity for a state-led model of development and the proactive interventionist policy of the Centre transformed Indian agriculture. Two northern states—Punjab and Haryana—were pioneers in the adoption of the high yielding varieties (HYVs) of seeds, and allocation of sizeable area to wheat during the late 1960s and the 1970s. In due course, a few southern states, notably Andhra Pradesh and Tamil Nadu, also witnessed higher innovation, private investment and production of paddy and diversified value-added products. The Green Revolution took agriculture on to a higher growth path and India achieved the overriding goal of food security and self-sufficiency, which significantly contributed to lessening hunger and rural poverty.
These achievements were followed by impressive successes in the White (milk) and Yellow (oilseeds) Revolutions during the 1980s. Unfortunately, by that time, productivity growth in agriculture had started to decelerate due to the reduction in public investment on major and medium irrigation projects, delays in the completion of existing projects and the emergence of anti-dam movements (Gulati & Bathla, 2001). The diminishing returns from public investment in irrigation also set in, along with an unsustainable use of natural resources. The government’s efforts to support agriculture through subsidised inputs failed to accelerate the productivity of land and provide alternative occupations to rural households. Even during the economic reforms of the 1990s, agriculture remained a neglected sector with insignificant policy interventions. It was only towards the end of the 1990s, when the Centre gave handsome increases to the MSP of wheat and paddy and encouraged exports of rice and other commodities, that the terms of trade (agriculture price relative to industry price) became favourable to agriculture. India’s comparative advantage was identified in cotton, groundnut seed, soybean seed, protein meals, spices and basmati rice. To realise the potential of these crops in the global markets and be compatible with the stipulations under the Agreement on Agriculture of the World Trade Organization (WTO), the government reduced farm protection by lowering tariffs as well as non-tariff barriers. However, as envisaged, an increase in exports could not help revive agricultural growth. Cereals exports became uncompetitive owing to increase in their support prices. The exports were also affected by price volatility in the global markets, transboundary threats, surge in imports and higher competition.
Agriculture continued to face serious challenges, including uneven regional growth, rising fiscal constraints, mounting subsidies, failing institutions that are responsible for managing public canals, increasing fragmentation of holdings, labour-intensive farming and depleting groundwater and solid nutrients. These were serious impediments for sustained agricultural growth and farmers’ livelihoods (Singh, 2019). From the early 2000s, the Centre focused on structural changes through increased budgetary outlays towards major, medium and micro irrigation projects, rural infrastructure, fertiliser and power subsidies, various flagship programmes, including that on irrigation, and the initiation of income support schemes for farmers. The MSPs of food grains were hiked and far reaching reforms were initiated in the marketing of agri-produce, the major ones being allowing inter-state grain movement and contract farming under the aegis of the Model APMC Acts of 2003 and 2017.1
These measures, however, could not make uniform progress across states. In some, private investment increased and the transition began. In others, especially in the eastern regions—which also lacked public investment in irrigation, roads and other infrastructure and marketing support—stagnation continued. Implementation of the Bringing Green Revolution to Eastern India (BGREI) programme initiated during 2010–11 (now a sub-scheme of RAFTAAR-Rashtriya Krishi Vikas Yojana2) helped in the adoption of technology, building of assets, farm renovation, seed production and distribution, backed with the procurement of paddy at MSP. Agriculture growth did pick up in the eastern states, but they continued to face low levels of productivity and risks relative to other states due to variations in weather and commodity prices (Joshi & Kumar, 2016; Hoda et al., 2017).
The increase in output price barely corresponded with the rise in input costs and resulted in an agrarian crisis in many regions. The worst affected were smallholders and rural labourers who not only lack technical know-how and access to finance but also have low risk-bearing capacity to shift to non-farm activities. Consequent upon a steady decline in the net returns (income) of farmers in some states, a shift from a production-based agriculture policy towards an income-based policy framework has been suggested (Saxena et al., 2015; MoA&FW, 2018). Agriculture, with a 15% share in the national income, still absorbs more than 45% of the labour force, indicating limited success in achieving structural transformation. Binswanger-Mkhize and D’Souza (2012) maintained that India’s structural transformation process is atypical, due to the slow pace of reallocation of labour from a low productivity sector, namely agriculture, to high productivity sectors. It is also characterised as “stunted”, with the exiting labour moving primarily into the rural non-farm and informal sector instead of industry and services and also becoming increasingly ‘casualised’.
The COVID-19 pandemic in 2020 has added a new dimension to the entire gamut of issues that the agriculture sector has been facing for long. Government intervention in this sector is considered necessary to boost production as well as to maintain supply in order to keep commodity prices at manageable levels. The Centre has spearheaded institutional reforms backed with a financial stimulus in order to reinvigorate private investment, infrastructure development and post-harvest technology. It also passed three Acts with the objective of addressing the structural weaknesses inherent in the sale, marketing and stocking of agri-produce being governed under the state-run APMC markets. In January 2021, the Supreme Court of India stayed the implementation of three laws. This was followed by a decision by the Central Government, in November 2021, to repeal them. Since agriculture is a subject in the State List of the Constitution of India, it is important to consider how the states should amend their existing policies and institutions and frame marketing reforms to raise the income levels of farmers, ensure sustainable agriculture and bring competition.
This chapter has done an in-depth analysis of four critical areas and attempted to unravel the governance issues under each:
Centre-state fiscal relations and shared responsibilities for agriculture development;
public expenditure policy to compare spending on investment and subsidies in agriculture relative to other economic sectors and the relationship between public investment in agriculture and private (farm household) investment;
interventions in the input and output subsidy regimes and the feasibility of replacing the existing price support system with direct income support to farmers; and
reforms in agriculture pricing and marketing and the implications of the three new Acts.
The rest of the chapter is organised into four sections. Section 2 sets out India’s federal structure, focusing on agriculture development and the Centre’s role in the form of various schemes and grants and the governance issues in the agriculture sector. Section 3 analyses public spending on capital formation and input subsidies in agriculture vis-à-vis other economic sectors and their relation with private (farm household) investment and national income. It also examines possible ways to augment private investment in agriculture and rationalise input subsidies through alternate methods, including direct income support. Section 4 analyses state intervention in transactions relating to agriculture output, focusing on procurement of grains at MSP, and also explains the implications of the three new laws enacted in 2020 for state governments and the farmers. Finally, Sect. 5 sums up the key issues and suggests the way forward.
2 Agriculture Under a Federal Structure in India and Governance Issues
The power, functions and responsibilities of the Centre and the states are primarily governed by the Constitution of India. The subjects that each can legislate on and administer are set out in three lists—Union, State and Concurrent List. There is, however, an asymmetry in the fiscal relations, with the states having larger expenditure responsibilities than the Centre but lesser sources of revenue. Tiwari and Surya (2019) and Sahoo (2015) have highlighted the fact that the fiscal deficit and the revenue deficit of states have been growing due to an excess of their budget expenditure (excluding borrowings) over budget receipts and revenue expenditure over revenue receipts. A shortfall in the revenues over the requirements reflects the inefficiency of the respective governments to meet their regular or recurring expenditures.
States finance their expenditures through their own tax and non-tax resources, transfers from the Centre (their share in the net proceeds of the Centre’s tax revenues set out by the Finance Commissions3), grants and transfers for implementation of Centrally sponsored schemes4 (CSSs) and borrowings. States have, over the years, been demanding a larger share in the tax revenue of the Centre5 as well as greater flexibility and autonomy in the implementation of CSSs (as these come with conditions attached to them, failure to meet which results in withholding of funds). Successive Finance Commissions have tried to give more financial autonomy to the states; the Fourteenth Finance Commission increased their share in the pool of taxes from 32 to 42%. However, states continue to feel less empowered in decision-making (Singh & Singh, 2016; Patnaik, 2018).
Coming specifically to Centre-state relations in the primary sector, Singh (2008) adopted both the constitutionalist and issue-oriented approach.6 Under both, the issue of fiscal federalism assumes importance as it has implications for the devolution of funds to states and possible ways to resolve the conflicts that may arise due to the criterion adopted to share revenues and the use of various types of taxes by different levels of government. The Constitution places the agriculture and allied activities and irrigation (including flood control) sectors under the jurisdiction of states (Items 14 to 17 in List II of the Seventh Schedule). However, the Centre plays a vital role in these sectors in many ways. Through the Union Budget, it provides financial outlays to the Indian Council of Agriculture Research (ICAR) to disburse funds to the State Agricultural Universities for research and development. It provides funds for inter-state rivers and fisheries outside territorial waters. The expenditure on fertiliser and food subsidies is borne entirely by the Centre, with the objective of real-time monitoring of commodity prices, production and other factors that may result in food insecurity. Similarly, it bears the entire cost of procurement of food grains at MSP and its distribution through fair price shops under the public distribution system (PDS). From 1970 to 1980, it executed ‘Operation Flood’ (White Revolution) to create a nationwide milk grid. The National Dairy Development Board was permitted to retain money received from the sale of skimmed milk powder and butter oil gifted by the European Union through the World Food Programme.
Though the Centre implements several programmes to meet the national goals of food security, elimination of hunger, malnutrition and poverty, and financially supports states in such endeavours, the discontent of the states has endured. Almost every state is confronted with revenue deficits and resorts to borrowings, either from the Centre or from other funding sources to meet the revenue shortfalls. The fiscal burden of states has also been increasing due to farm loan waivers and initiation of income support schemes,7 similar to that of the Central government’s PM-KISAN.8 A few state governments allocated between 9 and 43% of their agriculture budget to targeted income and investment support schemes (Tiwari and Surya 2019). This combination of expenditure on loan waivers and income support schemes has resulted in higher cutbacks, in particular on investments in agriculture and irrigation. Even if Central funds are available to the states, they come with certain conditions which states may not be able to fulfil and, hence, are unable to spend the allocated amount. For instance, under RAFTAAR, a few states have not spent the allocated amount under two heads—micro irrigation and machinery—perhaps due to lesser requirements by the farmers for these, indicating that states may be given some autonomy to redirect such expenditures (Bathla and Kannan 2020).
