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Doubling India’s Farm Incomes

Paying Farmers for Ecosystem Services, Not Just Crops

Lalit Kumar (lkumar1503@yahoo.co.in) teaches at Dr Bhimrao Ambedkar College, University of Delhi. M Manjula (manjulamenon@mssrf.res.in) is a researcher at M S Swaminathan Research Foundation, Chennai. Ramachandra Bhatta (rcbhat@gmail.com) teaches at College of Fisheries, Mangaluru. L Venkatachalam (venkat@mids.ac.in) teaches at Madras Institute of Development Studies, Chennai. D Suresh Kumar (rithusuresh@yahoo.com) teaches at Tamil Nadu Agricultural University, Coimbatore. P Indira Devi (induananth@gmail.com) teaches at Kerala Agricultural University, Thrissur. Pranab Mukhopadhyay (pm@unigoa.ac.in) teaches at Goa University, Goa.

The Government of India aims to double farm incomes by 2022. A mechanism of payment for ecosystem services, which would compensate farmers for the value of the non-market agroecosystem services they produce, would address the issues of farm income and the deep ecological crisis in agriculture. This strategy would be within the fiscal ability of the government and would only use the existing allocation for agriculture. The institutional framework required to implement PES already exists. If properly implemented, PES could persuade Indian farmers to adopt ecologically sensitive agricultural practices which, in turn, could double farm income.

The authors are grateful to the Kerala Institute of Local Administration, Thrissur for hosting their workshop on 11 November 2017. They are grateful to participants for discussions and comments at two conferences: the Indian Society for Ecological Economics–KILA conference on “Sustainability, Institutions, Incentives” during 8–10 November 2017 in Thrissur and the “3rd National Dialogue on Himalayan Ecology” at Chandigarh during 15–16 June 2018. The comments of the anonymous reviewer of this journal have helped in rethinking some of the key estimates and arguments.
 

India’s agricultural sector has played a vital role in generating rural income and providing food security to the growing population of the country. The bulging buffer stock of food hides the perilous state of farmers, and it is reflected in the unending stream of farmers’ suicides in recent years. Data from the National Crime Records Bureau (NCRB) reveal that farmers constitute the most distressed group in the country; their suicide rate, higher than that of all others, is increasing. The NCRB data, made available since 1995, show that around 3,00,000 farmers had died by committing suicide by 2016, but the actual number of suicides could be more than double this figure (Sainath 2015). Economic distress leads the overwhelming majority of farmers to suicide (Reddy and Mishra 2009). Farm income has been dwindling over the past many years, and farmer debt has been increasing (Lerche 2011). The ensuing agrarian crisis has been severe; the recent farmers’ protests in several states have brought back the
nation’s attention to it (Gandhi 2017). To mitigate the crisis, the Government of India (GoI) plans to double farmers’ income (DFI) by 2022. Finance Minister Arun Jaitley presented this vision in his budget speech to Parliament in 2017. Prime Minister Narendra Modi reiterated the government’s commitment to the DFI agenda at a large national consultation in Delhi titled “Agriculture 2022: Doubling Farmers’ Incomes” in February 2018.

Historically, public policy has relied on multiple strategies to overcome agrarian crises, but it has focused on asset redistribution through land reforms; technology improvement and infrastructure enhancement to raise productivity and farm incomes; and the price mechanism, by providing fair market prices at policy-determined minimum support prices (MSPs).1 Land reforms remain a desired policy, but its implementation varies by state (Deininger et al 2009; Ghatak and Roy 2007; GoI 2013), and its future looks bleak (Srivastava et al 2007). Land redistribution is unlikely to resolve the current agrarian crisis. Technological solutions to traditional productivity enhancement by way of seed modification have reached a threshold. Technology or infrastructure is unlikely to boost farm incomes. The MSP cannot solve the agrarian crisis. It has lagged behind rising production costs and led net incomes to decline (Rao and Dev 2010). Many crops lack an MSP. Even the government has found that less than 5.8% of farm households are beneficiaries of the MSPs (GoI 2015a). In 2016–17, most agri-commodities—oilseeds, pulses, rice, wheat, and most kharif crops except, perhaps, cotton and black gram—traded below their MSPs. In some cases, prices fell below the production cost (Singh 2018).

