The Government should stop routing subsidies through manufacturers and give these as direct benefit transfer

The splurge in fertiliser subsidy in the last three years is giving jitters to policy makers, especially the Union finance ministry, which has to foot the bills. Fertiliser subsidy amounts to payments made to manufacturers or importers to cover the excess of the cost of production/import and distribution over a low maximum retail price (MRP, the price asked by the Union Government to charge from the farmers).

These payments are under two broad categories viz. (i) urea, main source of nitrogen or ‘N’ supply; (ii) phosphate or ‘P’ and potash or ‘K’ fertilizers – commonly known as non-urea fertilizers – popular fertilizer in this category being di-ammonium phosphate (DAP) and muriate of potash (MOP).

In the case of urea, the Government exercises ‘mandatory’ control on MRP and reimburses the manufacturers/importers for the excess of the cost of production (C&F landed cost in case of imports) and distribution or ‘cost of supply’ in short over the MRP as subsidy on a ‘unit-specific’ basis under the New Pricing Scheme (NPS) in vogue since 2003. As for non-urea fertilizers, it fixes ‘uniform’ subsidies on a per nutrient basis for all manufacturers and importers under another scheme called the Nutrient Based Scheme (NBS) introduced in 2010.

The two most crucial factors impinging on subsidy are: (i) the cost of supply and (ii) MRP, as subsidy on each ton of fertilizer produced (or imported) and sold is nothing but the difference between the two.

The total quantity of fertilizer sold is the third important factor which when multiplied with subsidy on each ton gives aggregate subsidy payments, as reflected in the budget.

India is overwhelmingly dependent on imports for meeting its fertilizer requirements, the extent of dependence in each fertilizer segment being Phosphate (90 percent), Potash (100 percent), Urea (33 percent), Gas (50 percent). Their landed cost on Indian shores is determined by an inter-play of global demand and supply forces.

Then, there are add-ons such as customs duty (CD), port handling and internal transportation cost in case of fertilizer import in finished form and ‘processing cost’ (a catch all phrase for raw material or RM cost , interest, depreciation, return on equity; overheads, including wages and salaries, packaging, etc.,) in case where fertilizer is produced in India using imported RM. Then, there are taxes and duties.

Apart from CD on imports of non-urea fertilizers and RMs @5 percent (except rock phosphate and sulphur which attract 2.5 percent), all fertilizers attract GST (Goods and Services Tax) @ 5 percent.

Phosphoric acid and ammonia (RMs used for making non-urea fertilizers) attract GST @ 12 percent and 18 percent respectively. Natural gas (it is outside GST) attracts VAT which can go up to a high of 21 percent, say in Uttar Pradesh.

In view of the above, the cost of supply is largely beyond the control of manufacturers and importers. As for MRP, here again, given the political fallout of any hike, particularly urea, no government dares touch it. How crucial its role is, may be gauged from the following:

In his budget speech for 1998-99, Yashwant Sinha, finance minister under the Vajpayee Government, had proposed an increase of Rs 1,000 per ton in the MRP of urea. However, in a bid to avoid giving an impression that the hike was big, he presented the increase as Re 1 per kg instead of expressing it on a per ton basis, which is normal practice. But the trick didn’t work. Sinha was forced to roll back 50 percent of the hike on the very next day and balance in less than two weeks.

Believe it or not, for almost two decades since 2002, there has been no increase in urea MRP (sans a marginal 10 percent hike in 2010). Even for non-urea fertilizers, although the NBS allows for an increase in their selling prices, the Modi Government has de facto put a freeze on them as well since April 2021.

Hamstrung by the above factors, successive governments have helplessly watched fertilizer subsidies rise continuously which has acquired alarming proportions in recent years. Only in 2008-09, it had crossed `100,000 crore mark. Now, we see this happening for three consecutive years. During 2020-21 and 2021-22, the subsidy outgo was `138,000 crore and

`162,000 crore, respectively. During 2022-23, it is expected to touch the `250,000 crore mark.

What is the road ahead? The answer is hidden in an analysis by the chief economic advisor (CEA) in the Economic Survey FY 2015-16. According to it, as much as 24 per cent of the subsidy is spent on inefficient producers, 41 percent is diverted to non-agricultural uses, including smuggling to neighboring countries, and 24 per cent is consumed by larger, presumably richer farmers. That leaves a tiny 11 percent for small and marginal farmers who should be getting the maximum benefit of the subsidy.

Look at the diversion of urea which could be as high as 30 percent currently notwithstanding the much trumpeted neem coating (since 2015-16, all manufacturers/ importers are required to do it). Out of total annual sales of 35 million tons, the quantity that gets diverted and hence doesn’t deserve subsidy works out to around 10.5 million tons. Taking the average subsidy per ton of `71,400/- (250,000/3.5), eliminating diversion can yield savings of about Rs 75,000 crore.

From total sales, deducting the quantity diverted, we get the quantum of urea actually used by the farmers. This works out to 24.5 million tons (35 – 10.5). Of this, consumption by medium and large farmers (land holding over 2 hectare) is about 25 percent or 6.1 million tons. If they are excluded from the subsidy scheme, this will result in savings of about `44,000 crore (0.61×71,400).

There is tremendous scope for improving the efficiency of fertilizer use. A 10 percent increase in urea use efficiency translates to savings of 2.45 million tons (24.5x0.1). Taking a subsidy of `71,400/- on each ton, will yield savings of about `17,500 crore (0.245x71,400).

All put together, it is possible to garner savings of `136,500 crore (75,000 + 44,000 + 17,500). But, to get there, the government will require to embrace far-reaching pricing and subsidy reforms.

The Government should stop routing subsidies through manufacturers; instead, it may be given as direct benefit transfer (DBT) only to the small and marginal farmers. All suppliers should be free to sell fertilizers at market determined prices. Urea import should be freed even as the import of non-urea fertilizers is already free.

