India has now reached a stage in which surplus foodgrain management has become a major challenge, the Reserve Bank of India (RBI) said in its annual report on Tuesday.
The total production of foodgrains reached a record 296.65 million tonnes in 2019-20, while total horticulture production -- accounting for about 40 per cent of gross value added (GVA) in the farm sector -- also reached an all-time high of 320.48 million tonnes. India is now among the leading producers of milk, cereals, pulses, vegetables, fruits, cotton, sugarcane, fish, poultry and livestock in the world.
As a result, the growth in agricultural GVA rose to four per cent in 2019-20. The farm sector contribution to overall economic growth surpassed that of the industrial sector for the first time since 2013-14, it added.
"India has now reached a stage in which surplus management has become a major challenge... Going forward, shifting the terms of trade in favour of agriculture is the key to sustaining this dynamic change and generating positive supply responses in agricultural production," the RBI said.
Turning to production activity, Indian agriculture is undergoing a distinct transformation notwithstanding headwinds, it said.
Therefore, the priority is to move towards policy strategies that ensure a sustained increase in farmers' income alongside reasonable food prices for consumers. An efficient domestic supply chain becomes critical here, it suggested.
Accordingly, the focus must now turn to the major reforms that are underway to facilitate free trade in agriculture, it added.
The RBI further said the recent spate of reforms in agricultural marketing and infrastructure could open up new opportunities for agriculture if complemented by trade policies that are predictable.
First, the amendment to the the Essential Commodities Act (ECA) is intended to encourage private investment in supply chain infrastructure, including warehouses, cold storages and marketplaces.
Second, the Farmers' Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020, is aimed at facilitating barrier-free trade in agriculture produce. Third, the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020, will empower farmers to engage with processors, aggregators, wholesalers, large retailers, and exporters in an effective and transparent manner.
With this enabling legislative framework, the RBI recommended that the focus must turn to crop diversification, de-emphasising on water-guzzling crops, however politically difficult it may be as well as promoting food processing.
The RBI also stressed on agricultural exports that expose the Indian farmer to international terms of trade and technology; and public and private capital formation in the farm sector.
Experience shows that in periods when the terms of trade remained favourable to agriculture, annual average growth in agricultural GVA exceeded 3 per cent. Otherwise, the main instrument of incentive has been minimum support prices, but the experience has been that price incentives have been costly, inefficient and even distortive, it added.