The difficult economics of the Indian farmer: 

The difficult economics of the Indian farmer: 

Context:

Most farmers swim in a turbulent sea of risks against which they have almost no protection.

Introduction:

One way to reduce price risk is through price deficiency payment, which has been advocated by Niti Aayog

Agriculture condition:

• The economist at HSBC showed in a recent report that the fall in inflation has increased the real debt burden of farmers, which has risen faster than real income in recent years.
• Price risk is the most important factor affecting Indian agriculture. A bumper crop can pull down prices in wholesale markets.
• The bountiful rain of 2016 resulted in record farm output.
• Farmers are reported to have not been able to even recover the cost for some crops.
• The prospects of rural monsoon pushed up rural wages.

Problems of Indian agriculture:

• The production in the months ahead is deeply dependent on whether conditions.
• The opportunities for risk mitigation are minimal.
• Even a round of unseasonal rain can destroy standing crop
• Irrigation can offer some respite-but not to the extent of completely removing production risks
• The successive governments have taken steps to reduce the risk faced by farmers.
• The Minimum support prices (MSP) was originally conceived as a way to mitigate risk through guaranteed prices. But later it degenerated into a tool to buy the political support of large farmers.
• Crop insurance will not benefit farmers as desired if the compensation is not paid in time, as they will need the money for sowing in the next season.

Other issues:

There are other issues as well. For example, gross margin in the MSP recommendations by the Commission for Agricultural Costs and Prices looks higher on the basis of “actual paid out cost plus imputed value of family labour”, which does not account for foregone interest and rental for owned capital and land.

Government initiatives:

• The government in 2016 launched the Pradhan  Mantri Fasal Bima Yojna, as a potential game changer.
• In 2016, the government encouraged farmers to produce pulses because of rising prices, part of the protein inflation that the Reserve Bank of India used to be obsessed with

Solution:

• A more robust mechanism is needed to mitigate the price risk.
• The standard cobweb model in microeconomics helps us understand why production decisions based on limited information lead to wild swings in prices every year.
• One way to reduce price risk is through price deficiency payment, which has been advocated by Niti Aayog.
• In price deficiency payment, farmers can be compensated through direct benefit transfer if prices fall below a predetermined threshold level.
• Farmers should be register with relevant details at the nearest mandi.
• A deeper derivative market in agriculture commodities will also help farmers in hedging against price risks.
• The government should avoid its Pavlovian response of banning trading whenever price rise.
• Protecting consumer interest in general is the right thing to do for any government.
• In areas where markets don’t function freely, it needs to strike a balance between the interest of both the producer and the consumer.
• The actual impact of higher remunerative farm prices can be contained by making markets more efficient and removing middlemen from the system.
• Building a common agriculture market is also necessary.

Conclusion:

Policy should focus not just on higher production but also on helping farmers manage risks. Government should do well to remove inefficiency in the system. Government policy should focus not just on higher production but also on helping farmers manage risks.