There are around 11 crore farm households in India. Of these, 67 percent own less than one hectare of land. What does this really mean in terms of farm income? One hectare produces about 50 quintals of wheat in Punjab, but it would only produce about 35 quintals in poorly irrigated areas of Uttar Pradesh. At today’s MSP rates, this means that a farmer in the Punjab would earn around Rs 1 lakh per hectare during the wheat growing season, while a farmer in the drylands of the UP would end up with Rs 70,000. .
Now we have to remove their costs to get the profit they would make per hectare. Ironically, the overall cost of wheat production – as calculated by the government – is lower in the Punjab than it is in the UP. Thus, the Punjab farmer would earn around Rs 35,000 on a hectare of wheat, while the UP farmer would earn only around Rs 15,000.
Remember that this is the farm income of the entire household over six months. For example, a farming family with less than one hectare of land in the Punjab will earn about Rs 6,000 per month, while the small farming household in the UP will only earn a monthly income of Rs 1,250.
Even that, it is only if farmers manage to secure the minimum support price (MSP) that the government has announced. As the Shanta Kumar Committee reported in 2015, only about 5.8% of farming households in India were able to access APMC mandis and obtain MSP for their products. Sixteen years ago, the National Commission for Agriculture recommended that there be one regulated mandi for every 80 km², but in 2017, the national average was one mandi for 434 km². Even a well-covered state like the Punjab has a mandi for 118 km².
This means that farmers in most states are entirely at the mercy of local private traders or arhtiyas. In fact, even in Punjab and Haryana, where farmers bring most of their produce to the APMC mandis, arhtiyas play a major role in agricultural marketing. They charge hefty commissions to supposedly help farmers find buyers, even when farmers bring their harvest to the mandis themselves, unload it, and government buyers are already there to buy the product.
The new agricultural laws of the Modi government are supposed to break this iron fist of traders and commission agents. By allowing farmers to sell outside of the APMC mandis, the government intends to introduce competition between traders and help farmers obtain better prices.
This is pure wishful thinking based on a fundamental – perhaps deliberate – misunderstanding of how the agricultural economy works in India.
As agriculture has become mechanized and heavily dependent on a variety of high-yielding seeds, intensive use of fertilizers and pesticides, the costs of agricultural inputs have increased dramatically. Before the Green Revolution, when agriculture depended heavily on local seed variants and natural fertilizers, many farms existed outside the realm of market transactions. Modern farming techniques have increased market dependence and monetized agriculture.
These processes – high input costs and monetization – made the farmer dependent on credit early in the growing season. When Indian banks were nationalized 51 years ago, one of the goals was to increase agricultural credit. To date, small farmers have struggled to obtain credit from the organized banking system. An RBI study last year indicated that 28 percent of farm credit is still provided by pawn shops, traders and relatives. As for small farmers, almost 60 percent do not have access to bank loans.
This is where local traders come into the picture. They are the main source of loans for small farmers. They give it immediately and without any guarantee. That is why they not only charge high interest rates, but they also tie farmers to a whole network of bonds. A 2014 study by Sukhpal Singh of the Punjab Agricultural University gives us a clear picture of how this system works, making farmers dependent on all input purchases from the arhtiyas and their associates. The study showed that the arhtiyas and their associates provided 77 percent of the seeds, 12 percent of the fertilizers, 95 percent of the pesticides, 98 percent of the fuel and lubricants, and all feed purchased by the farmers. The arhtiyas provided over 70 percent of all inputs purchased by farmers.
As part of the loan agreement, the farmers were also forced to purchase household consumption items from these arhtiyas and their associates. The study found that over 31 percent of all national goods purchased by farmers were supplied by stores owned by arhtiyas or by traders linked to them. Finally, the farmers had to sell their product through these arhtiyas and they were only paid after the traders had deducted the loans they had made. It seems that the arhtiyas are the problem. But the real reason these traders and commission agents have thrived is the farmers’ need for finance. The institutional banking system let small farmers down and high input costs pushed them into the arms of the local merchant-lender.
It could be argued that large companies will solve this problem not only by providing capital, but also by making inputs cheaper through backward linkages with suppliers and achieving economies of scale. However, if the organized private sector was so big, what stopped the big private banks from entering the space and providing easy credit to small farmers? Why has the government not even pushed the public sector banks to break this control over finance which gives immense power to the local arhtiyas?
It is beyond belief that a smart politician like Prime Minister Modi does not know. PM-Kisaan and various interest subsidy programs are a recognition that the real problem that binds farmers to arhtiyas is that MSPs do not give them enough income to get out of their perpetual debt state. The answer to the kisan’s problems is a higher PSM which gives 50% more than the “overall” cost of production, subsidized inputs, public investment in rural infrastructure, more mandis across the country and easy credit from from institutional sources.
The Modi government’s decision to let companies solve India’s agricultural problems is a political choice determined by its own voting calculations. But that’s a whole different story, which I’ll tell another day.