Profitability in Agriculture and Inclusive Growth

N.Srinivasan1

Increasing profitability in agriculture through higher productivity has been an

important goal in developing countries like India. It has become increasingly
relevant in recent years due to limited scope for expansion of arable land.
Increasing yield to their technically highest level may be feasible, through
adequate investment in infrastructure and technology i.e., irrigation, land
development, storage, markets, etc. Besides appropriate pricing of inputs and
outputs, availability of credit and extension services would facilitate access to
available technology. A major theme emphasised by Planning Commission in
its mid term review of Tenth Five Year Plan is “Expanding inclusiveness of
growth by creating market opportunities in the lagging sector of agriculture, in
more and more States, and improving people’s participation on more and more
favourable terms in the market”

These issues are more relevant in our country because 58 % of labour force is
dependent on agriculture. The growth of value added in this sector has
declined from about 4% during 1980s to 3% during 1990s and 2% in last five
years as given in table-1

Table-1: Comparative Growth of Agriculture and overall Economy.

Years Overall GDP Agriculture

growth rate and allied
activities
1981-1991 5.74 3.84
1991-2001 5.64 2.72
2000-01 to 2004- 6.00 2.24
05
Source: Economic Survey, Government of India, Table S-10

1
Consultant, development finance and rural development. Previously Chief General Manager of National Bank for
Agriculture and Rural development, India. Email: shrin54@yahoo.co.in

1
A major concern is the relatively low growth in agriculture GDP as compared to
overall GDP without significant reduction of labour force engaged in
agriculture. It has widened the gap between per capita income of labour
engaged in agriculture and non-agriculture sectors. A large number of rural
households share a shrinking part of the national pie. In fact, the situation
has worsened in recent years with 60% of rural households owning less than 1
ha, 12% households landless and 28% of rural households owning more than
1 ha (National Commission on Farmers 2006). Such an uneven distribution of
income and assets has social and political ramifications for future.

2. Profitability and Viability

Profitability may be defined as positive return to working capital and capital

invested in various productive assets including land. In case of capital assets,
profitability should ensure return of capital and also return to capital at rate
equal to or exceeding the prevalent market rate of interest. As regards
viability, the farm family must be in a position to generate a total net income
that is sufficient to meet the expenses of the household and invest in future. In
this context, the National Commission on Farmers in its 10 major goals for
National policy for farmers mentions its first goal as “to improve economic
viability of farming by ensuring that a farmer earns a minimum net income
and ensure that agriculture progress is weathered by the advance made in
improving the income”. Hence inclusive growth refers to viability of even the
smallest and the most marginal rural farmer. Sustainability is the ability to
generate positive net returns over a period of time, protecting the productive
capacity of capital assets.

3. Trends in Income from agriculture

2
The index of agriculture income increased from 100 in 1993-94 to 151 in
2004-05. Sectors other than agriculture experienced an increase in indexed
income from 100 to 234 over the same period. It indicates, ceteris paribus,
widening disparity in income between agriculture and non-agriculture
vocations.

The indices of Terms Of Trade (TOT) in agriculture prepared by CACP and

Directorate of Economics and Statistics are given in Table 3. As per CACP data
the terms of trade have been favourable to agriculture during 1990s up to
1995-96. However, after this period the TOT has turned unfavourable. The
TOTs prepared by the Directorate of Economics and Statistics indicate that the
terms are deteriorating from 94-95 onwards till 2000-01. In the recent years,
the prices of the inputs have not increased much as compared to the
agricultural commodity prices. This suggests that the cause of unviability lies
somewhere else. The influence of non- price factors such as public investment
in agriculture, human development and institutional reforms are as important
as price incentives, in inducing effective supply response (Rao and Gulati,
2005).

The Planning Commission in its mid term review of X Plan observes that
agriculture prices declined relative to prices not only of inputs, but also non-
food consumer goods. As a result, purchasing power of agriculture income
(current price GDP/consumer expenditure) decelerated more than GDP. Farm
incomes not only show low per capita growth after 1996-97 but also exhibit
increased variability.

