India is experiencing an agricultural crisis not so much
because of low production or drought or other calamities, but for excess
production and mismatch of demand and supply in many parts of the country. Farmer
suicides have been making news and the fact of the whole matter is that no one
has any idea as to what to do to mitigate it. There is plethora of suggestions
about good farming practices, development of infrastructure, soil testing and
resulting steps, storage facilities, marketing of products, MSP (Minimum
Support Price), but there is also dearth of idea as to what should be the
future Agricultural Model for India. This is because of if you try to fit in
all these then you end up wishing th
at you hadn’t started as the whole idea of good farming
practice is for the long run only and common people do not wait that long. Then
of course, there is the loan write off which is just as horrible as it is
surely very bad economics.
In addition to all this you have around 500 million or so
people dependent of agriculture directly and according to statistics they say
around 180 million households live on agriculture only. There is yet another
static that reveal that 52% of agricultural households are in debt. It is also
official that 67% of farmers in this country are marginal and hold less than 1
hectare of land. Then according to
official estimate the country loses Rs 92,000 crores of rupees annually as food
wastage.
Yet another striking thing according to the experts and
media is that the subsistence level farmers do not commit suicides when
compared to those who had taken loans and purchase inputs from external sources
other than their own. There are other aspects like ruthless middlemen, black
marketers, hoarders, money lenders, bureaucracy and what not. Then there are
few cases of farmers cheating and not cultivating and some are in agriculture
just for getting loan waivers and so on, but these are very small percentage.
However, we shall keep this too in mind while we go about preparing a new
agricultural model for India.
There are more statistics and these could be found in the
newspapers, journals and in websites. In fact, there are tons of suggestions
that mostly aim for better cultivation, better inputs, seeds and fertilizers
and also infrastructure and irrigation yet these may take time. But none offers
a real life solution that can be the basis of a new agricultural model. However,
we shall not dwell on these and go straight for the new structure or model that
aims to do the best in the current given situation.
Acknowledging the present chaos in agriculture
Before deciding on anything it is necessary to acknowledge
that the agricultural structure as it is seen today is in a chaotic disorder.
You have high prices of some agricultural produce in some parts of the country
while you have low prices in some other parts. Again, the consumers do not get
food cheap and they burn their pockets while the farmers do not cover their production
costs while selling their produce to the middlemen who fleece them horribly.
There are also cases of over production and wastages both at
the farm as well as storage areas of the country. In other words, you have
general situation with burdening fiscal problem that is outright shocking.
However, there is a fine structure in this chaos. They do
not fall apart, but remain as a whole although there is this turbulence like
you may see in the Universe. This too is a fractal structure. You need to make
some technical adjustments and understanding of the agriculture procurement and
marketing side in order to create the much needed agricultural produce flow
within the larger contest of agricultural farming. Otherwise, the whole thing
may look a bit like a mess. In order to make the chaotic or fractal structure
look less ambiguous, but as a whole we have to understand the different areas
of instability and stability and thus pave way for that natural flow that
always exist in the fractal flow. A cluster should be fine tuned and managed
taking into consideration its several differences and not left to chance for
the benefit of a few in the society.
It also need to be emphasized that in the present current
situation elasticity of demand and supply of agricultural produces as analyzed
are only at the micro levels only and not at the macro-level although it is
stated to be so. In other words, prices oscillate so horribly that price of a
particular produce in one part of the country are not what they are at many
other places. This brings in a lot of anomalies and no true picture emerges
while analyzing the actual price. This is because most products except for the
case of food grains do not reach other far flung areas from their place of
origin in a time bound manner and due to lack of infrastructure. Again, the
country always has plenty at one part and shortage at another for the same
commodity. There are also commodities that never reach other parts and simply
sold near to their place of origin and the rest dumped as waste. Thus, price is
not properly determined.
In this model we shall move straight and directly into the
general model for future agriculture taking into consideration that within the
chaos there is a structure that can be fine tuned to the country’s needs.
New Model
The new model comes with a few assumptions.
Agriculture in India is like all other
businesses yet unlike any of these it is having its own separate and unique buying
and selling platform due to small holdings and huge employment potentials and
dependency
The Central Government (NABARD and other
agencies) are the most important Centers in regulating and administering the
flow of agriculture from farmers to the consumers.
