Minimum Support Price

Bihar’s APMC Story Does Not Inspire Much Confidence

This is the third piece in the agriculture reform series. You can read the first two pieces here and here. While this piece stands on its own, for a better context on the overall issue, it makes sense to read the two pieces published earlier, before reading this piece.

Chintan Patel and Vivek Kaul

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 became a law on September 27, 2020. It is one of the three farm laws passed by the Modi government that has been met by stiff opposition from farmers. The law supposedly creates a mechanism allowing the farmers to sell their farm produce outside the Agriculture Produce Market Committees (APMCs).

As we pointed out in an earlier article, the fate of the APMCs or mandis, under the new laws is a topic of much debate. Proponents of the bill claim that allowing farm trade outside the APMCs will encourage competition and help farmers get better prices for their produce. The idea being that there will be more competition for agriculture produce and in the process, farmers will make more money. QED.

Farmer organizations opposing the bill argue that unregulated transactions outside the APMCs will actually result in a price squeeze for the farmers, given the asymmetry or the huge difference of negotiating power between the individual farmer and corporate-backed buyers. As is often the case, both sides can lay claim to a logically coherent argument backed by economic theory. So, which argument has higher odds of manifestation?

When the future is uncertain, the past is often a reliable guide. Using that rationale, it is instructive to look deeper at the Bihar experience vis-a-vis APMC markets. Bihar had done away with APMC markets in 2006. But before we get into the specifics, let’s zoom out a little and take a look at the bigger picture first.

Bihar’s Backdrop

Bihar is India’s poorest state. Given below are tables that chart the per capita income of India’s richest and poorer states.

Source: https://statisticstimes.com/economy/india/indian-states-gdp-per-capita.php

Source: https://statisticstimes.com/economy/india/indian-states-gdp-per-capita.php

As the above tables show, Bihar has the lowest per capita income in the country. It is about 18 percent of the income of Haryana and less than 10 percent of the income of Goa. Ironically, Bihar is endowed with abundant natural resources, especially fertile soil and groundwater, and yet it continues to remain one of the poorest states in the country.

The state has a population of 11.52 crore (2016), with a very high population density of 1,218 per square km as compared to the national average of 396 per square km. It is largely an agrarian rural economy with approximately 88.5 percent rural population out of which 74 percent of the workforce is reliant on the agriculture sector for a livelihood as per the 2011 Census.

Even accounting for shifts in the economy away from agriculture and migration out of rural areas since the last Census, the poverty in Bihar is closely linked to state of its farmers.

The high population density is clearly reflected in the land holding pattern in Bihar. Compared to other states, Bihar has highly fragmented landholdings. As the same piece of land has got divided among more and more family members over the generations, the average holding has fallen dramatically. Even though quite a few migrate to the cities, they still keep their farmland. This also stems from the fact that selling agricultural land in India is not easy.

As the table below indicates, marginal holdings of less than one hectare (around 2.47 acres) constituted about 91.2 percent of all land parcels in 2015-16, compared to the national average of 68.5 percent. Additionally, 97 percent of all holdings are  less than 2 hectares in Bihar. This high skew towards small land holdings is an important statistic, as agricultural marketing policies affect small and marginal farmers differently from those with larger holdings.

Land holdings in Bihar.

APMC Abolishment in Bihar

In 2006, the Nitish Kumar state government made the decision to abolish its state-level APMC Act allowing private players to directly purchase agricultural produce from farmers. Under the erstwhile Bihar APMC Act, both farmers and buyers would pay 1 percent of the sale price to municipal bodies. After the APMCs were abolished, the government introduced Primary Agriculture Credit Societies (PACS). PACS are panchayat level cooperatives with farmer members that fulfil 3 roles in Bihar.

1) Help farmers borrow money for buying farm equipment, farming inputs such as seeds, fertilizers, etc., or to tide through losses. PACS in turn are given credit by cooperative banks which are funded by the state government.

2) A one-stop shop for high-quality seeds, fertilisers, and other inputs.

3) Most importantly, PACS are responsible for procurement of grains particularly rice-paddy and wheat from the farmers at the government-announced minimum support price (MSP). Thus, PACS act as an intermediary between the farmers and the eventual purchasers of wheat and rice – which can be any of the following; Food Corporation of India (FCI), state procurement agencies or private mills, for that matter. For other produce (other than rice and wheat), farmers interact directly with private traders.

Upon procurement of the crop, especially in the case of paddy, it goes to the Bihar State Food and Civil Supplies Corporation, and then on to the Food Corporation of India, who direct it to the Public Distribution System or ration shops as they are more popularly known. The payment is expected to reach the farmer within 48 hours of selling the crop at PACS.

It should be noted that PACS exist nationwide and have long been a part of the cooperative banking system in India, formed to provide credit to rural areas. Bihar however is unique in that it expanded the scope of PACS to b) and c) above. As we shall see later in the article, PACS have not been able to deliver effectively on these objectives.

The deregulation of agriculture market transactions in Bihar in 2006 shares significant similarities with the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 . Although the central law does not call for the closure of state APMCs or creation of PACS-like entities, the core idea of deregulating agriculture trade outside of APMCs is the same.

Thus, there is merit in examining the outcomes of what has happened in Bihar over the last decade and a half,  to form expectations from the new law.

Several leaders of the Bhartiya Janata Party including prime minister Narendra Modi  and other supporters  of the new laws have touted Bihar’s abolition of APMCs to make their case. At the same time, critics have invoked Bihar as a cautionary tale of deregulating agriculture market.   So, the same scenario is being presented to suit diametrically opposite arguments.

What gives? As is often the case, the truth lies somewhere in between two extremes.

Prices

The bane of Indian agriculture is the price difference between the first transaction – what the farmer gets for a commodity, and the last transaction – what you and I pay for the same commodity.  Any changes to agricultural markets like the abolition of APMCs in Bihar needs be assessed against its impact on prices.

The government recognizes the importance of collecting data on prices. Each year, the Ministry of Agriculture and Farmers Welfare publishes data on farm gate prices based on data received from the state governments “to facilitate fine-tuning of agriculture policies aimed at farmer welfare”  .

The average wholesale price of a commodity (e.g. wheat, rice, etc.) at which the farmer sells to a trader at the village site during the specified marketing period after the harvest of each commodity, is termed as the Farm Harvest Price (FHP) for each commodity.  The next few charts track both the FHP and MSP of four commodities (paddy, wheat, maize, and ragi) from 2000- 2017. The central government announces MSPs for 23 agricultural crops during the course of any year, but primarily buys only rice and wheat directly from farmers.

Source:  https://eands.dacnet.nic.in/

The above chart shows that for rice paddy, the MSP has always been higher than the FHP. From 2001-02 to 2006-07, the average difference between MSP and FHP was around 26 percent. This basically means that  the FHP was 26 percent lower than the MSP on an average. From 2006-07 to 2014-15, the average difference reduced to around 18 percent. 2015-16, onwards the difference has inched up to around 24 percent, for the last two years for which the data is available.

                                                                            Source:  https://eands.dacnet.nic.in/

For wheat, the difference between MSP and FHP has been less stark than that for rice paddy.  From 2001-02 to 2006-07, the average difference between MSP and FHP for wheat was around 7 percent. From 2006-07 to 2014-15, the average difference barely moved up to  around 8 percent . However, for the last two years 2015 to 2017, for which data is available, the difference has spiked to around 17 percent.

