Monthly Archive January 15, 2018

http://www.india-seminar.com/2018/701/701_a_gulati_&_r_roy.htm
ASHOK GULATI and RANJANA ROY
THE prime minister of India made a clarion call to double farmers’ incomes by 2022 at a kisan rally in Bareilly on 28 February 2016. This statement assumed an official tone when the finance minister recalled it in his budget speech of financial year 2016-17 (FY17) and then again in FY18. It was followed by setting up a committee for Doubling Farmers’ Income (DFI) under the chairmanship of Ashok Dalwai, then additional secretary in the Union Ministry of Agriculture and Farmers’ Welfare (MoA and FW). The committee is reported to have prepared a 14 volume report detailing the strategic design for DFI by 2022. Currently, five volumes of this report on DFI have been uploaded on the MoA & FW website.
In the meantime, the prime minister has given another clarion call on 26 November 2017 during his address to the nation (Mann ki Baat), and that is: halving urea consumption (HUC) by 2022. It is not yet comprehensible whether this is a well researched and thought out policy goal of the current government, and whether it will be backed by another expert committee to delineate its strategic design on how to achieve it, or just a spontaneous and casual statement expressing Narendra Modi’s ‘wish dream’. But this statement about HUC by 2022 has sent the entire urea industry into a tizzy guessing what might follow in terms of urea policy in the months to come.
At one level, both clarion calls coming from the prime minister – of DFI and HUC by 2022 – convey his good intentions and concerns about Indian agriculture and farmers in particular. But, at another level, if not backed by realistic strategic plans to achieve them, such statements can also cause confusion and disappointment among important stakeholders in Indian agriculture.
In this paper, we undertake a reality check about the twin clarion calls of the PM to DFI and HUC by 2022. We do this by digging a little deeper into the current status of farmers’ incomes and urea consumption in the country and how they have evolved during the last 15 years or so, and the challenges that lie ahead if one is to achieve these twin goals in the next five years. Subsequently, the paper analyses trends and composition of farmers’ income during 2002-12, and trends in profitability of crops in some major producing states during 2012-17. This is followed by a discussion of trends in production, imports and consumption of fertilizers, especially urea, and the impact of recent policy initiatives, especially neem coating of urea (NCU) and soil health cards (SHC), on urea consumption. Then we look at the possible association between farm profitability and fertilizer consumption, and finally, based on this analysis, offer our final assessment and policy suggestions which hopefully may contribute towards moving in the direction of augmenting farmers’ incomes and reducing urea consumption.
The Dalwai Committee on DFI clearly states that the objective of the government is to double farmers’ incomes in real terms by 2022. Also, that the period over which this has to be achieved is seven years (2016-17 to 2022-23), not five as is repeated in many political statements. Finally that realizing the objective would require farmers’ real incomes to grow at a compound annual growth rate (CAGR) of 10.4% per annum in real terms. This is a much needed clarification if one has to move in this direction in any serious manner.
In this context, it may be worth pointing out that the NSSO situation assessment survey releases data on average annual income of agricultural households from various sources every 10 years. Agri-households’ income comprises of four components: (a) cultivation of crops; (b) rearing livestock; (c) wages and salaries; and (d) non-farm business. The results of the NSSO situation assessment surveys show that over the period 2002-03 to 2012-13 agri-households real incomes increased at CAGR of 3.56% (say 3.6) per annum only, while the nominal incomes increased by 11.8% per annum (Figure 1).
In absolute terms, the monthly income of an average agri-household hovered around Rs 6426 in 2012-13. Expectedly it was lower for small and marginal farmers. However, there is a wide variation in CAGR of real incomes across states. Odisha registered the highest CAGR growth of 8.7% in real incomes of agri-households, followed by Haryana (7.8%), Rajasthan (7.5%) and Andhra Pradesh (6.3%). The worst performers were West Bengal (-0.7%), Bihar (-0.1%) and Uttarakhand (-3.0%) with an absolute decline in the real incomes of agri-households.
As indicated earlier, there are four components of farmers’ incomes: income from crop cultivation, farming animals, wages and salaries, and non-farm business. In this context, it is interesting to observe that during 2002-03 to 2012-13, the share of income from crop cultivation and farming of animals increased from 50% to 60% while the share of wages and salaries declined from 39% to 32%. Note that the Dalwai Committee report on DFI by 2022 aims to raise the share of crop cultivation and animal husbandry to 69% by 2022-23 (in fact at one place it mentions taking it to as high as 80%).
Three major questions arise from these observations. Given that during 2002-03 to 2012-13, farmers’ incomes grew by just 3.6% per annum in real terms, call it business as usual (BAU) scenario, how do policy makers aim to achieve a double digit growth rate of 10.4% per annum, almost a threefold jump, to double farmers’ real incomes by 2022-23? Given that a CAGR of 10.4% has never been achieved, even for the whole economy, for any seven years at a stretch in our history, how can one dream of achieving that for farmers’ real incomes?
