Increasing Farm Incomes
Source: Flickr, Jankie

In late December, the Indian Economic Association (IEA) and IFPRI organized a panel session as part of a larger three-day event held in Tirupati, Andhra Pradesh. While the overall event focused on a plethora of economic factors such as growth, inflation, India’s financial sector, and macroeconomic factors related to revenue and expenditures, the IFPRI panel highlighted the role of evidence-based agricultural research to inform government policy.

India’s government has recently paid special attention to farm incomes, pledging to double farm incomes by 2025. Several policies and strategies have been enacted to help meet this goal, and efforts have been made to integrate work plans at different levels of the government. Four new schemes have been launched – Pradhan Mantri Fasal Bima Yojana (Indian Crop Insurance Scheme, or PMFBY), the e-National Agricultural Market, Paramparagat Krishi Vikas Yoiana (Farmer Development Scheme), and Pradhan Mantri Krishi Sichai Yojana (Farmer Irrigation Scheme).  To focus on doubling the farmer income, the first task will be to understand better the income components. There will be focus on different dimensions of farmer income such as gross farm income, income per crop, and income per household. A measurement is being created to measure all  income from agriculture (crops, livestock, fisheries, and forestry) called Net State Domestic Product that will be used to compare state to state net farming incomes.

The IFPRI panel highlighted that there are multiple valid approaches with which you can calculate farm income, including deducting the paid-out cost of hired labor; deducting the paid-out cost of hired labor, family labor, and rental value of the farm land; and including non-farm income. Regarding farmers’ income, the first step is to finalize the growth scenario for the entire agricultural sector and its sub-sectors. Then sources of growth across sectors can be identified, strategically targeted, and monitored on an annual basis. This will allow the government to increase investment in lagging sub-sectors and identify and address constraints for growth.

Agriculture Diversification has shown potential to increase farmers’ incomes. With 67 percent of India’s landholdings only 1 acre or less in size, many smallholders’ only escape from poverty comes from either exiting agriculture altogether or diversifying their agricultural production to increase their income per unit of land. Agricultural diversification can improve income by four ways - improving on-farm income and employment (higher net returns), improving back-end linkages (requirement of high-value inputs and labor), improving forward linkages (demand for labor by traders, etc.), and improving the demand for high-value crops (HVC). One participant from the National Institute of Agricultural Economics and Policy Research (NIAP) explained that even if labor use is 2-5 times more for HVC, these crops are still able to generate twice the income generated by staple cereal systems.

However, smallholders are often hesitant to diversify into more high-value crops because HVC production comes with greater risk and higher transportation costs than cereal crops;  thus, investment in HVCs can put household security at risk. Dr. Partap Birthal, National Institute of Agriculture Economics and Policy Research (NIAP) stated that a solution could be land consolidation among these farmers if they want to engage in diversification to increase bargaining power in the market and spread the risk. From a policy perspective, investments in public infrastructure to reduce transaction costs for HVCs can help defray the risks associated with diversification to HVCs; in addition, policies to facilitate institutional arrangements like contract farming and to ease access to markets and reduce market risks are needed. The PMFBY can be viewed as a step in this direction.

Agricultural markets also play an important role in contributing to farmers’ incomes.  Many innovations exist to help improve agricultural markets, including: the  institutionalization of contract farming, farmer producer organizations, private markets, direct purchase centers, the use of warehousing receipts as collateral instruments, farmer markets, ICTs for market information, a single license for operation of traders, and futures trading. ICTs in particular have massive potential to transfer important market information quickly and efficiently; mobile phones are the most effective mode of communication in rural areas, and market decisions regarding sale and storage can be guided by market intelligence distributed through this technology. In addition to these innovations, domestic market reforms are required to make market access more equitable and widespread; similarly, the development of cold storage and warehousing facilities can make important contributions to farmers’ incomes.

The panel also discussed how institutional and non-institutional credit for agricultural households can impact farmers’ welfare. India’s agricultural policy regarding institutional credit has improved over the years, decreasing farmers’ dependence on informal credit, improving their risk-bearing ability, and helping them make new investments and adopt new technologies. Some of the concerns highlighted regarding rural credit delivery included disparity in the disbursement of rural credit (differences among states and social group) and the persistence of informal credit agencies that charge high interest rates. Several recommendations were made regarding how to improve rural credit, including making flexible products and services more available and accessible, emphasizing financial literacy, simplifying lending procedures, providing unique identification numbers for households, and convergence with extension and value chain development.

Finally, the panel discussed the development of non-farm skills to help increase farmers’ incomes and reduce poverty. There has been a structural shift in the Indian economy away from agriculture and its sub-sectors and toward non-farm employment. The workforce engaged in agriculture in India shrunk from 70 percent to 52 percent from 1951 to 2011; at the same time, the share of agriculture in India’s GDP shrunk from 55 percent to 15 percent. Households with higher per capita expenditures are also more inclined toward non-farm labor than their counterparts with lower expenditures. Thus, careful macro-level policy reforms are needed to leverage the benefits of this transformation and improve the lives of millions, especially those living in the lowest quantile of income groups.

By:  Jaspreet Aulakh 

Photo credit:Flickr, Jankie