This will ensure competition amongst suppliers and survival of the fittest, i.e., those who can supply at low cost. With no subsidized fertilizer in the market (as subsidy goes to the farmer’s account), diversion will be completely eliminated. Moreover, in view of MRP reflecting fertilizer’s true cost, farmers will use them efficiently.

The Government also needs to review the taxes and duties. It makes no sense to impose a tax on fertilisers only to be reimbursed as an additional subsidy. Customs duty on all fertiliser imports and RMs used in their making should go. Gas should be brought under GST and put under a five percent slab.

(Courtesy The Pioneer: Uttam Gupta)

Russia will be more prudent this year in exporting food, especially to countries that are pursuing a hostile policy towards Russia, President Vladimir Putin said.

"This year, against the backdrop of a global food shortage, we will have to be more prudent in our food supplies abroad, namely, to carefully monitor the parameters of such exports to countries that are clearly hostile towards us," Putin added on Tuesday at a meeting to support the country's agricultural sector.

At the same time, he said the "increased production volumes make it possible to ensure food prices in Russia are lower than on the world market," Xinhua news agency reported.

Food self-sufficiency is Russia's competitive advantage and the country must protect its people from price fluctuations in the global food market, the Russian President added.

Russia is the world's largest wheat exporter. During the last agricultural year that ended on June 30, 2021, Russia exported 49 million tons of grain, including 38.4 million tons of wheat, Interfax news agency reported.

New Delhi, Jan 11 (IANS) A Supreme Court bench led by Chief Justice S. A. Bobde on Monday toughened its stand on the farm laws and said the court has made up its mind to stay the implementation of the three farm laws, which have led to the protest by thousands of farmers at various Delhi borders.

"We do not believe the Centre is handling the situation correctly. We do not believe your negotiations are effective. We are attempting to make the atmosphere conducive by keeping the implementation of the laws in abeyance," the Chief Justice told Attorney General K.K. Venugopal and Solicitor General Tushar Mehta, representing the Centre.

The Attorney General (AG) insisted that the top court should not pass any order in a hurry. The CJI replied: "You should not lecture us on patience." Four senior lawyers -- Dushyant Dave, Prashant Bhushan, H.S. Phoolka and Colin Gonsalves -- represented eight farmer unions before the top court. The Chief Justice told these lawyers to ask the protesting old men, women and children to go back home.

After learning that they are not inclined to go back, the Chief Justice told the lawyers of the farmers, "I am taking a risk and making a personal request. Please convey this message." The top court has indicated that it may give a part of the order on Monday, as it insisted that the Centre must stay the implementation of these farm laws.

For the purpose of constituting a committee to examine the farm laws, the Chief Justice sought the name of former Chief Justices, who could probably be on the committee which would determine what provisions are good for farmers and what is going to hurt the interest of the farmers. Dave suggested the name of Justice R.M. Lodha. The Chief Justice said he had spoken with Justice P.S. Sathasivam, but he declined as he is not good in Hindi.

Why Is the Farmer Angry?

The government recently brought in 3 farm laws with the stated objective of bringing in investment into the Agriculture sector by- removing impediments in the market access, stockpiling regulations and laws, as well as improving contract farming structures. Besides this, there is a pending bill in Parliament to remove the power subsidy to the farm sector. There is also a new law which penalizes a farmer with fines of $150,000 (the annual farmer revenue being $1000) for burning paddy residue and giving rise to air pollution. These legislations have unnerved farmer bodies. The farmers have opposed all five laws, and have been campaigning for the last three months. However, matters escalated within the past 20 days seeing masses encircling the national capital in peaceful protest. They have also demanded that the Minimum Support Price for all crops be legislated with penal provisions if violated.

Since 2013 the bumper crops have resulted in a steady deflation in farm-produce prices which are now 7 years running. Over 3,00,000 farmer suicides in the last decade have been a direct outcome of the agrarian crisis that grips the nation.

How poor is poor anyway?

The Economic survey in 2017 stated that the farming household incomes in 6 states in India fell below Rs. 50,000 per annum (for a family of 4), well under the minimum wage for unskilled labour set by each state. The range of income for over Rs. 14 crore farming households in India varies by state from a low of Rs. 30,000 to a high of Rs. 1,92,000 per annum, and the average for the country is Rs. 78,000 p.a. i.e. under Rs.20,000 p.a. per capita, or under Rs.2000 per month. 60% of this rural income is coming from non-agricultural sources, mainly as labour/working in factories /MNREGA to supplement farm income.

Any discussion on farmer issues must first come to terms with the reality that 500 million farmers are below any sensible definition of the Poverty Line. When the media tags some of them as being pampered, they end up showing blatant insensitivity to all but 2% of farmers with landholdings over 25 acres. The highest-earning states, Punjab and Haryana generate a household gross income of Rs.192,000 ($2700)p.a., and an average household debt between Rs.3-9 lacs.

Food Security

A nation’s memory should not be so short, that to cope with famines and food shortages in 1965 Lal Bahadur Shastri had to resort to giving a call to the nation for fasting one day a week to reduce the demand. Even between 2006-08, the central government was wooing farmers in Punjab and Haryana for growing more wheat as the supply was inadequate for meeting the commitments in the Public Distribution System. Our farmers have made us self-sufficient in foodgrains, milk, fruits and vegetables, and substantially reducing imports of edible oils and pulses.

Therefore, what should a $2.7 trillion economy be willing to pay for its food security?

The OECD (Organisation for Economic Co-operation and Development) conducted a study in 2018 quantifying the support major nations provide to their respective agricultural sectors. Globally the annual aid to agriculture is approximately $ 700 billion, without which agriculture has proven unviable on a standalone basis. China tops the list with $190 billion, The European Union with $120 billion, and the US with $50 billion. Whilst India provides its farmers with a direct subsidy of $30 billion (fertilizer, power, irrigation water) , PM Modi introduced a Rs.6,000 direct benefit transfer to all farmer households ($8 billion) totalling $38 billion. However, the study shows we are penalizing our farmers $77 billion by paying them below international prices in many crops. There isn’t a single developed country that does this.

