Meeting PM’s goal of doubling farmer income

Last year, Prime Minister Narendra Modi announced the government’s goal of doubling the farmer’s income by 2022. Simple math tells us that this would require the farmer’s income to rise by around 12 percent per year on average, over the next five years. This is in nominal terms, i.e. not adjusted for inflation. It’s an audacious goal if you consider the fact that agriculture growth (in real terms) has never averaged more than five per cent over any continuous five-year period, in recent history.

That’s because of two reasons. Firstly, agricultural productivity cannot rise steeply year after year, and secondly the area under cultivation cannot expand rapidly and continuously.  Some modest increase is possible, but not exponential. Besides prices may remain stable, denying any nominal rupee gains. In addition to all this are the attendant risks associated with agriculture, which are monsoon failure, pest attacks, spurious seeds, adverse weather shocks and so on, all of which contribute to making the goal truly audacious.

But if you read the Prime Ministers goal carefully, you will notice that it is to double the farmer’s “income”, not agricultural production per se. Hence it is possible that the farmer may have some non-agricultural sources of income. Indeed, the services sector activities in rural areas have been increasing substantially, providing livelihoods to many farmers and their families. But more importantly, what if we increased the share of the overall national income pie that accrues to the farmer? It is this approach that holds the greatest promise of increasing incomes to the farmer. 

There are two aspects to the incomes associated with the food and cash crop economies.  First, in case of fruits and vegetables, the difference between what the city dweller pays for the tomatoes, and what the farmer actually receives is huge. City folk typically pay four times the cost, attributable to reasons like transport, losses, entry taxes and fat margins for middlemen.  Surely if some of these inefficiencies are removed, a larger share can go to the farmer. The dismantling of the provisions of the APMC Act in many states is ensuring the reduction of this gap. So also is the establishment of electronic national agriculture market. Any mechanism to connect buyers and sellers directly can potentially benefit the farmer, so long as he retains some bargaining power.

The other aspect of increasing income share to farmers, is through value added agriculture, namely agro processing.  This has immense potential. The groundnut may fetch only forty rupees a kilo to the farmer, but when it becomes salted masala coated peanuts in a fancy packaging, it fetches four hundred rupees a kilo, an increase of ten times.  The same is true for oranges and orange juice, or bananas and banana chips.  There is an almost infinite range of agro processing products possible, which can retain freshness, flavour and taste of produce, through a combination of technologies like nitrogen or vacuum packing, or freeze-drying.  Some of the products that have become very popular in a short time are wet idli mix, instant upma and noodles, fresh juices including pomegranate and lychees, jowar chips and so on. All of these products require investment, working capital, marketing, advertising and efficient distribution. The growth of conventional consumer food companies is an indication of the great potential.  But the trick is to ensure that farmers garner a disproportionate share of the increase in value and income that comes from agro processing.

This is where the farmer producer organisations (FPOs) come in. These are hybrid organisations combining features of a shareholder-owned company and cooperatives.  The FPO structure was formally introduced under Company Law, to enable farmers to collectively become shareholders. This ensures that they have clout and bargaining power when dealing with consumers, small or big (such as organised retail supermarket chains).  If a farmer sells groundnuts to a buyer, then no sales tax, VAT or now GST is applicable. But if an FPO sells salted peanut packets then all kinds of taxes become applicable. This defeats the economic viability since profit margins are slim and overheads can be large, especially when the scale is small. It is here that policy intervention is needed to ensure healthy growth of FPOs around the country.

Not all crops and agri-products are amenable to be produced within an FPO structure. The success of FPOs depends also on them holding their own against FMCG companies, truly assessing consumer tastes and preferences, ensuring consistent quality and offering competitive pricing. But because the demand is so large, those FPOs that manage these challenges well are bound to increase the incomes of their shareholders, i.e. farmers, immensely.

For far too long the farm sector was neglected or has suffered from muddled policies and inefficient implementation. By making the goal of doubling farmer’s income in five years, the PM has brought the right focus to a problem that has been neglected for long. In addition, we’ll need investment in irrigation, better water management (another of the PM’s slogan, “more crop per drop”), dismantling APMC-like shackles, more seamless connect between buyer and seller and proactive policies for FPOs to flourish.

A good monsoon last year ensured that agriculture growth would be close to nine per cent in the second half this fiscal. Some states like Madhya Pradesh, Maharashtra and Andhra Pradesh are reporting even higher, double-digit growth rates. Sub sectors like horticulture, dairy, livestock, show promise of high growth in incomes. While conventional policy push should continue and strengthen (more irrigation, credit, water, electricity) we also need a push to ensure the profits from agro processing go predominantly to the farmer. That’s the only way to reach the goal of doubling his income.

(The writer is a senior economist based in Mumbai)