Source:  https://eands.dacnet.nic.in/

For maize too, the difference between MSP and FHP has been less stark than for paddy but higher than that of wheat.  From 2001-2 to 2006-07, the average difference between MSP and FHP for wheat was around 19 percent. From 2006-07 to 2014-15, the average difference reduced to around 12 percent . However, for the last two years 2015 to 2017, the difference has spiked to around 18 percent.

Source:  https://eands.dacnet.nic.in/

Finally, for ragi, the difference between MSP and FHP has been quite high and has kept increasing.  From 2001-02 to 2006-07, the average difference between MSP and FHP for ragi was around 26 percent. From 2006-07 to 2014-15, the average difference increased to around 31 percent. Finally, for the last two years, 2015 to 2017, the difference has increased to around 37 percent.

The following table summarises the data from the above four charts.

Price Trends Summary
Source:  https://eands.dacnet.nic.in/

What can we infer from the above charts. Let’s take a look pointwise.

1)  The span from 2001 to 2017 can be divided into three periods : 2001-06, 2007-13, and 2015-17. Farm prices improved for paddy in the second period (around 18 percent lower than the MSP)  compared to the first period (around 25 percent lower than the MSP). Of course, they were lower than the MSP during both the periods.

Similarly maize prices improved in the second period (around 12 percent lower than the MSP) from the first period (around 19 percent lower than the MSP). Of course, they were lower than the MSP during both the periods.

For wheat, difference between the farm prices relative to MSP stood at 7 percent during the first period and at 8 percent during the second period. Hence, the difference increased though marginally.

Rice, wheat and maize are the three major cereals produced in Bihar and make up for 80 percent of the cropping area. The difference in prices between the FHP and the MSP, largely came down in the seven year period after the removal of the state level APMC Act. This finding weakens the argument that market deregulation will necessarily lead to lower prices, even though the farmers did not get the MSP.

2) As can be seen from the above table, starting in 2015, difference between FHP and MSP has increased for all the four commodities. Let’s take the case of maize. Between 2007 and 2014, the difference had stood at around 12 percent. It has since jumped to around 18 percent, almost back to pre-2006 levels.

A similar trend can be seen for the other three crops as well.

The official government data is only available till 2017, but this divergence between FHP and MSP is also reported in recent articles discussing the farmer situation in Bihar.

An article from People’s Archive of Rural India on Feb 20, 2021  reports  that “In 2019, a farmer sold his stock of raw paddy at the rate of Rs. 1,100 per quintal – this was 39 percent less than the MSP (minimum support price) of Rs. 1,815 at that time”.
Another article from December 2020 reports that “Paddy has sold for Rs 900-1,000 a quintal in Bihar, almost half the Rs 1,868 fixed by the Centre as MSP”.

The farm prices at which farmers sell continue to be depressed compared to the MSPs and given that difference has only increased in recent years, weakens the argument forwarded by supporters of the new farm laws which extrapolates deregulation to improved price realization for farmers. Economic theory doesn’t always fall in line with things actually happening on the ground.

A key underlying rationale behind dismantling of the APMCs in Bihar was that it would lead to an increase in the number of buyers in the marketplace. A similar argument is also being made in the case of the new farm laws. However, that is not how things have worked out, in markets across Bihar.

In fact, anecdotal evidence from newsreports emanating from Bihar suggests that sales to private traders are often distress sales since farmers don’t have access to a sizeable pool of local buyers .

A 2019 paper by the National Council of Economic Research makes a similar observation: “Despite the abolition of the Agricultural Produce Market Committee (APMC) Act in 2006, private investment in the creation of new markets and strengthening of facilities in the existing ones did not take place in Bihar, leading to low market density. Further, the participation of government agencies in procurement and the scale of procurement of grains continue to be low. Thus, farmers are left to the mercy of traders who unscrupulously fix lower prices for agricultural produce that they buy from farmers..”

Of course, there are other reasons that push farmers to make these distress sales such as a deficient transport network, poor storage facilities, and lack of capital. All of these are exacerbated for small and marginal farmers who form the bulk of agriculturists in Bihar. Given these harsh conditions, it is unsurprising that farmers are unhappy with the present system.

The disillusionment of the Bihar farmer can also be understood looking at incomes of farmers, because ultimately the proof is in the pudding.

Income of Farmers in Bihar

 Source: Study on Agricultural Diagnostics for the State of Bihar in India, 2019 report by NCAER

                                   
The above chart shows that while the net income of farmers in Bihar rose from 2007 to 2010, nevertheless, it has been declining continuously since 2010, up to the point we have data for. The declining income is explained by a rise in costs of agriculture inputs (seeds, power, labour, fertilizers, cost of finance, etc.) without a commensurate increase in sales revenue. The net income per hectare farmed, has moved alarmingly towards zero.

Government procurement of foodgrains 

Farm prices and farmer incomes are significantly affected by the level of government procurement of foodgrains in Bihar. The Central Government extends price support to paddy and wheat through the Food Corporation of India (FCI) and state procurement agencies across the country.

As per this policy, state governments are supposed to purchase paddy and wheat (conforming to certain specifications) from farmers at the declared MSP. Farmers have the option to sell their produce to private traders if they can get better prices in the open market. The objective of foodgrains procurement by government agencies is to ensure that farmers get remunerative prices for their produce and do not have to resort to distress sale. The central government accepts the responsibility to fund the procurement operations.

The next two tables give a breakdown of foodgrain procurement in the recent few years for major rice and wheat producing states.

State wise FCI Procurement of rice-paddy 
Source: Food Corporation of India.

State wise FCI procurement of wheat

Source: Food Corporation of India.

Procurement of paddy in Bihar is around 20 percent of the state’s total production, and that of wheat is almost negligible (less than 1 percent). Compare this to Punjab and Haryana, where procurement levels for paddy are over 80 percent and that of wheat are over 60 percent. This is primarily because of historical reasons, in order to promote the green revolution in the states.

This is one of the reasons for the disparity of wealth between Bihar and the other states. Since government buys paddy and wheat at MSP rates, low levels of government procurement in Bihar negatively impact the FHP for wheat and paddy, and in the process farmer incomes.

If the government purchased 100 percent (hypothetically speaking) of the paddy grown in the state, the FHP for paddy would more than likely be the same as the MSP. At 2016-17 prices, that would mean the farmer would get Rs 1,510 per quintal instead of Rs 1,147 per quintal for paddy – an increase of around 32 percent or Rs 363 per quintal. This additional revenue would directly pass-through as added income for farmers. This explains why procurement at MSP rates is a pressing demand by farmers during any policy debates on improving farmer incomes.

Low procurement of foodgrains by the state of Bihar can be attributed to two main reasons: a) inadequate funding by the state and b) Poorly functioning PACS.

There are several deficiencies in how PACS operate including restrictive registration requirements which limit who can sell to PACS, limited windows of procurement, sub-optimal timing of procurement, rejection of crop by the PACS due to excessive moisture content, and excessive delays in payment.  In fact, the number of PACS  in Bihar has declined by over 82 percent, from 9,035 in 2015-16 to 1,619 in 2019-20.

While the specific problems of PACS are less relevant to the national debate on the farm bills, they point to an important fact. The success or failure of market deregulation is highly dependent on the alternate systems that emerge in that environment, which will be unique for each state. Hence, the “vocal for local” mantra should also be applied when implementing policy solutions that strengthen federalism over a one solution-fits-all approach.

