Tag Archives: Our Agricultural crisis – A managers viewpoint

Our Agricultural crisis – A managers viewpoint

Our Agricultural crisis: A manager’s viewpoint

Much has been said about the crisis in agriculture. Newspaper and Digital columns have been written, TV anchors and their guests have screamed at each other, politicians have called each other anti farmer, experts (sic) have pontificated endlessly. However much has also been left unsaid. Today I want to bring in a managers viewpoint? Before we start, let me assure you those simplistic solutions like farm loan waivers and raising MSPs are NOT the solution.

So what is so unique about a manager’s viewpoint?

  1. A manager is guided by facts and data. In the words of one of my mentors. I trust my wife. For everything else show me data.
  2. A good manager is not driven by ideology, he is driven by a desire to solve problems
  3. Lastly, a manager, unlike politicians or bureaucrats, uses incentives and persuasion to solve problems, not rules and bans.

So let’s start with the key facts

Agriculture and allied services contribute about 14% to India’s GDP. In simplified terms, if all Indians together earn Rs 100, then all the farmers together earn Rs 14.

The problem is the number of people who have to share this Rs 14. The total number of people dependent on farming is about 60%. So again in simple terms, if India’s population is taken as 100, then 60 of them are dependent on agriculture and are sharing that 14% of Income.

Now our per capita income is Rs 1 lakh. So per capita income of farmers is 1/4th the national, i.e. Rs 25,000 per year. Not surprisingly most farmers also have other sources of income including small retail, construction wages etc. In fact, on an average farming accounts for 60% of farmer’s income.

So key takeaway. Too many people are sharing too little income.

Let’s as a manager, two possible approaches to a solution

  1. Increase the income from agriculture, i.e. grow the numerator.
  2. Decrease number of people dependent on agriculture, i.e. reduce the denominator

Increasing Agricultural Income

At its simplest, agricultural income equals Production Qty X Price. (less expenses)

I) Raising prices:

So the simplest way to increase agricultural income is to raise the price. Please note the clamor for a rise in MSP or minimum support price (Trust politicians to focus on the easy wrong answer for every problem). Unfortunately, raising MSP has many disadvantages

  • It raises the cost of food for Indian poor, i.e food inflation. And since the poor are in many cases daily wagers, it raises wages, including farm wages, creating an inflationary spiral.
  • MSPs only work if a government agency buys substantial quantities of agri produce. So, FCI buys wheat and rice and hence is able to implement an MSP. But for most other products there is no agency, which buys agri produce.
  • A simple demand and supply graph shows that to sustain higher MSP’s agencies like FCI have to buy larger quantities of food grains. And hence when MSP’s are set based on politics rather than economics,  we see overflowing godowns and wastage due to pests, spoilage etc.
  • Lastly, an MSP creates a false demand for products and hence distorts price signals. For example, say there is an oversupply of Rice. Market economics would see a drop in price, which would signal farmers to reduce supply in the next crop. But a high MSP would encourage more rice farming and hence create a greater oversupply next year.

Key takeaway: MSPs for all agri crops is not feasible. Nor can MSPs be raised independent of laws of supply and demand.

II) Increasing productivity:

Obviously increasing productivity is a win-win situation. A farmer can get more income without a rise in price, which will hurt the consumer. And clearly, there are many crops where Indian farms have lower per hectare yield compared to global standards.

The key problems here

  1. Fragmented landholdings: Like almost all productive operations, farming is also subject to economies of scale. Average landholding in India is far too low to generate economies of scale and sufficient income for farmers.
  2. Scientific Irrigation: The easiest way to generate more productivity is to convert single crop land into multi crop land. That requires a fundamental rethink of irrigation: from large multi purpose projects to small sustainable projects, from government operated to farmer operated and maintained through user fees, from flood irrigation to drip irrigation. We also need scientific crop selection suitable for the land. For example, the stupidity of growing sugar cane in water scarce Marathwada needs to stop.
  3. Risk of oversupply and falling prices: A higher productivity in many cases leads to a steep fall in prices. This happens because most agri products (esp perishable ones) tend to be price inelastic. Demand is fairly constant and hence a small change in supply can lead to drastic changes in price. Onions and Tomatoes are prime examples. There are only two broad ways to avoid such price fluctuation: One, is to address the perishable nature of such crops, so create cold storage facilities and connect to international markets using imports and exports to balance local supply fluctuations. The second is financial insurance against price fluctuations, which involves hedging against prices.
  4. GM Crops: While activists have demonized GM crops, let me assure you that scientific evidence on harmful effects of GM crops is Zilch, Zero. Americans and Canadians have been consuming GM food for ages and there has been no connection between GM food and health risks. Please note that the US is a lawsuit happy nation, If there was any evidence, there would have been million dollar lawsuits. In a nation where thousands of farmers commit suicide, preventing a technology that can greatly benefit farmer lives with a minuscule risk is a tragedy.

Decreasing the workforce in farming

All the other options notwithstanding, this is an inevitable option. Farming is not viable at the levels of landholdings and the labor-intensive methods that we use. And this is not an opinion. There is not ONE country in the world, which has a high standard of living and a high percentage of people working in agriculture. Not ONE. All developed nations have between 5 to 15% of the population working in agriculture, and even those farmers are subsidized. The benefits of a transition to farm labor to Industry and urban work are clear and obvious.

  • Greater land holding size for remaining farmers and hence a greater income
  • Greater scope for mechanization, scientific farming, investments in technology and economies of scale
Country Per capita Income % age Population in Agriculture
USA $ 57,436 1.6%
France $ 38, 128 2.8%
South Korea $ 27,539 4.9%
New Zealand $ 39,427 6.5%

Before people accuse me of planning a large scale forced takeover of farmer land, let me assure you that I am talking of voluntary migration, as has happened in every developed nation in history . It must be noted that farmers across India would love to have the option of giving up farming and in many cases that is almost every farmer’s dream for their children.

What do we need to catalyze such a move?

  • Manufacturing: Manufacturing allows for the easiest transition from agriculture to jobs. Of course, despite Make in India program, progress has been slow. Reasons include global environment, ease of doing business, labor laws and infrastructural bottlenecks.
  • Allow those who want to exit farming an easy exit. Allow a simple land leasing model, which allows a farmer who gets a job to lease out his/her land to other farmers: a win-win option that supplements his income as well as makes his neighbor’s farming viable.
  • Remove restrictions on the sale of land and allow bank finance for purchase of agricultural land. This allows for farmers to scale up to a viable farm size while allowing a clean exit to farmers who want out. Today, you need to be certified by government as a farmer to buy farm land. Google search for Amitabh Bachan labelling himself as a farmer to buy land in UP.
  • Above all: education and skill development for next generation of rural youth to get employment rather than be forced into farming out of lack of choice.

In conclusion, we Indians have an oversupply of opinions and judgments and ideologies and a serious shortage of data and logical analysis. Certain mega trends are inevitable and cannot be fought. Second, it’s not for you and me to decide what is good for farmers. They will decide for themselves. We just need to see that they have decent alternatives to choose from.

A movement away from farming and into higher skilled jobs is one such inevitability. It would be accompanied by greater urbanization, which again is a good thing. Urbanization creates conditions for knowledge sharing, trade, and business, scale-based efficiencies in all areas. Rather than fight these trends we need to find a way to manage these transitions. For example, we cannot send back people migrating to cities, but we can definitely help provide a better quality of life for them.