All agricultural produce in India are
perishable and storing them for long periods of time is very difficult
currently
Only land of maximum 3 hectares and below
come under the ambit of the new model and all other lands beyond this limit are
quite self sustainable and efficiently managed by owners including their
marketing
There is no need for loan waivers for this
new model as it is self adjustable and sustainable as will be seen below
It is assumed that drought, flood and other
natural calamities have to be treated differently under a totally different insurance
program altogether
Milk and poultry do no come under the ambit
of this new model
Sketch of the Model
You may think that this is just a joke as this doesn’t even
look like a model. You may also think ‘what’s the big idea about it’. Well,
this is just a general idea where the stress of government participation has
been made and emphasized. We will now expand each of these segments to arrive
at the most appropriate model. Let us start with the first segment Agricultural
Farmers.
Agricultural Farmers: These are farmers engaged in
agriculture with a maximum of 3 hectares and below. The government may change
the criteria of maximum to be brought into the folds of this model. All produce
under this model would be purchased covering the cost of production plus an
additional sum for farmer’s well being. This would be country wide MSP (Minimum
Support Price) for each particular agricultural products. Further, under this
model the farmer is assured of MSP, but will have to apply for crop insurance
separately. This is because MSP by itself would be configured to be such that
it gives every farmer sufficient returns over the produce. In other words, MSP
will by itself act as a surety for sale of the produce. In case of failure due
to drought, flood and other calamities then a proper survey by respective
village, state and central agencies has to be carried out so that farmers
unable to produce would be covered under a separate insurance policy. All this
is important to bring about fiscal discipline and arrest the rising NPAs of the
banks.
This would remove whatever bad practices of false claims and
uncultivated lands. MSP would bypass hoarders, ruthless middlemen and other
notorious agencies that make farmer’s life hell. MSP would also give fillip to farmer’s to make
their produce better than simply relying on government agencies to extend
monetary help only. Here, MSP means the moment an officer from the State agency
has visited and agreed then the purchase has been done.
However, in case of crop loss due to calamities a separate
insurance agency under the Central Government must be in place. This is because
those farmers who are willing to engage in good farming practice would get
reimbursement in genuine cases only. A separate insurance like the present
Pradhan Mantri Fasal Bima Yojana is a good system although there could be some
changes. It would make its own survey while providing the necessary coverage
and the respective farmer would have to bear the cost of premium.
As far as loan is concerned this will be treated quite
separately and by a separate system which will be discussed later.
Government and other Agencies for procurement
The government and the respective authorized agents under it
would do the entire procurement of agricultural produce from the country at MSP
at the harvest spots, mandis and state warehouses and also with the help of
mobile units. The huge amount that is involved in such country wide large
purchases would be recovered through a unique and an entirely new approach of
marketing that is again unique only to perishable agricultural produce. This
will be revealed in the later paragraphs.
The FCI or Food Corporation of India is one such well
structured agency that is involved in large scale procurement of paddy.
However, there is need for other procurement agencies to facilitate the
procurement of vegetables and fruits. Instead of a single agency fruits and
vegetables should be treated separately as under different agencies. Again,
vegetables too need to be under different agencies like potatoes and onion for
one while cabbage, cauliflower and similar varieties with another and so on.
For example separate baskets should be provided for fruits
of each season while distinguishing the other fruits by placing them in other
baskets. So also for more or less similar vegetables that are cultivated in the
same pattern and in the same season. The idea is that a basket would be such
that each authorized agency could make the purchase and the sale in a homogeneous
manner. How the sale is to be carried out will be revealed which is quite
different from the sale of manufactured goods and consumer items.
How this is to be achieved with limited funds and lesser
storage facilities would be revealed as we go to the marketing part of this
model.
All agencies however make immediate procurement the very
moment harvest is done under the above stated MSP.
Storage of farm produces in Mandis, Storage Centers and
In-Transit storage
As stated earlier all farm produces are perishable and
assumed to be so hence there is little need for storage but fast movement of
the produces from one part of the country to another. Of course, storage
facilities could be installed when and there fund and infrastructure is
available, but in other places all these would take time. Hence, on the part of
each agencies handling their own unique and more or less homogeneous varieties
of fruits and vegetables to have an access to good logistics of all types. This
is mandatory for the speed of delivery and marketing. Even goods-in-transit
would be seen as partly stored for value as the items are perishable.