Based on the recommendations of the Fourteenth Finance Commission, the Centre increased the share of states in the net proceeds of its tax revenues. In 2015–16, the Centre initially decided to reduce its share in all the CSSs, which was in the range of 75–100%, to a uniform 50%, which meant that states would have to bear a higher share of the expenditure. Several schemes of the Ministry of Agriculture and Farmers’ Welfare (MoA&FW)9 were to follow this changed pattern of funding. However, following protests by state governments, the Centre constituted, in March 2015, a sub-group of ten Chief Ministers and one Lieutenant Governor on rationalisation of CSSs. On 17 August 2016, the Centre revised the sharing pattern based on the recommendations of the sub-group. The existing 66 CSSs were merged into 20 core schemes, six core of the core schemes and two optional schemes. The Centre’s share of funding stayed at 100% in the core schemes. For the other two categories, the Centre bore 90% of the expenditure in the case of the eight north-eastern states and the Himalayan states of Uttarakhand, Himachal Pradesh and erstwhile Jammu and Kashmir; these states were to contribute 10% of the expenditure. In the case of all other states, the sharing ratio was fixed at 60:40 between the Centre and states respectively. In another significant change, the funds for CSSs were now to be routed through the budgets of state governments instead of the earlier practice of the Centre directly releasing the funds to the implementing institutions.
In the case of irrigation water, during the Twelfth Five-Year Plan period (2012–17), the Command Area Development and Water Management Programme (CADWM) was implemented pari-passu with the Accelerated Irrigation Benefit Programme (AIBP). In the Union Budget of 2014–15, INR 89.92 billion was provided for AIBP. Since 2015–16, the programme is being implemented under the Pradhan Mantri Krishi Sinchai Yojana (PMKSY, Prime Minister Agriculture Irrigation Scheme)—har khet ko pani (water for every farm). The ongoing CADWM programme has now been restricted to the implementation of command area development works of 99 prioritised AIBP projects. In 2016–17, the Centre initiated an innovative model of funding the prioritised projects through extra-budgetary resources (EBR). A Long-Term Irrigation Fund (LTIF) was created in the National Bank for Agriculture and Rural Development (NABARD). NABARD provides loans, with a 15-year tenure, to cover the share of the Centre as well as the states. The Central share is provided to the National Water Development Agency (NWDA), which comes under the jurisdiction of the Ministry of Jal Shakti; loans for the state share are given to the state governments. Since April 2018, loans towards the Centre’s share are entirely funded through EBRs in the form of fully-serviced Government of India bonds while the state’s share (increased from about 10 to 40% of the project cost since 2015–16) is entirely funded through market borrowings by NABARD. NABARD extends loans to states at 6% per annum, and the Centre compensates the cost that NABARD incurs through interest subvention. The Union Budget for 2020–21 allocated INR 19 billion for payment of interest and INR 4.75 billion for payment of the principal for the NABARD loan to the NWDA.
While the Constitution places agriculture production and irrigation development (including flood control) squarely under the jurisdiction of states, it has taken a different approach to the marketing of agri-produce. Article 301 says trade and commerce will be free across all of India, while Article 302 gives Parliament the power to legislate on inter-state trade (See Box 1: Constitutional provisions on trade). The idea behind this is to break inter-state barriers in order to make the entire country as one market. The interpretation of this provision by the Centre is that freedom of trade is not confined to only inter-state trade, but also extends to intra-state trade and commerce. States, on the other hand, quote Article 304 to aver that the state legislature has powers to legislate on trade and commerce and can impose tax and restrictions on intra- and inter-state trade in the public interest.10 In particular, state governments cited Article 304(b) to justify the restrictions on trading imposed through the Model APMC Acts (2003 and 2017) as these were considered reasonable and in public interest.
Box 1: Constitutional Provisions on Trade
Article 301—Freedom of trade, commerce and intercourse:
“Subject to other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free”.
Article 302—Power of Parliament to impose restrictions on trade, commerce and intercourse:
“Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India, as may be required in the public interest”.
Article 304—Restrictions on trade, commerce and intercourse among States:
“Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law -
impose on goods imported from other States or the Union territories, any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and
impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest:
Provided that no Bill or amendment for clause shall be introduced or moved in the Legislature of a State without the previous sanction of the President”.
However, increased grain production over the last three decades demanded a less restrictive marketplace. The APMC Act of 1966 and regulations restricted fair competition not just within the states but also within the wholesale markets, popularly known as mandis. Restrictions were imposed on the number of new licences issued to traders within a mandi and a separate licence was required for every mandi. So constricting was the implementation of the Act by most states that, over time, it prevented the entry of new market players within APMCs and even outside. APMCs also discouraged contract farming being brought under the Model Act of 2003 as companies have to register with mandis, pay market fee and levies without receiving any services and often face restrictions on stock holdings of produce.
In many places, the auction of produce was seen as opaque, resulting in denial of fair competition and prices to farmers. States earn substantial revenues from mandi fee/cess/taxes, which, in some cases, was fixed as high as 6.5% over and above the arhatiya’s (commission agents) commission of 2.5%, with little infrastructure and facilities being provided to the farmers (Acharya, 2017). All this explains why agri-markets continue to be less competitive and inefficient in terms of proper discovery of commodity prices, have low margins for producers and high margins for wholesalers.
The Centre, in several Union Budgets, proposed reforms to improve the marketing system. A few states, namely Punjab, Karnataka and Maharashtra, have amended their APMC Acts, encouraged contract farming,11 and introduced direct farm-to-kitchen models, but clear-cut rules on these have mostly been missing.
A breakthrough came in June 2020 when the Centre promulgated three ordinances (which were later legislated into Acts by the Parliament in September 2020) with the objective of enabling one common market for agri-produce across the country, freeing farmers from stringent restrictions on selling their produce anywhere, enabling them to enter into contracts with processors, aggregators or other agencies for better prices, lowering their risks and enabling them to earn a higher income. Some state governments criticised these laws on the grounds that they were bypassed and that the laws would have the effect of (a) reducing or doing away with grain procurement at MSP, (b) reducing market fees earned from transactions and (c) putting agriculture in the hands of the private (corporate) sector. Details of these laws as well as the underlying implications of each are discussed in Sect. 4.
In sum, the Centre has never been disconnected from agriculture, as the Constitutional provisions would suggest. Agriculture serves certain national development goals and thus requires considerable handholding, especially during times of natural calamities and market risks. States, in turn, lack resources and are highly dependent on the Centre for funds and grants. Both have to work in tandem, even if there are conflicts in their respective agriculture policy agendas. Marketing is a key example, where states have built a monopoly and earn significant revenues from levies, taxes and cess on transactions in the wholesale/regulated markets without realising the adverse impact that this has on price stability, efficiency, farmers’ income and the formation of supply chains. However, states also have their compulsions. With no revenues from tax on land and agriculture income, they have a high level of dependence on mandi fees and taxes. Their reliance on the Centre for financing of the agriculture and irrigation sectors will, therefore, continue in the future as well. The question of whether such interventions are seen as an assault on the federal structure and autonomy of the states will remain. The Centre follows the recommendations of Finance Commissions on the sharing of revenues with the states. However, the status of agriculture development differs across states and the Centre’s one-size-fits all approach in its agriculture policies may not suit the specific needs of states. For instance, grants under CSSs have conditions attached to them and the states lack the flexibility to modify the spending in line with their requirements. Institutions such as the Inter-State Council and NITI Aayog should be involved in resolving disagreements, if any. In order to ensure proper spending of assigned grants, there needs to be more coordination within the existing institutional structure to prevent overlapping or duplication of schemes and their effective implementation.
In many ways, in the quasi-federal polity of India, governance poses unique challenges, not only at the level of implementation but also while enacting laws, both at the Centre and in the states. ‘Governance’ may be understood to be the traditions and institutions by which authority is exercised (Kaufmann et al., 1999). It may include the process by which governments are selected, monitored and replaced; a government’s capacity to formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions. As per the United Nations Development Programme (2014), good governance is considered to be broader than institutions and includes the people, the state and the interactions between them. Good governance is important for promoting economic growth and improving developmental outcomes such as per capita income, literacy, conservation of natural resources and poverty reduction, among others. The mechanisms that promote good governance are transparency, democratic institutions and effective public services. Its processes may include the quality of participation (which includes the involvement of the most vulnerable sections of society and the poorest) and the accountability of institutions to the public and other stakeholders. Bad governance leads to corruption, poor and inefficient implementation of programmes, weak social norms and increased social and political conflict over the access to and use of resources (Keuleers, 2004).
Needless to say, the concept of governance and the indicators that measure it vary, depending on context and sector. Even though the government has repealed the three laws enacted by Parliament in September 2020, the need for marketing reforms still remains. Since agriculture impacts millions of people, farmers and consumers, good governance in the case of agri-marketing reforms would imply wide consultation with various stakeholders.
At the level of implementation, the main instrument of governance is the officers’ cadre of the Indian Administrative Services (IAS). These officers are appointed by the President of India but they are allotted to a specific cadre (a state or Union Territories) and can work either in the states or come to the Central government on deputation. The IAS officers hold most of the important positions at both levels and are at the centre of the universally agreed target of ‘good governance’. The Central government has the benefit of expert advice from the Department of Agricultural Research and Education (DARE) in the MoA&FW. This department is headed by an eminent agricultural scientist. The ICAR, which is entirely managed by scientists, researchers and other professionals in every field of agriculture and allied sectors, reports to DARE. It has 64 research institutions, 14 national research centres, four deemed universities, 13 project directorates and six national bureaus. The government, thus, has sufficient professional expertise, based on science and research, to advise it in the formulation of policies.
When judged by the broad governance parameters,12 Indian governance since Independence largely measures up. By and large, political violence has not affected large parts of India and in spite of political instability in some states, mid-term elections, short tenures of chief ministers, defections from one party to another, etc., the agriculture administration has carried on. However, the effectiveness of government varies from state to state.
The actual implementation of policies at the district level is done by the officials of the respective state governments. There are qualified professionals appointed by the states in agriculture, horticulture, animal husbandry and poultry, fisheries, dairy, etc. Their work is coordinated by the district magistrate. At the state level, the departments are headed by secretaries. In most states, the work of departments is coordinated by the Agriculture Production Commissioner (APC) or Development Commissioner (DC) and the Chief Secretary. However, in most states, the secretary in charge of irrigation and power (electricity) does not report to the APC/DC, as these two departments get a large allocation of funds and they are considered more important than the departments of agriculture, animal husbandry, horticulture, fisheries, food and public distribution etc. The coordination between departments at the state level, therefore, becomes the responsibility of the chief secretary. However, the most influential role in the formulation of policies is played by the Department of Finance in both the Centre and the states. This department prepares the final budget, places it before the parliament or the state assembly and determines the allocation of funds across other ministries and departments.