The reality on the ground is that policies of successive Governments have resulted in the Indian farmer subsidizing the Indian trader (no evidence that benefits go to consumer) and the farm sector being deprived of fair treatment. The contrast is glaring when we compare China and India with populations of 150 and 140 crores, China subsidises $190 billion, and India penalises $ 38 billion every year.

50 crore able-bodied resources-who wants them?

If Indian farming were to adopt Israeli/Dutch farming practices, 90% of the 60 crore (600 million) farmers would be rendered surplus. Does any government or economist have the faintest idea where they would create 50 crore (500 million) jobs? If these people stopped farming, what would the cost of Universal Basic Income to support their very existence resemble? Both the Industry and Services sectors have been shedding manpower due to automation and Artificial Intelligence applications.

Hence, it is crucial to identify and develop livelihood opportunities for this cohort without geographically destabilizing it. It is for this reason that schemes like MNREGA are so successful in rural areas. We can hope for and strive towards achieving social stability only when 50% of our population can see a future for themselves.

The market for Produce:

The Government of India designed a model, Agricultural Produce Market Committee (APMC) Act in 2003 to bring reforms in the agricultural markets, and these markets are regulated under the APMC Act legislated by State Governments. There are about 2500 principal regulated markets based on geography (the APMCs) and 5000 sub-market yards managed by the respective APMCs in India. Each state APMC selects a group of Commission Agents that enforce the following- market-making, cleaning, standardizing, packing the produce, as well as getting auctions conducted in the presence of farmers who assent to the bid offered to conclude the transaction. For this, they charge a fee on the value of the sale.

These 7,000 Mandis are woefully inadequate to support the sale of the produce. Conservatively, we need at least 42,000 Markets &Yards on the principle of buying point at 5 Km distances from major growing clusters. State governments other than Punjab and Haryana have failed their farmers by doing minimal work in agriculture markets. Farmers consequently, have no pricing power and left to the mercy of traders/aggregators.

Successive Central and State governments have time and time again ignored investment in this sector. From the years 2000 to 2020, the total investment in Agriculture has been $20 billion or Rs. 7,500 crores per year. It is embarrassing to note that a $300 billion sector gets a capital expenditure of $ 1 billion a year and much lip service is paid to the Kisan in every budget since independence.

The total Credit given by banks and institutions to the agriculture sector is roughly Rs. 12 lac crores, of which 55% is too small a number to be given to marginal farmers. The gross NPAs in agriculture are about 1 lac crores, much lower than the Corporate sector which have habitually provided write-offs funded by the Indian taxpayer. The above lending is inadequate, hence many farmers remain indebted to Adhatiyas (commission agents in mandis) estimated at nearly 35% of bank credit.

To give PM Modi his due, the lending to the agricultural sector has doubled from Rs.6 lac crores to Rs. 12 lac crores during his 6 years. His thrust in this direction is visible (included in this is growth in FCI debt by nearly Rs.2 lac crores which is strictly not agriculture credit but food security credit).

India being a low per-capita income country can also justify why only 10% of the produce lands up getting processed and not sold in its primary state. The value addition products are milk and sugarcane. Although, the bulk of the milk is pasteurized, packaged and sold. These demographics are changing slowly, but demand growth of ready-to-eat food is slow due to low per capita income of 95% of the population.

MS Swaminathan Commission and MSP

The Swaminathan Commission was created for finding solutions to the problems faced by farmers. The commission submitted five reports between December 2004 and October 2006.The contentious recommendation related to the calculation of fair pricing of the produce.

To give farmers a minimum support price at 50 per cent profit above the cost of production classified as C2 by the Commission for Agricultural Costs and Prices (CACP)

• The CACP defines production costs of crops under three categories -- A2, A2+FL (standing for family labour) and C2.
• A2 is the actual paid-out expenses incurred by farmers -- in cash and kind -- on seeds, fertilisers, pesticides, hired labour, fuel, irrigation and other inputs from outside.
• A2+FL includes A2 cost plus an imputed value of unpaid family labour.
• C2 is the most comprehensive definition of the production cost of crops as it also accounts for the rentals or interest loans, owned land and fixed capital assets over and above A2+FL.

Swaminathan Commission recommended this to be the basic cost and prescribed MSP 50 per cent above C2.

The UPA government failed to notify prices as per the above formula. MSP has no meaning if it is not backed by a body that will buy the offered produce at the announced price. PM Modi as CM of Gujarat was the biggest advocate of MSP as per the Swaminathan formula, and it was a major poll plank for him in 2014. As PM, in 2015 his government filed an affidavit in the Supreme Court saying they could not fully implement it. There were major farmer agitations in 2018, and once again PM Modi in 2019 reiterated his promise of implementing the report. Till date, the government only gives a mark-up on variable cost but excludes rent on land and farmers labour. Once again, the results belied expectations.

Governments use MSP as bait to provide direction to farmers on what to grow. This is how Punjab and Haryana farmers were induced to completely shift to growing grains- wheat and paddy. Whilst the farmers have delivered output, unfortunately, they did their job too well. The government only buys 40% of India’s paddy and wheat production at MSP leaving the rest of the farmers out to dry, having to sell at 30/40% discounts. The ground reality also is that the Food Corporation of India through whom the Central government buys wheat and paddy at MSP, was holding nearly 100 million tons of Grain as Food Security reserve, and the FCI’s debt would hit Rs. 3.5 lac crores. India is now surplus in grain.

These reserves came in good use as 80 crore (800 million) people could be issued 10Kg per capita every month during the COVID 19 crisis i.e. 8 million tons per month. Possibly the FCI is out of cash, and till the government provides adequate budgetary support further buying may be stymied.

