The FY19 agriculture crises, the curious case of food inflation.

The plight of the Indian farmer is not a new story to us, although the last financial year brought forth a paradox which perplexed many. As a result of the agrarian crises at the time, 2018 saw farmers take their outrage to the streets, despite the bumper harvest of 283mn MT1 (3% higher than FY17).

Taking a closer look, the agrarian crises in India comes as no surprise. The sectors share of GDP has remained stagnant since FY07 at ~16%, this despite ~50% of India’s labor force engaging in agricultural activities, a testament to the gross inefficiencies within the sector which has seen little technological innovation post the green revolution.

India has also received deficient rainfall for five consecutive years (2015-18), with 2018 being ~9%2 below normal. Unseasonal rainfall in the recent years has also resulted in crop failure, in February’18 hailstones and unseasonal rainfall damaged in 4.76 lakh hectares12 of farmland in Maharashtra, Uttar Pradesh, Telangana, Punjab and Haryana amongst other states. The irrigation infrastructure in the county is also lacking, as of FY15 of the 141 million hectares3 of net sown area, the net irrigated area accounted for 68 million hectares3 (~50%). The Accelerated Irrigation Benefit Program (AIBP) has also seen slow progress with ~57%4 of the projects stuck in last mile completion. In an attempt to ease the pains of the farmers the government has introduced several subsidies and schemes although these have brought little respite.
Source: Envi Stats India-2018

In FY19 the center allocated 3% (~ ₹700 bn)5 of its budgeted expenditure for fertilizer subsidies. 70% of this went towards the subsidization of Urea (Nitrogen) and 30% was allocated for other fertilizers (Phosphorous and Potassium). The ideal Nitrogen (N), Phosphorous (P), Potassium (K) ratio in the soil is 4:3:1 although the significantly lower cost of Nitrogen has resulted in its over use. In 2013 the NPK ratio in Punjab was 61:19:16, Haryana and Rajasthan saw similar trends with the NPK ratio being 61:19:16 and 50:16:16 respectively. Nitrogen is a key component for plants in the process of photosynthesis, often resulting in plants having larger leaves, although the high nitrogen levels have resulted in plants having shorter, weaker roots, making them susceptible to uprooting. Excess Nitrogen also takes water away from the plant leaving behind salts, resulting in the dehydration of the plant, moreover, the higher nitrate content in the soil also results in groundwater contamination. The lower soil quality has led farmers to become increasingly dependent on these fertilizers, creating a vicious cycle.

FY19 also saw the government increasing MSP for 22 crops, to a minimum of 50% over the cost of production. Although marginally benefiting farmers MSP largely covers cereals and food grains and fails to address the increasing shift towards horticulture crops. Production of horticulture crops grew at 2.6%7 CAGR between FY14-18 versus 1.3%7 CAGR of food grains. As a result, raising MSP does little to increase the farmers income.

The prevailing low food prices reflected in the low inflation rates have worsened the Indian farmers financial condition. One of the possible explanations for these low rates may lie in the government procurement of agricultural produce has also been deficient. As of December’18, of the 149 lakh MT9 of rice produced in West Bengal only 0.45 lakh MT9 was procured by the government (~0.3%), a similar trend can be seen across other states as well. The low capacity of government mandis has resulted in framers having to sell their produce in the open market at prices far below the MSP. This has been an issue raised by several economists, most notably Ashok Gulati who has said in an interview “So, if you have to make the new MSP to work, either you have to buy the produce or you have to make price deficiency payment,”13. Post procurement, FCI warehouses have also seen inefficiencies which have resulted in food grain wastage of 0.6 lakh tonnes14 between FY14-18 with West Bengal and Maharashtra reporting the highest losses.

FY19 also saw a bumper harvest particularly in the case of Kharif crops. Food grain production was 283mn MT1 with Kharif output 2% higher y-o-y (explaining the negative inflation rates seen from October to February). Adding to this, global agricultural production was also higher than normal, resulting in lower exports and higher supply in the domestic market.

It should also be noted that some government schemes have proved beneficial and may explain the higher yields despite lower rainfall. The Micro irrigation initiatives under Pradhan Mantri Krishi Sinchayee Yojana have irrigated 36 lakh hectares10 of farmland between FY16-19 (~88% of its target). Moreover, the success of road and highway projects such as Bharatmala and Pradhan Mantri Gram Sadak Yojana have may have translated into lower post-harvest losses. The pace of rural road construction has doubled from 75km/day11 in FY14 to an 8 year high of 134 km/day11, improving connectivity between farmlands and markets.

Low food inflation may have a calming impact on headline inflation and CPI, although if sustained, tends to have an adverse impact on rural income. This explains the resentment amongst India’s ~14cr framers who inevitably demanded an assured minimum income. This assurance came in the form of PM-KISAN, a direct benefit transfer of ₹6000 annually to every farmer of the country. The success of this scheme is yet to be seen although at ~₹ 16 a day it is unlikely to significantly benefit India’s farmers. Existing schemes and subsidies will need to be reviewed in order to provide a more sustainable solution.

1 Agricultural Statistics Division Directorate of Economics & Statistics Department of Agriculture, Cooperation and Farmers Welfare Third Advance Estimates of Production of Foodgrains for 2018-19
2 Envi Stats India-2018
3 Department of Agriculture, Cooperation & Farmers Welfare 2016-17
4 AIBP Dashboard
5 Union budget FY20
6 India’s flawed fertilizer policy, 1st April 2015, LiveMint.
7 Why are Indian farmers taking to Horticulture, 30th May 2018, Livemint
8 CMIE, NNDB, JM Financial
9 The challenges of procurement at MSP, 10th July 2018, Bloobergquint
10 PMKSY Dashboard

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