Rural distress: Farm sector needs an Amul-like solution: Financial Express Jan 17 2019

The agrarian challenge is well known in India and the reaction of politicians, economists, and experts is always on target. Yet little seems to be achieved, and after the regular noise for a season or so, it is back to the old ways. Announcements that are made are rarely followed up and there is a big gap between loan waivers announced and allocations made. It is not that there is a magic formula to address the issue as the problems and solutions are well known. Yet, we never seem to be anywhere close to a solution and the same story which we heard two decades back is replayed.

The issue of farm loan waivers is due to farmers not paying their debt service commitment because the crop has either failed or prices have come down, resulting in defaults. There is a farm insurance scheme in place which has not worked because, if it did, this problem would be non existent. Therefore, it is clear that we have not sewn the pieces and have done the usual patchwork which is very typical of our entire policy framework. It is not surprising that there is a lot of apprehension when schemes are announced. This holds for interest rate subvention, e-NAM, repeal of APMC Act, free power and water, subsidies on fertilisers, and so on.

Agriculture is a ‘state’ subject in our federal structure and hence, while the Central government has its contribution and takes credit for everything good that happens, the flak also comes back to haunt it even though its influence is limited. This is so as some expenses are incurred by the Centre but states have a different mindset when it comes to reforms.
We need to construct a matrix that has to be addressed in a concerted manner much like the production line in a manufacturing concern where the production process is linked with the supply chains and then cemented with a marketing strategy.

There are two steps in agriculture. The first is the pre-harvest stage where farmers need support from the system. This includes procuring inputs which cover high quality seeds like the HYV, fertilisers, pesticides (which came with the Green Revolution) and which are backed by irrigation to ensure that output is protected and productivity enhanced. To enable the same, it is essential to have access to credit or else the farmer has to move to the moneylender.

At this stage, the farmer has two kinds of risks which have to be covered. The volumetric risk which is the size of the crop that gets affected and which should be covered by the insurance policy. This is a major lacuna. The other unknown is price risk where the farmer is not certain of the price at harvest. Here, the arhatiya plays a role in offering a buyback which may be skewed against the farmer, causing adverse comments, but the risk is transferred. Alternatively, an active commodities futures market would work to cover price risk. All this has to be addressed by policy.

Intuitively, it may be seen that the state plays a role here. If there is an insurance scheme which we are committed to, then ideally every farm loan that is disbursed should be covered automatically where the government pays the premium while the farmer’s share is deducted from the loan amount and disbursed. By enabling an automatic hedge through banks which can take the price cover on commodity futures exchanges, the circle is complete. This sounds simple but requires mindsets to change to enable it.

The second stage is post-harvest where things go wrong for the farmer. There are challenges in getting the crop to the consumer. There are issues of infrastructure such as roads, connectivity to the mandi, storage, packing and marketing. Unless all these steps are in place, the solution is never attained. e-NAM makes sense only if we are able to connect the farmer to the e-mandi which means connectivity, warehousing and transport to the mandi. Otherwise it is only a partial solution and will not work. Repealing APMC laws is one thing, but ultimately the farmer requires money immediately and has no other option but to sell at the mandi which is the known place. Putting him in touch with the consumer is feasible as can be seen in case of horticulture which links them to cities. But this has to be made scalable which means all local laws have to be aligned to allow such sales.

Further, while policies talk of MSP and marketing, foreign trade policies have to be integrated by routine. This calls for state intervention to ensure that surpluses are immediately channelled to exports or, alternatively, to the creation of buffers based on a pre-stated policy.

As can be seen in the absence of all these links being tied up, farming will always run the risk of slipping at some stage, leading to distress. For the present, two solutions can be considered. The first is corporate and contract farming with adequate safeguards to ensure farmers get a fair deal and the back-end is tied up. Secondly, the state governments need to get more active and treat it as an industry. Rather than running services like power and transport, agriculture should gain in precedence so that it can start the process of tying up the ends.

In this context, the Amul example merits mentioning to show how a low-value perishable product like milk, being produced by myriad small farmers, has now become an established industry. This was possible because it was treated as an industry with a cooperative set up. The back-end in terms of collection, processing, storage (cold), transportation, packaging, conversion to value-added products and, finally, export has become a seamless chain. Quite clearly, we need to do the same for other products, especially horticulture, to get out of this risk-trap which is now perennial in nature.

The message is that loan waivers or raising MSPs or creating electronic markets, even if implemented, sound good on paper but will never quite provide a complete solution. A holistic view is required to address the concerns. All organs of the government need to work in unison with support taken from cooperatives as well as corporates given the distance to be covered.