Table - 2
Terms of Trade in Agriculture
Year CACP Base DE&S
TE 1980-81 TE 1980-81
1980-81 100

3
 1981-82 95 88.7
1982-83 97 91.4
1983-84 98.9 91.6
1984-85 98.5 93.9
1985-86 94.4 93.6
1986-87 97.7 95.7
1987-88 99.5 97.4
1988-89 98.7 98.3
1989-90 99.1 99.4
1990-91 103.1 101.9
1991-92 106.2 105.6
1992-93 99.2 103
1993-94 104.1 103.6
1994-95 105.2 106.6
1995-96 103.3 105.3
1996-97 93.1 103.1
1997-98 91.7 105.6
1998-99 95.6 105.2
1999-00 95 102.7
2000-01 101.2
Source - CACP, MTA of X plan, Planning Commission.

State-wise/Crop wise Income per ha

Gross value of Output (GVO) per ha for different States as worked out by
Bhatia, revealed that the overall growth in GVO is 1.13% during 1990s as
compared to 3.79% in 1980s. During 1980s, all the States have recorded
positive growth rate in GVO while during 1990s, Bihar and Gujarat have
recorded negative growth. Among the States, West Bengal has recorded the
highest growth rate during 1990s. The main reason for the declining growth
rate of GVO is the stagnating yields of major crops during 1990s as compared
to 1980s as given in table 4 (Ramaswamy, 2004).
Table 3: Growth performance of selected crops (all India)
(Compound growth in percentage)
Crop 1970s 1980s 1990s
Wheat 1.87 3.09 1.81
Paddy (Rice) 1.65 3.56 1.10
Maize -0.51 2.06 2.25
4
 Pulses -0.98 1.57 0.49
Groundnut 0.99 2.03 0.83
Sugarcane 0.57 1.28 0.84
Sesamum -1.17 3.72 1.89
Sunflower -3.14 -3.61 -0.11

Crop-wise Input Output Ratios

The crop-wise productivity and output-input ratios have been worked out for
crops grown in the State of Punjab. It shows that wheat and paddy
combination is giving maximum returns per ha and the output-input ratio is
higher for these crops as compared to other millets, pulses and oilseeds.
Therefore, the areas with lower allocation of acreage under wheat and paddy
may have relatively less income than the all India average.
Table 4 - Input Output Ratio: Comparison Among crops (2001-02)
Crop Gross returns Variable cost Net returns Output/Input
(Rs./ha) (Rs./ha) (Rs./ha)
Wheat 30,016 11,665 18,351 2.57
Paddy 29,792 16,921 12,871 1.78
(Rice)
Sugarcane 68,750 50,120 18,830 1.37
Gram 14,900 5,663 9,237 2.63
Linseed 17,100 8,013 9,087 2.13
Barley 18,100 9,084 9,016 1.9
Arhar 13,650 6,948 6,702 1.96
Cotton (A) 21,362 15,125 6,237 1.41
R&M 136.1 9,248 4,362 1.47
Basmati 19,400 15,906 3,494 1.21
Maize 13,590 12,180 1,410 1.11
Cotton (D) 15,124 14,042 1,082 1.07
Moong 9,080 8,000 1,080 1.13
Groundnut 12,080 11,422 658 1.05

Source: Dept. of Economics, PAU, Ludhiana as reported by Dr. H S

Shergill, 2006, table 5.1, page 23.

The above table shows that the highest financial returns per ha and the best
output input ratio is achieved in wheat followed by paddy. It is to be noted that

5
even the net financial returns from sugarcane amount to only Rs.9715 per
crop season (of six months). The other crops that yield reasonable financial
returns are gram, linseed, barley, though the absolute income is much less as
compared to wheat and paddy. In case of pulses and oilseeds, the returns are
at the minimum. The dry land crops show much lower returns than irrigated
crops. This clearly brings out the difficulties faced by dry land farmers in
generating viable incomes.

Farmers Response
In a recent survey, it was revealed that 40% of farmers want to quit farming.
Lack of viable alternative has kept them in farming. There have been periodic
and persistent requests for relief from cultivators. Even those cultivating
commercial crops like sugarcane, cotton and plantation crops have been
demanding relief. The existence of the people in dry land areas is marginal;
even those who have large land holding, fall into transient poverty whenever
monsoons fail. Suicides have been resorted to as a distress response in the
extreme.
Hidden costs.

A number of hidden costs that make agriculture are rarely recognised and

computed. The farm models in agriculture are designed on the basis of

standard costing norms. But there are invisible and hidden costs in carrying

out agriculture that tend to distort the farm models adopted by the official

machinery. These costs relate to i) failure in infrastructure, ii) delay in receipt

of subsidy, iii) delay in the delivery of services, iv) lack of quality inputs, v)

under financing by banks and vi) the procedural complexities. Each of these

tends to increase the level and duration of efforts of the farmers to access the

quality services at the appropriate time. In some cases, the farmers have to

6
substitute the low cost resources with a much higher cost resource on account

of delays and complexities. Since these costs rarely enter the farm models the

losses inherent in carrying out farming operations, do not come to the surface.

