Profitability In Agriculture And Inclusive Growth

Profitability in agriculture and inclusive growth National Symposium on Agriculture, College of Agricultural Banking, Pune 12 Jan 2007 N.Srinivasan Views are of the presenter. Not necessarily held by employer bank.

Profitability and sustainability • Profitability – Return to capital and return of capital – ability to generate positive net incomes out of each working cycle • Sustainability – Capacity to post profits on a continuous basis, with growth – especially the ability to manage risks and post net positive returns over a period after meeting risks and all costs

Trends in Profitability Examined in terms of • Terms of trade in agriculture • Trends in agriculture GDP vis a vis GDP • Per ha income • Input output ratio

Terms of trade in agriculture • Terms of trade generally unfavourable to agriculture • Both CACP and DES indices show that farming is not advantageously placed

Planning commission MTA X plan • l g c o m m M T A X p l a n

Income from agriculture A case of Maharashtra

Income per ha declining in real terms Small farms and landless unable to meet household expenses with returns from farming Considerable regional disparities within the state Profitability not strong even in Maharashtra with high proportion of commercial crops

Trend in per Hectare Agriculture Income

Year

1980-81 1985-86 1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05

State Agricultural Income (NSDP) (Rs. in Crore) At 1993-94 At Current Prices prices 10,889 10,997 15,880 21,850 22,394 23,773 23,340 21,571 21,110

3,749 5,455 11,715 23,880 31,100 34,070 33,876 32,864 34,684

Net Sown Area (in 000' ha)

18,008 18,223 18,565 17,980 17,636 17,631 17,580 17,432 17,342

Maharashtra

Per Hectare Agricultural Income (Rs.) At 1993-94 Prices At Current prices 6,047 2,082 6,035 2,993 8,554 6,310 12,152 13,281 12,698 17,634 13,484 19,324 13,276 19,270 12,374 18,853 12,173 20,000

0 1980-81 1985-86 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Thousands

Income trends in Agri Maharashtra Trend in per Ha Agri Income (Rs)

20

15 At 1993-94 Prices)

10 At Current Prices)

5

Region wise income trends (per ha) Sl

Region

At Current Prices 2003-04

I i ii II i ii III IV

Western Region W. Maha 28,474 Nasik Region 21,543 Vidharbha Region Nagpur Region 26,171 Amravati Regn 19,469 M’wada Regn 17,720 Konkan Regn * 29,864 State Total 28,848

2004-05

Maharashtra

At Constant Prices 2003-04

2004-05

32,172 24,083

16,829 18,075 12,557 13,382

28,922 20,836 18,850 33,128 32,170

14,851 10,844 9,839 17,427 16,765

15,446 11,074 10,163 18,560 17,864

Trends in GDP - agriculture vis a vis Other sectors (all India) 1200

800

Agriculture

600

Other Sectors

400

Years

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

0

1995-96

200 1994-95

Rs 000 crore

1000

Input output ratio (2001-02) Dryland crops not profitable Crop

Gross Return Rs/Ha

Variable Costs Rs/ha.

Net returns Rs/ha

Output/ input

Wheat

30016

11665

18351

2.57

Paddy (Fine)

29792

16921

12871

1.76

Sugarcane

68750

50120

18630

1.37

Gram

14900

5663

9237

2.63

Linseed

17100

8013

9087

2.13

Barely

18100

9084

9016

1.9

Arhar

13650

6948

6702

1.96

Cotton (A)

21362

15125

6237

1.41

Rapeseed and Mustered

13610

9248

4362

1.47

Basmati Rice

19400

15906

3494

1.21

Sunflower

13848

11715

2133

1.18

Maize

13590

12180

1410

1.11

Cotton (D)

15124

14042

1082

1.07

9080

8000

1080

1.13

12080

11422

658

1.05

Moong Groundnut

Farmers response • Farmers want to quit farming- state survey • Suicides as a distressed response in the extreme • Requests for relief from plantation sector, sugarcane, cotton and other crop sectors from time to time • Marginal existence in dry land areas • Transient poverty in rain fed areas after every monsoon failure

The hidden costs • • • • • •

Failure of infrastructure Subsidies Delayed delivery Lack of quality in inputs Under-financing Procedural complexity These hidden costs are not captured and factored in any viability analysis of projects and farm models.

