The problem with Indian agriculture, and government

The problem with the Indian agriculture sector is that the government takes a very “cash view” of the sector while what is required is a “derivative view”. 

So Congress VP Rahul Gandhi railed on in a rally about how the current Narendra Modi government is anti-farmer, and pointed out at the land acquisition amendment bill and the lack of raising of “minimum support price” as key points of failure. Gandhi was joined at the rally by a large number of farmers, who reports say were primarily very pissed off about the failure of their rabi crops thanks to unseasonal rains in the last month and a bit.

If the government were to take Gandhi’s criticism seriously, what are they expected to do? Not amend the land acquisition act, or amend it in a different way? Perhaps, and we will not address that in this post, since it is “out of syllabus”. Increase the Minimum Support Price (MSP)? They might do that, but it will do nothing to solve the problem.

As I had pointed out in this post written after a field trip to a farm, what policymakers need understand is that farming is fundamentally a business, and like any other business, there is risk. In fact, given the number of sources of uncertainty that exist, it can be argued that farming is a much riskier business than a lot of other “conventional” businesses.

So there is the risk of high prices of inputs, there is risk of bad weather, there is risk of a glut in supply that leads to low prices, there is a risk that the crop wasn’t harvested at the right time, there is a risk that elephants trampled the field, or there is a risk that there might be a new strain of bugs that might destroy the crops. And so forth. And given that most farmers in India are “small”, with limited land holdings, it needs to be kept in mind that they don’t have diversification as a (otherwise rather straightforward) tool to mitigate their risks.

And when the farmers face so many risks, what does the government do? Help them mitigate at max one or two of it. One of them is the “minimum support price” which is basically a put option written by the government, for free, in favour of the farmers. All it entails is that the farmer  is assured of a minimum price for his wares if market prices are too low at the time of harvest. In other words, it helps the farmer hedge against price risk.

What other interventions do Indian governments do in farming? There are straightforward subsidies, all of the input variety. So farmers get subsidised seeds, subsidised fertilisers, subsidised (or in several cases, free) electricity, occasional subsidies in irrigation, subsidised loans (“priority sector lending” rules), and occasionally, when shit hits the fan, a loan waiver.

Barring the last one, it is easy to see that the rest are all essentially input subsidies, making it cheaper for the farmer to produce his produce (I’m proud of that figure of speech here, and I don’t know what it’s called in English). Even loan waivers, while they happen when market conditions are really bad, are usually arbitrary political decisions, and never targeted, meaning that there are always significant errors, of both omission and commission.

So if you ask the question of whether the government, through all these interventions, make the business of farming easier, it should be clear that an answer is no, for while it makes inputs cheaper and helps farmers hedge against price risk, it doesn’t help at all in mitigation of any other risks. Instead, what the government is essentially doing is by paying the farmers a premium (subsidised inputs, free options) and expecting them to take care of the risks by themselves. In other words, small “poor” farmers, who are least capable of handling and managing risk, are the ones who are handling the risk, and at best the government is just providing them a premium!

The current government has done well so far in terms of recognising risk management as a tool for overall wellbeing. For example, the Jan Dhan Yojana accounts (low-cost bank accounts for the hitherto unbanked) come inbuilt with a (albeit small) life insurance cover. In his budget speech earlier this year, the Finance Minister mentioned a plan to introduce universal insurance against accidental death. Now it is time the government recognises the merits of this policy, and extends it to other sectors, notably agriculture.

What we need is a move away from “one delta” cash subsidies and a move towards better risk management. The current agricultural policies of successive governments basically ensure that the farmer makes more when times are good (lower inputs costs, free put options (MSP) with high strike price), and makes nothing when times are bad. Rudimentary utility theory teaches us that the value of a rupee when times are good is much lower than the value of a rupee when times are bad. And for the government, it doesn’t really matter as to when it spends this money, since its economic cycle is largely uncorrelated with farmers’ economic cycles. So why waste money by spending it at a time of low marginal utility as opposed to spending it at a time of high marginal utility?