The Dalwai Committee estimated that in order to achieve CAGR of 10.4%, an additional investment of Rs 6.4 lakh crore at 2011-12 prices is needed for agriculture. Is it feasible for the government to pump in this additional investment in/for agriculture, especially given the widespread culture of subsidies and loan wavers?
Even if this extra investment is generated and double digit (10.4%) growth in farmers’ incomes achieved, how will the huge agri-surplus produce be absorbed? Is there enough demand in the country for say a threefold increase in farm output? Is there adequate marketing and storage infrastructure to keep it in place? Or will it be exported? Will we be sufficiently competitive and can the global markets absorb it?
As per the DFI report, the large share of income will come from crop and animal husbandry; therefore, it is important to analyse the present situation of Indian agriculture and measure the challenges faced by the sector.
In the last three years, the sector grew at a mere 1.8% per annum (2014-15 to 2016-17), less than half of what we achieved during 2011-12 to 2013-14. Deficient rainfall was a major reason for poor performance during 2014-15 and 2015-16. But though 2016-17 experienced normal rainfall and there were bumper harvests, yet farmers experienced a severe loss due to a collapse in agri-prices. It is higher return on farming operations rather than higher productivity that motivates farmers to invest more in agriculture, which is what will raise agri-GSDP.
Next we look at net profitability of major crops produced in India during recent years for which data are available. Profitability is calculated by subtracting per hectare cost (C2) from gross value of output per hectare. The C2 cost includes the paid out costs by farmers plus imputed rental costs of owned land, imputed interest on owned capital and imputed value of family labour employed as estimated by the Directorate of Economics and Statistics of MoA & FW and used by the Commission for Agriculture Costs and Prices (CACP) in recommending minimum support prices (MSP) for these crops. It may also be worth recalling that in its election manifesto in 2014 the BJP had promised to raise profitability to 50% over cost (C2), which has been the demand of many farmer organizations – popularly known as the Swaminathan formula.
But the reality about crop profitability on the ground is quite different. Profitability of important crops in major producing states has actually declined from an already low level. We have calculated a weighted average profitability of major crops from state level profitability by using share of state in total cropped area under that crop. The uncomfortable truth is that net profit margin in almost all major agricultural commodities covered here has declined in recent years. Farmers cultivating paddy, maize, cotton, soybean and potato have all experienced loss in 2014-15 compared to 2012-13 and 2013-14. (Figure 2)
It may be noted that actual profitability over cost (C2) is available from Government of India (GoI) data only up to 2014-15. There is normally a lag of two to three years before one can hope to get actual numbers from 2015-17 from GoI sources. However, one can use the projected costs as calculated by CACP for their MSP calculations, and look at the market prices of those crops at harvest time in major states to get an idea of profitability of major crops in 2016 and 2017. This is what is attempted below. Actual market prices are obtained by taking an average of major mandi prices of the largest producing states and compared with projected costs as derived by CACP. The results of major kharif crops for the season 2016-17 and 2017-18 are presented in Figure 3.
Falling crop profitability since the NDA government took charge in May 2014 is appalling and should serve as a wake-up call. This is also reflected in the overall agri-GDP tumbling down from about 4% in the last three years of the UPA II government to 1.8% in the first three years of NDA rule. Even including 2017-18, the performance of agriculture GDP under four years of the Modi government may turn out to be just 2%. These facts, based on government data, indicate that most likely, under a BAU scenario, the dream of doubling real incomes of farmers by 2022 remains a chimera. But nevertheless there are still a wide range of opportunities available which can help augment farmers’ incomes, if not double them by 2022. But, can we achieve that by cutting down urea consumption by half by 2022? That’s a big challenge which we take up next.Figure 3 clearly shows that farmers producing kharif crops suffered huge losses, especially in kharif 2017. No wonder, farmer agitations are on an increase and even the government realizes that farm distress is severe.
India has come a long way with an increase in foodgrain production from 52 million tonnes in 1951-52 to 276 million tonnes in 2016-17. The green revolution was a result of high yielding variety seeds, irrigation and fertilizer usage and remunerative prices through MSP policy. Given limited cultivable land, enhanced fertilizer use played a crucial role in increasing crop yields in the years to follow. However, the usage of N, P and K, the three main fertilizer nutrients, has not been very balanced. The GoI policy of promoting use of chemical fertilizers by heavily subsidizing them, and the very low prices of urea have resulted in imbalanced use of nutrients (Nitrogenous, Phosphatic and Potassic).

