IGC Panel Discussion: Financing growth and diversification of Bihar’s agriculture

  • Blog Post Date 05 April, 2019
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Kumar Das

International Growth Centre

In a panel discussion held at Patna, Bihar in December 2018, Anjan Mukherji (Jawaharlal Nehru University), Mekhala Krishnamurthy (Ashoka University), Avinash Kishore (International Food Policy Research Institute), Bharat Ramaswami (Ashoka University), and Pronab Sen (IGC) discussed the issues related to agriculture in Bihar and what can be done to promote growth and diversification in the sector.

The India Programme of the International Growth Centre (IGC), in collaboration with the Department of Finance, Government of Bihar, and the Centre for Economic Policy and Public Finance (CEPPF) at the Asian Development Research Institute (ADRI), organised a panel discussion on “Financing Growth and Diversification of Bihar’s Agriculture” in Patna in December 2018. The session chair, Anjan Mukherji (Jawaharlal Nehru University) set the stage by emphasising the importance of improving agriculture in Bihar, a landlocked state where an overwhelming proportion of the population is engaged in agriculture. Mekhala Krishnamurthy (Ashoka University) moderated the panel discussion among Avinash Kishore (International Food Policy Research Institute), Bharat Ramaswami (Ashoka University), and Pronab Sen (IGC).

Where does liquidity in agriculture come from?

Dr Pronab Sen focused on the larger context of finance and the role of liquidity in the Indian economy. He contended that while we understand and discuss the role of liquidity in corporate or urban India, the same is not true for the cash economy, which is in fact the larger component and encompasses agriculture. When the Reserve Bank of India (RBI) produces currency it goes only to the banking sector. The way that the money travels into the cash economy is essentially through transactions between the banked economy and cash economy. If there is shortage of cash or liquidity in the cash economy, it will lead to a crash in prices and growth slowdown. 

The single largest source of transfer of cash into the cash economy is the procurement operations of the government. For the longest time, the procurement operation was entirely in the hands of the central government. In the 1990s, the central government requested the states to get involved, such that the states undertake the actual physical act of procurement and the centre provides the necessary finance. Unfortunately, only a few states took this up and even in those states much of it has been done very half-heartedly. 

If a state is thinking about what it can do for its agricultural sector, it has to seriously ask the question: is cash coming into the state or not? Dr Sen remarked that he is not aware of any state government that has even remotely tried to assess this flow. If cash is not flowing to a state, then what you should expect to see is differential movement in prices of the same products across different mandis of the country, other than the mandis where the Food Corporation of India (FCI) is present. Mandi-level data show that the price of goods in Bihar are the lowest among all the states, and the reason is that there is not enough cash available within the Bihar economy itself. 

When the government thinks about fiscal policy, it is not just about how much is being spent but the manner in which that expenditure is incurred and how much of the expenditure is a transfer of cash to the cash economy. The poorer the state, the more agriculture-dependent the state, the greater is this imperative and all other forms of finance ultimately work around this. 

The salience of the demand side

Bharat Ramaswami said that policy analysis typically focuses on the supply side. While supply investments are important, he argued that it is demand and markets that ought to be the first priority. This is a much harder and more nebulous problem is some ways because the points of intervention are not always very clear. When we think about supply-driven episodes of agricultural transformation such as the Green Revolution, we realise that the gains may have floundered beyond a point had markets not been there to absorb the surpluses. To facilitate demand in Bihar, we need to invest in infrastructure relating to access to ports, inspection of export produce, and so on. 

At our level of development, mandis are very important institutions but these by themselves offer limited incentive in terms of diversification, which is key to agricultural transformation. Most agents in wholesale markets are myopic, leading to a lot of price instability. Producers make incorrect decisions because there is no market information system. To resolve this problem, we need more agents in the market, especially large agents, who have greater foresight. 

