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India in Transition

Transforming Traditional Agriculture: The Role of Digital Innovation

Marshall M. Bouton
January 14, 2019

In March 2016, Indian prime minister Narendra Modi announced a historic shift in India’s agricultural policy: doubling farmer incomes by 2022 would replace increasing food production as the main focus of India’s policies—a goal many experts criticized as unachievable even as they lauded the shift in priorities. What lay behind Modi’s departure from decades of policy attention and where does the initiative stand today?

Since the onset of the Green Revolution in the late 1960s, India has pursued policies focused almost entirely on ensuring national food security. The overriding aim has been to increase total foodgrain production, reliably provide for feeding citizens, and guarantee national self-sufficiency. By the early 2000s, productivity per hectare of staple crops wheat and rice had grown steadily and total foodgrain production had more than doubled.

The Green Revolution polices have, however, failed in at least one major respect: farmer incomes have not kept pace with the growth in productivity and production, especially for the small and marginal cultivators who account for 80 percent of all Indian farmers. Over the last two decades, the real incomes of small and marginal farmers have fallen by as much as 30 percent due to rapidly increasing input costs, weather-related shortfalls in yields, widening price swings, and lack of access to technology, finance, and markets.

The socio-economic costs of India’s new agrarian crisis have been heavy. Farmer indebtedness has risen rapidly, leading to over 300,000 farmer suicides since 1995 and farmer unrest in many areas of the country. In March 2018, 40,000 cultivators marched across Maharashtra state to protest. In many states, farm groups have demanded farm loan waivers. Farm distress has now emerged as a major political issue and is sure to figure prominently in the April-May 2019 national polls.

The Government’s new policy focus on increasing farmer incomes was clearly timely, but how to achieve that goal is far from clear. Various government initiatives have been announced, many based on digital innovations, to give small and marginal cultivators greater access to finance, technology, markets, and risk management tools.

In October 2018, the Center for the Advanced Study of India (CASI) partnered with the World Food Prize Foundation, McKinsey and Company, and the Chicago Council on Global Affairs to assess India’s new farm crisis and responses to it. At the Foundation’s annual Borlaug Dialogue in Des Moines, Iowa, the organizers presented a panel discussion of how Indian agriculture might be transformed through digital innovation and policy reforms in four critical areas.

Caught in the grip of Green Revolution policies and incentives, much of India’s farmland remains devoted to wheat and rice, especially and ironically in more irrigated and market-connected regions. Farmers growing single crops of paddy and rice in rainfed areas are the most disadvantaged by these same policies.

Today, greater returns to farming are possible where cropping is more diversified. Small and marginal cultivators, in particular, improve their incomes by growing vegetables and fruits and raising livestock. Dramatic progress has been made in poorer states like Orissa where livestock cultivation has taken hold.

To diversify, small farmers need less costly and readier access to the financing, technology, and inputs, and fewer barriers to the sale, storage, and transport of those more perishable products. Digital innovations and government-issued soil health cards can offer that access. Credit can be extended to small farmers at lesser risk and cost through digital channels. Digital extension services can provide real-time advice to help farmers transition to new crops. Mobile phones, especially through the use of WhatsApp, make it possible for farmers to determine the price and time at which to sell their crops and possibly to enter into sales contracts.

The single greatest challenge to India’s agricultural transformation is enabling farmers to realize better prices for their produce. That, in turn, requires a shift from production-centric incentives to market-centric incentives. Indian farmers’ current share of the value of their production is about 20 percent of the value being delivered to the consumer. This has increasingly meant they cannot sustain their families with farming alone and, on average, now earn about a third of their income from off-farm labor.

Most farmers face many obstacles to better monetization of their production. These include the distance from markets, dependence on local moneylenders and traders for access to capital before and after the season, little knowledge of price movements, the need for ready cash at harvest, the cost of transport to markets, the control of markets by trader cartels (70 percent of Indian farm produce is sold to middlemen), and the lack of nearby and inexpensive storage facilities.

Much attention is now being given to how farmers can realize better prices for their produce, and digital solutions are seen as a way to overcome many obstacles. Digital lending could help break the linkage between local sources of production credit (and other lending) and the farmer’s ability to sell for the best price. Online price discovery and marketing platforms would provide farmers transparency and unmediated market access.

The Modi government is working to create an electronic national agricultural market (eNAM) and has enlisted about a third of the country’s regulated wholesale markets in the scheme, but its effectiveness depends on the so-far-incomplete participation of traders in those markets who remain resistant for the obvious reason that it would lessen their price-setting power.

A more promising possibility is the creation of local or regional farmer producer organizations (FPOs) through which over a thousand local farmers could gain market power and better price realization. To be effective, the FPOs result from the initiative of the producers themselves and when they achieve some scale, have professional management. This may be a case where government could provide an enabling regulatory environment and perhaps initial financing.

Risk Management
In recent years, farming in India—always risky—has become more risk-prone. In three of the last five years drought, excessive rain, or extreme temperature have reduced harvests in several parts of India. The 2018 Economic Survey of India traces these setbacks directly to observations of weather extremes in those locations, which appear to be concentrated in the regions that the Intergovernmental Panel on Climate Change has predicted will be most vulnerable to climate change impacts.

Many Indian farmers now also face the risk of increased price volatility due to cycles of over- and under-production of certain crops. The impact of these supply-demand imbalances and resulting price swings on Indian farmers is, in part, a problem of success, the increases in total production of many crops. For small and marginal farmers who lack access to early warnings of weather and production shifts, the risks are magnified. The risk is greater for those growing perishable commodities such as fruit and vegetables, who have no access to storage and little ability to hold onto their produce until prices improve. Nor does the great majority of farmers have any form of crop insurance to guard against sudden and sometimes total losses.

Digital innovations offer much promise for buffering both weather and price risks. The Government of India has developed large-scale weather forecasting capabilities which have been shown in limited use to reduce losses by 5-10 percent and proposes to develop price forecasting models. The next and critical step is to make these forecasts accessible to large numbers of farmers in terms they can apply readily to their locations and crops. Additionally, the Government of India announced in 2016 a crop insurance scheme underwritten in part by government subsidies and enabled by digital technologies for verifying crop losses and connecting insurers with small and marginal farmers. It is not clear if these digital platforms are in widespread use.

One of the most promising responses is not digital—encouraging the construction and operation of local, inexpensive crop storage facilities through financing guarantees and/or tax incentives.

The Digital Potential
There is much promise in digital applications to improve farmer livelihoods. But it is also clear that much remains to be done to bring the benefits to the great majority of Indian farmers. Most importantly, Indian agriculture needs to be made more market-oriented through reform in existing government policies, even as government provides enabling environments for digital innovation. For instance, government should focus on regulating sensibly rather than intervening directly in markets, removing constraints on the operation of digital systems across agency and state boundaries, facilitating local infrastructure development (such as storage facilities and irrigation), and removing any legal or bureaucratic obstacles to the scalability of digital innovations when they appear.

Marshall M. Bouton is Acting Director & Visiting Scholar at CASI.

India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI.

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