Only 6% of the total production in 22 crops that have a government declared Minimum Support Price is actually bought at that price. 94% has historically been sold to traders in a free market mechanism. Hence it is pertinent to ask, if the private sector has invested in developing the agricultural value chain, or just exploited the small farmers who have no staying power. A classic case is of Bihar where Nitish Kumar abolished APMC in 2007. The farmer in Bihar sells at a 35% discount to the farmer in UP. This act in one stroke killed agriculture in Bihar and forced the creation of “migrant labour”. Ironically, hardy Bihari farmers with larger landholdings in Bihar work as farm labour on smaller holdings in Punjab and Haryana.

The water table levels in Punjab, Haryana, and Western Uttar Pradesh have dropped alarmingly due to growing grains especially paddy which is very water-intensive. Crop diversification in these states is necessary to preserve agriculture for the long term. However, for three decades farmers have moved away from other crops to wheat, paddy, cotton as the Central government incentivized them to become the grain basket of the country. State governments worked hard to create a working mandi (marketplace) system with 50% of the country’s mandis in these two states alone. In both grain crops, the farmer has an assured buyer in the form of the government.

The government of India needs to have the courage to tell the farmers that it erred in its forecasts and farmers in low water table states need to shift to other crops. They could have offered compensation for a defined period for farmers to switch to fruits, vegetables and pulses. This is the least gratitude to be shown for providing us with food security. The farmers know this reality of a disappearing market and hence the heightened fears and tensions as all are upto their ears in debt. It is better to address the real problem of impracticability of Price based support openly and provide succour by a Direct Benefit Transfer.  The Prime Minister can redeem himself in the eyes of the farmers by discussing the unthinkable and formulating such a financial solution.

Remarkably the Agricultural sector is the best performer during COVID times and has saved the economy the blushes by absorbing the 80 million migrant labour that returned to their villages preventing a major law and order challenge. Credit also goes to the Central and State Governments that procured a record 39 million tons of Rabi crop and did not let the standing crop go waste. This good work was done by end of May 2020. To be noted is that 67 million tons were absorbed by private buyers. Since APMC regulations were largely suspended due to COVID, and the market mechanism moved smoothly, it perhaps emboldened the Government to hammer the 3 laws through Parliament in a hurry.

60 crore farmers and no representatives in Parliament!

One would presume that 45% population in the country would have a very powerful say in national politics. Yet nowhere does one see a political leader of significant standing who is an agriculturist. We had Chaudhary Charan Singh, Devi Lal, Mulayam Singh Yadav and Prakash Singh Badal, but no younger leaders have emerged. Like India’s middle class, farmers are a generic class which gets split by caste and religion, their challenges for each crop are different, and hence get exploited by political parties whose vested interest is in keeping farmers away from aspirations. Winds of change are visible in the current agitation. After the 1988 agitation of Mahendra Singh Tikait which shook the Rajiv Gandhi brute majority government, 500 farmer associations have come together in opposition to the three farm bills. They have refused to let any political party share the podium. The movement is gathering steam and the Modi government is facing its biggest challenge in the last 6 years.

The Challenge needs a response

In summation, grain and sugar in India is surplus, the water table in Punjab, Haryana, Maharashtra and UP is dropping rapidly. Policymakers want farmers to reduce growing wheat paddy and sugarcane, but do not have the courage to start a debate on this. The government is running out of money to buy and hold beyond 60-100 million tons of Reserve Food Stocks (depends on the time of the year). Capital Expenditure in cold storages, food processing is not happening in significant volumes and nearly 30% of fruits and vegetables grown to perish. The poverty of farmers - over 3 lac suicides in the last decade due to shame at not meeting loan commitments, with annual income sometimes as low as Rs. 30,000 stares us in the face. Yes, the nation’s challenge is defined and urgent actions have to be taken.

However, since they impact such large numbers, it is mission-critical that all stakeholders be engaged. Policy measures that emerge must meet the test of fairness especially to a class of people that have been used for getting their votes, compulsorily acquiring their lands (sometimes for dubious project plans) and steadily pushed to a life of penury. 

During the last six years, PM Modi has taken more constructive/structural actions to alleviate the farmers cause than at any other time since Independence. However, he had made a lofty commitment to double farmer household incomes by 2022 and given his track record for relentlessly pursuing the last mile activity, perhaps the pressure of time running out is telling on him too. Farmers cut across religion, caste and gender. 50% of the population is too large for even a magnetic PM to alienate. The irony is that 70 years of collective angst of being ignored, exploited and cheated is bursting against a man who has tried to do good.

The Real Battle-ground

India’s non-milk agricultural sector is approximately $300 billion per annum at farm-gate prices. It is small, distributed, governed by State laws, coming out of small landholdings, and is manpower intensive. No corporate wants to get into a space where so many non-business related headaches have to be faced. However, the opportunity becomes interesting to them ex farm-gate to the final consumer. The product has to be cleaned, segregated, packaged, distributed and retailed, or processed/preserved, stored and distributed and retailed. Suddenly this becomes a $500-1000 billion market at the consumer level. There are multiple conflicts to be won:

• Transaction costs through the APMC system can go upto 8.5% in grains and 10-12% in fruits and vegetables. The appointed commission agents get between 2.5% to6% commissions based on the commodity. It’s a cosy club in each state that cleans up between Rs.15-20,000crores ($2-2.5 billion) annually and is aligned to the regional political parties or the Congress.

Hence the need for a parallel new market which will create disintermediation, and also possibly eliminate the cash-flow of the opposition party supporters over some time.

• Current laws on stockpiling other than by farmers prevented storage and distribution over long periods. The new bill makes changes in the Essential Commodities Act, with Government only intervening if retail prices were to rise more than 50-100?cording to produce a classification. This should be alarming the middle class, as stockpiling without limits leads to higher retail prices.
• Wastage of 25-30% in fruits and vegetables due to limited longevity post plucking, and storage/transportation losses besides unsold retail inventory. Appropriate investments in Transportation, Warehousing and Primary Processing can radically reduce this.
• Possible transactional portals like ENAM which would assist in online aggregation with a little tweaking.
• No strong deep-pocket players with national reach. Currently, this ex farm-gate opportunity has only small entrepreneurs/traders/ politicians who dominate at local/regional levels. There are a few food processing companies but it’s been slow progress. 
• With small and marginal farmers having no financial standing, contract farming can potentially succeed if aggregation does not get caught in multiple litigations and hence legal amendments to have them arbitrated at SDM or DC levels.

