Despite the hardships, rural families have surprisingly low expectations for the upcoming Union Budget 2022. One reason might be the sheer volume, diversity, complexity and nature of externalities affecting the rural sector particularly agriculture.
The combination of lingering agricultural challenges, scant employment opportunities beyond agriculture in rural regions and more recently, Covid has created a strong cocktail of complexities that has been exacerbated by rising costs. Unless the government makes amends in the Union Budget, it may be too little, too late.
Unresolved issues
The issues confronting Indian agriculture are not new. They've been around for decades, if not centuries. Covid lockdowns and supply chain interruptions have exacerbated challenges such as uneconomic holdings, underemployment, high cost of financing for agricultural producers, tenancy concerns, depleting groundwater resources, reduced subsidies, low productivity and lack of investments, to list a few.
Input costs have risen dramatically in the last year as a result of an increase in diesel and fertilizer prices. Covid has significantly cut income while increasing healthcare expenditure. The squeeze is more pronounced among those who supplemented their incomes from the rural economy with income from working in urban areas.
Apart from these well-known issues, price volatility is the most worrisome among producers. Furthermore, lack of investment in the rural economy implies that non-agricultural economic activities are unable to assist when needed. Unseasonal rains and floods, as well as Covid-induced supply chain disruption, have all contributed to the devastation of the informal sector. The redeeming grace is that the impact varies owing to the diversity of the country.
Thus, in the context of these long-standing problems, the call to shift cultivation from food grains, like rice and wheat, to 'value-added crops' is a simplistic and unrealistic notion.
While 'value-added crops' may boost profitability in times of adversity, volatility is scarcely an inducement to adopt them. As a result, the predominant trend in recent years has been a return to crops such as rice and wheat. The overall effect of agricultural challenges on the economy is expected to be a reduction in rural consumption.
Agriculture needs budgetary support
Agriculture desperately requires budgetary support, particularly in the form of public investments. Given the increasingly capital-intensive nature of associated operations, the annual rise in priority sector lending targets may be inadequate. Unfortunately, investments in these allied sectors are not labor intensive and thus do not contribute much to rural India's overall consumption capacity. This necessitates the development of a novel budgetary support mechanism for prices volatility during periods of high volatility or a downward spiral. Such a safeguard will persuade farmers that it is in their best interests to shift to crops with better value addition.
Subsidy cash transfers add new challenges for beneficiary households. While it may have helped the government save money by plugging leakages, it has created a new difficulty for households since available cash is generally spent for immediate needs rather than for the reason for which it was granted.
Money deposited before festivals, for example, means that money is spent for conspicuous consumption rather than purchasing inputs. Subsidies have been lowered, while fuel costs have risen, reducing the producers' surplus significantly. There is a need to implement programs that offer subsidies in the old pattern of subsidizing commodity producers in exchange for controlled prices or at the very least to implement a program that incentivizes cooperatives or farmer producer organizations (FPOs) that can pass on benefits to their members.
Tenants are a segment of the agricultural value chain that requires assistance. Tenants are an important element of rural culture because of out-migration, the rising importance of education, and a generational transition. However, the concept of 'adverse possession' and land reform laws have instilled fear among owners who refuse to engage into formal land leasing agreements or contracts with renters. As a result, because they do not match the standards of the formal banking sector, renters are compelled to use the high-cost informal markets.
As a result, it may be essential for Parliament to abolish provisions that allow tenants to challenge the title of landowners and perhaps adopt regulations that encourage the development of long-term formal tenancies without jeopardizing the title of the owners. Creating such a framework does not cost money and adopting the necessary modifications by Parliament may possibly kick start a fresh round of agricultural investment. Hopefully, the next Budget will go beyond the standard rhetoric and toward concrete improvements that benefit producers and renters.