Conclusions

1) The so-called opening up of the agriculture market in Bihar to private players has not fundamentally altered the state of the Bihari farmer. The data on farm prices and farmer incomes is mixed after dismantling the APMCs. The difference between FHP and MSP for commodities like paddy and maize did decrease after APMCs were abolished, but those gains have reversed since 2015. The lived experience of farmers as reported by ground reports and the data on farmer incomes and prices paint a grim picture.

2) The PACS created by the state government for procuring food-grains have proven to be inefficient and non-responsive to farmer needs.

3) The government procurement at MSP continues to be a key contributing factor in improving FHPs and farmer incomes. This underlines why MSPs continue to be a key issue for farmers protesting the new farm laws.

4) The Bihar experiment is pertinent to the 2020 Farm Laws, but extrapolating the outcomes in Bihar to the current farm law debate needs some nuance. The data can be presented selectively, both by opponents and proponents of the farm laws to further their argument. But based on the analysis presented here, it is clear that deregulating agriculture markets in Bihar, did not cause prices to crash, though the difference with the MSPs has risen in the recent years. Neither did it usher in a wave of private buyers vying for agriculture produce, buoying up farmer incomes and prosperity in its wake.

It must be noted that the total output of an agrarian economy is affected by a host of factors including crop yield (how much crop is produced per unit area), land usage (how much area is used for cropping), cropping patterns (choice of high-value vs low-value agricultural produce), and prices . Of these, only prices are affected by the new law.

The other factors are influenced by variables such as irrigation, power availability, fertilizer usage, seed quality, rainfall, weather events, mechanization, among others. In a 2017 paper on agriculture in Bihar, the authors identify the following factors as drivers of agricultural growth. These are, irrigation, flood protection, energy for agriculture, roads, procurement system and agriculture markets.

While government policy has a role to play in shaping some of these variables, Bihar’s APMC abolishment law in 2006 and the central laws in 2020, are limited to procurement and agriculture markets. Thus, commentary correlating the abolishment of APMCs in 2006 with changes in macroeconomic metrics in Bihar such as total agricultural output or agricultural growth is disingenuous.

PS: Such a detailed data dive takes a lot of time and effort and you won’t see it anywhere in the mainstream media. Given this, our work needs your constant financial support. 

Please support Vivek’s work. 

Why Large Parts of North India Turn Dystopian Every Winter

Pic by Neil Palmer (CIAT). Burning of rice residues in SE Punjab, India, prior to the wheat season.
— Picture by Neil Palmer (CIAT). Burning of rice residues in Punjab, India, prior to the wheat season.

In the end, it’s all about incentives, perverse or otherwise.

My parents moved to Delhi in 2009, after my father retired from Coal India. Since then I have spent all Diwalis in Delhi, though this Diwali due to reasons beyond my control, I will most probably be in Mumbai.

The last few Diwalis in Delhi have been very difficult for me. In fact, last year, I could smell smoke inside the house even before the Diwali day (so, it was clearly not because of crackers). Delhi and many other parts of North India go totally dystopian during winters.

On some days when one gets up and looks out of the window, there is so much smog that one gets a feeling that Armageddon is here.

One of the primary reasons for this smog/pollution is the rice stubble burning that happens in Punjab, Haryana, parts of Uttarakhand and Western Uttar Pradesh. From the looks of it, the situation doesn’t seem to be very different this year.

Newsreports suggest that stubble burning is currently on and was responsible for 40% of Delhi’s pollution on November 1, the highest it has been so far this season. Last year on the same day, the stubble burning’s contribution to Delhi’s pollution had stood at 44% on November 1.

Let’s try and understand this issue in detail and why it happens every year.

This is a great story of how noble intentions on part of politicians and bureaucrats (yes, you read that right) along with incentives that seem right when they are introduced, can really screw up things in the years to come.

And once a system is in place, right or wrong, it is difficult to change it, given that many individuals benefit from the status quo.

Why do farmers burn rice paddy stubble?

They do it primarily because the time farmers have between harvesting rice paddy and sowing the wheat crop, is very short. That’s the short answer. But there is a lot more to it than just this.

Mechanical harvesters found their way into Punjab sometime in the early 1980s. Around four-fifths of the rice crop is harvested using combine harvesters and not human beings (if you still thought humans being carry out harvesting in Punjab, you haven’t moved beyond Hindi cinema of the 1960s).

These harvesters cut and clean rice from the rice paddy, but they leave behind straws on the field. These straws are six to eight inches long and for all practical purposes are useless.

The straws remaining after harvesting of wheat can be used as animal fodder. Rice straw cannot be used as animal fodder primarily because of its high silica content. If this straw is used as animal fodder, it impacts the quality of milk, with the quantity of calcium in the milk coming down. This is not true about straw left behind after harvesting basmati rice, which has low silica content.

But basmati is grown only in a limited area. Like this year, rice was planted on a total area of 27.36 lakh hectares. Of this, basmati was planted on around 6.5 lakh hectares or 24% of the total area under rice. This was primarily because the government does not buy basmati rice under the minimum support price (MSP) structure. (We shall look at this in detail later).

Farmers have a time of around 10-15 days for removing the rice straw and get the fields ready for planting wheat. The easiest thing in this situation is to burn the rice straw. All it takes is a single well-lit matchstick. The cost is close to zero.

This burning leads to higher pollution and deterioration of air quality even in places hundreds of kilometres away. The heat from burning the rice straw leads to an increase in soil temperature which kills beneficial soil organisms. The burning is also a potential source for greenhouse gases. Also, it is worth remembering that the burning of post-harvest rice stubble forms around 50% of the all the crop residue burning in the country.

Let’s take a look at stubble burning in incidences reported in Punjab and Haryana, where most of the burning takes place.

Source: Price Policy for Kharif Crops – The Marketing Season of 2020-2021, Commission for Agriculture Costs and Prices.

As can be seen from above table, the number of stubble burning incidents have come down over the years. The total number of incidents in Punjab and Haryana have come down by 52% between 2016 and 2019. In 2016, the total number of incidents had stood at 1,18,065. By 2019, this was down to 56,742.

So there has been some improvement on the number of fires front over the years. But there are other ways of looking at the situation; the total weight of the stubble burned and the total area of stubble burned. The Chief Secretary of Punjab Vini Mahajan said on October 31, that the total straw burning area in 2020 was 7.49 lakh hectares, which was 5.23% lower in comparison to 7.90 lakh hectares last year.

A Amarender Reddy, the principal scientist at the ICAR-Central Research Institute for Dryland Agriculture recently wrote in The Wire that last year the farmers burnt 11 million tonnes of rice stubble in Punjab and Haryana. This is a little over 40% of the total stubble of 27 million tonnes of rice stubble produced in both the states. Reddy expects the figure to be the same this year.

There has been some improvement on the paddy burning front. One reason has been the distribution of Happy Seeder, a machine which cuts rice stubble and plants wheat seeds at the same time. Reddy writes that the Punjab government has distributed around 24,000 Happy Seeder machines though the state needs nearly 50,000 seeder machines to remove all the rice stubble in the short period of time available before wheat seeds are planted.

Also, farmers have complained about low germination of wheat seeds when the Happy Seeder machine is used. The central government, like most central governments, has allocated more money to solve the problem. Using this money, machines to tackle the rice stubble can be bought at a subsidy.

While, all this is fine, it doesn’t answer the most basic question: why do semi-arid states like Punjab and Haryana, grow a water-intensive crop like rice paddy in the first place?