If a particular agency opts to sell its produce while
in-transit it may be allowed and produces may be sent from one mandi to another
mandi depending on the shortage of the same commodity at a different
location.
The FCI or the Food Corporation of India has a better
systematic way to procure and distribute although there too wastage exists and
this may need to removed as well shall see in the marketing part.
Sale of agricultural commodities through Government Agencies
This is also one of the most important aspects of this model
and that the State takes the full responsibility of the farm produces with the
help of its authorized agencies. The whole idea is to bypass the entire cluster
of hoarders, retailers, wholesalers and black-marketers. It also means that
independent private participation starts only from the offloading centers of
the State agencies. State agencies start to offload farm produce other than milk
and poultry through this way from thereon private participation is allowed.
Instead of dragging with the suspense we shall unfold the
marketing side of the colossal supply chain here itself.
Marketing part of the Agricultural Produces
Marketing of agricultural commodities are done by the State
agencies in an entirely different manner than the usual models that exists in
the case of industries, commercial organizations and other services. Here, the
products are offloaded in a constant manner in order to keep the flow going
uninterruptedly.
The State agencies so authorized may purchase and then sell
the agriculture produce right after harvest in four different ways as shown below:
1. The state agencies may make outright purchase from
farmers of the agriculture produces as they are found on the field at MSP and
make outright sale to wholesalers, retailers and other private agents or
cooperatives in bulk from the very same place of origin.
2. The state agencies may make outright purchase of produce
from farmers at MSP and sell them in transit to any buyers across the country.
3. The state agencies may make outright purchase of produce
from farmers at MSP and sell them at specified locations all over the country
as shown in the chart below.
4. All agricultural produces are offloaded to buyers from
the storage sites on the first –in-first-out basis thus reducing wastage where
ever possible due to rot and spread of fungi and other micro-organisms.
In the above diagram the sale of the agricultural produce is
not done gradually, but in haste at the marketing end by the authorized state
agencies. The word ‘Throw’ means instant action and not dumping anywhere as
wastes. From the above it would become clear that there are 5 different ways to
market the produce by the State agencies. These are done via exports, Public
Distribution System (PDS), Auctioning to private retailers or wholesalers and
food processing units, Co-operative Societies and lastly to others. Other would
mean trade fairs, exhibitions and open public auctions. Further, all these are
done at the very moment the produces reach each particular destination for
‘Throw’ or call it ‘offloading in haste’. Here, others may be to some other
agencies or other marketing platform that the Government may think convenient.
Here, the marketing is being made flexible so that there is enough scope for
better offloading of agricultural produces. As seen in the diagram the sale is
not only quick and fast, but also has a cascading price structure so that
offloading or ‘Throw’ is possible. The system here bypasses all sorts of
middlemen and private agents and this means from farmers to procurer
(Government Agencies) so that it is only at the end of offloading or call it
‘Throw’ that the market economy for agriculture actually starts to operate.
Let us look at the pricing module when such offloading
stocks of produces’ are done at ‘Throw Price’ with cascading affect during
seasons and slower offloading during off seasons. The hypothetical price is per
quintal of a produce.
MSP LC t TC TP MP MP without TP
100 20 10 130 140 180 250
100 20 10 130 130 140 240
100 40 20 160 170 200 300
100 30 10
140 140 150 220
100 10 20 130 80 130 190
100 10 40 140 90 140 250
100 50 10 160 170 200 350
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--------- ---------- ------------- ------------ -------------- ------------
700 180 120 990 920 1140 1800
-------------------------------------------------------------------------------------------- ------------
Here, MSP denotes Minimum Support Price; LC stands for
Logistical costs; ‘ t ‘stands for Perpetual Inventory Cost for very Short
Period of Time; TC denotes Total Costs; TP for Throw Price and MP for Market
Price.
It is to be seen that in this random suggestive chart the TC
is Rs 990/- is way below the MP of Rs 1140/- as the retailers, traders and
wholesalers would try to make the maximum profits even for the perishable farm
produces. However, it is to be noted that the prices would have spiraled up
much more had there been no TP which acts as a sort of pressure to arrest the
unbridled hike in MP for the end consumers. The hypothetical food price rise as
shown in the above chart is Rs. 1140 per quintal of produce. Without TP the
price would have escalated to Rs. 1800 per quintal.