In Prof. Ramaswami’s view, the state government in Bihar should free ride on the central government procurement policies; Madhya Pradesh and Chhattisgarh have done this very well. However, a pitfall is that this will lock-in the cereal dependency of agriculture, which should ideally shrink. 

Besides thinking about what the State can do for farmers, efforts should also be made to enhance capacity of private organisations that work with farmers in providing market access and inputs. Finally, he emphasised the importance of investing in extension services, and reform of land leasing laws. 

Bihar’s agriculture: Challenges and solutions

Avinash Kishore noted that the National Food Security Act (NFSA) is highly favourable to Bihar, covering 86% of the population. While this is benefitting consumers, it is hurting farmers as it involves net dumping of enormous quantities of wheat and rice at low prices. The state government should increase procurement of wheat and rice with the goal of at least neutralising the effect of NFSA. While this may impede the diversification process in the long run, it is what needs to be done in the short- and medium-term. 

Dr Kishore emphasised the need to provide affordable irrigation to farmers and to electrify agriculture. This is particularly important because unlike Bangladesh, Bihar does not have any summer crops. While all villages have now been electrified, 95% of pump-sets in Bihar still run on diesel and farmers are effectively paying Rs. 22-27 per kilowatt hour. It is also important that electricity is not provided free of cost or at highly subsidised rates so that high-quality, reliable supply can be ensured. This would still result in an 80% decline in costs for farmers. 

Speaking of mandis, although it has been 12 years since Agricultural Produce Market Committee (APMC) Act was abolished private investment in market infrastructure and facilities has not really come in. The State needs to create large density of markets at the levels of district, block, and sub-block, with facilities for auctions, grain-drying etc. and reasonable fees.  

On extension services, the Nitish Kumar government made a huge investment and hired krishi mitras in every panchayat. However, the problem is that they are not well-trained, and often live far away from the area that they are meant to serve. They are promoting technologies that they themselves do not use and so farmers are not convinced. 

Finally, on land leasing, with Direct Benefit Transfer (DBT) being implemented, the issue of tenancy has become important. The only thing the land leasing laws have done in Bihar is to push tenancy into informality. We do not even know how much land is under tenancy cultivation; it is way more than what is reported in primary and secondary surveys. A lot of research is required to understand the ratio of bargaining power between the land owners and tenants in different regions, and how things work when there is information asymmetry – say if the owner collects fertiliser subsidy and the tenant does not know about it. 

Understanding how agricultural markets work in Bihar

Mekhala Krishnamurthy highlighted that despite constraints on diversification of agriculture in Bihar, its diversification index is greater than virtually any other state in the country. However, this produces a challenge for markets and issues of scale and how markets work need to be considered. 

Prof. Krishnamurthy’s research has shown that farmers sell to intermediaries at the village level; there is a need to put in place a system that captures price information for these exchanges. She noted that farmers are not involved in credit relationships with village intermediaries that come to pick up the crops. The village traders often rent transport from the farmers to go to mandi; it is puzzling that the farmers do not themselves go to the mandis if they have transport. Since this is not a mandi-based system, we need to think about various questions: Do we invest in different kinds of markets? What is the right level at which to put markets or competition? Do price signals come to the village from more competitive, distant markets? 

Bihar now has much better data analytics available on agriculture and that may be used to try and figure out where these markets are and how to organise them, and if there were to be a system of regulated markets how should it be conceived and designed for a state that has historically had village-level exchange. 

As Bihar thinks about increasing paddy procurement, the modalities of procurement need to be considered. Will procurement be done through vyapar mandals or PACS (Primary Agricultural Cooperative Society)? How would PACS be empowered since it has not historically played this role? There are complex challenges involved but this is important to do. In terms of wheat, she gave the example of Madhya Pradesh where the quality and diversity of wheat produced declined quite rapidly when the government began procuring; this is something to be kept in mind when we think about large-scale procurement. 

In conclusion, she contended that there is a lot of dynamism in the sector but there is a pressing need for investment in infrastructure in terms of markets, logistics, storage, transportation connectivity, and so on. 

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