The normative costs associated with credit, fixation of support prices,

subsidies for investments, etc., ignore these costs and thereby fail to measure

profitability in accurate terms at farm level.

2. Policy bred causes: Several reasons for low profitability of agriculture

have their roots in State policy. For example the policy on land tenancy and

ownership has pushed up the cost of leasing and has driven the market

underground. Without effective grievance redressal mechanisms in case of

disputes, the land policy has made the relationship between the owner and

tenant extortionate from either side.

The overall slant of agricultural policy has been on inputs and supply of a

variety of goods and services such as seeds, fertilisers, technology, etc. By

failing to focus on markets the policy has adversely impacted the profitability

of agriculture and made farmers dependent on subsidized inputs supply rather

than on the market for remunerative prices. Through a combination of State

and credit policy overall production growth was targeted rather than farm

incomes. The State intervention in agriculture has tended to benefit irrigated

farms and large holdings as these are better placed to use the inputs offered.

On the other side, the socio-political need for keeping the consumer prices low

and providing cost effective access to food, has ensured that the farmers did

7
not benefit from higher prices possible in the markets. Procurement and

marketing especially in cereals has been managed by the State in the same

manner in the interest of consumers and thereby restricted gains to the

farmers. The subsidies given by the benevolent state seeking to reduce input

cost has led to distortion in the market and encouraged misuse and

misapplication of inputs. The review over the last four decades of the farm

policy and the policy of inputs leads one to feel that farmers' security has

become a casualty to the interests of food security. The policy of encouraging

short-term loans in agriculture on the part of banks has restrained the private

sector from making optimum long-term investments in improving the

productivity and asset quality.

3. Risks and profitability

The risks inherent in farming impact its profitability. Some of the major risks

related to technology, credit availability and most importantly policy

continuity. Increasing share of purchased inputs in Indian agriculture leaves

it open to market risks of increasing costs. The absence of market based risk

mitigation mechanism has made it difficult for farmers to use friendly and

reliable insurance products. The existing risk products are limited both in

coverage and appeal. This lack of risk coverage on the basic production efforts

of the farmers at the individual farm level is compounded by lack of safety nets

to secure their future. The state action in terms of risk mitigation is more

evident in calamity relief rather than systematic management of risk.

8
4. Promise and performance

A significant contributor to the present state of farming is the tardy

performance under the promises that are made to the farming community.

Farmers across states have made several investments on the basis of

promises made by the State. Such investments suffered when the promises

were not fulfilled. For example availability of power and energisation

pumpsets are clear issues for farmers trying to set up the irrigation

facilities in their farms. There are many states in which the pending

applications for power connection are fairly large and even after power

connection the availability of power is erratic. The investments made in

such cases have become partially or wholly infructuous. Often, subsidies

are promised but delivered after considerable lapse of time. The farmers

have to depend upon borrowings from elsewhere in order to complete the

investment. During this period, the high cost of borrowing pushes up the

capital costs and reduces profitability. Similarly, delayed supply of seeds

and fertilisers is a commonplace occurrence that affects crop output and

profitability. Quality of inputs especially in seeds impacts germination and

consequently outputs. Non-maintenance of infrastructure created has a

dampening effect of assured availability of services (power, irrigation,

market). The leakages that take place in the delivery of the several

promises made by the State and others strain the farmers’ budget as they

have to bring supplementary resources from elsewhere at higher costs. If

9
 the performance matches promises on every good and service that is offered

to farms, perhaps there would be more stability in farm income.

5. Technology and transfer of knowledge

Technology has been the corner stone of green revolution during which

quantum jump in food grain productivity was evidenced. But today if we

compare the productivity of Indian farms with those obtaining elsewhere in

the world we find that our productivity is lower in every major crop. Why

technology has not been able to improve productivity beyond a point may

be due to the fact that farm viability has not been made an objective in

technology development. Even after 50 years of intensive work, there is no

mainstream farming solution for dry lands that is sustainable. The

technology transfer mechanisms are weak with a significant proportion of

farmers willing to use press and media as source of credible information

rather than the extension workers2. The universities have not emphasised

linkages with farms.