The National Institution for Transforming India (NITI) Aayog, India’s apex policy body, set up a task force on agricultural development. To overcome the crisis, the task force suggested that the government focus on improving agricultural productivity, remunerative prices for farmers, land policy, agrarian distress, and eastern states that have lagged behind the rest of the country in farming (GoI 2015b). A follow-up policy document suggested increasing livestock and crop productivity; improving resource use efficiency, crop intensity, crop diversification, and price realisation; and shifting to non-farm occupation (Chand 2017). Increasing farmer income using low marginal product strategies requires high investment (Singh 2018) and may lead only to marginal increases in income; therefore, traditional strategies to DFI seem unfeasible and creative solutions are needed (Alagh 2018).

Farm income and variability depend critically on the access to ecosystem services, such as soil fertility and hydrological services (quantity and quality of surface and groundwater resources). Ecosystem services are benefits generated by ecological systems that contribute to human well-being, both directly and indirectly (MA 2005). Agriculture depends largely on ecosystem services provided by natural resources; therefore, sustainable agriculture strategies must focus on conserving and enhancing natural resources.

The United Nations Sustainable Development Goals indicator 2.4.1—the “percentage of agricultural area under productive and sustainable agriculture”—has been defined primarily on the basis of environmental criteria; the economic and social dimensions were included later. The Indian government outlines five broad principles of sustainable agriculture. These principles are in close resonance with the sustainability principles proposed by the Food and Agriculture Organization (FAO) (Gupta et al 2018): improving resource use efficiency; conserving, protecting, and augmenting natural resources; enhancing resilience of ecosystems and people; protecting and improving the livelihoods and social well-being of people; and effective governance. The sustainable agriculture principles are interconnected; if promoted, conservation agriculture can facilitate sustainable crop production (FAO 2015).

However, much of the ongoing debate on the agrarian crisis or DFI ignores the market for ecosystem services, even though a framework to assess the non-market ecosystem services already exists. Ecosystem services are services produced by farmers in addition to marketed commodities they grow, like food and vegetables (Pert et al 2013). Agriculture is categorised as an ecosystem, the agroecosystem, which consumes ecosystem services like water, soil nutrients, pollination, and produces services (like food, soil fertility, carbon sequestration, and water purification) and disservices (like soil run-off and chemical pollutants).

Market institutions—more particularly, payment for ecosystem services (PES)—can help increase farmer income and sustain ecosystem services by addressing the ecological crisis. PES is a voluntary transaction where a well-defined environmental service is bought from a service provider. The PES mechanism is a market-based solution that demonstrates the practical application of the Coase theorem, which postulates that problems of externality can be overcome through private negotiations between affected parties under a well-defined property rights regime (Engel et al 2008). Paying farmers to adopt more environmentally friendly production systems is likely to generate a win-win outcome in terms of poverty alleviation and enhanced ecological benefits.

Devi et al (2017) outline how PES as a mechanism could be adopted for agriculture in India, but their analysis was introductory, and they did not adequately articulate the mechanism for implementation (Sharma 2017). This article shows how PES can be made an effective policy tool in ensuring a stable farm income while protecting ecosystem quality. The long-term aim is to incentivise and reward farmers to undertake sustainable, eco-friendly farming techniques. This can form one component of the guaranteed income basket being proposed for the farming community. The strategy proposed in this article aims at incentivising ecologically sustainable farming systems that are less input-intensive at a lower cost of production.

Ecosystem Services and Payment Mechanisms

The literature on ecosystem services emerged in the 1960s and 1970s, and it gained momentum during the 1990s (Costanza et al 1997; Daly 1993). Ecosystem services are classified into provisioning, regulating, cultural, and supporting services (MA 2005). Provisioning services include food, water, timber, and fibre; regulating services consist of climate regulation, flood control, disease control, nutrient recycling, and water quality regulation; cultural services come in the form of recreational, aesthetic and spiritual benefits; and supporting services contribute to soil formation, photosynthesis, and nutrient cycling. Several attempts have been made to put the ecosystem service concept into practice and also to link changes in ecosystem services to changes in human well-being (Daily and Matson 2008; Ploeg and de Groot 2010).

