India’s farm policy needs to focus on creating robust commodity supply chains

China has been recorded to have doubled its farmers’ income between 1978 and 1984. Drawing inspiration, the government declared in 2016 to double the farmers’ income by 2022. A committee was set up to identify the constraints in doubling farmers’ income and to provide a roadmap. The committee has efficiently concluded its inquiry and submitted its findings in 2018. Come FY24, a year after the target period; it’s time to examine where we are and what needs to be done to push the cart forward.

Doubling farmers’ income needs that the productivity of crops shall improve with enhanced technology adoption, and the prices paid for the crops grown by the farmers should also increase. However, any increase in prices paid to the farmers will reflect on the consumer prices with amplification as the intermediation costs increase proportionately. This would make it challenging to realise higher farm prices, i.e., an annual increase of about 15 percent. Any direct measure to increase price realisation, such as through higher Minimum Support Prices (MSP) levels, would have made managing food inflation and subsidy bills challenging. While the market forces control the prices of most agricultural commodities, the government announced MSP in crops other than paddy and wheat are mere market signallers. Moreover, MSP is purely a cost-based measure with nothing to influence the market forces.

MSP is just a guide

A look at the rise in MSP levels (FY16 to FY22) of select crops reveals that the prices of crops other than ragi have not increased by more than 50 percent. On the other hand, soybean oil prices have more than doubled during the same period indicating that what the consumers pay is not reflected in what the farmers get. At the same time, one may wonder how to connect soy oil, a processed product, with soybean, the raw material. Given that we are comparing price increases of the end product and that of the raw material, one can safely conclude that the price increases in the end products are not being passed on to the farmers. Why?

• Farmers are far from the end markets, and the Indian agricultural marketing value chain is wrought with many non-value-adding but commission-earning intermediaries adding to the marketing costs
• Agricultural commodity markets remain opaque, and there are no credible present or future price signals readily available for the farmers
• India’s large food processing industry would need better connectivity with farmers to deliver them a larger share of consumers’ rupee
• Finally, the price discovery process of markets in India relies on a weak data foundation

Furthermore, MSP being a cost-based price measure, any increase in the same can only result from increased input prices. With most crops not backed with procurement to support prices, MSP is just a guide for the farmers making sowing decisions. The issue of lower price realisation is typically associated with the availability of and access to benchmark commodity price information, the wide prevalence of quality testing and standardisation facilities, the bargaining power of farmers, and increased access to scientific warehousing. Policymaking should focus on these areas to make commodity value chains more efficient and deliver the benefits of most price increases at the last mile (consumer level) to the farmers.

Disconnected price discovery

While sincere measures were taken to dismantle the dilapidated APMC markets, the absence of efficient reach of electronic online platforms - such as eNAM and other private initiatives - keeps price discovery disconnected, benefiting neither the farmers nor the consumers. Bringing back the derivative markets and strengthening them with clean, deep, broad and timely data would reinforce their price discovery process, guiding farmers in their economic decisions. To empower farmers to hold the commodity in anticipation of a better price, it is essential to make available Warehousing and Development Regulatory Authority (WDRA)-registered warehousing facilities at the ground with connectivity to financial institutions.

To facilitate risk management by the lenders, wish that the online market platforms also enable the sale of electronic negotiable warehouse receipts. To adopt scientific storage widely, apart from warehouses, policy measures should also aim to make quality testing and standardisation facilities widely available. More urgently, there is a need to arm the warehouse regulator with more regulatory, supervisory, and penal capabilities to connect WDRA with the world of finance robustly. The growing phenomenon of food processing industries should be connected to the farmers by encouraging procurement at the farm level through online platforms. In short, efficient agricultural commodity value chains powered by online platforms with transparent price discovery mechanisms will empower the government to deliver on the promise of doubling farmers’ income without stirring inflationary forces.

V Shunmugam is Adjunct Faculty at National Institute of Securities Markets. Views are personal, and do not represent the stand of this publication.