In other words, the government should move towards an institutionalised system of comprehensive crop insurance. Given the small landholdings, transaction costs of such insurance is going to be high, and the government should help develop this market by providing subsidies. And this subsidy can be easily funded – remember that the government is already paying some sort of a premium to farmers so that they manage their own risk, and part of this can go towards helping farmers manage their risk better.

It is not going to be politically simple, for the opposition (like Rahul Gandhi) will rail that the government is taking money away from farmers. But with the right kind of messaging, and subsidies for insurance, it can be done.

Wheat and rice production revisited

Towards the end of last month we had looked at states in India with the maximum land under wheat and rice cultivation (both on an absolute and a relative basis). We revisit that topic of rice and wheat cultivation here, except that now we look at production (in KG) and productivity (KG per hectare). The data at spans from 1998 to 2010, but data for all states is not available for 2009 and 2010, so assuming that production patterns don’t change drastically, I’ve used data from 2008 to look at the biggest producers of these commodities.

Four figures offered without further comment.

1. Top wheat growing states in India (as of 2008)


2. Productivity growth in major wheat growing states of India


3. Top rice growing states of India (as of 2008)


4. Productivity growth in major rice growing states of India


Largest crop by state

We will continue to stick with the state-wise data on agriculture. In this edition, we will look at the largest crop by state, by year. We define this as the crop with the biggest acreage in the state.

No fancy visualizations here. Just data presented in a table. Two tables, actually, one for kharif and one for rabi. For each year these two tables show the biggest crop per state.

Offered without comment.

Major Crops in India, by State: Kharif Season
Major Crops in India, by State: Kharif Season


Major Crops in India: Rabi Season
Major Crops in India: Rabi Season

(click on images for larger size)


Growing wheat and rice in India

One of the most massive data sets on is district-wise data on the total area under cultivation and production of various crops for each season for each year from 1998 to 2010. In this post we will look at which states utilize the most amount of land growing each crop.

First, a note on the data. The data is district-wise and season-wise. The irritating thing is that the seasons are not mutually exclusive. The seasons in the data set are “Summer”, “Kharif”,  “Autumn”, “Winter”, “Rabi” and “Whole Year”. First of all, I don’t know what “Autumn” means in India – as far as I know India doesn’t have one such season. Granting some liberties, it is irritating that seasons overlap.

Here is how I’ve consolidated the data. For either crop, for each year, I took the total area under cultivation for each state for each season. Next, I looked at the maximum area under cultivation in a particular state at a particular point in time (any time in the 12 years of data I have). So the data I present in this post is the maximum area in a particular state that was under a particular crop at some point of time in the 1998-2010 time period.

So, who grows wheat in India? The graph here shows the states with the maximum area under wheat:



Notice that Uttar Pradesh and Madhya Pradesh have had much more area under wheat than Punjab or Haryana. Also notice that only eight states in India have ever had more than 5000 square kilometers of land growing wheat. To put this in perspective let us look at rice:



Here I have put the cutoff (for entry to the graph) at 10000 square kilometer, and yet fourteen states make the cut. In terms of area under cultivation at least, we can say that we are a predominantly rice growing country. Again, in rice, notice that Uttar Pradesh and Madhya Pradesh have more area under cultivation of rice than more “traditional” rice growing areas like Orissa or West Bengal.

Which state has the biggest proportion of its land area under wheat? And rice? The next two graphs show the proportion of land under wheat and under rice in each state (note again that these are maximum values over a decade).


There is much more information in this particular data set. We will revisit it in subsequent posts.



Wheat Prices in India

The ministry that has taken the greatest enthusiasm in disseminating data via the data portal launched by the government of India is the Ministry of Agriculture, which has so far released over 1700 different data sets. Once you download the data you will find that the data is extremely extensive.