The price of DAP (Diammonium Phosphate) has for a long time been higher than that of urea. But before decontrol of P&K fertilizers, the MRP of MOP (Muriate of Potash) used to be lower than that of urea. The price of both DAP and MOP became higher than urea after that. After 2010-11, the prices of DAP and MOP have undergone large changes whereas for 15 years now the price of urea has remained almost at the same level (the increase in urea price is marginal – from Rs 4600/mt in 2000-01 to Rs 5360/mt in 2014-15). In comparison, the MRP of DAP and MOP increased manifold.The generally conceived ideal ratio of NPK use is 4:2:1, although it will differ from state to state and even within a state across many districts. The ratio improved in 2009-10 (4.3:2:1). But after the adoption of nutrient based subsidy (NBS) scheme for P and K fertilizers in 2010, prices of these nutrient based fertilizers increased enormously even as urea prices remained low. The imbalance kept increasing after that. Urea prices are the lowest in India compared to our neighbouring countries. This has led to the misuse of urea – its diversion to non-agricultural uses as well as to neighbouring countries.

The 11th plan gave importance to setting up of soil testing laboratories. The prime minister launched the Soil Health Card Scheme on 19 February 2015. An outlay of Rs 585.54 crore was approved for the 12th plan period. In the period of 2014-17, 460 laboratories were sanctioned. The scheme aims to measure the nutrient status of soil and recommend step for improved and sustainable soil health and fertility status. Soil samples are to be drawn from a grid of 2.5 ha in irrigated area and 10 ha in rain-fed area with the help of GPS tools and revenue maps. The state government will refer 1% of all the samples in a year to a ‘referral laboratory’ to analyse and certify the results of the primary laboratory. In cycle I and II respectively, 9.89 crore and 0.55 crore SHCs have been distributed.In order to improve the situation, some steps were undertaken. Two of them are worth mentioning : (i) introduction of Soil Health Cards (SHCs); and (ii) neem coating of Urea (NCU).
Nitrogen use efficiency (NUE) is very low in India. Tests (mostly on paddy and wheat) have shown that neem coated urea (NCU) increases efficiency by around 10%. It is expected to save fertilizer subsidy by Rs 6500 crore. The upper limit of NCU (20% in June 2008) was increased to 35% in January 2011 and again to 75% in March 2015. In May 2015, NCU was made mandatory for 100% of the production. This was also ex-tended to imported urea from 1 December 2015.
Fertilizer subsidy has helped increase consumption of urea from 19.2 mmt in 2000-01 to 29.6 mmt in 2016-17. Some studies claim that NCU is the main driver behind stagnating or marginally falling urea consumption in 2016-17, over say 2013-14. But, it is equally likely that crashing crop prices and consequently falling farmers’ profitability might have also led to fall in fertilizer consumption (Figure 6). It is, however, clear that so far neither the SHCs nor NCU have been able to make a major dent in reducing consumption of urea. How the Modi government expects to cut it to half by 2022 is not only puzzling but confusing, unless it comes up with some bold, ‘out of box thinking’ policy decisions. In the present scenario, with even SHCs and NCU, there does not seem to be any possibility of cutting down the urea consumption to say 15 mmt (by half) by 2022.
Regressing profitability (over A2 cost) on Fertilizer ConsumptionThe big question is whether the Modi government can achieve the twin objectives of simultaneously doubling farmers’ incomes and halving urea consumption by 2022. In order to better understand this issue, we have tried to look at the relationship between crop profitability and fertilizer consumption. For this, we have estimated year wise profitability (Rs/ha) at constant prices (with 2011-12 prices as base) and regressed it over fertilizer consumption per ha. We pooled the data for major crops (paddy, wheat, cotton, rapeseed-mustard, and sugarcane) and their major producing states, over the three years. In total, we had 75 observations and we ran the regression in log form. The results are as given below:
Ln_profit =                6.23***                      + 0.82
Ln_Fertilizer***
(7.49)                        (10.93)
Adj R square= 0.43
N=75; *** means significant at 1%.
 