6. Markets and incomes

Markets have been the weakest link in the chain that connects the

farmers with incomes. Cost of accessing physical markets and the opacity

of dealings therein have been adversely affecting the farming community.

Marketing infrastructure and fair practices in the markets need to improve

2
This is revealed in the Situation Assessment Survey of agriculture carried out by NSSO>

10
 considerably. Lack of aggregation mechanisms for produce and lack of

marketing mechanisms have prevented the small farmers from realising the

best prices for their outputs. The support prices combined with

procurement have distorted the market and have reduced the income

realisation in the hands of farmers. The mid-term evaluation of Xth Five

Year Plan has been critical about performance of both MSP3 and

procurement mechanism. The policy of keeping private sector out of

procurement and marketing operations has led to continued exploitation by

the existing intermediaries in the chain. While different commodity

exchanges have been set up, they tend to look towards organised trade

rather the farming community.

7. Impact of global trade

Globalisation of farming has already affected the Indian farmers with gluts

in production across the world being transmitted to India in the form of

lower prices of farm produce. Sugar, oil seeds, edible oils, milk and milk

products, plantation crops and cotton are the prime examples of crop

sectors in which adverse impact of global markets have been felt by Indian

farmers. The global shortages do not seem to produce high returns for

Indian farms4. Such shortages seem to benefit trade and industry more

than the farmers. Export import policy is used by the Govt. in case of

3
Minimum Support Price – this is fixed by the government based on the report of the CACP
4
In the last one year (2007) global wheat prices had increased by over 70%, but the Indian prices have incrased by
only 10%!

11
 domestic shortages to cool the market to maintain consumer prices at lower

levels to the disadvantage of farms. While intensive negotiations are

underway on the issue of access to OECD markets for farm produce, the

fact remains that the subsidies given to farmers in OECD countries was 2.6

times of the entire agricultural GDP of the year 2004-05. With subsidies in

such large quantities available to the farmers abroad (as much as 40 to

60% of their incomes), how do the Indian farms compete in a global market

is a big question. The non-trade barriers such as PSP requirements,

country of origin, labour standards, quality standards and the like also

reduce access to remunerative markets.

8. Silver lining

More reforms in agriculture have been visible in last two years. Agricultural

marketing is being unshackled with entry of private sector. Creation of new

marketing infrastructure has been actively pursued. There are exciting

developments in design of new risk mitigation products. The Govt. has made

the initial shift from providing subsidies to offering venture funding for

enterprises in agriculture. There is greater tolerance and some encouragement

for entry of private sector. This should introduce greater efficiency and

innovations. The corporate farming and contract farming practices that are

currently gaining ground should improve the cultural and marketing practices

to the benefit of farms.

12
 8. Agenda for the future

In future, if farmers have to remain efficient and get viable incomes, farm

profitability should be clearly focused and enhanced. This calls for action

from several players. First at the level of policy, there must be a shift in focus

from inputs to outputs and markets. While the agriculture policy is needed to

ensure growth of production, productivity, crop diversification and food

security, what is more needed is a farm income policy that would ensure that

farmers are in a position to implement the agricultural policy with profits.

What needs to be clearly articulated is where consumer protection must end

and farm protection should start. The protection needed by the poor and

vulnerable sections of the population must be met through welfare measures

separately and not achieved through depressing farm produce prices across

the board. Public investment in rural infrastructure must not only be

enhanced but also made very efficient. This results in reducing the cost of

agriculture operations and widening the market. On the technology front, we

must prioritise cost reduction, income enhancement at farm level. Even when

all these are done, market failures are bound to impact farms. Safety nets for

farmers to rescue them from market failures are imperative. The commodity

exchanges should have a rural service obligation so that greater access to

market for farmers and their associations are available. The trade policy on

farm produce should strive for consistency and continuity so that investments

made in farming do not become unviable.

13
A dispute redressal mechanism that would address the issues relating to

contract and corporate farming is necessary in the context of increasing

coverage of such arrangements. A mechanism should be in place to

compensate farmers for failures of technology and inputs. Eventually the

State has to shift from the hands-on project management approach in

agriculture to a supervisory role where it sets standards and benchmarks for

quality of services and ensures that service providers adhere to these

standards. Income generation is an entrepreneurial activity. Less of state and

more private involvement could provide suitable conditions for enhancing farm

incomes. More private sector initiatives must be welcomed in agriculture with

necessary safeguards to prevent exploitation of farming community.

14