Why Punjab and Haryana grow rice?

Punjab has the highest yield of 4,132 kgs per hectare when it comes to rice, against the all India yield of 2,659 kgs per hectare. The rice productivity in Haryana is better than the all India average and is at 3,121 kgs per hectare. But this does not take into account the total amount of water used to produce this rice.

As the document titled The Price Policy for Kharif Crops: The Marketing Season for 2016-17, brought out by the Commission for Agriculture Costs and Prices, points out:

“If water consumption is measured in terms of per kilogram of rice, West Bengal becomes the most efficient state, which consumes 2,169 litres to produce one kg of rice, followed by Assam (2,432 litres) and Karnataka (2,635 litres). The water use is high in Punjab (4,118 litres), Tamil Nadu (4,557 litres) and Uttar Pradesh (4,384 litres). … [This] shows that the most efficient state in terms of land productivity is not necessarily the most efficient if irrigation water is factored into. This is because of high rainfall in the eastern region.”

Haryana also uses a lot of water to grow rice.

What this means is that Punjab and Haryana given that they are semi-arid water deficient areas, should not be growing rice in the first place. In the early sixties, Punjab used to grow crops which did not require a lot of water. These included maize, bajra, pulses, oilseeds etc. But over the years, the share of these crops in the overall cropped area has come down dramatically. Take a look at the following table.

Source: Economic Survey of Punjab, 2019-20.

Rice paddy was grown only on 4.8% of cropped area in 1960-61. In 2018-19 it was grown on around 39.6% of cropped area. What happened here? Sometime in the mid 1960s, the central government launched the Green Revolution in Punjab, in order to build food security in India and reduce our dependence on import of American wheat under the Public Law 480 (PL -480).

The farmers were encouraged to plant a high-yielding variety of wheat. In order to incentivise them, the government bought this wheat from them at a minimum support price (MSP) which was declared every year.

A look at the above table tells us that the cropped area under wheat jumped from 27.3% in 1960-61 to 40.5% in 1970-71. The fact that the government bought the wheat at the MSP, led to an increase in wheat plantation.

The government started buying rice at an MSP as well. This led to a jump in number of farmers planting rice in Punjab and Haryana because they had a readymade customer in the government willing to buy at a fixed price. They weren’t subject to the vagaries of price and India’s underdeveloped agricultural marketing system.

The farmers were first incentivised to grow wheat (rightly) and then incentivised to grow rice as well (right from the point of food security, but wrong from all other angles).

Take a look at the following chart which plots the total amount of area on which rice has been planted in Punjab, over the years.

Source: http://punenvis.nic.in/index3.aspx?sslid=5882&subsublinkid=4993&langid=1&mid=1 and Agricultural Statistics at a Glance 2019.

As can be seen there was a major jump in the area under rice production between 1970-71 and 1990-91, from 0.39 million hectare to 2.02 million hectare. This was primarily because of rice being bought by the government at a minimum support price announced every year. The next jump came in the mid 1990s.

In the year 1997, free electricity for farmers was introduced in Punjab. This encouraged farmers to grow rice even more. They could now pump groundwater for free. This could be used to grow rice. Take a look at the following table, which plots the number of tube wells in the state over the years.

Number of tubewells (in lakhs)

Source: Economic Survey of Punjab, 2019-20.

As can be seen from the above table, the number of electrically operated tube wells has gone up dramatically over the years. In 2018-19, the number is more than 13 lakhs. With free electricity, farmers were incentivised to buy electricity operated tube wells and pump as much ground water as required to grow rice.

This has led to the exploitation of groundwater. As the latest Economic Survey of Punjab points out:

“A state-wise assessment of the groundwater resources in the country showed that 80% of 138 blocks assessed were ‘Over-exploited’, 2 blocks were ‘Critical’, 5 were ‘Semi-Critical’, and 22 were ‘Safe’.”

In fact, 95% of groundwater is extracted for the purpose of irrigation.

Along with this, the Food Corporation of India (FCI) buys up a bulk of the rice produced in the state. It is worth remembering here that Punjab is not much of a rice eating state. Take a look at the following chart.

Procurement of rice in major producing states.


Source: Price Policy for Kharif Crops – The Marketing Season of 2020-21.

In 2018-19, Punjab produced around 12.82 million tonnes of rice. Of this, 11.4 million tonnes was procured by the government through FCI and other state procurement agencies. In Haryana, around 4.5 million tonnes of rice was grown. Of this, around 85% was procured. The major reason for this lies in the fact that given that the green revolution started here, FCI has the best infrastructure to procure and store foodgrains, in this area.

The government doesn’t procure basmati under MSP because there is a huge international demand, given its fragrant smell when cooked. Hence, farmers don’t plant much of it. While there is international demand, the farmers also need to suffer the vagaries of price.

This easy procurement along with free electricity encourages farmers to grow rice in what is largely a semi-arid area. But this still does not explain how the farmers came around to burning rice paddy stubble. I mean, I have been going to Delhi for more than 35 years now, but the city was never dystopian during winters earlier. This is clearly a phenomenon of the last decade. What changed?

What led to farmers burning rice stubble?

As we have seen, the government policies over the years, have incentivised farmers to grow rice. At the same time, these policies have led to the water table in Punjab falling dramatically. Given this, the government had to something about this and it did. (I am talking more about Punjab than Haryana here, simply because the number of fires in Punjab is many times more).

As the Economic Survey of Punjab points out:

“It requires 4,500 litres of water to grow one kg of sathi rice when it is sown in April-May. But if sowing is done around mid-June, water requirement reduces to 1,500-2,000 litres. Water requirement is high in April-May because the evaporation rate is high and there is no rain. As a result, all the water used in irrigation is groundwater. In June-July, rainfall supports water needs of the crop.”

This logic essentially led to the enactment of the Punjab Preservation of Subsoil Water Act in 2009. As per this law, farmers are not allowed to sow paddy seeds in nurseries before May 10. They are not allowed to transplant the saplings before June 10. The idea being that by the time farmers start transplanting the saplings in the fields, the Monsoon would have already arrived and hence, lesser groundwater will be used to grow rice. Haryana has a similar law.

The intention behind the law was noble, but the incentive it created for the farmer was again perverse. The end to end production of rice takes 120 days. The process of growing rice used to start in April earlier. But this was pushed back by a month due to the law to prevent the overexploitation of groundwater.

This led to a situation where farmers were left with a time of around 15 days to get their fields ready for the plantation of wheat. The quickest way to turnaround is to burn the rice stubble and that is precisely what has been happening for the last decade.

History plus perverse incentives are at the heart of this problem.

What’s the way out of this?

The central government recently told the Supreme Court that it was planning to bring a new law to tackle the stubble burning problem. This is a classic way of how any government tries to tackle a long-term problem. They either bring a new law or throw money at it, in the hope of solving the problem.

But the question is will this law or any law be of help? The Punjab government did bring in a law to solve one problem and ended up creating another one, without really solving the first one.

In the short-term, innovations like the Happy Seeder have clearly helped. But the problem can only be solved if the Punjabi and other farmers in the semi-arid areas of North India are incentivised to not grow rice and to grow other crops which do not require a lot of water.

But at the risk of repeating a cliché, it is easier said than done.

Let’s take a look at this pointwise.