The log regression coefficients were highly significant (at 1% level) statistically. The equation implied that 10% increase in fertilizer consumption is associated with 8.2% increase in farm profitability over cost A2 (paid out costs). Since it was a cross-section and time series pooled data, Adjusted R-square does not matter much. It is the statistical significance of the coefficients generated, which is of relevance. Figure 7 also shows this relation between fertilizer consumption and crop profitability (over cost A2, at constant prices).
So, is the PM’s call for halving urea consumption by 2022 achievable and is it consistent with the goal of doubling farmers’ income? In 1992-93, when India’s urea consumption was about half of its current levels, paddy and wheat productivity levels were 38% and 33% lower compared to those in 2015-16. Does it mean that in case of halving urea consumption by 2022, GoI is ready to accept substantially lower yields of paddy and wheat, or is there a special strategy to keep the yields high and rising while reducing urea consumption by half? In our view, with a growing population and limited arable land, there will be tremendous pressure to raise productivity of rice and wheat, and for that urea consumption is likely to increase unless some drastic measures and alternative strategy are put in place.
Consequently, where do we stand in terms of the twin objectives of doubling farmers’ incomes (DFI) and halving urea consumption (HUC) by 2022? In our opinion, this is almost an impossible task under the business as usual scenario. However, substantial progress can be made in that direction provided that the government is willing to take some bold decisions. Very briefly, the foremost job of the government should be to set the incentives for farmers right. This means ‘getting markets right’. It calls for reforms in APMC and Essential Commodities Act of 1955, enabling a free play of markets and allowing the private sector to hold stocks and export without restrictions. The interests of the poor consumers can be taken care of by targeted interventions though direct cash transfers. If incentives can be set right, the next challenge will be to attract investments in and for agriculture. Institutional reforms, especially enabling land lease, can help to further augment farmers’ incomes. Above all, it is continuous innovations in production and marketing of produce, fetching the best price, that will help to augment farmers’ incomes.
On urea consumption, there is some scope for reduction, especially by correcting the imbalanced use of N, P and K, and by stopping its diversion to non-agri uses as well as to neighbouring countries. To achieve all this, only one policy needs to be followed – direct benefit transfer to farmers’ account the money equivalent to current levels of subsidy and set the fertilizer pricing and markets totally free. That would not only enthuse the fertilizer industry to innovate and give the best products to farmers, but also remove the wrong signals of under pricing of urea and thus correct its imbalanced use, and stop the diversions of urea to other uses and across borders. Opening millions of bank accounts under Jan Dhan Yojana in a record breaking time was a great step by the Modi government. But it can become a real game changer only when these accounts are used for direct benefit transfer of food and fertilizer subsidies. The rest will all follow. Can the Modi government bite the bullet? Only time will show.
References:

1. Chand, Doubling Farmers’ Income: Rationale, Strategy, Prospects and Action Plan; Niti Policy Paper No.1/2017, National Institute for Transformation India, Government of India, New Delhi.
2. Fan, A. Gulati and S. Thorat, ‘Investment, Subsidies, and Pro-Poor Growth in Rural India. IFPRI Discussion Papers 716, International Food Policy Research Institute, 2007.

Government of India, Report of the Committee on Doubling Farmers’ Income, Volume II, Status of Farmers’ Income: Strategies for Accelerated Growth, Department of Agriculture, Cooperation and Farmers Welfare, Ministry of Agriculture and Farmers Welfare, New Delhi, 2017.
Government of India, Agricultural Statistics at a Glance, Department of Agriculture, Cooperation and Farmers Welfare, Directorate of Economics and Statistics, New Delhi, 2016.
Government of India, Key Indicators of Situation of Agricultural Household in India, Ministry of Statistics and Programme Implementation, National Sample Survey Organization 70th Round (January-December 2013), Kolkata, 2014.

2003. Gulati and S. Narayanan,The Subsidy Syndrome in Indian Agriculture. Oxford University Press, New Delhi, 2003.
2004. Gulati and P. Banerjee, Rationalising Fertiliser Subsidy in India: Key Issues and Policy Options, Working Paper 307, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, 2015.
2005. Gulati and S Saini, Making Indian Agriculture Profitable, Productive and Sustainable, Department of Economic and Analysis and Research, Mumbai, 2017.
2006. Gulati, P. Rajkhowa and P. Sharma, Making Rapid Stride – Agriculture in Madhya Pradesh: Sources, Drivers and Policy Lessons, Working Paper 339, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, 2017.
2007. Gulati, R. Roy and S. Hussain, Getting Punjab Agriculture Back on High Growth Path: Sources, Drivers and Policy Lessons, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, 2017.
2008. Hussain and A. Gulati, ‘A Sketchy Road-map’,Indian Express, 25 September 2017. http://indianexpress.com/article/opinion/ columns/a-sketchy-roadmap-niti-aayog-three-year-action-agenda-tyaa-4859507/
2009. Gulati and P. Terway, ‘From Plate to Plough: Why Bumper Harvests Spell Doom’,Indian Express, 19 June 2017.

http://indianexpress.com/article/opinion/columns/madhya-pradesh-maharashtra-farmers-protest-loan-waiver-from-plate-to-plough-why-bumper-harvests-spell-doom-agriculture-in-modi-government-4710585/
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