Corporates entering the sector would look at acquiring 50-60 % of revenues over a 10-15 year period i.e. $100 billion-plus of purchases at farm-gate prices and at least $ 300 billion-plus at retail prices. They will need locking-in of produce ex farm-gate to focus on front-end business. The farmers if they organize themselves well can assure themselves better and transparent pricing. The Central government has blundered in not communicating this to farmers. It could play a key role in working with Farmer Associations on designing contracts that are not one-sided. However, the track record of the state governments in enforcing contracts is very poor. Take the case of Sugarcane. Mills are supposed to pay for these wares in a defined period, yet we find that often arrears run upto two years, and then political parties do farmers a poll plank favour to get them monies due to them. Trust is the key in these challenging times that is lacking.

This discussion begets the question as to why the Government was in a hurry to bring in the Farm laws without getting stakeholder consent, without referring them to a standing committee in Parliament, or rushing it through a voice vote in the Rajya Sabha. 

Multiple rounds of discussion with Farmer bodies and the Government’s openness to make amendments indicates a recognition that clauses were weakly drafted, or worse that nuances of all issues were not fully thought through: The Government now faces a Hobson’s choice on multiple issues:

The NDA has only one principal vote catcher - PM Narendra Modi. Brand Modi is strong, credible, built on the premise of swift and decisive decision making with great emphasis on last-mile delivery. The personal integrity and hard work of the PM have not been questioned, and he has positioned himself as a robust nationalist. Attacks by Congress on “suit-boot ki sarkar” and Rafale were short-lived because the challenger was not credible himself.

Brand Modi now face formidable odds. They are faced with thousands of 70 years plus farmers protesting peacefully, braving the winter by sleeping in the open, speaking politely without rancour, refusing to let their movement become political or sidetracked. The bulk of India’s armed forces, police and para-military are farmers’ children. They are all watching their parents and grandparents participating in this Satyagraha. The longer this agitation lasts and becomes a national rallying point for all who oppose Modi, the PM’s image loses badly. The government’s media machinery seems confused, attacking the farmers on air with oft repeated nametags, but filing a different reply in the Supreme Court. Either Solicitor General Tushar Mehta is confused or a cohort of cabinet ministers.

A few days ago the call by farmer associations to boycott all products of Ambani and Adani (perceived Modi backers) has provided the missing credibility to the accusation that Rahul Gandhi could not achieve in his battle of words. Farmers have given a call to “gherao” BJP leaders, and this must be making BJP Members of Parliament from rural constituencies incredibly nervous. They cannot risk an escalation of this call, after all, it is over 40% of the country’s population we are talking about. It’s now becoming Brand Modi vs Brand Farmers by default.

The good news is that 20 days and counting, the PM has not spoken so far. He has kept the door open for a final roll of the dice. Government supporters fear that withdrawing the 3 bills would end the PM’s ability to push through other needed reforms. However, the PM is a great communicator, and in national interest, a solution which is a win-win is needed both for the sake of justice and the country’s image in the world.

The eyes of Global media are on this remarkable protest. Western and Chinese media would love to tear into PM Modi for vested reasons. The attempts by the BJP spin doctors, and its loyal media channels to brand these farmers as “separatists” have bombed badly. The government also faces a data crunch on how deep-rooted the farmers’ resentment is to the 3 Bills nationally. Time is not on the Government’s side to figure out whether small and marginal farmers in the poorer states would support contract farming on a large scale. The farmer bodies have dug in their heels and are prepared for the long siege of the Capital. With trains not running, farmers from all over the country are not able to reach New Delhi, so the heavy lifting is being done by the neighbouring states. The stability of the NDA government in Haryana is threatened by its coalition partner JJP(a farmers party) under severe pressure from the electorate to withdraw support. 

The government needs to understand the psyche behind why people are still into farming despite it being uneconomic. The simple explanation is the attachment to their land, and that is their real identity. A perceived threat to their land titles by replacing traders and market makers by a new set of players who have both money and political muscle makes them very agitated. All they want to see is a fair market for their crops. They are entrepreneurs - the rest they can do. No government till now offers them that.

Media reports suggest that the BJP plans to launch a nationwide farmer connect the program to explain the new laws. Consultation with the stakeholder is sought to be done post-event. It looks like the start of a long winter for the residents of the National Capital Region. This agitation seems to have vaccinated India’s sleeping opposition parties out of hibernation. We do see some green-shoots in the form of the Central government clearing exports of 6 Million tons of sugar, and trying to make India the food security provider to the UAE. Nearly 20 farmers have died so far braving the weather, if body-bags starts to mount, emotions will start to run high. Waiting out the agitation is not an option .

Despite tall claims made by the UPA and the NDA dispensations since 2012, a gradual transition to direct cash or benefit transfer of subsidy to the farmers has not been done

The additional provision of Rs 65,000 crore towards fertiliser subsidy (over and above the Rs 71,000 crore allocated in the Budget for 2020-21), that was announced by the Finance Minister under “Stimulus- III” on November 12, will help in clearing all pending dues to the industry. This has led the latter to believe that this is a precursor to a gradual transition to direct cash or benefit transfer (DBT) of subsidy to the farmers. This is illusory, as despite tall claims made by the UPA and the NDA dispensations since 2012, this has not been done. The dominant stumbling blocks are a threat to the viability of high cost units in the public sector, including revival projects viz Sindri, Gorakhpur, Barauni and so on. Plus there is the risk of inviting the farmers’ wrath if subsidy does not reach them in time. Bureaucratic red tape is a third major factor. Till these are addressed, DBT to farmers won’t see the light of the day.            

