Prime Minister Narendra Modi spoke of his “dream” of doubling farmer’s income by 2022 in a farmers rally in early 2016. Since then, the government has been on a publicity overdrive to show that it is working towards this goal. The goal was reiterated by the Prime Minister in his Independence Day speech this year. Naturally, one is tempted to ask how incomes have changed in the recent past.

The NITI Aayog has pointed out the difficulties in estimating changes in the income of farmers in general. The problem becomes tractable if one confines oneself to incomes from just two crops, paddy and wheat, whose importance for farmers’ income will be apparent shortly. This analysis shows that real incomes from paddy and wheat farming have fluctuated in a narrow band and in the case of paddy, at levels lower than those prevailing five or six years ago.

The importance of paddy and wheat

Paddy occupies 23% of total cropped area and is grown in most parts of India while wheat covers another 16%. So, between them, paddy and wheat use nearly 40% of total cropped area (See Agricultural Statistics). Paddy and wheat are also grown by the largest number of agricultural households – 59% and 39% respectively – according to the NSSO 2013 survey.

Further, the government procures over 30% of the total crop in both rice and wheat at the Minimum Support Price (MSP) that it announces every year. Procurement on this scale at MSP should strongly influence the prices in the APMC mandis.

Income from paddy and wheat is thus of interest both because of the number and spread of agricultural households who depend on it and also because of the government’s ability to influence it.

Avenues for increasing income

Higher income can come from increased earnings and increased productivity. Earnings are determined by how much the price realised by the farmer exceeds the cost of cultivation. Productivity measures the crop produced per hectare. Let us consider the question of productivity first.

Productivity estimates for the current decade (2010s) are available in the latest Price Policy Reports of the Commission for Agricultural Costs and Prices (CACP). The Compounded Annual Growth Rate (CAGR) of productivity in wheat is negative at -0.63%. Wheat farmers need higher earnings just to hold on to the same income levels.

The productivity of paddy is increasing, but at a paltry CAGR of 0.9%. This amounts to a growth of 5.5% in six years, which, as we shall see, is not enough to compensate for falling earnings of paddy farmers.

The hope of higher income therefore rests on higher earnings. To estimate earnings on paddy or wheat we need to know the average price realised by the farmer.

Average prices realised by farmers

The ‘average price’ we are looking for is the total realisation by paddy (or wheat) farmers in the country divided by the quantity produced. It turns out that this data is embedded in the National Accounts Statistics (NAS).

The NAS records the output value of each major crop including paddy and wheat. Output value is calculated as the product of price and quantity produced where the price is expected to capture as accurately as possible the income that accrues to the producer.

The Central Statistical Organisation (CSO) determines output value at district level using production data and average wholesale prices prevailing in APMC mandis during the peak marketing season. District level output values are aggregated to obtain state and national level values.

The output value of paddy (wheat) in NAS is then an estimate of the total realisation of paddy (wheat) farmers. The ‘average price’ can be calculated using production figures from the Ministry of Agriculture and Farmers’ Welfare (MOAFW).

The charts below show the average price of paddy and wheat realized by farmers along with the MSP announced by the government.

The charts show what is expected, that the MSP announced by the government indeed largely determines the average price realised by wheat and paddy farmers. With the exception of 2011-12, the average prices of both wheat and paddy have remained higher but within 6% of MSP.

However, what really matters for farmers are earnings rather than the average price or MSP itself. We first look at earnings on sale at MSP as this provides a clearer picture of government policy at work.

Nominal and real earnings at MSP

Nominal earnings at MSP are obtained by deducting the cost of cultivation (“A2+FL” costs in CACP terminology, available in their ‘Price policy reports’) from the MSP. Real earnings can be estimated by adjusting nominal earnings for inflation.

Paddy is brought to the market almost throughout the year except the monsoon quarter. So, the average Consumer Price Index (rural) prevailing over the other three quarters (for example for 2016-17, the average of Q4 2016, Q1 2017, Q2 2017) is used as the deflator of nominal earnings to get real earnings at 2012 prices.

Chart 3 shows the nominal and real earnings of paddy farmers who sell their produce at MSP. It is useful to remember that 30% of the total paddy produced is sold at MSP. The results are surprising to say the least.

First, the government actually let nominal earnings of paddy farmers fall each successive year till 2013-14 by keeping increases in MSP less than the increase in cost of production. The margins over cost built into the MSP were reduced from 38% in 2011-12 to 27% in 2013-14. Fall in nominal earnings lead to a steeper fall in real earnings because of inflation. This was a deliberate policy of the government to lower earnings of farmers selling at the government procurement price.

In subsequent years, the government of the day fixed MSP’s to increase nominal earnings every year but the increase was just enough to compensate for inflation. Margins over cost built into the MSP remained at 28-29%. Real earnings of farmers selling paddy at MSP barely changed from 2013-14 levels.

Why did the government act as it did?

It had two major concerns in this period – burgeoning stocks of cereals and inflation. The stocks of rice with the government rose from 19.6 million tons in July 2009 to 31.5 million tons in July 2013, far in excess of the stock norms. Higher stocks meant higher costs and a higher subsidy bill for the government.

MSPs were held down for some years till stocks of procured rice came down to more manageable levels – 21.7 million tons by 2015. Subsequent pricing policy aimed at avoiding inflationary pressures from any rise in cereal prices by keeping real earnings on paddy more or less constant.

Let us turn to wheat.

Chart 4 shows the nominal and real earnings in wheat when sold at MSP. As wheat is harvested in April-May, the average CPI (rural) prevailing in Q2 (for 2016-17 the average of Q2 2017) is appropriate as the deflator to get real earnings at 2012 prices.

The government set MSPs for wheat at levels which led to real earnings of farmers falling till 2015-16. The margins over cost built into the MSP fell from 110% in 2011-12 to 94% in 2015-16.

Just as in the case of paddy, the motivation for such pricing was the rise in the level of wheat stocks with the government. Wheat stocks went up from 32.9 million tons in July 2009 to 49.8 million tons in July 2012. The government engineered successive reductions in real earnings by fixing low MSPs until stocks reached a manageable level of 30.2 million tons in July 2016.

Real earnings at average prices

We can now return to a consideration of real earnings at average prices which are indicative of the incomes of farmers as a whole from paddy and wheat.

The procedure followed is the same as for computing real earnings at MSP. Charts 5 and 6 show earnings up to 2016-17 using NAS 2018 data and the author’s projections for 2017-18 earnings based on the prevailing MSP.

After a steep drop till 2013-14, real earnings in paddy have moved up and down in a narrow band. In the case of wheat too, they have moved up and down in a small range.

To sum up, an analysis of earnings on paddy and wheat sold at MSP over the last six years reveals the government’s main concerns while deciding increments in MSP.

In the initial period, the concern was to reduce stocks of grain with the government which had reached over 80 million tons in 2012. The strategy employed was to fix MSPs at levels which would help bring down procurement and facilitate the sale of excess stocks in the market.

After stocks came down to manageable levels – around 55 million tons – in 2016, the main concern was to avoid stoking inflation. MSPs were fixed at levels that would ensure that nominal earnings kept pace with inflation and real earnings remained at the same levels.

The government’s hand in fixing MSPs shows up in how real earnings at average prices have moved over these years.

Earnings on both paddy and wheat have fluctuated in a narrow band, and in the case of paddy, at levels lower than those prevailing five or six years ago. Given that a large majority of farmers grow paddy and/or wheat and that nearly 40% of cropped area is used for these crops, one has to conclude that increasing farmer’s income has not been high on the government’s agenda at least till this year.

Kannan Kasturi is an independent researcher and writes on public interest and policy.