1) Over the years, the government has bought much more rice and wheat than it needs to maintain the operational reserve and the strategic reserve. Like in September, the rice stock in the central pool of the FCI was at 22.2 million tonnes. As of October every year, FCI needs to maintain an operational reserve of 8.25 million tonnes and a strategic reserve of 2 million tonnes. Clearly, the FCI has much more rice than is required.

This reserve can be brought down by buying lesser rice in the time to come. If this policy is followed for a few years, the farmers will automatically be disincentivised to grow rice. If they are disincentivised to grow rice, there will be lesser rice stubble to burn.

Of course, this is a politically risky move and in the process a section of farmers is bound to face losses, until they move away from growing rice.

2) Another way is to buy more rice from states like West Bengal, which is best suited to be growing rice, given it uses less water to grow rice, in comparison to other states. In fact, West Bengal produced 16.05 million tonnes of rice in 2018-19. Of this, the government purchased just 1.9 million tonnes. The point to remember here is that West Bengal is a rice eating state.

So, unlike Punjab the government cannot buy almost all the rice that is produced. Hence, buying by the central government shouldn’t lead to a shortage of rice in the state, forcing it to buy rice from other states, in the process. The solution lies in helping increase the rice yield per hectare in the state. In 2018-19, West Bengal produced 2,906 kgs of rice per hectare. This was significantly lower than Punjab’s 4,132 kgs per hectare, but more than the national average of 2,659 kgs per hectare.

3) The most important way in weaning away farmers from rice is to change incentives. Let me offer an analogy here. Why does a wealth manager/insurance agent/personal banker/mutual fund agent mis-sell? Simply because their incentives are so aligned.

Along similar lines, if the farmer has an incentive to grow rice (and unlike financial salesmen, the incentive here is an honest one), he will grow rice. We can’t judge him for this.

One way out is to encourage farmers to grow maize, like they used to in the sixties. In 1960-61, 6.9% of the total cropped area in Punjab was used to grow maize. By 2018-19, this had fallen to 1.4%. As the document titled Price Policy for Kharif Crops—The Marketing Season of 2020-21 points out: “Maize cultivation is more water efficient than rice… [It has] a great potential for crop diversification in rice-wheat cropping system areas of north-western plains, where substantial groundwater depletion has occurred.”

The trouble is that maize has low profitability in comparison to rice “due to low and fluctuating prices and yield of maize.”

As the Price Policy document points out:

“There is a need to find alternative uses of maize in the country for industrial uses like feed, starch and ethanol as well as for direct consumption, mainly value-added products… Allowing maize as raw material for ethanol production would help in crop diversification and ensure remunerative prices to farmers.”

This will help increase the demand for maize and help increase its price.

Along similar lines, there is a need to encourage and incentivise the growing of pulses and oilseeds, which we don’t grow enough of. As the Price Policy document points out:

“Instead of promoting water-intensive crops like rice… it is important to promote production of pulses and oilseeds by encouraging farmers to grow these crops by providing better quality seeds, technology and appropriate price support to address gap between domestic production and consumption and maintain stability in the domestic market.”

The fact of the matter is that the private agriculture markets in the country don’t function well. At the same time, in order to encourage farmers to grow particular crops, the government cannot buy a large amount of it, like it buys rice and wheat, simply because it doesn’t have enough money to do so or the right infrastructure to store what it has bought. Pulses are an excellent example. The reason FCI cannot buy pulses is simply because it doesn’t have the right infrastructure to store them.

In this scenario, getting farmers to grow something other than rice is going to be very difficult and will take a lot of concentrated effort on part of the politicians as well as bureaucrats. Will that happen? On that your guess is as good as mine.

The moral of the story being, just because there is a problem, doesn’t mean it has an immediately implementable solution.

 

Why Farmers Are Protesting Against Laws Which Will ‘Supposedly’ Help Them

Over the last week many of you have asked me to write on this particular topic. One gentleman even suggested on Twitter, perhaps sarcastically, that I was slacking. (I guess after this 3,800 word piece, he will clearly not say that).

Well, I wasn’t slacking. This is a complicated topic with multiple issues and because of that I was trying to read as much as I could, before offering my views on the issue. (Also, I might be writing more on the issue in the days to come).

What do the Bills which have been passed by the Parliament seek to achieve?

Yesterday, the Rajya Sabha passed two out of the three Bills being referred to as the Farm Bills. These two Bills are the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, and the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020.

The Lok Sabha had already passed these Bills. There was some ruckus in the Rajya Sabha where the Bill was passed through a voice vote.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, allows the farmers to sell their produce outside the Agricultural Produce Market Committee (APMC) regulated markets. The APMCs are government controlled marketing yards or mandis.

This law allows farmers to sell their produce to cold storages, warehouses, processing plants or even directly to the end consumer (you and I, restaurants, hotels etc.) The state government is not allowed from levying any market fee, cess or any other levy in these other market places (or trade areas). In short, anything that the state government can do is limited to the physical area of the APMCs. The Bill allows intra-state trade and inter-state trade.

So, the farmers clearly have more choice on who they want to sell. But they are still unhappy about it? Why? This is a question that will get answered in the piece.

Now let’s take a look at the other Bill.  The idea behind Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020, is essentially to create a framework for contract farming. This needs an agreement between the farmer and a buyer, before the production happens.

Of course, this hasn’t gone down well with the farmers either.

Why are the farmers protesting?

The passage of both the Bills hasn’t gone down well with the farmers. In fact, farmers in Punjab, Haryana and Western Uttar Pradesh, had been protesting even before the Bills were passed by the Parliament. Why has that been the case? Let’s take a look pointwise.

1) As mentioned earlier, the farmers of Punjab, Haryana and Western Uttar Pradesh, are the ones, primarily protesting. Hence, farmers across the country are not protesting against these Bills.

The farmers of these states are primarily protesting because the government procurement infrastructure in these areas is very good. This is primarily because the Green Revolution of the 1960s started here. In order to encourage farmers to adopt a new variety of wheat, the government offered procurement through the Food Corporation of India and a minimum support price (MSP) to farmers, which was declared before every agriculture season. Since then the system has evolved and the government sets an MSP on 23 agricultural crops, though it primarily buys only rice and wheat. In the recent years, it has bought some pulses and oilseeds as well.

The fear among farmers is that the next step in the agriculture reform process will be the doing away of government procurement process as well as the MSP. This is going to primarily hurt the farmers from Punjab and Haryana, who benefit tremendously from this.

2) The farmers who benefit from the government procurement process and MSP are medium and large farmers. As the document titled Price Policy for Rabi  Season—The Marketing Season of 2020-21, published by the Commission for Agricultural Costs and Prices 2020-21, which is a part of the Agriculture Ministry points out:

“As indicated by data received from some states, medium and large farmers occupy a major share in total procurement in the State and share of small and marginal farmers, though improved during last few years, remain low.”

Hence, it’s the bigger farmers who are protesting against the passage of these Bills. (It is important to make this distinction because the media is largely using the word farmers).

The government and Prime Minister Narendra Modi have assured that there are no plans to do away with government procurement or the MSP policy for that matter. The trouble is the protestors don’t seem to be buying these assurances and there is good reason for the same.

3) Why are the big farmers not buying the government’s assurances? The answer perhaps lies in the fact that it is but natural that the next step in the process of reforming agriculture is reforming government procurement and the MSP policy.

As NITI Aayog’s occasional paper titled Raising Agricultural Productivity and Making Farming Remunerative for Farmers published in December 2015, points out:

“There is a need for reorientation of price policy if it is to serve the basic goal of remunerative prices for farmers. This goal cannot be achieved through procurement backed MSP since it is neither feasible nor desirable for the government to buy each commodity in each market in all region.”