Broader issues in profitability • • • • • • •

Policy impairments Market imperfections Risks Gap between promise and performance Technology issues Land holdings and economies of scale Impact of globalisation

Policy bred problems • Land policy – high lease costs without grievance redressal • Input centric, supply driven • Private investments in agri not optimal – preference for short term loans by banks • Production growth targeted - not farm incomes • Benefits oriented towards irrigated farms and large holdings • Rent seekers benefit more than farmers • Consumer made the object of farm policy • Subsidy led distortions – encouragement of antimarket behaviour • Farmer security a casualty to interests of food security?

Risks • Weather, Technology, Market, Credit availability, policy continuity • Increasing share of purchased inputs • Absence of market based mitigation mechanisms • Available risk products –limited in coverage and appeal • Lack of safety nets • State action more evident in relief – not in systemic management

Promise vs performance Investments made on basis of promises suffer on account of under performance – erosion of returns Electric pumpsets – without power – high costs of protective irigation Delayed Subsidies - lead to high capital costs Delayed input provision – affect productivity Supply of indifferent quality inputs – low output Non-maintenance of infrastructure – cost push Leakages – alternative funds to be accessed – higher credit costs

Technology issues • Technology development as the goal – not farm viability • Remunerative agriculture not always the objective • 50 years of intensive work – yet to solve problems in dry lands • Tech transfer mechanisms weak • Low emphasis on linkages • Farmers faith in agri extension low – SAS finding

Competitiveness – productivity dimension – tech answers?

Lowest yields across all crops – how we can break into global market

Market imperfections • Marketing – the weakest link in the chain • Infrastructure and fair practices need to improve • Small farmers unable to realise the best prices – lack of aggregation and marketing mechanisms • MSP and procurement - distorts the market ? • Rent seeking predominant in procurement operations • Prevention of private sector entry – ensured continued exploitation by existing intermediaries • COMEXES – still oriented towards trade – slow progress towards farmers

Alignment of MSP with World Market Prices (1991-92 to 2001-02)

Year

Wheat Minimum Support Price (MSP)

Rice World Market Price (WMP)

Minimum Support Price (MSP)

World Market Price (WMP)

1991-92

275

293

343

667

1992-93

330

394

403

695

1993-94

350

443

463

745

1994-95

360

474

508

847

1995-96

380

577

537

1041

1996-97

475

744

567

1198

1997-98

510

588

619

1097

1998-99

550

524

657

1259

1999-2000

580

482

731

1068

2000-2001

610

517

761

908

2001-2002

620

543

791

937

458.16

507.18

580

951

Mean (91-92 to 01-02)

Impact of Globalisation • Global gluts transmitted to India – affecting price realisation by farmers • Farmers do not benefit much from Global (or domestic) shortages • Subsidies in OECD countries was 2.6 times of Indian agricultural GDP in 2004-05 – how do we compete • Trade barriers – PSP,Origin,Labour & Quality standards – reduce access to global markets • EXIM policy used more to maintain consumer prices – not sustain farm incomes?

The silver lining • • • • •

More reforms visible in the last two years Agri Marketing being unshackled Risk mitigation products on the anvil Welcome shift to venture capital from subsidies Tolerance of private sector entry – introducing innovations and efficiencies • Contract farming assuring incomes with technology – requires to be perfected • Corporate farming – emerging trends to be encouraged

Action • Shift focus from inputs to outputs and markets • Farm income policy needed – distinct from Agri policy • Clear articulation of where consumer protection stops and farmer sustenance starts • Public investments in rural infrastructure reduces cost of agri operations – widens market • Technology to prioritise cost reduction and income enhancement – not production and new varieties • Safety nets – to include market failure

Action • Compensation from technology and input providers in case of failures • Organic farming as a cost reduction alternative in dry lands • Dispute redressal mechanism for contract farming • Greater access to markets for farmers and their associations – introduce rural service obligation for COMEXES • Consistency of trade policy to be ensured • State to play a regulatory role rather than handson project management

Thanks

Despite all our pretensions to knowledge and intelligence, we owe our existence to a six inch layer of topsoil and the fact that it rains