In the Budget for 2012-13, the then UPA Government had announced tracking the movement of fertilisers from retailers to farmers, and linking part of the subsidy payment to manufacturers for sale  to farmers by retailers. In the mid-year economic analysis of 2012-13, the Finance Ministry came out with a blueprint on modalities for implementing the Budget announcement. Pilot projects in 10 districts spread over nine States were to be launched, which were to be followed by DBT in these districts from April 1, 2013. Concurrently, the Government planned to track fertilisers movement in the whole country. A pan-India launch was contemplated from April 2014.

Even as the Department of Fertilisers developed the technology platform called e-Fertiliser Monitoring System (e-FMS) to execute the blue-print, the DBT remained on paper.  Meanwhile, the NDA Government under Narendra Modi recognised that there was rampant misuse of subsidy. According to the Economic Survey 2015-16, as much as 24 per cent of the subsidy was spent on inefficient producers, 41 per cent was diverted to non-agricultural uses, including smuggling to neighbouring countries, and 24 per cent was consumed by larger, presumably richer farmers. That left a tiny 11 per cent for small and marginal farmers, who alone, according to Modi, should have been the sole beneficiaries of the subsidy. The survey advocated DBT using the Jan Dhan-Aadhaar-Mobile (JAM) platform. In the Budget for 2016-17, the then Finance Minister, Arun Jaitley, made an announcement to this effect followed by the launch of pilot projects for linking subsidy payments to producers with the sale of fertilisers to farmers by retailers in 18 districts spread over 12 States. In March 2018, the scheme was launched across the country.

Under it, the Government has made disbursal of 100 per cent of the subsidy to producers conditional upon actual sales to farmers and these getting registered on point-of-sale (PoS) machines at the dealer’s shop (prior to this, they were getting 95 per cent of subsidy on receipt of material at a district’s railhead point or approved godown and the balance five per cent on confirmation of sales to farmers by States). But this is not DBT as subsidy continues to be routed through manufacturers. Now, just because the Government has cleared all subsidy dues to manufacturers, it gives no clue that this will happen soon. In fact, there are major roadblocks on the way — some explicit and others not so. To understand these, let us look at how the extant system works. The Centre controls the Maximum Retail Price (MRP) of urea at a low level, unrelated to the cost of production and distribution, which is  higher. It reimburses the manufacturers for the shortfall as subsidy on a “unit-specific” basis under the New Pricing Scheme (NPS). The current MRP of urea is ridiculously low at Rs 5,360 per tonne even as the cost can vary from about Rs 15,000 per tonne to Rs 25,000 per tonne. Even as all units (31) sell urea at the same price, each one of them gets paid on the basis of its own production cost. Thus, an efficient unit producing at, say Rs 15,000 per tonne, gets a subsidy of Rs 9,640 per tonne whereas another producing  at Rs 25,000 per tonne, gets a subsidy of Rs 19,640 per tonne.

In the case of P and K fertilisers, the Government gives “uniform” subsidy on per nutrient basis to all manufacturers under the Nutrient-Based Subsidy (NBS) Scheme. For arriving at the MRP, they are expected to deduct the subsidy amount from the cost. For instance, if a unit produces DAP (dia-ammonium phosphate) at a cost of say Rs 34,000 per tonne and subsidy is Rs 10,000 per tonne, then it will have to fix the MRP at Rs 24,000 per tonne.          

Now, if instead of routing through the manufacturers, the subsidy is to be given directly to farmers, the transition in case of P and K fertilisers may not face much of a hurdle. The subsidy of Rs 10,000 per tonne or Rs 500 per bag (50 kg) of DAP can be credited to a farmers’ account even as the manufacturer will sell at the market- based price, say Rs 34,000 per tonne or Rs 1,700 per bag, this being the cost of the most efficient producer (this could also be an average of all units depending on how market dynamics evolve). However, the farmer will have to spend Rs 500 per bag extra at the time of purchase, though he will get back this amount from the Government as subsidy later.      

In the urea segment, however, the transition will be tough for manufacturers as well as farmers. For producers, since each one of them will have to sell at the market-based price, all those whose production cost is higher than that of the most efficient producer or the industry average, will either have to perform or wind up. As for the farmer, he will have to spend, at the time of purchase, at least thrice (based on the market price of Rs 15,000 per tonne or Rs 750 per bag) of what he is spending now.      

The Government has fears on both counts. On the production front, there are several public sector plants, which fall in the high cost zone and hence risk being chopped under the DBT. Even the revival projects, like Sindri, Gorakhpur and Barauni, on completion (2021) will have a production cost of over Rs 30,000 per tonne. Hence it won’t be viable under the new regime. As for farmers, it risks inviting their wrath if subsidy money does not reach them in time, which is inevitable if the budgetary allocation is inadequate.

There are other roadblocks which are not so explicit. Under the present system of urea being available at a throwaway price of Rs 5,360 per tonne, a mere one-fourth of the cost, dubious operators make a quick buck by diverting it to chemical industries or smuggling it to neighbouring countries. This won’t be possible without the tacit consent of those in the hot seat. Further, urea imports are canalised through State agencies like the Minerals and Metals Trading Corporation (MMTC), State Trading Corporation (STC) and there is a lot to gain for decision-makers. Clearly, there are vested interests in continuing with the status quo.   

Unless the above roadblocks are cleared, the transition to DBT will be next to impossible. But this is doable provided Modi sheds his plan of linking development of eastern India with the revival of Sindri, Gorakhpur, Barauni (alternatively, their production cost needs to be cut drastically); pledges to fully fund subsidy requirement (if it can be done for 2020-21, why not every year then); ruthlessly applies his dictum of “naa khaoonga, naa khane doonga (neither will I take bribe nor will I let anyone else take it)”; and does away with bureaucratic red tape by removing all controls, including on urea import.   The subsidy may be computed on a per hectare basis and given annually as mooted by the Commission for Agriculture Costs and Prices (CACP). In its Rabi report for the 2021-22 marketing year, it has proposed a subsidy of Rs 5,000 per year to be given in two tranches of Rs 2,500 each in the Kharif and Rabi seasons. This should be given only to the small and marginal farmers, i.e. those with land holdings of less than two hectares. Further, a cultivator must not be denied subsidy merely because s/he does not own the land tilled by her/him.   

