Structural Reforms and Governance Issues in Indian Agriculture

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:

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.

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.

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 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.

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.

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.

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.

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.

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.