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Unharvested Gold: Can The Budget Make Farming Profitable Again?

18/01/2016 12:18 PM IST | Updated 15/07/2016 8:25 AM IST
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In this Tuesday, April 14, 2015 photo an Indian farmer Premchandra shows wheat crop damaged in unseasonal rain at Malaca village, outskirts of Allalhabad, Uttar Pradesh state, India. April is usually a time of celebration for millions of farmers across northern India. The winter wheat crop is ready to be harvested, and there's money to clear past debts and plan future planting.This year, however, unseasonal rain and hailstorms in March destroyed millions of acres of farmland in the region, leaving dozens of distraught farmers to kill themselves. (AP Photo/ Rajesh Kumar Singh)

Did you know that Indian agriculture's net export earnings are higher than those by services and manufacturing? Agriculture's net export earnings were $52.7 billion, versus $48 billion by services, and $10 billion by manufacturing, according to the latest data from the World Trade Organisation.

Few know that agriculture is as productive as financial services, going by its incremental capital output ratio (ICOR). This metric assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production. A sector that has an ICOR of, say, 10 implies that Rs 10 worth of capital investment is necessary to generate Re 1 of extra production. So a lower ratio indicates higher productivity. Agriculture has an ICOR of 2.5 to 3, according to the Prime Minister's Economic Advisory Council.

Few know that agriculture is as productive as financial services, going by its incremental capital output ratio (ICOR).

In short, the agriculture sector enjoys one of the highest productivity and international competitiveness amongst all the sectors of our economy. Instead of handling it as a child with special needs, we have to start treating agriculture like the good business it is.

After the two-year-long onslaught of unfavourable weather and low prices, farmers only want to know if farming will turn profitable in 2016. With several state elections round the corner, this is also the most pressing political question. To give the right answer, the forthcoming Budget has to tread a new path.

Traditionally, a "good" Budget for agriculture is one that is big on government spending. Larger allocations have become a political symbol of the government having its heart in the right place. It is time to discard this mind set.

More often than not, government programmes have proved wasteful as they continue regardless of effectiveness. Unlike a private company, there is no one to pull the trigger if market realities change. Moreover, it is a fallacy that private investors lack the nerve to put capital into a risky sector like agriculture. Over the last five years, private equity and venture capital funds have allocated more than $1 billion towards Indian food and agri businesses. Government spending erects barriers to investment by the private sector.

To make a real difference, the government should stop spending itself, and become an enabler for the inflow of private capital into farming.

The current crisis of profitability is a signal that agriculture is crying out for investment to reduce the cost of farming and raise productivity so that farmers can earn more without worsening food inflation. To make a real difference, the government should stop spending itself, and become an enabler for the inflow of private capital into farming.

Primary focus should be on making it easier for agricultural small and medium enterprises to get finance for investment. Agricultural SMEs include every one engaged in farming and production-related activities, such as input supply, processing, trade, wholesaling, and marketing at all levels.

The growth in lending to agriculture and allied sectors has decelerated from 20% in October 2014 to 11% in October 2015. The Reserve Bank of India has questioned the efficacy of farm loan subsidies. Most of the credit is absorbed by absentee landlords, while marginal farmers continue to depend on money lenders.

On the other hand, lending to farmers by non-bank finance companies against warehouse receipts and collateral finance has increased. Private investment in agri and food hit an all-time high in 2015 with 88 deals, according to website VCCircle. Most recently, SV Agri, a potato supply chain management company backed by Lok Capital and Aspada Investment's SONG fund, a Google and George Soros-financed vehicle, raised Series B funding from Lok.

The Government should encourage private capital in seeds and crop inputs so that farmers can dramatically improve yields. Private investment is not forthcoming because of government meddling in retail prices. Several large corporates are waiting for the fertiliser policy to become market friendly.

Private investment is not forthcoming because of government meddling in retail prices.

If water pricing is introduced, investment will come into micro-irrigation without subsidies. If the government encourages price discovery on regulated, online trading platforms in primary and derivatives markets, the entire food economy will receive the right price signals. If it encourages private weather stations, insurance, crop data collection, extension and marketing, farmers will be better informed.

A recent success story is the government's decision to free up warehousing and encourage warehouse receipts, which brought more than Rs 1000 crore in FDI and private equity into storage, collateral finance, post-harvest marketing and allied activities.

If land lease and contract farming laws are modernised, new operators will enter the sector. Social schemes such as MNREGA raised the farm wage bill without raising labour productivity. They should be re-designed to stop disrupting the agricultural labour market.

The government should introduce centralised reporting of stocks on rather than brutal stock limits that convulse markets and don't bring anything in the long run...

Simultaneously, business-friendly policies have to be supported by the political determination to stand by them. The government should introduce centralised reporting of stocks on rather than brutal stock limits that convulse markets and don't bring anything in the long run except distrust of government reflexes and scaring away capital and talent.

Agriculture is India's largest private sector enterprise. Instead of approaching it with philanthropy in the form of government spending, we have to approach it as a market investment, creating a system where all stakeholders have the incentive to innovate, and where there is a scope for large quantum of private investment, resilience to endure risk and capital to invest in growth. This year's Budget can be the starting point.

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