The increase in minimum support prices (MSPs), which promises up to 97% increase in return on costs, can become the trigger for stimulating much-needed investment in agriculture by the Indian farmer. But it needs to be backed by the other factors that go towards making farming profitable.
Like all sectors, agriculture too depends upon attracting investment for rapid growth. This demands accelerated investment from farming families, besides greater capital efficiency. The ministry of agriculture estimates that to double farmer incomes by 2022-23, private investment in agriculture must jump two times to almost Rs 1,40,000 crore. Private investments refer to investments made by farmers themselves, inclusive of their own savings and borrowings from institutional and non-institutional sources.
Since the decision to invest occurs within each farming household, and opportunity costs are high, the real question is: how can India encourage farming families to boost investment in their farms? The answer lies in unleashing the entrepreneurial energies of the smallholder farmer, especially those already thinking commercially and sell at least a third of their crop. Thanks to their majority, such smallholders collectively possess the highest latent energy for moving the needle on agricultural growth.
Smallholders (with up to 2 hectares of land) run 85% of the total farms in India and own more than 50% of the livestock.
They are highly cognisant of the need to invest. In Odisha, where 92% are smallholders, each farming family spent on average Rs 1,142 a month on crop production, according to National Sample Survey Office (NSSO) 2012-13.
Yet, due to the low productivity, low production and lack of market incentives, families receive no commensurate return. So, smallholders have, on an average, less than 10% share of the total private investment in farming.
What would encourage them to invest? Profitability. Assured buying, and export demand in some years, stimulated investment in wheat, rice, cotton, mentha, guar, a few pulses and sugarcane.
But farmers are frustrated by the high entry barriers to liquid and regulated markets. If they do enter, the interplay of market forces doesn’t necessarily enable fair play, trust and transparency.
There are few ways to mitigate the higher risk in high-value horticulture crops. So, even small commercial farmers frequently survive mainly on income from wage labour.
As financial markets demonstrate, access to markets is insufficient. Markets require the ‘visible hand’ to protect small participants so that they have agency. States must similarly develop and defend agricultural markets that work for smallholders by reducing transaction costs and counterparty risks, and raising price discovery, price transparency and bargaining power.
Since smallholders till mainly leased land with uncertain and informal tenure, they have little incentive to take long-term capital loans for investments, such as micro-irrigation, which mitigate risk. Suitably modified land-leasing laws can encourage investments in land improvement. Likewise, investment in dairy and poultry will increase by the incentives from integration into tight value chains.
Smallholders have always been excited about technology. The adoption of hybrid maize by Bihar’s smallholders, hybrid vegetables in Maharashtra, solarpower pumps in Gujarat, for instance, demonstrate their eagerness to optimise profitability and de-risk income when terms of trade turn positive.
Strong public extension services can raise returns on this investment. Next comes capital. Nearly 86% of farm investment depends on loans.
Smallholders borrow nearly half of their loans from moneylenders, traders and input dealers. Repaying debt is a far more compelling consideration than buying machinery. Deliberate efforts towards financial inclusion, and emphasis on long-term capital, could kick-start the virtuous cycle. Above all, smallholder farming is directly energised by public investment.
Agricultural growth is private sector, but requires large investment in public goods — rural roads, education, research, irrigation, extension, finance, institutions for women farmers’ participation. According to ministry of agriculture, public investment must grow 16.8% annually, up from around 10%, to achieve the target of doubling farmer incomes.
Once the ecosystem for enabling agriculture growth strengthens, the corporate sector, with a 2% current share in the overall investment, will venture closer to the bottom of the pyramid, offering smallholders linkages to technology, services and competitive markets.
High growth in agriculture springs ultimately from the convergence of profits, knowledge and power in the hands of smallholder commercial farmers. Despite poverty and neglect, they see themselves as entrepreneurs, willing to try new crops, cultivars, livestock and alternative technologies to increase productivity, diversify production, reduce risk — and increase profits. It is time to tap into this entrepreneurial energy by creating, and enabling, opportunities for them to invest in a bright future.
The article was originally published in The Economic Times on July 13, 2018