Healthy agroecosystems supply goods and services, such as food, fibre, and fuel, which are usually traded in markets. These generate valuable non-market ecosystem services available for consumption, usually at zero marginal cost (Dale and Polasky 2007). Agroecosystems offer valuable non-market services, such as climate regulation, water purification, managing surface water flow, maintaining the groundwater level, assimilation and breakdown of waste, and nutrient recycling (Swinton et al 2006). These services are positive externalities available even outside the boundaries of agroecosystems. Farmers, who are the producers and managers of agroecosystems, do not reap the full benefits from these services, and have less incentive to enhance the supply of such services. The market-based incentive mechanism of PES is considered well-suited to align economic incentives for the providers of non-market ecosystem services (Engel et al 2008).

The PES mechanism has been implemented in genomes worldwide, and farmers have been paid for ecosystem services (Clements et al 2010; Engel et al 2008; Lipper et al 2007; Müller et al 2015; Wunder et al 2008), but few empirical studies exclusively consider farmers paid for non-market ecosystem services generated by their current agricultural practices. Many PES schemes implemented worldwide pertain to water-related services. Such programmes are increasing in many developing and industrialised countries (Schomers and Matzdorf 2013). Stanton et al (2010) reviewed 228 PES schemes on watershed protection programmes, which are developed and implemented by multiple agents—private individuals, governments, non-governmental organisations (NGOs), and communities. Most PES schemes are found to be negotiated either by private parties themselves or by the government with private parties. The literature documents many successful examples; a few are discussed here by way of illustration.

A privately negotiated PES scheme was successfully implemented in the catchment area of Vosges Mountains in north-eastern France where Nestlé Waters, a commercial mineral water company, paid all the 27 farmers for changing their existing practices to the desired practices in dairy farming, for example, abandoning agrochemicals, composting animal waste, and reducing animal stocks (Venkatachalam and Balooni 2018). The payment to the dairy farmers was equivalent to the opportunity cost of best practices; it was organised through a buyer-created agency (Perrot-Maître 2006).

In Bolivia, a government-negotiated PES programme compensated 46 upstream farmers who agreed to protect cloud forests. By maintaining trees and preventing hunting, the farmers enhanced the hydrological (water) flows to downstream farmers during the dry season. In addition to the in-kind payment, like beehives and apicultural training, the beneficiaries of hydrological services also paid upstream farmers a monetary compensation through water cooperatives (Asquith and Wunder 2008).

As part of the Working for Water programme in South Africa, upstream municipalities removed invasive species affecting water flow to the downstream areas. The cost of such activity was funded jointly by government subsidies, payment from water utilities, and consumers (Turpie et al 2008). In China, the Sloping Land Conversion Program and the Forest Ecological Services Compensation Fund have introduced payment for water services; it reduced siltation and floods in some major river systems (Feng et al 2018; Yan et al 2009).

The Indonesian government implemented a “compensation for environmental services” (CES) programme in addition to a PES programme. While the CES was established between the central government and provincial governments, or between two provincial governments, the PES was established between a private company and the community. The PES/CES mechanism for conserving natural resources is viewed as a more effective strategy than command-and-control policies, since local governments and communities can negotiate and participate in implementation directly (Fauzi and Anna 2013).

Many ecosystem services do not have markets or, hence, a market price. Assessing the value of services emanating from the ecosystem is difficult, and it could lead to inappropriate policies. Generating a local value for each ecosystem service is nearly impossible, as it involves time, cost, and humanpower.

Methodology

Data from the Economics of Ecosystems and Biodiversity (TEEB) database (Ploeg and de Groot 2010) are used since there is no comparable Indian source available to estimate the economic value of ecosystem services. The next step is to extract the relevant data on Indian agriculture. Data on total cultivated land area (GoI 2017) are analysed. Data on operational holdings by size classes from the National Sample Survey Office (NSSO) (2016) are used.