This paper essentially had the philosophical underpinnings on which both the Bills we have been talking about are based. Also, if the government purchases and the MSP are done away with, there will be further danger of free power, fertiliser subsidy etc., being done away with as well.

4) The MSP policy has led to excess production and excess procurement of rice and wheat by the government over the years. As of September 2020, the Food Corporation of India had 700.27 lakh tonnes of rice and wheat. As per the stocking norms for food grains, FCI needs to have an operational and strategic reserve of 411.2 lakh tonnes as of July and 307.70 lakh tonnes as of October. These massive stocks of rice and wheat are despite the government deciding to distribute a lot of rice and wheat for free to bring down the negative impact of the covid pandemic.

It has also led to farmers growing rice and wheat at the cost of other agricultural crops. As the NITI Aayog research paper referred to earlier points out: “Per capita intake and availability of pulses in the country has declined to two third since early 1960s. During the 50 years between 1964-65 and 2014-15, per capita production of pulses declined from 25 kg to 13.6 kg.”

Now, you cannot fault farmers for doing this. If they are incentivised to grow something, with a regular buyer available in the form of the government, they are bound to do that. Why take a risk, when a safer option where the government increases the price of rice and wheat every year, and buys what is produced, is available.

In fact, it is safe to say that if the government procurement is lowered (even without the MSP being done away with), the price of rice and wheat will fall. If private markets are established, it will fall even faster. This is something that the big farmers of Punjab and Haryana, don’t want, hence, the protests. It is worth remembering here that the marginal and small farmers, who own land of less than two hectares, are largely consumers of food, and food inflation tends to hurt them.

5) Let’s look at how strong the incentives of big farmers of Punjab and Haryana are. As the document titled Price Policy for Kharif Season—The Marketing Season of 2020-21 points out:

“For example, more than 95 percent paddy farmers in Punjab and about 70 percent farmers in Haryana are covered under procurement operations while in other major rice producing States like Uttar Pradesh (3.6%), West Bengal (7.3%) Odisha (20.6%) and Bihar (1.7%), very small number of rice farmers benefit from procurement operations.”

In total, the procurement system reaches around 11.8% of the rice farmers. This explains by the protests are limited largely to Punjab and Haryana.

6)  Punjabis themselves eat very little rice. But the solid procurement system in place ensures that the Punjabi farmers grow a lot of rice.

Procurement of rice in major producing states 2018-19.


Source: Price Policy for Kharif Season—The Marketing Season of 2020-21.

As can be seen from the above chart nearly 89% of the rice produced by the farmers in Punjab is procured by the government. In Haryana, it is 85%. Clearly, the farmers in Punjab and Haryana have a huge incentive in growing rice and doing away with price risk.

The government procurement system and the MSP have essentially ensured that semi-arid areas like Punjab and Haryana, grow rice, a crop which needs a lot of water. And this has created its own set of problems. “Continuous adoption of rice-wheat cropping system in North-Western plains of Punjab, Haryana and West Uttar Pradesh has resulted in depletion of ground water and deterioration of soil quality, posing a serious threat to its sustainability.” It also creates the problem of stubble burning during the winter months.

7) How do things look for wheat, the other crop procured majorly by the government? Take a look at the following table.

Statewise procurement of wheat.


Source: Price Policy for Rabi Season—The Marketing Season of 2020-21.

As can be seen from the above table Punjab and Haryana are again the major beneficiaries when it comes to procurement of wheat. Uttar Pradesh is the biggest producer of wheat but only around 11-12% of its production gets procured by the government.

As the NITI Aayog paper referred to earlier points out: “The pricing policy has also discriminated against eastern states where procurement at the MSP is minimal or non-existent. With part of the demand in these states satisfied by subsidised PDS sales of the grain procured in other states, prices of wheat and rice in these states end up below what they would be in the absence of price interventions of the government. The price policy has thus also created a regional bias in crop pattern as well as incomes of farmers.” The fact that inequality has gone on for years is disturbing. But this does not mean that the government should procure more rice and wheat from these states as well.

8) The other big fear among farmers, those representing them and many economists, is that large corporates will take over contract farming. The politicians suddenly want farmers to trust corporates and the market process, after spending decades abusing them. This is not going to happen suddenly, especially in an environment where there is big fear of large corporates taking over many other areas of business. All this is happening precisely at a time when the government has banned the export of onions. The messaging just isn’t right, given that if the government trusted the market process, it wouldn’t have banned the export of onions.

9) Another reason that farmers don’t trust corporates is the rise in their input costs. As the document titled Price Policy for Rabi Season points out: “The increase in cost of production was mainly driven by rise in farm input costs such as human labour, machinery, seeds, fertilisers, fuel, etc.” The belief is that this rise in prices is primarily because of the increasing corporatisation of the agri-input sector.

To conclude this section, the government procurement and the MSP where introduced in a certain time when India didn’t produce enough food grains to feed itself. These are policies of a bygone era and help only big farmers in certain states, and hence, they are the ones protesting, despite the assurances by the government.

Will the government be able to do away with procurement and MSP?

This is a tricky question. The procurement and the MSP system are one side of the equation, the supply side. On the demand side, the government sells the rice and wheat thus procured at heavily subsidised prices under the aegis of the Food Security Act, through lakhs of ration shops under the public distribution system.

So, while the big farmers of Punjab and Haryana might feel that the government will do away with procurement and MSP, it is not possible at one go. What is possible is that the government can cut down on procurement, in order to ensure that FCI does not have to maintain excess stocks like it has over the last few years.

The food subsidy system is a system which has been in place and which is much more complicated and much more spread across the country, than just the big-farmers of Punjab and Haryana. Also, with the covid pandemic, the importance of the food security system has clearly come to light. Actually, only once the government does away with the food security system can it do away with MSP and procurement. This is too big a challenge for any government.

Theoretically, it’s possible to do this and give cash handouts to people so that they can buy rice and wheat, but the political repercussions of doing away with food security the way it currently exists, is not something any government will be able to handle. It’s too big a risk.

This problem of  government assuming something and farmers believing the opposite, can only be solved if the two sides talk it out. But that is unlikely to happen, given that the Bills have already been passed.

Reform by stealth

Like has been the case with economic reforms in India in the past, this time was no different as well. The government resorted to reform by stealth and aggressively pushed the Bills through the Parliament, without either talking to the Opposition parties or farmer organisations.

This has led to the firm farmer belief that MSP and government procurement will go in the next round of reform. If the government had tried to talk to the farmers before pushing through the Bills that might perhaps have helped.

Secondly, if contract farming and trade markets other than APMC have to pick up, the state governments need to be on board as well. No corporate or businessman is going to attempt contract farming or setting up trade markets where agricultural produce can be sold by farmers, unless the state government is on board as well.

Hence, some talking would have helped. But then that’s not this government’s style.

My views

Let’s take a look pointwise.

1) There are multiple problems with the way the APMC markets across the country have been functioning. As the Sixty Second Report of the Standing Committee on Agriculture (2018-19), stated, highlighting some of the problems:

a) “Market Committees are reportedly democratic institution but in fact… [the] Committee is dominated by politicians and traders not by farmers as required.”

b) “The provisions of the APMC Acts are not implemented in their true sense. For example, market fee and commission charges are legally to be levied on traders, however, same is collected from farmers by deducting the amount from farmers’ net proceed.”

c) “Market fee is collected in some States even without actual trade-transaction has taken place and simply on landing the commodity at processing units. While in other States trade transaction outside the market yard is illegal.”