Administrative reforms, which fall within the ambit of both the Centre and the states, can augment state capacity, which is imperative to bringing transformation in India’s agriculture sector. A closer look at two key parameters of good governance—growth in gross domestic product in agriculture and allied activities (GDPA) and farmers’ income—shows wide variations in these across states (Fig. 1). While some states have shown high growth in gross state domestic product in agriculture and allied activities (GSDPA) and farmers’ income, several others have experienced only mild growth. Importantly, several subsidies are provided by the state government in addition to Central subsidies. Both have an influence on agricultural growth and farmers income. The Centre takes several policy decisions relating to MSP, procurement of produce, subsidies on crop insurance, fertilisers, food, interest subvention on credit and direct income support (PM KISAN), exports and budgetary grant for capital work on irrigation projects. These are highlighted in the subsequent sections.
3 Public Spending on Investments and Subsidies in Agriculture
Sen (2016) highlights the fact that despite an increase in the devolution of funds from the Centre, state budgets show fiscal deficits. Hence, states have to either adjust spending patterns between revenue and capital accounts, or bring modifications in the budgetary outlays across various activities, or resort to borrowing. This section looks at the long-term trends in public expenditure (on capital and revenue accounts) to gauge how far agriculture and irrigation have borne the brunt of the resource crunch that states face. Since public investment in agriculture and irrigation has a ‘crowding-in effect’ on private (farm household) investment, the section also examines trends in the latter. The analysis would be useful in understanding the expenditure policy in terms of directing resources towards the capital account (for asset creation) or revenue account (for provision of subsidies), and exploring ways to increase fiscal space for investments in agriculture.
As shown in Fig. 2 and Table 1, during the 1960–70 period, the average gross capital formation in agriculture and allied activities (GCFA), at constant 2011–12 prices, was INR 314 billion, which significantly increased to INR 566 billion during the 1980–90 period. It then remained somewhat stagnant for many years but increased from the early 2000s to reach INR 1,583 billion during 2000–09 and then to INR 2,639 billion during 2010–18. The change in stock (CIS) varies but roughly constitutes 5–9% in the total GCFA, which is at a reasonable level. The private GCFA—mainly by the farm households—witnessed a steady increase compared to public GCFA. The latter picked up from 2003–04, showed a declining trend during 2007–12 but again increased from 2013–14.
Public and private GCFA, GDPA: 1960–61 to 2017–18 (at 2011–12 prices)
Note (1) GDPA (gross value added in agriculture and allied activities) is represented by GVAA (gross value added in agriculture and allied activities; (2) Data is converted into real prices at 2011–12 base using gross domestic product (GDP) and gross domestic capital formation (GDCF) deflators.
Comparing estimates on GCFA shows that both public and private GCFA have increased three times during the 2000s as compared to the 1990s. Private household investment accounts for a significant share (83%) in total investment. Although many private companies are making forays into agriculture, their share in total GCFA remains low and stagnant at almost 3%. Public GCFA mainly pertains to major, medium and minor irrigation systems and its share has consistently fallen from 33.76% during the 1960s to 15.19% during 2010–2018. A steady decline in the share of public GCFA in total investment has been explained by the bias in government expenditure towards the revenue account in the form of an increase in input subsidies and day-to-day expenses, inadequate funds and low priority towards spending on agriculture and rural development in comparison to that in other sectors (Chandrasekhar and Ghosh, 2002; Bathla, 2014).
As Table 1 shows, the annual growth rate of public and private GCFA declined between the 2000–01 to 2009–10 period and the 2010–11 to 2017–18 period. A slower increase in private investment during the 1980s and the 1990s has been attributed to deceleration in the rate of growth of public investment, unfavourable terms of trade and an inadequate flow of institutional credit (Bathla et al., 2020). A revival of private GCFA since the 2000s is explained by a big push in public GCFA, complemented with favourable terms of trade, weather conditions and adequate flow of institutional credit. Other factors may include an increase in the number of holdings due to fragmentation, diversification towards high-value crops, coupled with an increase in the demand for processed food (Chand & Kumar, 2004; Bathla 2014). Increased levels of investments on public and private accounts, complemented with other factors seem to have helped agriculture sustain a steady rate of growth close to 3% per annum for three decades (1980–2000s) (Chand & Parappurathu, 2012; Bathla and Kumari 2017). In the 2010–11 to 2017–18 period, India, for the first time, achieved a higher rate of growth at 4.10%.
Notwithstanding an impressive rate of growth in GCFA, its share in gross domestic capital formation (GDCF) has been declining. It was 16.56% in 1960–61, rising to 21.47% in 1968–69 and then decelerating for at least two subsequent decades. Although some improvement was observed in the share of GCFA in GDCF in 2001–02, at 11.89%, it fell to 6% again in 2017–18 (Annex Fig. 6). A significant fall in it can be attributed to public GCFA the share of which in public GDCF decreased from 16.4% in 1960–61 to 5.26% by 2017–18 (Annex Fig. 7). During the second half of the seventies, the government prioritised investment, which is visible in the form of a high share of public GCFA in public GDCF, at almost 20%.
A fall in the share of GCFA in GDCF may suggest that the latter, which constitutes almost 35% of GDP, has been increasing due to higher investments in the non-agriculture sectors relative to the agriculture sector. The share of GCFA in GDP improved from 6% in 1960–61 to 18% in 2013–14, which subsequently fell to 14% in 2016–17. This demonstrates that state governments accord less priority to agriculture and irrigation in comparison to this sector’s contribution to national income. The state level agriculture orientation index (AOI) confirms the low priority given to agriculture. As Annex Table 3 shows, the index has improved in Chhattisgarh, Gujarat, Himachal Pradesh, Karnataka, Kerala, Punjab and Uttarakhand, but weakened in Haryana, Jharkhand, Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh and West Bengal.
While this aspect merits attention, it needs to be noted that that the official estimates (National Accounts Statistics or NAS) on public GCFA relate to major, medium and minor irrigation systems and not agriculture. Investments in ‘agriculture and allied activities’ such as in crop and animal husbandry, soil conservation, forestry, livestock, storage etc., are not accounted for in the official statistics; instead, these are listed under the economic and functional classification in the System of National Accounts. A closer look at the magnitude of GCFA shows underestimation of investment in this sector. On average, public investment in agriculture-forestry-fishing was INR 107 billion during 2011–12 to 2017–18 and was much lower than the GCF in water supply (INR 146 billion) and transport and communication (INR 761 billion). It is somewhat higher than that in other economic activities such as mining, manufacturing, construction, electricity and gas etc. As shown in Annex Figs. 6 and 7 also, in relative terms, agriculture GCF accounted for 6% share in total GCF, almost the same (5.26%) as in the case of public GCFA i.e. irrigation investment in total public GCF during 2017–18.
Besides asset formation in irrigation and agriculture segments, the government incurs expenditure to support farmers and meet its own running expenses. The support is mainly to incentivise farmers to increase production, maintain price stability and ensure food security through input subsidies (the major ones being fertiliser, irrigation and electricity). Another significant expenditure is on account of procurement of wheat and paddy directly from farmers at the MSP, their storage and distribution at subsidised rates; this is the food subsidy for consumers. The NAS provides estimates on subsidy in agriculture and in other economic sectors, but does not provide disaggregated data on input and output subsidy.
Averaged for 2011–12 to 2017–18, at 2011–12 prices, data reveals that government expenditure on asset formation in agriculture was INR 508 billion (INR 107 billion in agriculture-forestry-fishing plus INR 401 billion in irrigation). However, the amount spent on subsidy in this sector is almost double at INR 964 billion. Table 2 shows that the agriculture and allied sector alone accounts for INR 964 billion (25.8% of the total subsidy of INR 3,733 billion across all economic activities) though it is somewhat close to the mining-manufacturing-construction sectors at INR 880 billion and lower than that given to `other economic activities’ at INR 1,079 billion. It is important to mention that these official estimates on subsidy may be on the lower side. The data collated from the budget and other sources indicate higher estimates of subsidy (fertiliser, power, credit, irrigation and crop insurance) at INR 1,290 billion, and food subsidy to consumers at INR 986 billion, averaged during 2011–12 to 2017–18 at 2011–12 prices.
Magnitude of GCF and subsidy under various economic activities per year (INR billion, averaged 2011–12 to 2017–18 at 2011–12 prices)
Value of each sub sector under economic activity
Capital Expenditure (CE)
Percentage Share GCF in CE
General administration, regulation & research
Agriculture, forestry & fishing
Mining, manufacturing & construction
Electricity, gas, steam and other sources of energy
Transport and communication
Other economic services
Total economic activities
Annual rate of growth (%)
General administration, regulation & research
Agriculture, forestry & fishing
Mining, manufacturing & construction
Electricity, gas, steam and other sources of energy
Transport and communication
Other economic services
Total economic activities
Source National Account Statistics, various years Statement S-4.2
Not only is the amount of farm input subsidy higher than public investment, statistics show that only 45% of capital expenditure in agriculture is actually utilised for asset formation. Other sectors, namely water supply, transport, communication etc., allocate more than 75% of capital outlays towards asset formation. This clearly indicates a relatively lesser public investment in agriculture and irrigation relative to other sectors, which is perhaps sought to be compensated by higher and increasing expenditure on input subsidies. One favourable inference drawn from Table 2 is a positive and higher rate of growth in GCF compared to that of subsidies in each economic activity. Among all the economic sectors, only agriculture and mining-manufacturing-construction show a negative rate of growth in subsidies during the 2011–12 to 2017–18 period. General administration and energy sectors have the highest annual rate of growth at around 16% each.
3.1 Accelerating Public Investment in Agriculture and Irrigation
3.1.1 Estimating Public GCFA at Disaggregated Level
The NAS provides national-level estimates on public and private GCFA based on budget expenditure, the decennial All India Debt and Investment Survey (AIDIS) conducted by the National Sample Survey Organisation (NSSO) and other surveys. State-level estimates are available only for some. This should be estimated for all the states to enable a location-specific plan for future investment requirements in agriculture and irrigation and the dedicated budgetary outlays.
3.1.2 Increasing the Magnitude of Public GCFA, Efficiency and Governance
The quantum of public GCF in agriculture is much lower than in other sectors. More fiscal space must be given to agriculture and irrigation in the expenditure policy of governments because a majority of the population is dependent on agriculture for its livelihood. As per the report on Doubling Farmers’ Income (MoA&FW, 2018), in order to double farm income by 2022–23, the required rate of growth in public investment (weighted agriculture, irrigation, rural roads-transport and rural energy) must be 14.17% per year (with 2015–16 as the base year). The rate of growth for private investment is estimated at 7.86% per year. As earlier shown in Table 1, the current rate of growth rate in investments is much lower at 6.68% and −0.76% respectively.
