Navigating market volatility and government support for Indian agriculture

India's agricultural sector, the backbone of the nation's economy, contributes ~17% to the GDP and employs over half of the workforce. Despite its significance, the sector grapples with persistent challenges stemming from market volatility and climate change.

Market volatility in agricultural commodities, driven by fluctuating demand, climatic conditions, and global economic trends, is a major concern for policymakers, researchers, farmers, and other stakeholders. This volatility not only impacts farmers' incomes but also consumers, vulnerable to food price fluctuations. A study by ICAR examining price volatility from 2010 to 2022 revealed that vegetable prices were the most volatile, followed by oilseeds, pulses, and grains. To curb food inflation, the government has historically imposed restrictions like export bans, increased taxes, etc. However, a study by the Indian Council for Research on International Economic Relations (ICRIER) indicated that in 2023, Indian farmers lost close to INR 45,000 Crores due to such measures.

Climate resilience and its impact

Climate change exacerbates agricultural challenges by causing erratic weather patterns, droughts, and floods, leading to crop failures, reduced yields, and price fluctuations. This year, regions like Uttarakhand, Uttar Pradesh, Bihar, and Jharkhand, which typically harvest in October, faced unseasonal rains, delaying harvests and impacting produce. The El Niño phenomenon has been a significant concern for Indian monsoons, agriculture, and the economy for several years. Yet, farmers are not equipped to counter the impacts of such events. According to the World Economic Forum, between 2015-16 and 2021-22, floods and heavy rainfall damaged approximately 33.9 million hectares of cropped area in India. Recent incidences of unseasonal rains have led to persistent increase in the cost of staples like wheat and rice, with government interventions like export bans having minimal impact on stabilising prices.

MSP analysis and budget allocation

89.4% of Indian farmers are small and marginal, owning less than 2 hectares of land. Moreover, a 2021-22 survey by NABARD reported that the average monthly income of an agricultural household is INR 13,661. It is evident that farmers are vulnerable, with limited capacity to endure losses and volatility.

Over the last decade, the MSP for staple crops like paddy and wheat has seen annual increments. However, when adjusted for inflation, the real value of these MSP varies, indicating that nominal increases do not always translate into real income gains for farmers. 

Another issue the sector faces is the skewed budgetary allocation. An analysis of the Union Budget reveals that budgetary allocation to R&D remains low. In the 2021-22 budget, only 6.5% of the Ministry's budget was allocated to the Department of Agricultural Research and Education, with about 75% of that utilised for administrative expenses. The major budgetary share was allocated to the Department of Agriculture and Farmer Welfare, with 82% of it allocated to welfare schemes like PM-KISAN and PM-FBY, and only 18% allocated to asset building schemes like AIF, RKVY, and PM-KSY. While welfare schemes saw a budget utilisation of more than 90%, long-term schemes saw utilisation in the range of 45% to 60%. 

Despite these schemes, challenges remain. Many farmers are unaware of government schemes or lack access due to bureaucratic hurdles. For instance, while PM-FBY aims to shield farmers in times of crop losses due to unforeseen events, its uniform implementation across the country is still a challenge. Around 70% of the gross cropped area remains uncovered under the scheme.

Building a resilient future

Navigating market volatility and enhancing government support for Indian agriculture requires a multifaceted approach with focus on the following parameters:

• Strengthening infrastructure: Investments in irrigation, storage facilities, and processing units are essential to minimise post-harvest losses and maintain supply consistency.
• Enhancing market access: Efficient supply chains and market linkages, along with platforms like e-NAM, can help farmers reach broader markets, gain market intelligence, and secure better prices.
• Suitable agricultural practices: Changes in agricultural practices like crop planning, crop diversification, agroforestry, and participation in carbon credit markets for income diversification can help farmers become resilient to volatile prices and markets. By selecting crops suited to changing climatic conditions, farmers can better withstand environmental uncertainties. This approach not only stabilises production levels but can also contribute to a more predictable supply chain.
• Budget allocation and fostering innovation: Increased funding for R&D and the adoption of climate-resilient seed varieties can ensure stable yields despite climatic adversities. While DBTs and crop insurance provide a safety net to farmers in times of crisis, long-term planning and building a stable agricultural ecosystem is critical to help farmers build resilience to volatility.
• Policy reforms: Strengthening MSP implementation, expanding crop insurance coverage, and simplifying access to government schemes can provide a safety net for farmers.
• Private sector & professional firms: Increased participation from private players, including professional firms like Grant Thornton, can bring in expertise in areas like supply chain management, financial services, and technological integration.
• Stewardship council: Concepts like Stewardship Council encourage responsible business practices and sustainable agriculture, fostering end-to-end collaboration between the public and private sectors.

By combining government support, private sector involvement, technological advancements, and sustainable practices, India can build an agricultural sector capable of withstanding market and climate variations. A balanced approach towards long-term investments in infrastructure and research, and welfare schemes will build short-term and long-term resilience of the sector. These measures will safeguard the livelihoods of farmers and ensure the nation's food security in the face of an uncertain future.

This article first appeared in Hindu Business Line on 28 December 2024.