How to increase farmer incomes

The debate on doubling farm incomes, in light of recent SAS statistics

 How to increase farmer incomes

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• The story: Indian agriculture's distress has been a real story: For the past ten years, a host of factors has made income growth for farmers very tough. First came two successive droughts in 2014-15 and 2015-16, when the PM set out an ambitious target to double farmers’ incomes by 2022-23. Then came the shock of demonetisation, and later the pandemic.
• Real not nominal: Was the PM talking of nominal incomes, or real? The Ashok Dalwai Committee, set up to chalk out a strategy to achieve this, made it clear that the target of doubling farmers’ incomes was in real terms, with the goal was to be achieved over seven years with the base year of 2015-16.

1. It said that a growth rate of 10.4 per cent per annum would be required to double farmers’ real income by 2022-23.
2. An estimate of farmers’ income for 2015-16 by NABARD in 2016-17 showed the average monthly income of farmers for 2015-16 was Rs 8,931. All indicators are that incomes are not doubled even as January 2022 looms large.

• SAS 2018-19: A strong indicator is the released data for 2018-19, based on the Situation Assessment Survey (SAS) of agricultural households conducted by the National Statistical Office (NSO).

1. An average agricultural household earned a monthly income of Rs 10,218 in 2018-19 (July-June) in nominal terms. A similar SAS for 2012-13, when the nominal income was Rs 6,426, shows that in nominal terms, the compound annual growth rate (CAGR) turns out to be 8 per cent between 2012-13 to 2018-19.
2. The growth rate of real incomes depends on the choice of deflator. Using the CPI-AL (consumer price index for agricultural labour), the CAGR turns out to be just 3 per cent. Using the WPI (wholesale price index of all commodities), the CAGR in real incomes turns out to be 6.1 per cent. This vast difference is just due to the choice of deflator.
3. There is another SAS by NSO for 2002-03. The definition of agricultural household in that SAS was based on some area operated during the last year of the survey — replaced by minimum income earned from agriculture in the SAS of 2012-13 and 2018-19 — when one compares CAGR in farmers’ real income (deflated by CPI-AL) over 2002-03 to 2018-19, it turns out to be 3.4 per cent (and 5.3 per cent if deflated by WPI). Obviously, in such point-to-point comparisons, the situation in the base year and terminal year influences the growth rates dramatically.

• Focus on a better metric: A better method would have been to look at average annual growth rates (AAGR), if yearly data was available. The AAGR for agri-GDP is available and at an all-India level, between 2002-03 to 2018-19, it turns out to be 3.3 per cent — very close to the real income growth (CAGR) of 3.4 per cent for the same period. At the state level, the variation is much more as state agri-GDP growth is volatile and depends on the monsoon — this is especially true for states that have a much lower level of irrigation. For example, Punjab with almost 99 per cent irrigation cover, will have a much more stable income than say Maharashtra with just 19 per cent irrigation cover. At the state level, it is important to consider both the indicators (growth in agri-GDP as well as farmers’ incomes based on a survey of the specific year) to get a clearer picture of the state of affairs at the farmer level.
• Comparison: What is the policy message that one can derive from comparing these three rounds of SAS – 2002-03, 2012-13 and 2018-19? The figure gives the changing composition of farmers’ real income. What is clear from this comparison is that

1. The share of income from rearing animals (this includes fish) has gone up dramatically from 4.3 per cent in 2002-03 to 15.7 per cent.
2. The share of income from the cultivation of crops has decreased from 45.8 per cent to 37.7 per cent.
3. The share of wages and salaries has gone up from 38.7 per cent to 40.3 per cent.
4. The share of income coming from non-farm business has come down from 11.2 per cent to 6.4 per cent.

• The right solution: The scope for augmenting farmers’ incomes is going to be more and from rearing animals (including fisheries). There is no minimum support price (MSP) for products of animal husbandry or fisheries and no procurement by the government. It is demand-driven, and much of its marketing takes place outside APMC mandis. This is the trend that will get reinforced in the years to come as incomes rise and diets diversify.
• What about MSPs: Perhaps farmers’ income cannot be increased by continuously raising the MSP of grains and government procurement, as the grain stocks with the government are already overflowing and more than double the buffer stocking norms. Perhaps investing more in animal husbandry (including fisheries) and fruits and vegetables, which are more nutritious, is better. Incentivise the private sector to build efficient value chains based on a cluster approach.
• Summary: Given the intense polarisation on this issue, only a broad-based consensus will work in the long term.
• EXAM QUESTIONS: (1) Explain how the MSP system works in India. (2) Why has the government struggled in its mission to double farm incomes? (3) What are the various ways government extends support to farmers of India?

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