The Government should garner data on all 140 million farm households and put it on a web portal. This is an absolute must to ensure that no one is left out. At present, there is a void as even under PM Kisan, just about 80 million farmers are receiving the eligible amount of Rs 6,000. Under a business as usual scenario, leaving out 60 million from subsidy payments could be catastrophic.

(The writer is a New Delhi-based policy analyst)

While the private sector favours market orientation for procurement of commodities, the public sector supports inclusivity for farmers in meeting their livelihood needs

The passage of the Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services (Special Provisions and Punjab Amendment) Bill, 2020 by the Punjab Assembly served a body blow to the Central Government’s three farm Acts that were passed in September. The Centre’s Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act allows growers to sell their produce outside the markets notified under the State Agricultural Produce Market Committee (APMC) Act. It attempts to develop “one nation, one market” besides bringing in a framework for both, the agriculturalists and the buyers, for contract farming across States and imposing stock limits on farm commodities only in extreme situations in retail prices. Let us look at how private procurement and State purchase may co-exist in Punjab and the implications if other States pass similar Ordinances.

To understand these Ordinances, we need to grasp the basic purpose of public procurement of foodgrain. The Central Government, through the Food Corporation of India (FCI) and other State agencies, procures foodgrain and other essential commodities from domestic producers at the Minimum Support Price (MSP). The objective is to provide price support to farmers, distribute subsidised foodgrain to the poor through the Targetted Public Distribution System (TPDS) and maintain buffer stocks to ensure price stability and food security. The Government’s procurement system also encourages farmers to increase production due to assured prices. The foodgrain procured through this system gets distributed through fair price shops across the country.

Although there are deficiencies and leakages in the PDS, it served as a basic support of nutrition to around 50 per cent rural and 30 per cent urban households in 2011-12, according to the latest National Sample Survey data. Moreover, the dependence on PDS rose considerably between 2004-05 and 2011-12 in both rural and urban India. Under the TPDS, people Below the Poverty Line (BPL) are provided foodgrain at a highly subsidised rate under the Antyodaya Anna Yojana (AAY). In fact, the PDS system provided great succour to the needy during the COVID-19 pandemic-induced lockdown.

In this sense, the State procurement and PDS system serve the purpose of doing public good. As farmers get better prices and poor consumers get food at lower prices, it serves the dual social objective of food security and a hunger-free nation. The latter benefits one and all, as a country that risks running out of food stock may face civil unrest that emanates out of the desperation of the poor. In contrast, private procurement is part of a system that enables farmers to produce goods which are both excludable and rivals. Food stocks procured through private procurement serve consumers who can afford market prices and exclude others. They are produced in a limited amount, hence rivals in consumption. These two systems have two different objectives and serve different purposes but both are equally important. The new Ordinances passed in the Punjab Assembly pits two systems  against each other.

The Ordinance disallows sale/purchase of wheat/paddy unless the price paid is equal to or greater than the MSP. This appears to be serving the social welfare objective of public goods production. However, it is more apparent than real. This is primarily because the procurement criteria of Government and private agents are very different as they serve two different objectives.

The criteria set by the Government are designed to exclude as few as possible. The grains are screened based on the moisture content, proportion of organic and inorganic foreign materials and test weight at a very basic level. The foodgrains that pass these criteria are accepted. However, all accepted foodgrains are offered the same price, the MSP.

On the other hand, private procurement is more fine-graded and priced differently. Hence a product, which marginally passes the Government’s procurement system, may fetch a lower price in the private one or be excluded from a price equivalent or higher than the MSP due to the grading system being applied. While the Government’s criteria of procurement may be standardised across India, private gradation is adjusted according to several factors, such as the cost of extraction of the end substance, the milling properties and the impact on the end product for the consumer. Hence, a penal clause by the Punjab Government’s Ordinance of imprisonment of no less than three years and a fine to the private procurement agent or company could be construed as being unjust.

Fine grading of agricultural produce is very essential from the viewpoint of manufacture of different food products. Due to the diversification of the consumers’ food palate, the focus is not only the cost but also the quality of the produce. This has led to greater attention by private procurement agents on factors like varieties, the agro-climatic zones and seasonal variations of the commodities during procurement. This has meant a finer grading mechanism as well to get both quality and cost optimisation. For example, in the case of wheat, a critical factor of concern is the density of the grain. The denser the grain, the more nutrients it contains and hence more will be the extraction during the milling process on a per weight basis. An important quality factor is the gluten content, a protein that impacts the baking properties of the flour and is used to determine the type of products that can be made. Hence, organisations create specifications in the procurement of commodities dependent upon the consumer segments and their needs.

The emergence of food retail has intensified the choices for the consumer. More choice and consumer awareness have resulted in shorter product life cycles, increased innovation and competition and demand for newer offerings. The repeal of the APMC Act by several States, creation of Farmer Producer Organisations (FPOs) and increased participation by the food retail and processing sector have led to the shortening of agricultural value chains. Procurement determines the profitability as it controls 60 to 75 per cent of the total costs in the system. Thus, procurement of raw agricultural commodities has become a strategic function from a back-office role.

It is imperative to understand that private agents would price their procurement of commodities based on the profitability and price behaviour of end consumers. It, therefore, bears out that they would pay less for a quality where an additional cost would need to be incurred for processing the grain to bring it in line with the consumer’s demand. This reduced price may result in the procurement price becoming lower than the Government’s prescribed MSP.