Further, attention needs to be paid to bringing efficiency in public canal irrigation and related infrastructure projects. These have long gestation periods and have not yielded satisfactory outcomes when assessed by the amount spent, net area irrigated, percentage of irrigation potential utilised and the gap in irrigation potential created and utilised (Gulati & Banerjee, 2017). Bathla et al. (2021) found that, on an average, public canals operate at about 59% technical efficiency, with wide inter-state variations. Between capital and revenue expenditures, the low efficiency score is found mainly due to capital expenditure, which calls for faster completion of irrigation projects and their improved management and governance. Kannan et al. (2019) constructed a state-wise irrigation water governance index and found it had a positive impact on the performance of public (canal) irrigation systems, which, in turn, can significantly augment farm productivity.
3.1.3 Synchronising Public and Private GCFA Requirements
The thrust of government efforts continues to be skewed towards major and medium irrigation projects—and, of late, minor irrigation—while farmers’ capital needs have moved beyond irrigation to machinery, implements, livestock, land improvement and non-farm businesses. Annex Table 4 shows that during the triennium ending (TE) 2015–16, 72% of budgetary allocations (capital plus revenue) within irrigation was for major and medium irrigation, 20% for minor irrigation and the remaining for command area development and flood control. The share of these categories in capital expenditure is slightly higher, except for command area development where the share of revenue expenditure is 3.29%, and capital expenditure a low 1%. In the case of capital and revenue expenditure for agriculture and allied activities, crop husbandry accounts for the highest share, followed by forestry and wildlife, food storage and warehousing and soil and water conservation. Outlays on food storage and warehousing have increased over time due to higher grain procurement.
In contrast, farmers’ asset preferences have changed significantly between 1981–82 and 2018–19. The NSSO AIDIS 2013 and 2019 show that expenditure on land improvement, machinery, tractors, irrigation structures and livestock together account for 80% of the rural household’s investments (Fig. 3). As expected, farmers in the hilly regions tend to spend more on land improvement, livestock and buildings/barns and those in the less developed states have higher expenditure on irrigation. An increasing number of farmers are opting for micro-irrigation (drip/sprinkler), machinery, implements and tractors for increasing mechanisation, productivity and higher water use efficiency. This development is more pronounced in agriculturally developed states and, of late, is visible in the less developed states as well (Bathla et al. 2020; Bathla & Kumari, 2017).
This indicates that the government should favour investments that correspond to the requirements of farmers across the country, such as storage infrastructure, soil health and solutions for post-harvest losses and other bottlenecks. This also intensifies the ‘crowding in’ effect of public GCFA on private GCFA. For instance, there are lesser outlays for animal husbandry, dairy development, fishery and bee keeping—activities that poor households mostly engage in. Governments can open veterinary hospitals, vaccine centres and training centres for farmers interested in allied activities. The public expenditure policy should be reassessed, primarily to address the mounting problems due to climatic changes, disasters, crop failure, depleting water resource and so on. Investment support to farmers for micro and minor irrigation is given through RAFTAAR. However, India needs much more investment in water recycling, bio-fertilisers and pesticides, weather information satellite mapping of crops, precision farming and so on. The use of artificial intelligence—drones, satellite imagery, robotics, sensors etc.—to diagnose diseases in plants and monitor storage conditions is also growing. Israel has used these latest technologies to shape its agriculture in the face of water scarcity and other geographical constraints. The private corporate sector must be encouraged to invest in agriculture—perhaps on the public–private partnership model similar to those in the power and airport sectors. Investments by start-ups in geographic information system (GIS), app-based weather advisories and other digital technologies should be scaled up by offering incentives.
3.1.4 Financial Inclusion and Outreach
Small and marginal farmers, who account for 86% of total holdings, have a less than 10% share in total investment, with the share of marginal farmers at a mere 1.9%.13 In contrast, medium and large farmers account for 25.8% and 47.3% share in total investment respectively (Fig. 4). The marginal and small farmers have limited access to institutional credit and are unable to spend on asset creation (MoA&FW, 2015, 2018, 2019).
Furthermore, of the total investment made by farmers, 13.8% is through their own resources, 53.8% is through borrowings from formal (institutional) sources and the remaining 32.5% through borrowings from informal (non-institutional) sources. The share of borrowings from formal sources is much higher across all the land size holders except in the case of marginal farmers where it is only 39.6% (Annex Table 5). Data further shows that the percentage share of investment from formal sources is 63.4%, as compared to 36.6% from informal sources such as moneylenders, traders and input dealers. In the case of small, medium and large farmers, more than 67% of investment is through borrowing from formal sources; it is 59.4% for landless farmers and 47.9% for marginal farmers. The marginal and landless farmers depend more on informal sources for their investment needs. While they have to pay exorbitant rates of interest when they borrow from informal sources, the medium and large farmers get subsidised loans from formal sources14 (Kumar et al., 2017). The credit policy should aim at expanding financial inclusion, given that India has large inter-farm and inter-regional disparities along with a growing number of women farmers, tenants and labourers in agriculture and related activities.
3.1.5 Public Investment in Agriculture versus Input Subsidies
Public expenditure on input subsidies is more than double the investments made in agriculture and irrigation. Does higher public expenditure on input subsidies cut down public GCFA and incentivise farmers to make investments? A positive and significant impact of input subsidy and on private GCFA and productivity has been reported in Kannan (2012), Gulati and Chopra (1999) and Terway (2021). Figure 5 shows an increasing trend in investments and subsidies over the period from 1980–81 to 2017–18.15 Increased budgetary outlays towards input subsidy lowered public GCFA for quite some time. However, both accelerated from the early 2000s, thus defying the argument that a hike in expenditure on subsidy lowers public investment. An increase in public GCFA also confirms a ‘crowding in’ effect on private GCFA, which became blurred from the 1980s to the mid-1990s. In fact, private GCFA and input subsidy have consistently shown an increasing trend up to 2008–09, followed by a decline. The estimated value of the correlation coefficient between public and private GCFA is 0.78, and that between private GCFA and input subsidy is 0.87. Going by this and other studies, the government should encourage private (household) investments by investing more, along with extending subsidised credit and subsidies on purchase of assets namely, micro irrigation, tractor and farm machinery. However, unabated rise in expenditure on subsidies has to be checked in order to improve expenditure efficiency and promote inclusive growth.
3.2 Reforming the Input Subsidy Regime
Public expenditure on agriculture has revived from the mid-2000s. Though spending on agriculture and irrigation accounts for nearly 11% of GDPA, only 3% of this is directed towards asset formation; the remaining 8% is for supporting inputs. The expenditure on input subsidy is INR 1,290 billion (at 2011–12 prices averaged during 2011–18), which is close to 1.5% of GDP. Within the total input subsidy bill, fertiliser and power had the majority share, at 45.6% and 30% respectively, followed by irrigation (16.4%), credit (5.07%) and crop insurance (2.69%). Tiwari and Surya (2019) confirmed that states, on an average, spent 6.5% of their budget on agriculture and allied activities during 2015–20. This constitutes 0.6% of budgeted capital outlay and 5.9% of the budgeted revenue expenditure. In some states, underspending (spending less than the allocated amount) in agriculture and irrigation was found to be to the tune of 8% and 16% respectively. Further, this underspending was more on the capital account, implying that states were unable to meet their development targets during that period or cut back expenditure in order to meet fiscal deficit targets.
The usefulness of input subsidy is often questioned on the grounds of the financial burden they impose on the exchequer.16 Gulati and Narayanan (2003), Fan and Hazell (2000) have argued that input support might be useful in the short run, especially in regions where input use, productivity and farm income is low. Gulati and Terway (2018), Bathla et al. (2020) estimated that additional public spending on investment yields higher marginal returns as compared to additional spending on subsidies. The returns from fertiliser subsidy are found to be higher in less developed states, indicating that it should be targeted towards the disadvantaged, rainfed and low productivity states, which have a high proportion of small and poor farmers. Similarly, rationalisation in power and urea subsidy is a must in the north and north-west regions, in view of intensified cultivation of water-intensive crops, continuous depletion of groundwater and imbalanced nitrogen, phosphorous and potassium (NPK) ratio (Chand & Pandey, 2008; Sharma, 2013).
The broad consensus, therefore, is that if public policy continues with lopsided support in favour of select crops and irrigated zones, it will further reduce land productivity and returns to farmers—outcomes that are diametrically opposite to the intent (Gautam, 2015). Moreover, subsidies must cover the marginal cost in the long run. Rationalisation of subsidies in the name of efficiency, targeting and saving of public resources has to be based on the development level of a region and the prospects of private investment and growth in output there. Any recovery model, be it through neem-coated urea, use of solar pumps or direct income support in lieu of the existing price-based support system has to be inclusive, equitable and backed with a corresponding increase in public investment in agriculture.
In the case of the fertiliser subsidy, the Centre introduced the nutrient-based subsidy (NBS) scheme during 2010, under which the prices of P and K fertilisers were partially decontrolled under a fixed subsidy regime in which N (urea) was not included. As a result, subsidy on DAP (di-ammonium phosphate) and MOP (muriate of potash) is just about 25–30% of their cost of production or import, while that on urea continues to be in the range of 75% of its cost of production. Chand and Pavithra (2015) found excessive use of urea in several states, including Andhra Pradesh, Bihar, Haryana and Punjab, while in other states, notably Chhattisgarh, Kerala, Rajasthan and West Bengal, its consumption is much less than the norm for the crops grown. The authors pointed out that if urea prices are decontrolled, and the subsidy amount is transferred directly to farmers, the amount required would be INR 7,000 per hectare (ha.). The cash transfer estimated in Bathla et al. (2020) is somewhat lower at INR 5,250 per ha. at 2017–18 prices. Chand (2019) explored the possibility of merging all types of subsidies into one pack for distribution to farmers on a per acre basis. However, the main hurdles to this are assessing the exact magnitude of various subsidies given by the Central and state governments, estimating the amount of cash transfers in each state and devising a criterion for payment to farmers.
There are several other implications of switching over to direct income support, such as exclusion of tenants or sharecroppers and women farmers and the likely reduction in the consumption of fertilisers in some high consuming regions which could adversely affect productivity. We believe that if fertiliser prices are completely decontrolled, the price at which they will flow from factories to distributors and then to retailers will be higher by about 60% to 80%. Therefore, the requirement for working capital by distributors, retailers and other participants of the supply chain (private and cooperatives) will increase. Banks will then have to raise the working capital limits sanctioned at various levels for handling the same quantity of fertilisers. Since complete decontrol of urea prices at one go may not be possible, bringing urea under the NBS may be a better option. The subsidy will be capped at the current level, and an increase in prices may get reflected in retail prices. One consequence of complete decontrol will, however, be the closure of several uneconomic urea manufacturing plants.
