View: Why do India's farmers kill themselves? Can market reforms help?

By Sukhpal Singh

It is known that 85% of India’s farmers operate less than or just five acres of land, half of which in many parts of India may be dry/rainfed. Small farmers contribute 51% of agricultural output with 46% of operated land, and a much higher share (70%) in high-value crops, such as vegetables and milk. However, small farmers are less literate and are from more marginalized castes and communities, and are generally excluded from modern market arrangements, like contract farming or direct purchase. In this context, it is important to examine the role and scope of impact of recent farm produce trade (APMC bypass) Act and the farmer empowerment or Contract Farming Act on smallholder livelihoods.

Many studies show that small farms produce as much as or higher value of output per unit area than that produced by the medium or large farms, which refutes the argument that small farms cannot be the future of Indian agriculture. Therefore, it is not the size of the farm but what a farmer does on that farm, when, how, where, why and for whom and how much, which makes it viable or not.

Given the cereals dominated cropping pattern, the farmers can only earn so much from their small farms. Further, only about 50% or less of the household income of cultivating farmer comes from farming with the rest made up of wages, off-farm and non-farm work. Therefore, nonfarm sources of income are suggested to be crucial for small farmer families to escape poverty or earn a decent livelihood.

The problem of small farmer livelihood is aggravated due to the fact that small farmers suffer from many production risks like drought, flood, lack of adequate use of inputs, poor extension leading to large yield gaps, lack of assured and adequate irrigation, crop failure and so on. The production risk coverage which was being attempted through crop insurance has not worked well and now has been made voluntary for farmers which would further reduce the insured area from already inadequate coverage of 30%.

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Further, there are market risks like absence of market, poor price realisation, high transaction cost, and poor bargaining power due to small marketed surplus. This leads to low and unstable farm incomes for these producers. It is here that the role of market becomes crucial as even if a farmer has produced efficiently but is not able to sell well, the story is lost. The distress among small famers in India is therefore market driven to a large extent in both ways- too much protection (MSP) or too little protection.

This is evident in the fact that since majority of the famers cultivate paddy and wheat in significant part of cropped area (69% in Punjab, and 40% in Bihar), there are limits to how much they can earn as price (MSP, which drives market prices) is given and available only to a fraction of farmers, yields are given, and cost of production can’t be manipulated much. Further, even in other crops, only a very small fraction of farmers gets MSP benefit in a few states where procurement happens. Further, once the farmer takes farm produce to the mandi he can’t bring it back as it is like taking a dead body to the mortuary.

But, markets though important, are only a part of the small holder livelihood problem. One, because APMC mandis cater only to only 1/3rd of total marketed farm produce with the rest of the produce being sold outside these mandis already. Second, the nature and type of crops grown makes all the difference. For example, income from farming per month per hectare is Rs. 4236 in Bihar and only Rs. 3448 in Punjab because Punjab is less diversified (only 11% area under F&V in Punjab compared with 35% in Bihar) in its cropping pattern compared with Bihar though Bihar does not have efficient or regulated agricultural markets. The average size of farm in Bihar is only 0.39 hacs and in Punjab it is 3.62 hacs. Imagine the gains for Bihar farmers if it had APMC markets and other marketing channels which are being promoted now and larger procurement at MSP. Incidentally, Bihar has not seen too many farmer suicides unlike Punjab.

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Therefore, MSP culture, and too much reliance on low value land intensive crops has been the culprit in many suicide prone areas while high production and market risk crops like cotton in others. Most problematic is farmers’ reliance on traders, commission agents, and moneylenders for credit as institutional credit reaches only 65% of them and more of small and marginal farmers are excluded from this institutional credit net. This private source borrowing leads to interlocking of credit and output, input and output, and credit and input markets where there is implicit over pricing of farm inputs and under-pricing of farm output of the farmers and they can’t access other channels even if they offer better prices as they don’t offer credit to farmers who are tied to traders and agents. This restricts their freedom to choose channels provided by new Acts. Further, if the smallholders and tenants belong to lower castes, their access to credit may be limited either by way of complete denial of credit to such groups/ persons or costly access because of higher rate of interest charged or unfavorable terms of repayment. This makes their faming enterprise unviable.

It is still important to realize smallholders suffer high market and price fluctuation risk, and institutional mechanisms to deal with that are missing. The prices are still determined and driven by APMC markets which are still not adequately regulated and, in many cases, mistreat farmers. Whatever new market channels like contract farming and direct purchase may emerge for farmers, small farmers will continue to depend on APMC markets for many commodities. Therefore, it is important to ensure fair functioning of such markets in terms of open auction, proper unloading and storage/handling of farmer produce especially perishable, which is generally auctioned from road side and filthy grounds and stopping of commission being charged to farmer sellers even in regulated markets in some states.

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APMC markets also serve as the main competitors to contract farming and direct purchase and they discover their prices based on APMC prices. Therefore, their better functioning can improve the terms offered to contract growers and direct sellers. Warehouse receipts system needs to be extended all crops with expansion of the facility to free farmers from credit and output linkage and avoid distress sale immediately after harvest.

Therefore, solutions go beyond produce markets whereas recent reforms are more about regulatory changes which do not really concern majority of Indian farmers as they do not have access to APMC markets. But, small farmers need to collectivise into groups and FPOs including Farmer Producer Companies to lower transaction cost for private buyers and to gain some bargaining power in the new markets. There is no need for co-operative farming. What is needed is pre-production and post production aggregation to buy better and sell better or to capture higher surplus in the food and fibre value chains.

(The writer is Professor, IIM Ahmedabad. Views expressed are personal)



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