Note: This is the first in a two-part series on Punjab’s agriculture economy and the road ahead for the state.
“Status quos are made to be broken”, said Ray A. Davis, an American thinker and writer. Sadly, this quote does not apply to Punjab, which has been struggling with a way to break with the status quo in agriculture for at least three decades but has not found an acceptable way of doing that.
During the nationwide COVID-19 lockdown, the Punjab government appointed a group of experts headed by economist Montek Singh Ahluwalia to prepare a strategy for the state’s economic revival.
The group’s first report was submitted to the Punjab government in early August 2020. No other subject covered in the report has generated as much heat as its recommendations about the agriculture sector.
Indeed, it is tragic that a state which was the harbinger of the green revolution in India and which brought food security to the nation, is struggling to find a prudent path to sustainable agriculture, while still providing a decent opportunity to its farmers to maintain their current level of income, primarily coming from the wheat and rice cycle. Punjab achieved a growth rate of 5.7% during 1971-72 to 1985-86, which was much higher than the all-India growth rate (2.31%).
There is no doubt that the state government made large investments in roads, mandis and electricity networks while the Centre also contributed through investment in dams and its policies of MSP and subsidies. For long years, Punjab remained at the forefront of food security to India by procuring wheat and rice at MSP and providing it to FCI to transport it to other states.
The expert committee group’s first recommendation is to allow leasing of agricultural land, geo-tagging of all farmers to land records and making the conversion to non-agricultural use more predictable. As per agricultural census 2015-16, Punjab had 10.93 lakh operational holdings but under PM Kisan, 15.58 lakh land holders have been registered. The average size of land holding is 3.62 hectare, much higher than the all India average of 1.08 hectare. An NSSO report of 2016 found that 24.16% of the operated area was on lease in Punjab.
It is clear that the leasing of agricultural land is quite common but the same is not recorded. A model leasing law was circulated by the NITI Aayog in 2016 but it has not made any headway. A fair law will provide legal protection to landowners while enabling investment by lessees on leased land. No one can have any serious objection to such a law.
Electricity and agriculture
The second major recommendation of the Group relates to free electricity. It says that Punjab should strive to reduce the area under paddy by about 1 million ha, out of 3.1 million ha. This is proposed to be achieved over the next seven years by diversification from paddy to less water-guzzling crops. The Group has suggested several measures including separation of electricity feeder lines, Direct Seeded Rice (DSR) and drip irrigation in paddy.
In June 2019, the state government launched the ‘Pani bachao, Paisa kamao’ pilot scheme under which farmers are eligible to get Rs 4 per every unit of electricity they consume less than a fixed amount, based on their current level of consumption. About 80% of the geographical area in Punjab is over-utilised for water and the water table declined by 70 cm per year from 2008 to 2012. With one kilogram of rice consuming 3000-5000 litres of groundwater, Punjab has no option but to reduce the area under paddy.
The State Farmers Commission under Ajay Jakhar had also noted in its report of 2018 that 110 out of 148 blocks are overexploited for groundwater and a shift from existing cropping pattern is necessary ‘so that the next generation has adequate natural resources for its use’. A task force set up by the state government on the directions of NITI Aayog (2016-17) also noted that if the area under paddy is not diverted, the productivity levels will fall back to that of the 1960s. So, there is no reason for commotion due to this recommendation of the expert group.
In November 2015, the Union government launched an ambitious programme of electricity reforms (Ujwal Discom Assurance Yojana, UDAY) but it made no effort to convince its own partner, Akali Dal, to implement the same. In the absence of a political consensus, little headway was made in this critical area. The Centre is now considering a draft Electricity (Amendment) Bill, 2020 which will constitute an Electricity Contract Enforcement Authority to decide the matters pertaining to sale, purchase and supply of electricity. If the Centre is able to actually reform the electricity sector at least in the states run by its own party, Punjab may also be convinced that it cannot afford to supply free electricity to all farmers.
As a state which has provided food security to the nation for three decades, Punjab, however, deserves a special package from the Centre for reducing the area under paddy over the next seven years so that the farmers can be compensated for the loss of income due to switching from paddy to an alternative crop.
The third major set of reforms suggested by the expert group relates to agricultural marketing. On August 28, the Punjab assembly passed a resolution rejecting the Centre’s proposed Electricity (Amendment) Bill and the three recent ordinances on marketing, essential commodities and contract farming. The assembly held that these are against the federal spirit of the constitution. It means that the sale and purchase of agricultural produce in Punjab will continue to take place only in APMCs and it will continue to attract a tax of 6% along with arhatiya (middlemen) commission of 2.5%.