Similarly, in order to reduce the subsidy bill on account of electricity used to extract ground water for irrigation, a formula needs to be devised to reward states that save energy (through the installation of metres or solar pumps) and to penalise the wrongdoers. The State of Uttar Pradesh has taken the lead in the installation of solar pumps. There is apprehension that if income support is substituted for subsidised electricity, farmers may grow less water-intensive crops because extracting groundwater will become more expensive. It may also alter the cropping pattern as per the irrigation water productivity (IWP). For instance, the IWP of rice in Punjab and Haryana is low as compared to several other states, especially Chhattisgarh. Income transfer can also spur investment in infrastructure in the eastern states which have higher IWP (Sharma et al., 2018). More research needs to be done on these issues and concerns raised.
On the issue of irrigation subsidy, the Fourteenth Finance Commission recommended the formation of Water Regulatory Authorities (WRA) for water pricing. The pre-requisite for this is an ex-ante assessment of the capacity and potential of different irrigation models, that is institutional arrangements, and ensuring the efficiency of departments engaged in the supply of canal irrigation water.
As in the case of support for inputs, the government incurs sizeable expenditure on the interest subvention scheme for agriculture. The subsidy on interest subvention on short-term crop loans in the budget estimates of the Union Budget of 2020–21 is INR 178.63 billion, which is way below the fertiliser subsidy of INR 799.98 billion. A sum of INR 136.41 billion has been allocated for subsidy on crop insurance. The expenditure of states has also escalated due to loan waivers since 2014–15.17
There are reports of beneficiaries not using loans given against gold for agricultural operations. The Report of the Internal Working Group of RBI to Review Agricultural Credit (RBI, 2019) has recommended that the scheme should be replaced with direct benefit transfer (DBT) for small and marginal farmers. The group has also recommended that tenant farmers, sharecroppers, oral lessees and landless labourers may also be covered as individual borrowers or through a self-help group/joint liability group (SHG/JLG) model with an overall limit of INR 300,000 per farmer. Since there is no record of tenants, sharecroppers and oral lessees, it would not be possible, in the first phase, to reach the DBT to them. If interest subvention is paid through DBT, farmers will have to avail loans from banks at market rates. In that event, the bank managers will also be more prudent while sanctioning the loans. Moreover, farmers will borrow only as much as is required for inputs. In the current situation, the extent of finance available is high for some crops and very low for others. This encourages the farmers to avail a loan for one crop and cultivate another crop. The working group also found that some states in the southern and western region have been availing agri-credit higher than their share in agri-GDP, while states in the central, eastern and northeastern regions get credit lower than their proportion of agri-GDP.
In sum, public expenditure on investment as well as on input subsidies can incentivise farmers to undertake investments. At the same time, states have budgetary constraints and tend to neglect asset creation in agriculture, relative to other economic sectors. However, spending on subsidies (done from revenue account) has been on the increase despite enormous fiscal constraints. It is, therefore, vital for states to allocate more resources towards the capital account—and, hence, capital formation—in their expenditure policy, bring in better governance in canal irrigation departments/systems and, at the same time, rationalise expenditure on input subsidies. Efforts should be made to ensure that support reaches the poorer states and farmers who are at the bottom of the income pyramid. The ongoing initiatives in fertiliser subsidy based on NBS can help to lessen the financial burden of the Centre. For reforms in the pricing of power, irrigation and other inputs, states have to be proactive in devising appropriate systems and assuring improved governance. Where shifting to cash transfers is concerned, each state should first examine its feasibility and then estimate the amount, intended beneficiaries (farmers, tenants/landless cultivators or both), possibility of changes in the cropping pattern and, hence, fertiliser application and its consequent impact on the environment.
4 Reforming Agriculture Price Policy and Marketing
4.1 Replacing Minimum Support Price with Income Support
Two institutions—the Commission for Agricultural Costs and Prices (CACP) and the Food Corporation of India (FCI)—were established in 1965 to formulate and implement agriculture and food policies. The MSPs of paddy and wheat and other selected crops are determined by the CACP based on the cost of production, demand and supply, movement of domestic prices, intercrop price parity and terms of trade between agriculture and non-agriculture sectors. The FCI was entrusted with the task of procuring wheat and paddy at MSP, maintaining the stocks to meet emergency needs and ensure price stability and distribution through the PDS and its network of fair price shops.
The CACP recommends MSP for 23 crops,18 but its major focus has been on wheat and paddy for enabling procurement by the FCI and state agencies, mainly from Punjab, Haryana, Uttar Pradesh and Madhya Pradesh. After the global food crisis of 2006–07, procurement of wheat/paddy has expanded in other states as well such as in Andhra Pradesh, Telangana, Chhattisgarh, Odisha, West Bengal and Bihar. Procurement of pulses has picked up in the last five years; the National Agricultural Cooperative Marketing Federation of India Ltd (NAFED) procures and maintains the buffer stock of 2 million tonnes under the Price Support Scheme. The National Food Security Mission (NFSM) launched in 2006 also gave a fillip to food grain production and its procurement.
While the price support policy has incentivised farmers to increase investment and production and helped the government to maintain price stability and food self-sufficiency, its deleterious effects—regional bias,19 mono-cropping and environmental degradation20—must not be ignored. In 2018–19, out of the total production of wheat, procurement was about 73% from Punjab and 80% from Haryana. In contrast, Bihar accounted for less than 1% share of procurement in total wheat production. Despite an improvement in the production and productivity of paddy in the eastern states, its procurement is sporadic and poorly organised. Furthermore, since procurement is confined to wheat and paddy, farmers in Punjab have largely moved away from maize, bajra, oilseeds and pulses. A similar situation prevails in Haryana and, lately, in Madhya Pradesh where, after an increase in the irrigated area, farmers have switched to wheat cultivation.
Another major outcome of the price policy is an excessive buildup of stocks (also called central pool stocks) from time to time. Procurement of wheat and paddy at MSP is open-ended, that is, government agencies are mandated to procure whatever quantity is offered by the farmers. The stock of rice and wheat has surpassed the buffer norms,21 and this has put tremendous pressure not only on state finances but also on the storage capacity of FCI and state warehouses. The Centre has, on several occasions since 1999–2000, resorted to open market sale of grains for domestic consumption and exports. While revising the buffer norm in 2015, the government decided that if the stock of grain in the central pool was more than the revised norms, it will offload excess stock in domestic markets through open sale or exports.22 Moreover, subsidising exports has become increasingly difficult because of WTO stipulations.23
The fixation of MSPs of wheat and paddy has also become highly politicised with states sometimes declaring bonus over and above the price recommended by the CACP. OECD-ICRIER (2018) found domestic price support in agriculture commodities to be negative in most of the years from 2000 to 2016, implying a price gap between their producer price and the reference (international) price. This indicates that India imposes an implicit tax on domestic producers through lower MSP, aggravated by regulations on trade, inefficiencies in agriculture markets and weak infrastructure. Farmers are also affected by a continuous increase in the input cost relative to output price, which results in lower net returns, and hence aspire for some safety net. On the demand of farmers, from the kharif season of 2018, the Centre fixed the MSP to ensure at least 50% return on overall paid out cost (A2 + FL).24 In the kharif marketing season of October 2020–23 September 2021, a much higher procurement of rice at 59.84 million tonnes might result in central pool stocks of 78.61 million tonnes as on 31 August 2021, which may again exceed 100 million tonnes by the end of rabi procurement next year, sending the subsidy bill soaring.25
Should India move away from a system of price support to other fiscally sustainable alternatives that would also shield farmers’ from price risk and maintain their income at a reasonable level? A high-level committee studied the grain policy and management and recommended several measures, which were never implemented (FCI, 2015). Chand (2019) suggested an “area-based income compensation” based on the difference between the market price received by farmers and the MSP for various crops, popularly known as price deficiency payment system. The State of Madhya Pradesh initiated such a scheme under which farmers were compensated in cash when commodity prices fell below a certain level. The policy, however, was not successful (Gulati et al., 2018). Yet another suggestion is to adopt market-based instruments such as derivative market, that operate through options, forwards and futures in order to effectively cover the price risk of farmers.
Direct income support, implemented in Jharkhand, Karnataka, Odisha, Telangana and West Bengal seems transparent, less distortionary and equitable. According to Gulati et al. (2018), in this model, farmers sell grains in the market and the government provides income support in unfavourable situations. Assuming all farmers get INR 10,000 per ha., irrespective of the crops they grow and whom they sell to, the estimated cost at the national level will be approximately INR 1.97 trillion. The cost will be much lower if farmers who have sold their paddy and wheat at MSP to government agencies and sugarcane at Fair and Remunerative Price (FRP)/State Advised Price (SAP) to sugar mills are excluded from this system of payment.
India can also experiment with a system modelled on China’s targeted price policy and direct compensation scheme. China followed a price support system, including buffer stock similar to India, and the country faced a situation of bulging grain stocks. The food grains purchased at the intervention price were much higher than the global prices. As part of reforms, the procurement price of wheat was reduced twice by USD 8.6 per tonne for 2018 and 2019. For 2020, the price has been retained at the 2019 price of USD 320 per tonne.26 When market prices are high, China sells from its reserves in weekly auctions of grains, akin to the open market sales scheme followed in India. However, unlike India where the MSP is uniform across the country even though the cost of production differs widely across states, China follows a differential price policy across provinces. For cotton and soybeans, the target prices are fixed and combined with compensatory, direct payments to farmers, based partly on the area planted. In due course, China proposes to dilute the link between compensatory payments and production decisions on a historical production basis; by making them conditional on environmentally friendly cultivation practices (OECD, 2015). However, these measures have to be supported by land reforms, improvements in marketing, research, infrastructure, innovation, extension services and accessibility to good education and health care for productivity gains in the long run.
4.2 Legislation and Regulations in Agriculture Marketing
As noted in Sect. 2, agri-markets governed under the APMC Act restricted farmers, and traders to geographical zones and forced them to pay a cess on any transaction within or outside the marketing yard of the APMC. Stringent rules on intra and inter-state trade together with improper price discovery and a long chain of intermediaries made markets uncompetitive and unfair to farmers for decades. Though the APMC Acts of 2003 and 2017 encouraged farmers to enter into contracts with private companies and retail chains to realise better prices, the monopoly of state-run mandis continued.27 Contract farming could not take off due to the requirement of compulsory registration with mandis, payment of fees, levies and other market regulations, as well as coordination with farmers to build their confidence in the contractual arrangement.
