While it is expected from the new government at the Centre, taking charge next month, to quickly take measures for bringing industry back on track, equally important is reorienting the support mechanism for agriculture.
In simple terms, moving away from plain populism, subsidies and support to agriculture need to be better targeted, catering to the real requirements of the farmers.
A Commission for Agricultural Costs and Prices (CACP) study done by Ashok Vishandass with B Lukka, called Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s, can be the bedrock for policy formulations going ahead.
According to the study, for various crops under minimum support price, labour accounts for 30% of the cost of production, followed by land at 27%, capital cost and other inputs 19% each, and fertiliser just 5%. Clearly, the support measures need to be attuned to this composition. What is the logic of R1 lakh crore worth of fertiliser subsidies every year if its contribution to the cost of production is a mere 5%?
To begin with, let us focus on the largest factor, the labour cost, which has witnessed high growth in recent years—wages grew at 6.8% per annum during FY08-12.
It is but natural that to cope with the rising labour cost, farmers have no other choice than to go for increased farm mechanisation. The government needs to chip in here as a higher level of farm mechanisation has several other benefits besides helping the farmers tackle labour costs. It will raise labour productivity, increase profitability, and will make agriculture more competitive. This would also be one of the better ways for reducing rural poverty. The study rightly points out that igniting the whole process may require some capital subsidies in the beginning.
In any case, MSP increases in the last few years have enhanced returns in agriculture in a big way and the government is now in the process of shifting to per acre subsidies for bringing in changes in the cropping pattern, which is still dominated by rice and wheat.
The CACP study estimated the gross value of output per hectare less cost of cultivation, defined as gross returns, during three periods (FY01-FY04, T1), (FY05-FY08, T2) and (FY09-FY11, T3).
Of the 22 crops analysed, 8 crops (wheat, barley, tur, lentil, rapeseed & mustard, sesamum, cotton and sugarcane) posted more than 100% gross returns in T3. It was between 50% and 100% for 10 crops (paddy, maize, bajra, gram,