Further, in the prevailing situation in the country the
agriculture produce has to go through a number of hands including unscrupulous
traders and black marketers. We denote the situation as A. In the above case namely
the situation B, this is changed as the whole structure is made to bypass all
the previous anomalies that existed in the Indian agricultural scenario. Hence,
situation B is much more superior to A as far as pricing of agricultural
produce is concerned and is more beneficial to the end consumer.
Again, suppose say anomalies appear at the MP end and
retailers and traders try to take advantage by hiking the prices of the produce
for the end consumers then there is TP to effectively check this.
Therefore, in this case we see that MPC + LC + t = TC. While
TP acts a stabilizing mechanism even if at random to prohibit undue price
hikes.
The inclusion of TP with B and non-TP with A situation makes
both situation ‘A’ and situation ‘B’ as mutually exclusive. Here, as
demonstrated in the chart they cannot overlap as situation ‘A’ without TP is
far different from situation ‘B’ with TP.
Thus, P (AUB) = P (A) + P (B) – P (A n B). Here, ‘n’ is
shown as intersection. Then it follows that P (A n B) =0. With situation A and
B remaining exclusive the B situation with TP we can come to a strong reason
that ‘B’ situation with TP is almost a certainty to happen and therefore the
prices at the end consumers would fall. In other words, it wouldn’t be Rs 1800
as shown in the chart, but way below it and perhaps in line with that of TP
itself.
Here, we must note that here ‘t’ means perpetual inventory
as agricultural produce has to be marketed at once or they simply perish as
wastes. This also means that there ought to be continuous stable mechanism at
work to ensure the speediest possible delivery system and instant offloading.
This can only take place when TP is offered at a hefty discount so that there
are quick buyers to take them. In the above, although hypothetical chart the
price would shoot up in the absence of TP as it is being witnessed in India.
Further, the government must be prepared to undergo some
risk for loss arising out of such model. However, the amount of loss suffered
due to the situation B, if any, would be adequately compensated by and large by
the loss being made due to farm loan waivers, unscrupulous middlemen, wastages,
high risk farm credits and subsidies as in situation A. Hence, situation B is
superior to situation A. Above all the government may make provision for a
loss, if any that may occur by adjusting the same with budgetary provisioning. By
simple reasoning one can understand that the loss over the whole supply chain
in all respects would be quite manageable in situation B.
There are certain points to consider while managing a
countrywide agricultural policy.
1) If TP = MP then it means that the cost may look just
about covered and in that case TC = TP= MP. In such cases it may be due to
certain factors like over production of produces, improper logistic spread or
low demand by end consumers. Here, the government may have to take action by
cutting down certain specific produces or give incentives for exporters.
2) If TP < TC then it means that the cost has not been
covered. It must be understood that when TP is introduced then there is always
this possibility and therefore the government agencies at best can offload the
produces even at broader area and areas previously inaccessible for the
commodities. This loss the government may have to bear in this model for
sometime as this is the loss that has to be adjusted with profits from other
produces. If there is still loss then the same has to be adjusted by making
budgetary provision for agriculture. It is the perpetual inventory system that
would make TP possible and so also the quick revenue return for the products
such that the cycle of produces and cash is on a continuous basis paving way
for the much needed supply chain flow for perishables.
3) If TP < or = MSP then it means that the particular
produces or group of produces are not being marketed properly or that there is
huge glut of the commodities from the producers end. However, it must be noted
that during the initial stages of introducing this model there would be such a
scenario yet overtime this would get rectified.
4) There must be continuous efforts in improvement of all
other factors relating to higher crop yield, fertilizers, irrigation and
storage facilities by the authorities such that the model would be able to move
from one level to the next level within a period of time.
The Financing part in the New Model
The financing part in the new model for Indian agriculture
is actually the revenue flow chart as shown below. This chart is quite
different for some special reasons which you may instantly notice. First, this
chart deviates from farm risk assessment and crop assessment and other risk
factors from the shoulders of the farmers to a separate agricultural insurance
company financed by NABARD. Here, the farmers would get loan from banks under
NABARD policies yet the banks in turn can only do so under the watchdog of
CFRRI (Crop Finance Repayment Risk Insurance for Lending Institutions). The
name is only for reference here and it may be in any other name.