On 5 June 2020, the Centre promulgated three ordinances—Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020, Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 and the Essential Commodities (Amendment) Ordinance, 2020. In September 2020, these were introduced as bills in Parliament and became laws after the President of India gave his assent. According to Chand (2020), these three laws were the most prominent structural reforms in the agriculture sector in the last few decades.
The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) (FPTC) Act, 2020 allowed sale and purchase of agricultural commodities outside the physical boundaries of APMC mandis. So far, such transactions attracted fees and other charges applicable to trading inside the APMCs. Only licensed traders were allowed to do business within these and such licenses were not freely available.28 Instead of a license, anyone having a valid permanent account number (PAN) issued by the income tax department would have been allowed to purchase or sell agricultural produce in the trade area. More importantly, such transactions would not have attracted any market fee or other charges which are levied on transactions inside the mandis. In the trade area, there was also complete freedom to operate an online trading portal. This did not need to be linked to the e-NAM (electronic National Agriculture Market). However, the Central and state governments were free to frame rules for registration, code of conduct and procedure for trading on such platforms.
The Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services (FAPAFS) Act, 2020, brought uniformity in contract farming. Prior to its enactment, contract farming was governed under the AMPC Acts of individual states. The FAPAFS Act facilitated a written contract between the farmers and a sponsor (which could also be a company). The contract can mention the terms and conditions of quality, grade, time of supply and the price of the commodity being cultivated. The Act prescribed a minimum period of one year and maximum period of five years for such an agreement. It further stipulated that for any additional amount in excess of the agreed price, the benchmark would be the prevailing price in the APMC mandi or an electronic portal like e-NAM. The contracts could be for any foodstuff, including edible oilseeds and oils, cereals like wheat, rice or coarse grains, pulses, fruits, vegetables, nuts, spices and sugarcane. Contracts could also cover poultry, piggery, goatery, fishery and dairy, intended for human consumption in its natural or processed form as well as cotton, jute and cattle fodder.
Importantly, the Act provided that the specifications of quality, grade and standards for pesticide residue and food safety standards can also be part of the agreement. Such specifications are especially important for contracts for export-oriented produce, specifically for perishables. Since Indian agriculture is dominated by small and marginal farmers, the Act protected their interests by clearly specifying that an agreement cannot involve any sale, lease and mortgage of the land. Moreover, no permanent structure can be raised on the land unless the sponsor agrees to remove it on the conclusion of the agreement, as per Section VIII of the FAPAFS Act.
The Essential Commodities (Amendment) Act (ECA) 2020, sought to deregulate the supply of food stuff, including cereals, edible oils, oilseeds, pulses, onions and potato by removing them from the purview of the ECA, 1955. The main objective of the 1955 law was to protect the interests of consumers by preventing hoarding of essential commodities by enabling the Centre to impose restrictions on their storage and movement. The Centre enabled the states to issue control orders through which they could impose such restrictions. The amended ECA limited the Centre’s power to impose restrictions to only extraordinary circumstances like famine, war, extraordinary price rise and grave natural calamity. It allowed the Centre to impose stock limits in certain circumstances. In the case of perishable horticultural produce, stock limits could be imposed only if there is a 100% increase in retail price over the retail price in the preceding 12 months or the average retail price of the last five years, whichever is lower. For non-perishable produce, the restrictions could be imposed only if the price rise is 50% over the price in the previous 12 months or the last five years.
These laws had a multitude of far-reaching implications. The privately owned markets and non mandi transactions between farmers and consumers would have run parallel with the existing APMC markets. There was a provision to establish a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the FPTC Act. The authority could levy facilitation fees and resolve any disputes that may arise. There was also a proposal to allow private entities and Farmer Producer Companies (FPCs)29 to transact directly in the e-NAM and ease the supply chain. However, this freedom to trade could be subject to regulation as the government retained the right to notify any document other than a PAN card as a requirement for trading in the future. A system for registration of traders, modalities of transactions and the modes of payment to farmers has to be prescribed. Furthermore, compared to physical trading where delivery is on the spot, trading on electronic platforms will require better oversight and regulations, as some agency or intermediary is needed to facilitate transactions between farmers and-or aggregators with the buyers.
State governments would have had to draw up a blueprint for the entry of the private sector in agri-markets and push for speedy implementation of regulations specified in the respective Acts. Appropriate institutional arrangements would have to be formed for aggregators, FPCs, SHGs, cooperatives and agri-start-ups that help in reducing the transaction costs of farmers and providing them grading and standardisation facilities. Such interventions have to be supported through adequate finance such as the support given by NABARD to the FPCs. The role of the Warehousing Development and Regulatory Authority (WDRA) would have been crucial.30 As the notified warehouses and private online markets will be deemed markets for direct sale of produce, these can be regulated by the WDRA. On the flip side, there might have been no incentive for any warehouse to register with the WDRA, as all warehouses could have acted as market places without paying any fee or charges to APMCs. However, since business in trade areas was going to be deregulated entirely, it would have been necessary to make registration of warehouses with WDRA mandatory so that the privately-held stocks in warehouses are known to the government. This would have helped the government take informed decisions and intervene in markets to check hoarding of commodities and price fluctuations that could be detrimental to consumers’ interests.
One important concern was that the warehouses and factory premises may have applied for de-notification and sub-market yards in order to take advantage of the zero tax structure. APMCs and the states may have had to bear some loss of revenue because of trade moving out of their jurisdiction as well as losing out on the market fee that was earlier levied on every transaction. Another issue was ensuring timely payment to farmers, which was earlier regulated by the APMCs. According to the FPTC Act, the payment will be made on the same day, but if procedurally required, it can be done in three working days. In this situation, the farmers will have to be given a receipt of delivery of produce in which the due amount will be mentioned.31 Since the trade area is not under regulation, it is necessary to ensure that the farmer is either paid in cash or by electronic transfer into his/her bank account on the same day before the delivery of the produce. This will eliminate the possibility of disputes between farmers and purchasers. For dispute resolution, the Act prescribed conciliation through a board appointed by the Sub-Divisional Magistrates (SDMs). Since SDMs and their officers also perform myriad other duties, it would be unrealistic to expect them to find time for settling disputes. Making same day payment mandatory will forestall disputes relating to payments. The farmers should be encouraged to use the e-NAM platform for more competition and better dissemination of commodity prices.
All these steps will enable the smallholders, having less than two hectares of land, be part of competitive agri-markets. The smallholders are unorganised and have to be securely linked with both back-end service providers and front-end agri-processors. Nearly 86% of the farmers are categorised as small and marginal. The share of tenant farmers, women farmers and women labourers in agriculture, horticulture, dairy and fisheries activities has been growing steadily. Male farmers own 86% of landholdings compared to women farmers who own just 14% holdings, mostly of less than two hectares area (FAO, 2016). Furthermore, women did not inherit agricultural land in several states. For example, the Uttar Pradesh Zamindari Abolition and Land Reforms Act, 1950 did not recognise daughters as primary heirs to agricultural land. It was only in 2006 that the provisions were modified to enable unmarried daughters also to inherit land as primary heirs, at par with sons. The Uttar Pradesh Revenue Code, 2006 which came into force in 2016 still places married daughters much lower in order of succession. They inherit agricultural land only if there are no widows, male lineal descendants, the mother and the father of the deceased or an unmarried daughter.32
Contrary to popular perception, studies indicate that the productivity of smallholding is not lower than that of the larger holdings, implying an inverse relationship between farm size and productivity.33 As shown in Annex Table 6, on a per hectare basis, the marginal and small farmers earned slightly higher than the medium and large farmers but their major source of income was salary/wage (46.75% in the case of marginal farmers and 23.16% in the case of small farmers) and livestock activities. Similarly, women-headed farm households earned lesser net income as compared to the male-headed farm households, though their net income is almost the same on a per hectare basis (Annex Table 7). The problems small and marginal farmers, including women, conceal various challenges that they face in farming activities—the two most significant ones being accessing credit for production and marketing of their produce.
RBI (2019) noted that only 41% of small and marginal farmers are able to get credit from public and private sector banks (as per priority sector advances annual return of 2015–16). This despite the fact that, under priority sector lending norms, all the scheduled commercial banks have been given a target of 40% of their adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposure, whichever is higher. Banks are also mandated to provide 8% of ANBC for small and marginal farmers. The RBI working group further noted that in 2015–16, only 40.9% of the 125.6 million small and marginal farmers, had accounts with scheduled commercial banks. Farmers having Kisan Credit Cards (KCC) get loans against negotiable warehouse receipts for the produce stored in warehouses registered with the WDRA. They also get the benefit of interest subvention of 2% for six months after harvest to prevent distress sales. These initiatives are not adequate as small farmers face several hurdles in accessing loans. Kumar et al. (2020) found that access to credit in eastern India benefitted farmers, and those who availed credit from formal sources are much better off than others who borrowed from informal channels. They suggested that the credit policy must offer a variety of loan products to cater to the requirements of different households.
Birthal et al. (2015) have maintained that smallholders prefer to produce high-value crops such as vegetables, fruits and milk. This is because they lack storage facilities for crops like sugarcane, wheat, paddy, pulses and cotton for which they can get a remunerative price through the government procurement system. However because of the relatively smaller quantity of produce, small farmers do not find it viable to hire transport to go to procurement centres and so their produce is sold to traders within the village. In such cases, even for wheat and paddy crops that are procured at MSP, they realise a lower value since they lack bargaining power.34 Extending support to smallholders through contract farming under the new Act, supplemented with subsidised credit and insurance, can go a long way in improving their condition. According to Joshi (2015), small farmers and women should be organised across the entire value chain as technology, information, finance and markets are sometimes inaccessible to them due to low marketed surplus or other reasons.
India needs location-specific, differentiated programmes for smallholders and women farmers with clear responsibilities for the public and private sectors in order to make farming viable. Women farmers receive assistance and training under the Mahila Kisan Sashaktikaran Pariyojana35 (MKSP) of the Ministry of Rural Development with a INR 656 million fund earmarked in 2018–19 and also under beneficiary-oriented schemes and programmes of the MoA&FW.36 The Centre must give states flexibility in spending and in strategising plans that help small farmers and women farmers enter into contracts with private agencies.
