25/02/2015 10:59 AM IST | Updated 15/07/2016 8:25 AM IST

5 Ways This Budget Can Make Agriculture Profitable

Going by the number of farmers, Indian agriculture is the nation's largest private enterprise. And also the only one lacking free markets. So it is hardly surprising that half of India's population, since it depends on agriculture, contributes only 15% of the country's income.

SANJAY KANOJIA via Getty Images
Indian farmers sort harvested potatoes in a field in the village of Fafamau on the outskirts of Allahabad on February 22, 2015. AFP PHOTO/SANJAY KANOJIA (Photo credit should read Sanjay Kanojia/AFP/Getty Images)

Going by the number of farmers, Indian agriculture is the nation's largest private enterprise. And also the only one lacking free markets. So it is hardly surprising that half of India's population, since it depends on agriculture, contributes only 15% of the country's income. The shocking waste of entrepreneurial energy, time and resources of 263 million farmers and laborers has kept rural families in poverty, accelerated urban migration and created widespread disaffection.

Here are five things that the Budget can trigger to make agriculture a profitable business.

1. Get the market right for leasing land:

Access to land is fundamental to farming and farm size is critical in determining productivity. Fragmented farm size makes mechanization and smart irrigation technology uneconomical. Landlessness is rising. Between 2001 and 2011, Census results show a fall of about 9 million in cultivators and an increase of about 38 million in agricultural labourers. The Budget can encourage states to promote land lease markets, which will reduce landlessness, increase the number of medium-sized farms, ensure greater crop diversification, and higher income.

2. Get the market right for labour, seed, irrigation and fertilisers:

India's farm labour market is beset with four major challenges - tightening of supply; attracting and retaining talented youth in agriculture; sustainable employment for rural labour force; and increasing labour productivity. Rural wages have spiralled 16% annually since 2005. But rising wages have not brought with them a corresponding rise in labour productivity.

This needs to change through a more focused approach. The scarcity in farm labour creates an opportunity to encourage young people back to farming by empowering them with new technology and improved practices that are less labour intensive and reduce costs.

The fertilizer subsidy has become a millstone round the neck of industry, taxpayers and farmers alike. Several urea plants are shut because government owes them Rs 40,000 in unpaid dues from last year. Farmers are poisoning their fields with subsidized urea. And the fiscal deficit takes a beating overall as imports continue to rise. The Budget can give a "Make in India" push to fertilizers by liberalizing the urea market and providing direct transfer of subsidy to farmers.

The vulnerability of India's food sector to bad weather is the result of a legacy of bad choices in India's farm policies, which have failed to insulate farmers from the impact of poor monsoon.

As long as scarce resources such as water and power are priced absurdly, their usage will be absurd. Rampant extraction of groundwater resources, aided by generous power subsidies to farmers, and the advent of a more industrial version of farming even in India's non-irrigated, and rain-fed belt has raised risk levels of farming in these regions. The Budget can make a push for more realistic power pricing and incentives for farmers to use micro-irrigation rather than flood irrigation. It can also encourage the use of new technologies such as drought-resistant genetically modified crops to drought-proof farming in dry regions.

3. Encourage free trade and an open market:

What to grow and when to sell are two critical business decisions taken by every farmer several times in a year. In market-oriented agriculture, this means listening closely to the customer through their only medium of communication - price signals. To be loud and clear, these signals have to be free from the distortions created by government intervention, cartelization, and inaccessibility. Moreover, even the most efficient farm will fail to produce optimal profits if the harvest cannot be sold at the best possible price in a timely manner to the best customer in any state without taxation and licensing barriers. In other words, the Budget must promote a free national market for agriculture that allows farmers to be consumer focused, coupled with reform of the FCI. Only free trade will promote investment in better quality, crop diversification and packaging.

4. Get the market right for finance:

Just as factory output is an asset for any company, crops should also become a financial asset against which farmers can take loans. Negotiable warehouse receipts and electronic registry for commodities, backed by a highly credible and low-cost warehousing network, can bring lenders closer to farmers keen to pledge their crops. The Budget can re-assess the current incentive structure to give warehousing and finance a push in the right direction.

5. Get the market right for welfare programmes:

In a country where 60% of the population lives on less than $2/day, no government should shy away from its welfare responsibilities. However, that can be no excuse for a runaway food subsidy bill of Rs 2.61 lakh crore that disguises public sector inefficiencies in the name of the poor and skews the market. The Budget should stress the use of just-in-time electronic auction markets to replace the current public sector system of foodgrain procurement, storage and distribution so that it stops hanging as a dark cloud over the open market.

Indian farmers urgently need two things - freedom and markets, preferably together. And Indian consumers need market-oriented agriculture that efficiently meets their nutritional needs. Both are looking to this Budget for a ray of hope.