The main idea of CFFRI is that it would take the repayment
risk from each of the banks account pertaining only to farmer loans. Any kind
of loan to farmers wouldn’t get that nod from CFFRI and hence this means that
the bank would be paying the same at its own risk and cannot claim any
insurance. For instance, the risk assessment would be done by CFRRI speedily
and create loan segments for farmers according to repayment capacities.
For instance, a farmer may want a loan on his or her 2
hectares of land for the purchase of a tractor, crop seeds, fertilizers, a TV
and washing machine. The Bank may allow or disallow, but the CFRRI wouldn’t
take that risky account for insurance. The criteria for eligibility of loans
would depend upon the farmers earning capacities from farm under MSP and his
past history of repayment. The farm loan may get enhanced over a period of time
or for each crop reason (A grade, B grade, C grade and so on) depending upon
the farmer’s capacity to pay. The banks in turn run less loss and needn’t
resort to waivers or take unnecessary risks as the CFRRI is an institution that
offers to take the risk of loan on their behalf. This would greatly reduce the
accumulating NPAs of the agricultural banks.
Here, it is to be noted that the farmers have no direct
contact with CFRRI and it should remain so. Again, banks are best to negotiate
with mostly illiterate farmers while an insurance body like CFRRI is best to
deal with complex technical details with a bank body on the same footings. The
bank, of course, pays a small premium to the insurance company for each loan
policy taken.
The above chart is the best bet for Indian agriculture to
remove unnecessary complexities and make the system more fool proof for the
benefit of the farming community.
Perpetual Inventory System and Working Capital
Unlike the manufacturing sector or other types of
industries, trade and commerce the Indian agriculture has to have a different
mechanism of accounting. This means that the State machinery provides the main
support between almost 100% private holdings and 100% end consumers. This is
due to the nature of almost all the agricultural produce.
True, if the land holdings were made like a free market
structure where anyone willing to produce or sell at their risks then chaos
would exist that would be threatening to the very smooth farming to marketing
of the produce. Further, if the individual land holdings were in the range of
10 or 20 hectares and above then the whole of the agriculture could have
operated analogous to that of the manufacturing and trading sector. This would
also mean displacement of a substantial part of agricultural population and
they would migrate to towns making life impossible for themselves and that of
others. In other words, this is not as manageable as it may sound for around
200 or more million of people engaged in agriculture would become jobless.
But in our present scenario and with the model as above we
can raise the productivity level by keeping the MSP reasonably high so that
there would be a dramatic shoot up of demand in the rural areas which in turn
would nourish all other industries and trade.
Hence, the government offers a middle support between the producers
and the end consumers. The agricultural procurement at MSP is financed by it
and then the same money is made to rotate so that a substantial part, if not
whole, is retrieved through the process of TP (Throw Price). Here, we see a
perpetual inventory being created by the government agencies and when the
revenue is received from the TP pricing the cash is further utilized for giving
support to further MSP for other seasonal crops or horticultural produce.
This means that the cash that is being utilized by the
Government is both for perpetual inventory for the Government as well as its
Working Capital. Nevertheless, the government agencies suffer losses at least
in the short time for most of the cash is not recovered as we have seen above.
This is because the State needs to keep both the interest of the farmers at MSP
and that of the consumers. And this is only possible by foregoing a part of the
profit and even offer hefty discounts of 25% and above to retailers by cleverly
and quickly auctioning the produces at TP.
During drought or crop failure this is easier managed as
then you only need to import the produces that are in shortfall. But in the
case of bumper harvest discounting heavily as shown above is the only way out.
The State agencies would then suffer losses when there is
bumper crop and then this loss would be adjusted with the budgetary provision.
Yet as stated earlier the B situation is much more superior to situation A as
the losses could be better managed and adjusted with improved digitization and
trained manpower who would be able to make the right TP to act so that
eventually a trade off is made during lean season when the produces sell at
higher prices.
It is also reasonable to understand that the loss in
situation A versus situation B would be much higher as there are inherent
anomalies in the whole structure and accounting procedures. Apart from that the
State would be facing loan waivers and banks increased NPAs making the entire
spectrum of stress level daunting and shocking.
An entire system of accounting and keeping the whole flow
going on in an uninterrupted way would enable the whole of the agricultural
supply chain to bring in more value. The model would take care of wastage as
well as correct pricing including profits for each particular produce.