5 Conclusions and Way Forward
This chapter provided a historical perspective of the key reforms initiated in Indian agriculture and the structural changes that have taken place with the objective of highlighting some important governance issues for further action. The chapter began by delving into the relationship between the Centre and the states in the devolution of funds and their shared responsibilities towards agriculture development. Though under the Constitution of India, agriculture and irrigation fall within the jurisdiction of states, the Centre plays a crucial role in the formulation of policies which have deep impact on agriculture and allied sectors. Since the Centre has much more financial resources than most of the states, it plays a critical role in the release of funds/grants to states, extending price support and subsidies for agriculture inputs and output and pursuing the national development agendas of food and nutrition security, elimination of poverty and hunger. In policy formulation, especially in the enactment of laws by Parliament, good governance would mean wide consultation with state governments and other stakeholders. The state governments can, well within their powers, enact laws and regulations which bring more competition in the APMCs. Farmers already have the freedom to sell their produce outside the APMC. The purchasers have to pay applicable market fees and other charges. To bring more competition and efficiency in the APMCs, unified licenses for the entire state should be issued to the FPOs, corporates and large purchasers. However, a law for inter-state trade needs to be enacted by the Centre. Further, when it comes to implementation of policies, the Centre should give flexibility to states in strategising action plans that are suited to their particular requirements in order to encourage farmers and the private sector. There is a strong need for convergence of various schemes and, hence, effective coordination across Central ministries for which an empowered group of ministers should be formed. Within the states, cabinet sub-committees on agriculture and related departments (including of irrigation and power) should be constituted. The underlying intent should be to reinforce public administration as part of the governance reforms. The administrative reforms can reinforce state capacity and deliver growth with equity and inclusivity.
Almost every state in India is confronted with a fiscal crisis, and the brunt of the resource crunch has largely been borne by agriculture and irrigation, indicating a lower priority accorded to this sector in the expenditure policy. Public investment, which has always been skewed towards major and medium irrigation, has to be synchronised with the changing investment requirements of farmers, such as micro irrigation, storage, mitigating post-harvest losses, soil health and allied activities and digital farm services on weather advisories. This will intensify the ‘crowding in’ effect of public investment on private household investment. Government spending on input and output subsidies is much higher than that on investment, which has long term implications for growth. It is important to raise investments and target support towards the less developed states/regions and small and marginal farmers in order to achieve higher productivity as well as alleviating poverty.
Replacing the existing price support system with direct income support to farmers or encouraging them to use neem-coated urea and solar pumps has to be backed with a corresponding increase in public investments in the agriculture sector. Direct income support may assure efficiency in input use and financial autonomy to farmers, but the amount of cash transfers have to be estimated and aligned with the existing cropping pattern in each state as well as the usage of inputs and presence of tenants and sharecroppers and women farmers. Having no titles to land, women farmers face credit bottlenecks, cannot avail crop insurance, have lower output (agriculture, poultry and livestock) and also find it difficult to become part of the value chain. Incentives should be given to enable them to form women farmer producer organisations (WFPOs), women SHGs federations, cooperatives and women-headed enterprises. Issuing of farmers’ card to each cultivator, irrespective of gender and ownership of land, can go a long way in empowering women and allowing them to take advantage of various government schemes. Farmers should be shielded from price fluctuations through direct income support or price deficiency payment or other feasible systems.
Similarly, the new marketing reforms laws—FAPAFS Act, FPTC Act and the ECA—that are now repealed could have yielded the desired results only if adequate investments are made in rural and marketing infrastructure and adequate flow of credit and extension services to farmers is ensured. The process of agri-market reforms will continue across the states. The way forward for them is to take forward the reforms in agri-markets and create an enabling environment that incentivises the cooperatives, agri-businesses and private companies to enter the sector and also undertake investments in handling perishables. Institutional support can be taken from various industry forums, export houses, NAFED and the National Centre for Cold-chain Development. Subsequent to the enactment of the three laws, a few states initiated measures in their respective markets, whereas some like Punjab, Haryana, Uttar Pradesh, Rajasthan and Tamil Nadu opposed the laws mainly on grounds of loss of revenue and the apprehension that this would lead to Centre reducing grain procurement at MSP, leading to a fall in the market price of grains. States do have the autonomy to bring suitable changes in the laws but it is important that they frame rules for registration and code of conduct for trade as well as procedures for trading on newer, even online, platforms, which can also be linked to e-NAM.
In Punjab and Haryana, a major proportion of market arrivals of wheat and paddy (about 99% in the case of Punjab) are procured by government agencies. In Punjab, such transactions attracted market development fee (MDF) and rural development fee (RDF) of 3% each. In Haryana, the MDF and RDF fee was 2% each. In both the states, the arhatiyas were paid 2.5% of MSP as commission. The marketing boards of Punjab and Haryana earned about INR 35 billion and INR 16 billion respectively on this account. The Centre has since decided not to pay the MDF on paddy procured in the kharif marketing season 2020–21 (October to September). The difference in fees between APMC mandis and other markets has already prompted other state governments to reduce the fee within the former. Within days of the Centre notifying the FPTC Act, the Government of Punjab reduced the MDF and RDF on basmati paddy from 2 to 1% each.37 Similarly, Haryana also reduced MDF and RDF on wheat and rice from 2% each to 0.5% each. Madhya Pradesh too reduced the mandi tax from 1.70% to 0.5%. On 6 November 2020, Uttar Pradesh reduced the mandi tax from 2 to 1%.
In order to ensure more competition and lower fee in the markets, the state marketing boards need to upgrade infrastructure in the existing regulated markets and make operations in these more efficient and transparent. Even though their income may decline due to the reduction of market fees and other charges, it is necessary that the state governments provide them required funds from the state budget.
APMCs own large tracts of land, mostly in towns and cities. So far there have been few cases of public–private partnership to create modern infrastructure for sorting, grading, drying and storage in these. It is possible that state governments will look for private collaborations to modernise the facilities within APMCs so that they remain competitive. In our opinion, private players may not venture into agri business/marketing in the short run. However, in the medium to long term, they can be expected to engage in agri-marketing, provided state governments facilitate such business practices and develop adequate infrastructure. We expect that by 2030, exporters and processors may set up their own purchase centres in the trade area which will provide facilities specific to a particular commodity or group of commodities. In all likelihood, both foodgrains and perishable horticulture produce will attract investment. This could be higher in the case of perishables, due to relatively less quantum of arrivals as well as the additional space required for their transactions. Even before the enactment of the FPTC Act, fruits and vegetables have largely been traded outside the APMCs. In the last few years, states like Delhi and Maharashtra had delisted them from the purview of the APMC Act. The emerging ecosystem of start-ups may see investment flowing into the establishment of value chains connecting producers with the processors and consumers.
The amendment in the ECA was seen as a step to reduce regulatory interference in business transactions. The latest example of such interference is the Centre using, in October 2020, the powers under the Act to impose stock holding limits on onions, stipulating that the wholesalers cannot store more than 25 tonnes while for retailers, the limit was fixed at only two tonnes. India’s surpluses for most agricultural produce are marginal. India is a large importer of some commodities like edible oils and pulses and any natural calamity can cause damage to pulse crops, resulting in shortages. In the last three years, India had to allow import of maize (in 2019) as well as onion and potato (in 2020). From 2000 to 2015, the government has often resorted to restrictions on the movement, stocking and export of wheat, maize, chickpea, potato, onion, sugar, cotton and milk (OECD-ICRIER, 2018). Due to such adhocism, India may not be seen as a reliable exporter.
Even though the government has decided to repeal the amendment, there is a need to make the regulatory regime more predictable so that private investment can be attracted into the agri-supply chain. At present, the private sector is reluctant to make any investment as the government can suddenly impose stock limits or restrictions on the movement and export of agricultural produce. If India’s crop productivity increases and the demand–supply situation improves, it is possible that the private sector may see opportunities to invest in the creation of infrastructure as well. A successful export-oriented supply chain of grapes and buffalo meat has already been created almost entirely by the private sector. By 2030, if there are surpluses in agricultural produce, such investment can be expected in other areas as well. The Agriculture Export Policy, 201838 already provides an assurance that organic produce and processed agricultural products will not be subject to any export restriction by way of minimum export price, export duty, ban on export, export quota, export capping, export permit, etc. However, the government has retained the powers to impose export restrictions on primary produce or non-organic produce. States must also devise some ways to record commodity stocks available with the private agencies, perhaps through registration with the WDRA.
The FAPAFS Act aimed to bring uniformity in contract farming. India already has a successful model in poultry and seed production. Under the contract system, aggregators provide extension services, including feed and medicines to small farmers who provide space and labour to grow one-day old chicks, also provided by the aggregators. The marketing risk is not borne by the farmers. It is estimated that about 66% of India’s poultry production is under contract arrangements. Most of sugarcane production is also through a form of contract farming under which an area is reserved for supplying sugarcane to sugar mills. The farmers are assured of the FRP with the mills having to pay the SAP, which is higher than the FRP, in some states. This system of assured marketing has, however, provided a perverse incentive to farmers to grow sugarcane even in water-stressed regions. As a result, India produces more sugar than required for its domestic consumption. In the case of perishables, a few companies—Adani Agri Fresh Ltd., MAHAGRAPES, Mother Dairy-SAFAL, Haldiram Foods International Ltd., etc.—have entered into contracts with farmers in several commodities for both retail and value addition, but their penetration is still very low. This is despite the fact that the farmers in selected regions in Haryana and Himachal Pradesh got at least INR 100 to INR 150 per quintal39 more for their produce from Mother Dairy-SAFAL compared to those selling to commission agents/traders (Bathla, 2016).
It is hoped that a legal framework for contract farming can provide the much-needed fillip and scaling up to these arrangements. In addition, it may encourage the production of better quality and high value produce. Going forward, one can expect that by 2030, Indian farmers will have sufficient incentive to enter into contracts for export-oriented agriculture and horticulture produce which will meet international standards of quality and food safety. Since contract farming has the potential to bring businesses and farmers together, it can enable the farmers to use better practices, including more appropriate use of fertilisers and pesticides. It can introduce appropriate technology in farming and in allied occupations like dairy, fisheries and beekeeping etc. It can also incentivise farmers to conserve water by adopting micro irrigation and fertigation practices. It is, therefore, imperative for states to strengthen institutional support, provision of credit and extension services that instil confidence among small holders and women farmers to engage in contract farming.
The authors acknowledge the FAO and NITI Aayog for awarding this study and the support received throughout. We are grateful to Prof. Ramesh Chand, Dr. P.K. Joshi, the paper reviewers and the participants in the National Dialogue—Indian Agriculture towards 2030 (January 2021) for their valuable comments and suggestions.
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Note (1) TE—triennium ending. (2) AOI serves as an indicator of the degree to which the share of agriculture and irrigation in public expenditure is commensurate with the weight of the sector in GDP. Irrigation expenditure excludes flood control. Data is derived from Finance Accounts and GoI-NAS.
aTill 2000, these were part of Madhya Pradesh, Bihar and Uttar Pradesh respectively.