Once we take this into account, there is a clearly problem with the way APMCs function. Also, they restrict competition and tend to assume that the farmers are not smart enough to do their own thing (something that many politicians have made a career of). In that sense the freedom that these Bills provide the farmer are great.

Having said that, the absence of any regulation in non-APMC trade markets is not a good sign.

2) Are the farmers going to benefit almost overnight, as is being projected on the social media in particular and media in general? The simple answer is no. It needs to be pointed out here that as per the Agricultural Census of 2015-16, 12.56 crore or 86.2% of India’s operational holdings are small and marginal that is less than two acres in size.

Hence, most of the farmers really don’t produce enough to be able to deal with any marketing system, the old one or the new one, in a direct profitable way. For such small farmers to be able to benefit and get a better price for their produce without selling to a middleman, all kinds of other infrastructure is needed. These include everything from more cold storages to improved roads connecting villages to the newer markets that come up, power supply which can be relied upon (so that a cold storage can function like one) and traders who compete to get their produce.

All of this is very important if farmers are to get a better price for their produce. A survey carried out by the Reserve Bank of India and published in the central bank’s October 2019 bulletin found:

“The survey findings revealed that farmers’ average share in retail prices vary across crops between a range of 28 per cent and 78 per cent [across 14 crops]. The traders’ and retailers’ mark-ups were generally found to be higher for perishables than nonperishables.” The Survey also found that “retailers’ margins were generally higher than the traders’ margins in consumption centres across commodities, possibly due to significant product loss at the retail stage, particularly for perishables.”

In fact, the state of Bihar did away with the APMC Act in 2006 and didn’t get anywhere near higher incomes for farmers, given that the basic infrastructure to get market transactions going was not available.

This is why all the other infrastructure mentioned earlier becomes important. And it can’t be achieved without the active participation of the state governments. Hence, communication between the central government and the state governments on this issue is very important. And that hasn’t happened. Also, as usual, the central government hasn’t gone into the details. It has talked about how the farmers will benefit and is driving home that narrative aggressively, without really talking about the all the practical issues that will keep cropping up. (Remember demonetisation? Remember GST? Why does this feel like déjà vu?).

3) It is worth remembering that arthiyas (commission agents) who buy produce from farmers at APMCs, are locally influential people. Hence, assuming that parallel systems of buying and selling in the form of new trade markets, will come up automatically, is rather stupid. It is worth remembering that many arthiyas are themselves big farmers and can ensure that the system continues to work as it is. They might just move out of APMCs to avoid paying levies (which are very high especially in states of Punjab and Haryana at 8.5% and 6.5%, respectively). Everything else might continue to be the same. This depends on whether creation of new infrastructure is worth not paying the levy.

This is why, at the cost of repetition, proper healthy communication between state governments and the central government becomes very important. Also, it will be interesting to see whether the central government continues to procure rice and wheat through the Food Corporation of India (FCI) at the APMC mandis in Punjab and Haryana, using arthiyas and paying levies amounting to 6.5-8.5%? Or will it choose to move out, thereby hurting the revenue stream of the state governments? (Did someone say cooperative federalism?)

4) It is being assumed that buyers who currently buy from big commission agents, will start buying directly from farmers and let go of the middleman. There is a reason why these buyers buy from agents. It is convenient for them to do so. Do they want to take on the headache of building a new system right from scratch? Is it worth their time and money?

These are questions for which answers will become clearer in the days to come. But prima facie given the abysmal ease of doing business in most states, I see no reason why the buyers won’t continue buying from the agents, instead of having to deal with many farmers. As mentioned earlier, a bulk of India’s farmers are too small to benefit from any market- oriented system, unless they organise themselves in the forms of cooperatives and farmers-producer organisations.

Also, if governments really want to help these small and marginal farmers, they need to reform the change in land usage norms, and let farmers who want to sell their land be able to sell it anyone else and not just other farmers.

5) There is great fear of Big Business taking over agriculture. As per the Agricultural Census of 2015-16, the number of medium and large operational holdings is at 63.16 lakh (A medium sized operational holding has an area of 4 hectares to up to less than 10 hectares. And a large sized operational holding has an area of 10 hectares or more). These are huge numbers we are looking at. Just imagine the kind of scale needed to deal with these many number of farmers. If just take a look at large operational holdings, they are at 8.31 lakh. Hence, it’s not going to be easy for any corporate to do anything without involving middlemen.

If businesses just concentrated on states which have a higher proportion of medium and large operational holdings they are looking at Punjab (33.21% of the total operational holdings), Rajasthan (19.47% of the total operational holdings) and Haryana (14.35%). Not surprisingly, farmers of Punjab and Haryana are worried. They would rather deal with the known devil, the government, who, they can always vote out in the next election. But how do you vote out a corporate?

To conclude, the central government clearly hasn’t gone into the details of what will it take to really make the life of an average farmer better. As usual it is only interested in selling the narrative that the passage of these Farm Bills will ensure that farmers get a better price for what they produce. (Remember, the 50% higher MSP story they tried selling sometime back?)

When it comes to the opposition parties, they have managed to get low-hanging fruit to put the government on the mat after a while, and not surprisingly, they are cashing in on that.

Meanwhile, nobody is really worried about the farmer.

I would like to thank Chintan Patel for research assistance.

Please support Vivek’s work. 

What’s Common Between Egyptian Cotton and Indian Pulses?

Toor_Dal_Tur_dal

In the recent past, Welspun India Ltd, has been in the news for all the wrong reasons.

The US retailer Target terminated its contract with the company for supplying bedsheets. Bloomberg puts the value of this business at $90 million. The stock price of Welspun has fallen by half over the last 10 days (between August 19 and August 29).

Welspun was supposed to supply bedsheets and pillowcases made of Egyptian cotton to Target. It seems that over the last two years, the company had been substituting Egyptian cotton with non-Egyptian cotton.

Fibres made from Egyptian cotton are longer than those made from regular cotton. This makes the fabric stronger. Further, bedsheets made from Egyptian cotton are also softer than those made from regular ones. For these qualities, in Egypt, cotton is also referred to as white gold.

Hence, given that Welspun was using other types of cotton, it wasn’t producing bedsheets that Target wanted it to. In the process, it lost the contract.

As to why Welspun did what it did, I really don’t know and that is not the reason behind writing this piece. What I am basically interested in is Egyptian cotton and the one common characteristic it shares with Indian pulses.

The production of Egyptian cotton has been falling over the years. Estimates made by United States Department of Agriculture – Foreign Agriculture Service (USDA—FAS) suggest that in the 1980s, Egypt grew cotton on an area of 5,00,000 hectares per year. This fell to 4,00,000 hectares per year in the 1990s. By the turn of the century this had fallen to 2,23,000 hectares of area. In 2015-2016, this fell to 1,00,000 hectares of area.

The USDA—FAS suggests that in 2016-2017, the area on which cotton has been planted in Egypt has fallen further to around 50,000 hectares. This is a huge fall of 50 per cent in just one year. The production is expected to fall to 1,50,000 bales from a production of 3,20,000 bales last year.

