The agriculture sector underwent major changes following India’s economic liberalization in 1991. The reforms in the public distribution system (PDS) where an array of food commodities was replaced with just rice and wheat, followed by a targeting of food subsidies, led to a decline in the value of production of coarse grains, oilseeds and pulses.
These changes were reinforced after India joined the World Trade Organisation in 1995, leading to a rising import dependence on pulses and oilseeds which adversely affected local producers. Also, during this time global seeds and input giants entered India, bringing new technologies like the genetically-modified cotton, which also drove up production costs.
The easing of priority sector lending norms and drop in rural bank branches following financial sector liberalization impacted farmers adversely by limiting the reach of formal credit and increasing the dependence on informal loans. This led to higher indebtedness and suicides, which was later corrected by introducing Kisan Credit Cards and interest subsidies on farm loans.
In 1991, the agriculture sector contributed close to a third of India’s GDP which fell sharply to 17% by 2019-20; however, the share of the workforce dependent on agriculture hovered at around 55% during this period— leading to lower incomes from farming compared to other sectors. Official data from 2012-13 showed that an average farm household earned a paltry ₹6,500 per month, barely enough to stay afloat.
The fundamental shifts following the reforms—to cater to a changing market and driven by aspirations of better incomes—exposed farmers to a variety of risks. From newer pests and price volatility to adverse weather and sudden trade policy changes, farm incomes are now dependent on too many variables which are beyond an individual farmer’s control.
The usual policy response to counter these risks has been to invest in improving agricultural productivity, creating market infrastructure and irrigation and credit facilities alongside guaranteed purchases at support prices. The direction of support policies changed when the Narendra Modi government came to power in 2014, marking the beginning of another round of reforms. The reliance shifted towards deploying market solutions and moving towards income support schemes.
For instance, instead of investing aggressively on irrigation projects (less than half of India’s crop area is irrigated), the focus shifted to crop insurance to deal with erratic rainfall. The initial euphoria over the flagship insurance scheme has faded since it was launched in 2016 as farmers began to opt out and state governments lost interest.
Similarly, instead of creating physical market infrastructure, the government floated the electronic national agriculture market or E-NAM which has failed to take off so far.
Just ahead of elections in 2019, the Centre also announced a direct income support of ₹6,000 per year to every land-owning farmer—a scheme on which it has spent a staggering ₹1.1 trillion so far. State governments too have followed a similar path by moving towards direct cash transfers. “These funds could have been better spent if it was invested in creating new infrastructure," said R. Ramakumar, professor at the Tata Institute of Social Sciences, Mumbai.
High level committees have urged the government to reform the Food Corporation of India and rationalise subsidies. There is an increased emphasis on replacing existing subsidies by direct cash support— despite the reality that cash transfers exclude tenant farmers who farm on at least a fifth of the country’s crop area.
The clamour for further reforms stem from the argument that Indian farmers are flush with inefficient subsidies—on inputs like fertilisers and electricity—and in the output market via minimum support prices (MSP). Such arguments, however, ignore the global reality where agriculture is supported by all major economies for strategic reasons.
A September 2020 working paper authored by Sachin Kumar Sharma from the Centre for WTO Studies, Indian Institute of Foreign Trade, Delhi, shows the extent to which developed nations support agriculture and do not leave them to the mercy of markets. Total domestic support (including price, income and input subsidies), as a share of the value of production, varied between 38% in the US and 20% in the EU to 15% in China—compared to 12.5% in India, data from the paper showed.
Another crucial policy reform in recent years has been to focus on improving farm incomes rather than set higher production targets. The Modi government has set an ambitious target—to double farmer incomes by 2022-23 (with 2016-17 as the base year)—and is deploying market solutions to achieve the goal.
This holds true for the recent reforms it pushed by enacting three new laws to liberalise agriculture marketing, allow contract farming and amend the decades old Essential Commodities Act. Farmers have vociferously protested these reforms. They fear that a larger role of giant corporations in agriculture markets will gradually weaken the minimum support price regime.
The reforms have also coalesced demands for making MSP a legal entitlement, a practical nightmare for any government since domestic crop prices are determined by a myriad of variables including international prices. Clearly, it makes no sense for a state like Punjab to keep growing rice at the cost of an impending desertification or the water-stressed Marathwada in Maharashtra to grow sugarcane.
But a trust deficit now threatens to push back the conversation on these necessary changes three decades after liberalization—from an equitable distribution of input subsidies and MSP benefits to aligning crop choices to suitable geographies.