In 2019-20, the Mandi Board and the state government earned Rs 3,800 crore from mandi fee and rural development cess. The board’s main source of income is from the procurement of wheat and paddy for central pool stocks. If the Union government does not force setting up of procurement centres outside APMCs (i.e. in the trade area), Punjab will continue to earn this revenue.
Several states have exempted fruits and vegetables from mandi fee. In the budget speech of 2020, Punjab’s finance minister also announced that mandi fee on fruits and vegetables will be reduced from 4% to 1% but it has not been implemented. Last year, the Punjab Mandi Board earned about Rs 120 crore from fruits and vegetables.
The expert group is correct in noting that Punjab will not be able to attract any investment in supply chain and food processing due to high taxes in mandis. Thus, the expert group’s assessment that Punjab may lose the opportunity to create jobs and attract investment is correct. The food demand of northern India will then be met from other states like Haryana, Uttar Pradesh and Rajasthan, which have lower taxes.
The fourth major recommendation is to double the area under high-value fruits like plums, peaches, litchi, guava and vegetables like potatoes, peas and chilli etc. Vegetable cultivation is much more labour intensive than food grains and farmers do not have any assurance of MSP. Frequent fluctuations in prices of perishables also affect their income. Amritsar and Malerkotla are important centres of vegetable production in Punjab. The group has recommended air freight subsidy for export from Punjab, but the state government is not in a position to bear this. As long as India’s relations with Pakistan remain tense, the farmers of perishables cannot access markets in Central Asia. Punjab would be the biggest beneficiary of better India-Pakistan trade relations.
The fifth recommendation is about direct benefit transfer (DBT) of fertilizer subsidy. This subject has been under discussion for several years but the Centre has not found it possible to charge market prices for urea and pay the subsidy through DBT. The Nutrient Based Subsidy (NBS) for phosphatic and potassic fertilisers (P&K) was introduced by the UPA government in 2010. It was followed by the decision in January 2013 to raise diesel prices by up to 50 paise per litre per month, till the entire losses on diesel are wiped out. Due to the high level of tenancy in Punjab, direct cash transfer of fertilizer subsidy to land-holders will further increase the cost of cultivation for tenants. The experience of Rythu Bandhu and PM Kisan shows that direct income support has not brought down the rates of leasing for tenants.
The most contentious recommendation of the expert group is to move to cash transfers instead of the distribution of food grain under PDS. There is merit in the argument that in a food surplus state like Punjab, it is rather awkward that wheat and rice are supplied under the National Food Security Act. Cash transfer of food subsidy may enable the beneficiaries to buy more diversified food like eggs, milk, fruits, pulses, chicken and meat. Punjab could be the right place to experiment with this.
In Punjab, however, this recommendation is seen as a step towards dismantling the procurement system which enables farmers to realise the MSP for wheat and paddy. In the next 15 years, production of paddy will have to come down anyway due to reasons of sustainability. If the Centre promotes the cultivation of oilseeds and pulses and if better seeds are available, Punjab farmers may grow less wheat in rabi season. Since the domestic demand for oilseeds and pulses will continue, procurement of 90% of market arrivals (as in the case of wheat) may not be needed.
At present, Punjab’s agriculture is the least diversified. As a result of this and high taxes, the private sector has not invested in agri-infrastructure in the state. Out of about 1,800 warehouses registered with Warehousing Development and Regulatory Authority (WDRA) on March 31, 2020, Punjab had just six warehouses, all of them belonging to Central Warehousing Corporation (CWC). Madhya Pradesh had 340!
On the National Food Security Act and public distribution system, several recommendations were made by the Shanta Kumar Committee (2015). These have remained largely on paper as the Centre could not find a way to proceed with DBT for PDS and reduce open-ended procurement of rice and wheat. As a result, much more wheat and rice is being procured than required under the PDS and the Centre incurs a large amount as food subsidy due to high carrying cost.
For a roadmap to achieve the reforms suggested by the Group of Experts, deeper consultation and consensus-building between the Centre and the states is needed, which was demonstrated in negotiations leading to the implementation of GST. It is a different matter that the GST regime is itself stressed due to the Centre’s inability to pay the compensation due to the states.
Siraj Hussain retired from the Indian government as Union agriculture secretary. At present, he is visiting senior fellow at ICRIER.