The Indian Government spends nearly 20 per cent of its budget on measures that suppress domestic food prices, support food producers and maintain import trade barriers. Minimum support prices (MSP), which are designed to ensure that farmers receive an income at least 1.5 times greater than the cost of production, together with agricultural import tariffs, have been identified by a recent report as the main barriers to increased Australian agricultural trade with India. Those barriers are unlikely to significantly diminish, as the agricultural sector remains a politically important part of the economy and the government sees market protectionism as vital to maintaining the support of rural constituencies.
With close to half of the workforce employed in farming or a related industry, agriculture is a politically sensitive sector of the Indian economy. Agricultural policy is often geared towards gaining the electoral support of this large demographic. On the campaign trail in 2014, Narendra Modi pledged to double farmers’ incomes by 2022. Since his election, however, protests by farmers have become more frequent, with 628 protests in 2014 increasing to 4,837 in 2016. Subsidies and other price support policies have been a major factor in these protests, particularly as the prices of agricultural inputs (mainly fuel and fertilisers) continue to rise.
In an attempt to placate agricultural workers, the 2018 Union Budget provides 165.5 billion rupees ($3.2 billion) in new spending on agricultural subsidies. Those subsidies mainly target crops and not inputs, however, suggesting that they are unlikely to alleviate the discontent within the farming community.
While the MSP and subsidies for credit, fertilisers and irrigation have helped small farmers adopt new technology, investment in agricultural research, education and rural roads has done more to increase rural incomes and reduce poverty.
The MSP also contributes to imbalances in the production of certain goods, by encouraging farmers to continue producing crops regardless of market demand. For example, India is the second-largest producer of sugar, after Brazil, but, at a time when both the domestic and international markets are oversupplied, government assistance to sugarcane farmers encourages them to continue producing sugar. Sugarcane is also one of the most water-intensive crops grown in India, consuming 22.5 million litres of water per hectare during its 14-month growing season. By encouraging farmers to grow water-intensive crops, food subsidies are contributing to the weakening of water security in parts of India.
While the Indian Government has asked farmers to shift production away from water-intensive crops to those that consume less water, it has done little to actually encourage them to do so. It continues to set a “fair and remunerative price” (FRP) for sugarcane, which protects sugarcane growers from the forces of supply and demand. The FRP was increased to almost 80 per cent more than the cost of production, making sugar a particularly attractive crop for Indian farmers.
In an effort to limit supplies on the local market, while still supporting prices, the Indian Government plans to purchase three million tonnes of surplus sugar in 2018. It also plans to introduce soft loans, worth 45 billion rupees, to help millers expand ethanol production capacity and create new demand for sugar-based products. The policy changes are possibly an attempt to win over the 50 million people involved in the sugar industry ahead of the 2019 general election.
While the MSP has done little to improve rural incomes and reduce poverty, it remains politically popular. The Indian Government is therefore unlikely to reduce the amount of financial support that it provides to farmers through food price supports, even when it contributes to socially and environmentally questionable outcomes.