Farm sector economics in India

indian economy

Farm sector economics in India…Continuing from yesterday …

Before planning for any reform in the India’s form sector, it is critical to understand the key characteristics of the India’s farm sector. To be successful, any strategy, plan, policies and programs must be in congruence with such characteristics. Unfortunately, most of the policy initiatives and programs implemented in past couple of decades have not been congruent with the characteristics of the farm sector.
The following are some of the typical characteristics of the India’s farm sector which have been hindering the growth and profitability of the sector and large proportion of population associated with the farming and allied activities.
Farm sector of India
As per the 6th Economic Census (2014) and Agriculture Census of India (2017), and NSSO (2013) data the following are the broad contours of the farm sector of India:
Non-farm activities
1.    There are about 3.5cr rural commercial (non-farm) establishments in India. Out of these only 1.3cr are engaged in agriculture related activities (excluding crop production and plantation).
A visit to 10 typical Indian villages will tell you that these establishments primarily include small shops, auto and farm equipment dealerships, services (tailor, auto repair, salon, telecom, medical, coaching, financing, etc.) and petty artisans like potters etc. Livestock constitutes 87% of economic activity in the farm sector
What is important to note is that over 60% non-farm commercial establishments are directly impacted by farm sector, even though farm sector contributes about 15% to GDP.
About two third of all rural households have farming as their principle source of income.
2.    About two third of these establishments are run without any hired worker (Own Account Establishments or OAE). Meaning the households manage the business themselves, mostly from home (36%) or without any fixed structure outside home (18%), e.g., from a cart, vehicle or on pavement. This segment is characterized by huge under-employment, disguised unemployment, low productivity and negative side effects like child labor, pollution, non-compliance with civic rules etc.
3.    The period between 2005-13 saw a massive jump of 56% in OAEs. This was incidentally the period of highest growth for Indian economy. Labor intensive construction in particular recorded very high growth during this period. MNREGA also started during this period. I believe this trend continues after 2013 also.
In my view, most of these OAEs added during 2005-13 were not voluntary. These were direct outcome of diminishing employment elasticity of growth, acquisition of large tracts of agriculture land for infra projects thus rendering a large number of farm labor jobless, at a time when number of people joining workforce is accelerated.
4.    Fewer than 2mn establishment are engaged in handicraft/handloom sector employing about 4mn people. About 80% of these establishments are OAEs.
If we browse through the headlines since 2013, the governments have made significant efforts to damage these sectors, e.g., through encouraging large retail formats and impeding beef trade etc. There is no evidence of any incentive or promotion for Mobile telephony related retail trade activities which have inarguably been the largest provider of incremental employment in past one decade.
Farming activities
The farming sector in India is characterized by (a) small holdings; (b) low productivity and (c) landless farmers.
1.    During FY11 and FY17, the total operated farm area has decreased from 160million hectare to 157.872million hectare; number of holdings have increased from 138.35 million to 146.45 million and the average holding size has decreased from 1.15 hectare to 1.08 hectare. For the context, the average farm size was 2.4hectare in 1971.
2.    The number of small and marginal farmers is rising consistently. UP, Bihar, Maharashtra and MP account for 45% of operational holdings. Bihar has the highest percentage of marginal and small holdings, followed by UP.
3.    14 out of 36 states & UTs account for 91% of the total number of holdings and 88.19% of the operated area. A large majority of states are thus relatively less relevant insofar as the policies and programs relating to farm sector are concerned.
4.    The marginal and small holdings (0 to 2 hectare) account for 86% of total holdings, covering about 47% of the operated area. Medium (2 to 10 hectare) holdings are 13.3% covering 44% of the operated area. Large holdings (above 10 hectare) are merely 0.57% covering 9% of the operated area.
5.    The more important and worrying statistics however is that there are over 100mn Marginal Farmers, with average holding of 0.38 hectare (0.9 acre) accounting for almost 68% of the total farmers. These farmers mostly do sustenance farming, and under no circumstances can earn decent two square meals from farming activity alone. 100mn farm holdings means about 400mn population, assuming an average family of 4. Marginal farmers with average land holding of 1.4 hectare are another 18% or 25mn.
About 47% of the total operated area is covered by these small and marginal farmers. The uneconomical size of holdings, which are getting further divided with the death of each farmer, ensures low productivity, poor financial conditions, no investment capacity and perennial debt in many cases.
6.    There is huge variation in land holding pattern amongst states. For example, AP and TN have largest proportion of landless farmers (more than 50%): Bihar and West Bengal have largest number of marginal farmers (close to 60%), where Rajasthan has the largest share of large farmers. Same agri policy for all these states is bound to fail.
7.    The average monthly rural household income in India is about Rs6426 and average Monthly rural household expenses are about Rs6223. About 85% of households earn less than their expenses. About half of this income comes from cultivation and rest from other activities like labour (including MNREGA) and animal husbandry.
8.    Rural household spend about half their income to buy food.
9.    As per the last available NSSO data, the average per student annual expense for education in rural areas was Rs6788 in 2014. It had risen more than 2.5x since 2008 when it was recorded at Rs2461.
10.  The average hospitalization expense in rural areas is close to Rs17000 per case of hospitalization as per the last available NSSO data
11.  Doubling the farmers’ income by 2x in 8years (2014-2022) means a nominal growth rate of 9% CAGR. There is little change in real rural wages over past five years. Rural wages are an important component of rural income and a key determinant of minimum support price for farm produce, the government might need to review its strategy.

Author: Midas Finserve

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