I happened to download data on wheat prices in the last four years and the level of detail is amazing. For each agricultural market in the country, for each kind of wheat, it gives the minimum, maximum and modal traded price of wheat for every day. Over the four years, the data set has over 6 lakh data points.

I wanted to look at how the wholesale price of wheat has varied in the last four years. Rather than get into the nittygritties of different varieties of wheat and different markets, I simply took the median traded price of wheat for each day and plotted them. While there might be different varieties whose prices vary from each other, the median is enough to give us a level.


Notice the seasonality in the price of wheat. Given that wheat is primarily a Rabi crop, you would expect the new harvest to hit the markets sometime around March-April (Baisakhi is the primary Rabi harvest festival). However, if you look at the price trends, you notice that the price peaks each year around December, and the price drops starting in January. It continues to drop until March-April after which it starts rising again.

The data shows that there was a steep increase in the price of wheat towards the end of 2009. 2011, however, didn’t behave similarly, with a sharp drop in the price of wheat towards the end of the year. The latter, however, has been more than compensated by the sharp increase in the price of wheat through the course of 2012.

There is a lot more you can play around with the data. You can expect some more agricultural analysis on this blog in the coming weeks or months.

Minimum Support Prices

In India, we have this concept of “Minimum Support Price” for agricultural commodities. It is basically an unlimited put option written by the Government in order to protect farmers against not getting “appropriate remuneration” for their produce. In that sense it can be thought of as an implicit subsidy towards agriculture. There is merit in the argument in favour of such a measure – agriculture is a fundamentally high risk business and in the absence of such safety nets, not enough people might take the risk to sow a particular crop, leading to shortages.

On the other hand, it can be distortionary too. If the MSP is set too high, it can lead to a glut in that particular crop in that year, at the cost of other crops, leading to shortages in the latter. Hence, it is a tool that is necessary but one that should be used with care.

Now, the MSP has to be set in advance – so the MSP for the 2013-14 season has already been set.  This is again a risky move but a necessary move – farmers need to know the minimum amount they can get for each crop before they make their sowing decision.

Source: Commision for Agricultural Costs and Prices
Source: Commission for Agricultural Costs and Prices

The figure on shows the Compounded Annual Growth Rate (CAGR) in the MSP of a few important agricultural commodities between 2007-08 and 2013-14. Notice that the CAGR is lowest for crops such as wheat or rice, and high for crops such as Tur Dal or Moong Dal. Under the current Public Distribution System (PDS), families below the poverty line get rice and wheat at subsidized rates, but not pulses. Note that I’m only mentioning facts and not trying to suggest any causation here.

Interestingly, the MSP for coarse grains such as Ragi and Bajra has also grown significantly faster than that of rice or wheat. Also note that prices of cotton and jute have grown rather slowly over the period of consideration.

Now, while this tells us by how much prices have changed in the last six years, it is also pertinent to see how the prices have changed – did the price rise consistently over the last 5-6 years or were there some discontinuities? The next figure tries to address this issue.

Source: Commision for Agricultural Costs and Prices
Source: Commission for Agricultural Costs and Prices

The figure on the left here charts the actual year by year growth in the Minimum Support price of the crops under consideration. To me, two things jump out from this graph – apart from sugarcane, there was a steep increase in the minimum support prices of all commodities between 2007-8 and 2008-9. You might want to be reminded that India went to polls in the summer of 2009 and Maharashtra, a prime sugarcane growing state, went to polls in the winter of the same year. Again, I don’t want to claim any causation.

Then, from 2009 to 2012, minimum support prices of these commodities remained largely constant – perhaps compensating for the large jump from 2008 to 09? And then again there was a spike from 2012 to 2013. There is no such jump from 2013 to 2014, though. Note that the nation goes to the polls in 2014.

Tur and Moong dal, however, have seen a rather secular increase in prices in the last five-six years.

How the proposed Food Security Bill will affect the MSP is left as an exercise to the reader. Comments are open.

PS: Data that I’ve used for this post is available at the website of the Commission for Agricultural Costs and Prices.