Composition of revenue and capital expenditure on irrigation, agriculture & allied activities (2011–12 prices)
Revenue Expenditure (percentage share)
Capital Expenditure (percentage share)
Revenue Expenditure (INR billion)
Capital Expenditure (INR billion)
Irrigation and Flood Control
Major & Medium Irrigation
Command Area Development
Flood Control and Drainage
Agriculture and Allied Activities
Soil and Water Conservation
Forestry and Wildlife
Food Storage and Warehousing
Agricultural Research and Education
Agricultural Financial Institutions
Other Agricultural Programmes
Source Based on Finance Accounts, GoI. The expenditure is taken for 20 major states
Percentage share of sources of credit in private investment in agriculture, 2012–13
Distribution of farm expenditure as per source (per cent)
Percentage share of investment from
Own source (non-borrower)
Borrowing from formal sources
Borrowing from informal sources
Formal (institutional sources)
Informal (non-institutional) sources
Source NSSO AIDIS, 2013. Schedule 18.2
Net income of agricultural households, INR/ha, 2012–13
Marginal (< = 1 ha)
Small (1–2 ha)
Medium (2–4 ha)
Large (>4 ha)
Percentage share of income
Source NSSO AIDIS, 2013. Schedule 33
Agriculture economy of agricultural households as per gender (2012–13)
Ratio Female to Male
Ratio Female to Male
Value of product
Value of by-product
Value of output
Plant protection chemical
Minor repair & maintenance of machinery and equipment
Rashtriya Krishi Vikas Yojana (RKVY), National Agriculture Development Scheme, aims to give a fillip to agriculture. It was rebranded as RAFTAAR, which is the Hindi word for speed and is the acronym for Remunerative Approaches for Agriculture and Allied sector Rejuvenation.
The Finance Commission is a constitutional body set up by the President every five years mainly for the purpose of the distribution between the Centre and the states of the net proceeds of taxes and setting the principles which should govern the grants in aid of the revenues of the states out of the Consolidated Fund of India.
CSSs form a major part of the Central assistance given to states to implement the development initiatives in certain priority areas. In 2016–17, the Centre approved merging the 147 CSSs and bring the number down to 66 for effective implementation and monitoring. The number has been further rationalised to 28 umbrella schemes of which ten are funded fully by the Centre and the remaining are funded in the ratio of 60:40 between the Centre and the states.
The fund distribution among the states is based on a formula recommended by the respective Finance Commissions, with some changes in the percentage assigned under each category. For instance, the Fourteenth Finance Commission (2015–2020) recommended fund distribution on the basis of population (17.5%); area (15%); forest cover (7.5%); demographic changes (10%); and income distance between states (50%). The Fifteenth Finance Commission (2020–2025) has recommended inclusion of tax effort as another criterion under which states with higher tax collection efficiency should be rewarded.
The constitutionalist approach underlines the fact that agriculture and related activities are subjects within the jurisdiction of states (List II of the Seventh Schedule of the Constitution). The Centre encroaches on states’ sphere through the use of constitutional provisions—the Centre can overrule the states in matters of ‘national interest’. This approach thus focusses on the degree of states’ autonomy in agriculture vis-à-vis Centre’s control by analysing the case of Punjab where agriculture was made a dominant economic activity during the 1960s to help attain national food security. In contrast, the issue-oriented approach identifies specific issues involving Centre-state relations, such as CSSs, pricing of agricultural commodities, input supply, credit and research and development.
These include Mission for Integrated Development of Horticulture, RAFTAAR, National Livestock Mission, National Mission on Sustainable Agriculture, Dairy Vikas Abhiyaan, Veterinary Services and Animal Health (Dairy Development Mission), National Rural Drinking Water Programme and Pradhan Mantri Kisan Samman Nidhi (PM-KISAN).
Even during the initial period of lockdown due to COVID-19 (from 24 March to 3 May 2020), the movement of agricultural produce between two states—Karnataka and Kerala was stopped. The Government of Karnataka decided to block all 23 roads connecting with Kerala because Kasaragod in north Kerala was a hotbed of coronavirus cases.
As of October 2016, 20 states amended their APMC Acts to provide for contract farming, whereas Punjab adopted a separate law on contract farming. In all, 14 states notified rules related to contract farming.
Kaufmann et al. (2009) shortlisted six parameters to assess good governance in a country. These are: voice and accountability; political instability and violence; government effectiveness; regulatory burden; rule of law and graft. Based on these dimensions, Debroy and Bhandari (2012) constructed an economic freedom index of Indian states to demonstrate how economic governance differs among them and is directly correlated with the well being of citizens. Similarly, at the sectoral level, Tortajada (2010) and Kannan et al. (2019) developed irrigation governance indicators to examine their impact on the public irrigation system and agriculture productivity.
Small and marginal holdings of up to 2 hectares (ha.) account for 86.21% of the 146 million land holdings which operated on an area of 157.14 million ha in 2015–16, an increase of 1.24% over 2010–11. The share of landholdings between 2 and 10 ha was 13.22% in total number of holdings, but had 43.61% of operated area. In contrast, the large holdings (>10 ha) were hardly 0.57% of total landholdings but had an operated area of 9.04% in 2015–16, little less than 10.59% reported during 2010–11.
The primary sources of data on subsidies are Expenditure Budget; irrigation subsidy: Ministry of Statistics and Programme Implementation (MoSPI) and Reserve Bank of India (RBI); power subsidy: Power Division of the erstwhile Planning Commission, the Working on State Power Utilities and Electricity Departments, General Review Report (All India Electricity Statistics) and Tariff and Duty of electricity supply in India (Central Electricity Authority).
An additional burden is that of loan waivers, which, according to the Report of the Internal Working Group of RBI to Review Agricultural Credit (RBI, 2019), may not address the underlying causes of farm distress, may destroy the credit culture, potentially squeeze investment and harm farmers’ interest in the long run.
According to information given in reply to starred question no. 172 in the Rajya Sabha, Parliament of India, on 6 March 2020, the loan waivers announced by states varies from INR 1.29 billion in Chhattisgarh to INR 302 billion in Maharashtra. In Tamil Nadu, Maharashtra, Uttar Pradesh and Punjab, the loans of only small and marginal farmers were waived.
The kharif crops include common and grade A variety of paddy, jowar (sorghum), bajra (pearl millet), ragi (finger millet), maize, arhar (pigeon pea), moong (green gram), urad (black gram), groundnut, sunflower seed, soybean, sesamum, nigerseed and cotton. The six rabi crops are wheat, barley, gram (chickpea), lentil, mustard and safflower. In addition, the CACP recommends support prices for sugarcane (called Fair and Remunerative Price), copra and jute. The sugar mills are bound by law to purchase sugar cane at this price. The difference between MSP and procurement price, however, became blurred over the years.
Madhya Pradesh and Uttar Pradesh are two states where wheat is procured in large quantities. Andhra Pradesh, Chhattisgarh, Madhya Pradesh, Odisha, Telangana, Uttar Pradesh and West Bengal have also geared up their machinery for procurement of paddy. Bihar is the only major paddy producing state where procurement is still largely ignored. The NSSO AIDIS 2013 shows that the output price policy benefitted only 10% of farmers and that too in select states. Price distortions happen due to delays in procurement and other inefficiencies in regulated/wholesale markets because of cartels formed by wholesalers, inadequate storage and other infrastructure (Birthal et al., 2015).
Assured MSP for wheat and rice has resulted in expansion of area under these crops in water-stressed regions at the cost of the environment. Punjab, for example, witnessed a massive depletion of the water table, at an alarming rate of 70 cms per year during 2008–12. Since farmers are not charged for the electricity used to pump groundwater and the canal network has also not expanded, the area irrigated by tube wells has soared and led to overexploitation of water in 80% of the blocks (CGWB, 2016).
The Inter-Ministerial Group (IMG) recommended better management of food stocks as the economic cost of wheat in the central pool was higher than the prevailing international prices, making exports impossible without a subsidy being given.
A2 + FL is actual paid out cost plus imputed value of family labour. The MSP for paddy (common variety) was increased by 12.90%. There was hefty increase in MSP of other crops as well (52.45% in the case of ragi and 45.11% in nigerseed). Since these crops are not procured by the Centre, there was no impact on central pool stocks.
The food subsidy bill has soared to INR 1,403 billion in 2016–17, from INR 6.50 billion in 1980–81. The food subsidy bill (excluding market price support) constitutes 1% of India’s national income averaged from 2011 to 2018.
A reply to Unstarred Question No 291 in the Lok Sabha of the Parliament of India on 19 November 2019 said that Andhra Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Madhya Pradesh, Mizoram, Nagaland, Odisha, Punjab (separate Act), Rajasthan, Sikkim, Telangana, Tripura, Tamil Nadu (separate Act) and Uttarakhand had made provisions in their respective APMCs to allow contract farming.
In fact, even an autonomous society promoted by the small farmers’ agribusiness consortium (SFAC) of the MoA&FW failed to secure a license to trade in Azadpur mandi of Delhi on the ground that it did not possess a shop in the mandi.
Satyasai and Singh (2021) reported the success of FPCs in strengthening backward linkages with farmers and forward linkages with food processing units for value addition. With support from NABARD, the FPCs in the north-east region have facilitated higher income to growers through consolidation of produce, access to inputs and integration with processing units.
The WDRA was set up by the Central government in 2010 to ensure implementation of the Warehousing (Development and Regulation) Act, 2007. The WDRA was envisaged to create a digital, online, web-based ecosystem of electronic negotiable warehouse receipt (NWR), similar to the issuance of financial securities like equity shares/bonds. The WDRA has set up two repositories namely, M/s CDSL Commodity Repository Limited and M/s National E-Repository Limited, for the creation and management of e-NWR. The registered warehouses shall issue e-NWRs on any of the repositories for the stocks stored. WDRA has notified 123 agriculture and 26 horticultural commodities for registered warehouses to issue e-NWRS.
In Nashik, the largest grape exporting district of Maharashtra, grapes have been out of the purview of APMC and the crop is sold by farmers outside the mandis. There are reports in the media about traders defaulting on payment of millions of rupees.
For instance, in May 2019, farmers in Gulabbagh in the State of Bihar sold maize at INR 1,100 to INR 1,200 per quintal even though the MSP announced was INR 1,765 per quintal. (10 quintal equals 1 tonne).
It is reported that over nearly 13.9 million women have been trained in agriculture under various Central schemes during between 2016–17 and 2018–19. As per Census (2011), there were 36 million women cultivators (main and marginal) and 61.5 million women farm labourers (main and marginal) (Lok Sabha starred question number 155, 2 July 2019).