This is happening primarily because the cotton farmers are concerned “in terms of their ability to market the crop, especially with the lack of strong commitment from the government that it will buy the crop from farmers.” Over and above this, “Egypt’s industry is relying less on the domestic crop which is comprised mostly of extra-long staple and long staple varieties, while users’ needs have shifted to medium and short staple varieties.”

Hence, while there is a demand for long staple Egyptian cotton internationally and there is a premium for it, that doesn’t seem to be the case within the country. This along with the fact that the Egyptian government hasn’t shown a strong commitment of buying cotton, has led to farmers planting less and less of cotton. Instead of growing cotton, the Egyptian farmers seem to be growing rice. The area under cultivation has jumped from 4,62,000 hectares last year to 6,50,000 hectares this year.

In fact, in India, pulses have been going through a similar phenomenon. While, the total production of pulses hasn’t fallen as dramatically as the production of cotton has fallen in Egypt, it hasn’t gone up either.

Take a look at the following chart. This shows the total production of pulses over the last 30 years.

As is obvious, the total production of pulses has more or less been flat over the last thirty years. In 1986-1987, India produced 16.32 million tonnes of pulses. In 2015-2016, the total production was at 17.06 million tonnes, as per the third advanced estimate published by the ministry of agriculture.

What does this tell us? It tells us that production of pulses has more or less been flat over the last three decades, even though the demand for it has gone up. How do we know that? Take a look at the following chart. It shows the total quantity of pulses that India has imported ever year, since 1990-1991.

In 2015-2016, the import of pulses peaked at 5.80 million tonnes. The increased import of pulses shows that the demand for pulses has gone up over the years, as the income has gone up and people have started eating better, leading to a demand for protein based food products. Pulses are an excellent source of proteins for vegetarians.

In fact, it is safe to say that the real demand for pulses is higher than the total production plus import number, given that even after increased imports, the price of different kind of pulses has continued to remain strong. Hence, many people are either not able to afford pulses or have had to simply cut down on its consumption.

A further increase in imports is not the solution given that India is the largest producer, consumer and importer of pulses in the world. The interesting thing is that despite rising prices, over the last few years, the production of pulses hasn’t gone up. This is primarily because the government up until now had been procuring only rice and wheat directly from farmers. It hasn’t been serious about procuring pulses like the Egyptian government hasn’t been serious about procuring cotton.

And given this ready availability of a buyer, the farmers find it safe to grow rice and wheat. This has led to the production of rice and wheat going up at a steady rate. In fact, now we have reached a stage where on the whole we are overproducing rice and wheat and not producing as much pulses and oilseeds as are required.

Along with the farmers preferring to grow rice and wheat what has not helped is the fact that the last two years’ rains have failed. Given that only 16.1 per cent of area under production of pulses is irrigated (2011-2012 data), the total production took a beating.

This year the government has started to buy pulses (like it buys rice and wheat) to build a buffer stock. The idea is to encourage the farmers to grow pulses given that the government is a ready buyer. It remains to be seen whether the procurement machinery of the government can gear up to the challenge of procuring pulses.

As economists Ashok Gulati and Shweta Saini write in The Indian Express: “The existing procurement machinery is more attuned to procuring rice and wheat than pulses — they require an operationally different treatment. This necessitates gearing up the system accordingly.”

Also, on August 26, 2016, the government ordered imports of 90,000 tonnes of pulses in order to add to the buffer stock. Following this procurement, the buffer stock of pulses has jumped to 1.76 lakh tonnes.

The other encouraging piece of information is that area on which kharif pulses (arhar, moong and urad) have been sown this year has gone up dramatically. As on August 26, 2016, the total area on which pulses had been sown stood at 13.94 million hectares, up by around 34.3 per cent from last year.

This basically means that the prices of the kharif pulses will come down in the months to come as the increased production starts to hit the market. At the same time the government needs to step up procurement in order to ensure that a bumper crop doesn’t lead to a dramatic fall in prices. If that turns out to be the case, then enough farmers will not be encouraged to sow pulses again next year and we will end up with the same problem.

This is important given that even the bumper crop won’t be able to cover for the 5.80 million tonnes of pulses that were imported in 2015-2016. Also, the basic problem of Indian agriculture i.e. well-functioning private markets through which farmers can hope to make some money and not be taken for a ride by the intermediaries, continues to remain.

The column originally appeared in Vivek Kaul’s Diary on August 30, 2016

 

The economics of Udta Punjab

udta punjab

The recent release Udta Punjab highlighted the problem of drug addiction in Punjab. While, drug addiction is a global problem, Punjab has nearly 3.3 times more drug addicts per lakh than the Indian national average.

And why is that the case? From the supply side, the state shares a border with Pakistan. Hence, drugs are easy to smuggle in. The demand side is a little more complicated to explain.

The state saw a Green revolution starting in the mid-1960s, with the agricultural yield exploding, thanks to C. Subramaniam, the food and agriculture minister back then.

Subramanian came to know of a form of wheat developed in Mexico which could rapidly raise output. As Gurcharan Das writes in India Unbound: “C. Subramaniam was a man in a hurry and he chartered several Boeing 707s and flew in 16,000 metric tons of seed of this miracle wheat…Punjabi farmers still speak lovingly of Mexico’s Lerma Rojo, one of the earliest varieties to take root in their soil.”

And thus started the green revolution in Punjab. In order to support this, the government also started to procure rice and wheat directly from the farmers through the Food Corporation of India and other state procurement agencies.

The higher yields along with assured procurement led to the farmers of Punjab progressing. While the procurement policy is supposed to be pan India, the procurement is limited largely to a few states. As the Economic Survey for 2015-2016 points out: “In Punjab and Haryana, almost all paddy and wheat farmers are aware of the [procurement] policy.” In 2013-2014, Punjab produced 11.1 million tonnes of rice. Of this, 8.1 million tonnes was procured by the government. This is the highest in the country.

What also helped is that there is no tax on agricultural income. Also, free power is available for farming. All this, has helped the Punjabi farmer. The first generation worked hard to spread the green revolution. The second generation carried on the good work. And the third generation, born into money, is enjoying the spoils.

This is along the lines of what happens to a typical family owned business. As Das writes, taking the example of Buddenbrooks by Thomas Mann, which he feels is the finest book ever written about family business: “It describes the saga of three generations; in the first generation the scruffy and astute patriarch works hard and makes money. Born into money, the second generation does not want more money…The third generation dedicates itself to art. So the aesthetic but physical weak grandson plays music. There is no one to look after the business and it is the end of the Buddenbrook family.”

Something similar seems to have happened in Punjab, where some part of the third generation has moved away from farming and gotten into drugs, given the access to easy money they have, due to the hard work put in by their grandparents. Some evidence of this can easily be found in the kind of songs that Punjabi popstars sing these days. The word dope, weed etc., keep cropping up in these songs.

The other interesting thing is the number of super expensive brand names that these songs refer to and espouse. From Jaguar to Audi to Gucci to Armani, they seem to have it all. This seems to be a good indicator of the fact that some part of the third generation after the Green revolution started, has gone away from farming and gotten into other things.

No other state in India (except perhaps Haryana) has this kind of music. What has helped is the astonishing rise in the price of land in the state. Also, land acquisition in Punjab is easier compared to many other Indian states given that the average size of a landholding in Punjab is around 9.3 acres, which is much bigger than many Indian states. Hence, large parcels of land are easier to buy.

Land sale has also brought in a lot of easy money. And some of this seems to have leaked into drugs.

The column originally appeared in the Bangalore Mirror on June 29, 2016