Thus, while the private sector favours market orientation of procurement of commodities, the public sector supports inclusivity for farmers in meeting their livelihood needs. The two objectives clash with each other. If corporates are punished for procuring at a price lower than the MSP, then they would also apply pressure tactics to go soft on implementation or again change the law, which may, in turn, affect the objective of public goods provision. This would lead to instability in the whole institutional set-up of the agri-business.

In the Punjab Assembly Ordinance, the farmers are given the discretion to approach the civil court or other remedies under existing laws, but all these involve long and expensive litigation and cannot be taken up by individual farmers. This coupling of both the public and private sector objectives through the conduit of one overarching Ordinance will likely be against the interest of farmers, private procurement agents and consumers of both foodgrain and allied products.

(De is Associate Professor and Vishwanath is Assistant Professor, Institute of Rural Management, Anand. Views expressed here are personal)

Through a fourth Ordinance, India can set a precedent in the world where nature and the agrarian economy grow together 

India has taken a small step for farmers but a big leap for free market through the three farm laws. Wooing the US “agri-dollar”, we have liberalised by opening the farm-gate for business, yet shackled farmers and their families under archaic land ceiling laws. Can an agrarian free market be pillared on limited land, plagued by soil degradation and shrinking water resources?

In a socialist mood, India implemented land ceiling laws to deracinate the zamindars and the landed elite. An entire class of people was destroyed overnight and from its ashes grew a new rural elite. As land ceiling laws differed from State to State, we saw a diversity of combinations and also unique systems of parity between irrigated multiple crop land owners versus grove land or un-irrigated land owners. For example, land holdings in Barmer, Rajasthan and Patna are very different in size. Policy-makers relied on production-based value to set these ceiling limits. For most States, the ceiling ratio of dry land to irrigated land is 3:1. Apart from the individual limits, there are family ceiling limits to curtail land ownership collectively. In 2020, we still follow the same system.

Of course, there have been minor tweaks in each State, but overall these laws hamper the growth of agriculture in rural India and confine farm families in a negative ownership trap. As with each generation, the average land holding of individuals reduces. Adding to their woes, the farm incomes have dropped significantly, too, due to higher inputs costs and low sale price, making agriculture less viable each year. The only alternative left for a progressive farmer is either to get out of farming or wait for the next generation, as contract farming has not been successful for most of his kind.

The result is that the Indian farm size is very small (86 per cent own under two hectares), and is decreasing further as the average size of operational holding has declined to 1.08 hectares in 2015-16 as compared to 1.15 hectares in 2010-11 as per the Agricultural Census 2015-16. The Economic Survey of India understood this problem and twice recommended the Government to increase land ceiling limits. But little has happened. Recently, the Karnataka Government tried to increase the land ceiling limits but amid protests rescinded this step.

Nevertheless, even if the land ceiling stays, can there be a consensus between States and farmers for the benefit of the latter, soil and water conservation and the free market? India is already producing enough grains, vegetables and so on but losing more critical resources — water and top soil.

Due to the push for industrialising agriculture, from Punjab to Tamil Nadu, we have witnessed soil degradation leading to desertification, salination and top soil erosion. With 30 per cent of India’s land degraded, the Narendra Modi Government stressed on soil health cards. The deleterious effects paddy has had on water is alarming. Noam Chomsky recently predicted that India and Pakistan may be on the brink of war over water resources. We are already witnessing water wars in southern States and the “Laturisation” (Latur in Maharashtra was the epicentre of a water crisis caused by bad agricultural practices) will only increase unless we stop exploitative practices. Soon, our eco-system and free market will collapse. So, States must study the soil conservation programme of the US, which was implemented to reverse soil degradation in the mid-west or the Dust Bowl. The Government paid farmers subsidies for soil conservation or allowing the land to be fallow.

Under extreme fiscal pressure, one doesn’t expect the Modi Government to give more subsidies but to declare soil degradation and water depletion as the nation’s top nemesis. But the question is how can the Government implement a soil conservation programme and also keep farmers happy?

The answer: Incentivise farmers for agro-ecological plantations and agro-forestry by relaxing land ceiling limits for them. Most of the State Acts already have a separate provision for grove land or orchards. By adding a sub-clause, Governments can ensure that plantations increase rapidly, without the use of chemicals and fertilisers. Each State can choose native varieties and non-water-guzzling trees for plantation or agro-forestry.

This policy change will have many benefits. Both soil and water will be conserved and farmers’ incomes will be boosted while adding new products for the free market. The return of organic matter and biodiversity will guarantee farmland productivity for the future too. Organic fruits get the top dollar. The Agricultural and Processed Food Products Export Development Authority (APEDA) predicts that by 2030, India will be exporting $50 billion worth of organic produce, but the cherry would be additional carbon credits that farmers can earn. If 10 per cent of arable land converts to organic grove land or mixed orchards, we will meet our climate targets sooner and also improve the air and water of our villages and cities. Each hectare of organic land can store 80,000 litres of water. We need a Central policy to bolster this drive.

By making an exception for the agro-ecological plantations, legislators can boost the organic market and also help heal the soil. Additionally, farmers may take over wasteland or degraded lands, beyond the ceiling limits, and restore them into orchards or groves. These zones or farms will be carbon sinks and produce more nutrition per acre, and as the farmers will care for these lands, the Government’s financial burden to restore wastelands will also lessen.

As per the policy in the US, bigger farms are better for business. Farmers of Mexico, Brazil and Argentina, all thought they could resist, but have failed. The fallout of the World Trade Organisation and the recent farm-gate liberalisation will be “bigger farms and lesser farmers” in India, too. But we, as a nation, still have a choice to steer the bigger farms towards agro-ecology or allow industrial farms to take over rural India. If we swerve towards healing the Earth, India may set a precedent in the world where nature and the agrarian economy grow together. The Modi Government needs to bring out a fourth Ordinance to free the land for healing the Earth.

(The writer is Director for policy and outreach, National Seed Association of India)