PM Kisan: Reducing risk while increasing return

Surbhi Jain and KV Subramanian *

As agriculture is intrinsically a very risky activity, where the vagaries of weather and market prices generate significant uncertainty for the farmer, the PM-KISAN scheme takes an important step in alleviating this situation towards by altering the risk-return trade-off of the farmers in their favour.

Historically, the debate in the farm sector in India has been focussed on increasing the agricultural output and to make the country self-reliant in food production. It was assumed that an increase in output will increase the producers’ (farmers’) income.

However, in reality, while agricultural production has multiplied about fourfold since the Green Revolution, the NitiAayog Policy paper on Doubling Farmers’ Income estimates that around one-fifth of farm households remain below the poverty line. Furthermore, this proportion varies hugely across states.

Taking cognisance of the agricultural distress due to low incomes, a Committee was set up to Double Farmers’ Income (DFI) in a period of five years i.e. by 2022-23. In this move to increasing farmer income, the PM-KISAN Scheme announced in the Union Budget 2019-20 represents an important step.

The scheme aims at providing assured income support of Rs 6,000 per year to small and marginal farmers. This amount will be transferred directly into the bank accounts of beneficiary farmers, in three equal instalments of ¹ 2,000 each.

While the Scheme increases the average income of small and marginal farmers, the scheme has the biggest impact in reducing the uncertainty faced by these farmers. The average annual income from cultivation for small-marginal farmers, i.e. those owning less than two hectares of land, has been estimated by DFI Committee at 29,132 in 2015-16 at current prices. Adjusting for food inflation, we estimate the current average income from cultivation of a small and marginal farmer to be 30900.

The assured annual income support of 6000 thus adds around 20% to his average income. Of course, this average income masks variation among farmers, where many farmers may earn substantially lower than the average and thereby remain at a subsistence level of income while others may earn much more than the average. As the increase in the return would be significantly higher than 20% for the farmers earning much lower than the average, an assured annual support of 6000 provides great source of succour for such farmers.

The assured income under the scheme reduces the risks faced by a farmer significantly. A farmer faces risk from the uncertainty in crop yields because of the vagaries of the weather and the volatility of the price that he procures for his produce in the market. A recent study undertaken by Prof. Ashwini Chatre at the Indian School of Business and his co-authors shows that the volatility of prices of agricultural commodities ranges from 2 to 40 times the average price; this volatility is the lowest for rice and wheat, medium for tomato, cabbage and onion, and the highest for cauliflower and capsicum.

Even if we ignore the volatility in production, the volatility in the average income of a farmer that stems from the volatility in prices ranges from twice the average income for farmers growing rice and wheat to 40 times the average income for farmers growing cauliflower and capsicum. Given this uncertainty, we estimate that in one out of three four-month periods a farmer growing rice or wheat may receive an income less than Rs. 2000.

Thus, in one out of three four-month periods, the 2000 provided by PM-Kisan can double his income in that 4-month period. A small or marginal farmer growing any other crop (tomato, potato, onion, cauliflower or capsicum) is likely to face even greater uncertainty. As a result, the 2000 reduces his uncertainty even more than that for a farmer growing wheat or rice.

As small and marginal farmers constitute 86.2% of all farm holdings, PM-KISAN benefits a significant majority of the vulnerable farmers. As a positive ‘side-effect’, the assured income also makes it easier for small and marginal farmers to get institutional loans especially from Microfinance Institutions and Self-Help Groups.

As RBI has recently raised the limit for collateral-free agriculture loans to small and marginal farmers to 1.6 lakh from 1 lakh, the effect of the assured income provided by PM-Kisan will get magnified through greater liquidity for farmers.

A loan waiver, in comparison, may act as a temporary healer to the farmers but its reach to small and marginal farmers is under doubt given that small and marginal farmers take more than 50% of their loans from non-institutional sources as evident from data from Agricultural Census, 2015-16.

A loan waiver also leads to moral hazard as those farmers who are able to pay their loans might not pay it expecting a waiver. Various studies have also shown that such loan waivers are often cornered by non-distressed farmers leaving the small and marginal farmers in the lurch. It also disrupts the discipline of the credit market, adds to the NPAs of the banks and increases the burden on the exchequer.

Thus, this income support scheme underlying PM-Kisan, which is specifically targeted at the small and marginal farmers, is a critical step in supporting the constituency that is entrusted the responsibility of feeding a 125 crore mouths.