The information on budgetary allocation for agricultural development, irrigation, and relief on account of natural calamities is taken from the revenue expenditure statements of the states and union budget published by the Reserve Bank of India (RBI). Data on Consumer Price Index (CPI)–Rural (General) used to extrapolate farm income for 2013 to 2017, along with the information on exchange rates, are sourced from the RBI database.

This article involved stepwise estimations of the economic value of non-market ecosystem services; agricultural income by size class; value of agroecosystem services by size class;
potential adjusted annual income from agriculture incorporating PES for cultivators; budgetary requirement for implementing PES.

The TEEB database provides item-wise estimates of ecosystem services from agroecosystems (Table 1). To arrive at the value of non-market ecosystem services exclusively, the values attributable to provisioning and recreational services are subtracted. Since they are traded and have a market value, subtracting their value avoids double-counting. Per hectare values for 2007 are given in United States (US) dollar terms in the database. The values for India are derived by multiplying the per hectare value by the purchasing power parity 2017 dollar–rupee exchange rate (₹ 17.76 to $1) to make it comparable to other values in this analysis.

Using the market rate could introduce large variations based on inter-country currency flows. The purchasing power parity (PPP) value is preferred because it is more stable, and is known to be a better way to predict the value of non-marketed items in developing countries, which is the focus of this study (Callen 2007). Since the database uses PPP for international comparisons of ecosystem values, it would only be logical to use the same exchange rate framework (Costanza et al 1997, 2014; de Groot et al 2012).

Next, the annual agricultural income of farmers in 2017 is estimated by size class (Table 3). This involves three steps. The first is to derive the monthly income exclusively from agriculture by size class by adding the monthly income from cultivation, farming of animals, and net receipts from the on-farm business of agricultural households. The NSSO (2016) provides the monthly income data for 2013. The second step is to extrapolate these data to 2017 prices and convert that to an annual figure using the CPI-rural deflator to make it comparable to the other data. In the third step, the annual PES payment is estimated by multiplying the annual value of non-market ecosystem services by the average holding per hectare across size class.

Next, the potential adjusted income from agriculture is estimated by adding the annual farm income exclusively from agriculture (second step) with the annual potential PES payment (third step) for different size classes.

In the transition to ecologically sensitive agricultural practices, three desired outcomes are finally proposed as a policy choice: increased carbon sequestration in soil; reduced water usage; and lower toxic residuals in soil. Farmers could choose whether they want to undertake ecologically sensitive practices that lead to one or more of the three outcomes. Based on these choices, three situations are possible: high adoption, where farmers undertake practices that results in all the three desirable outcomes; medium adoption, where ecologically sensitive practices result in two of the desirable outcomes; and low adoption, where ecologically sensitive practices result in any one of the desirable outcomes. Based on the extent of adoption, the amount of PES payment would be determined.

If there is high adoption (all three outcomes), the entire potential PES payment is paid to the farmers. This amount is calculated by multiplying the total cultivable land by the annual PES amount estimated per hectare (Table 3). If there is medium adoption (any two outcomes), it is proposed that 70% of the potential PES amount estimated should be paid. If there is low adoption (any one outcome), it is proposed that 35% of the potential PES amount estimated should be paid. This allows for the estimation of budgetary requirements under different types of farming outcomes and the extent to which these payments would change farmer incomes.

A conceptual incentive payment schedule is created (Table 2). If there is high adoption, 100% of the potential PES amount is paid in full annually. If there is medium adoption, 70% of the full potential PES amount is to be paid annually. If there is low adoption, 35% of the full potential PES amount is to be paid annually. This gives an estimate of fund requirements for PES to be made functional.

The current budgetary allocations are compared for some line items of agricultural development with the funds required if PES is adopted. This may be optimistic, as some of these payments may be difficult to reallocate at short notice. However, this study suggests possible programmes and activities with potential for reallocation. To keep this exercise realistic, the revenue expenditure of only (i) agriculture and allied sector, and (ii) irrigation and flood control is included. Non-development expenditure items like administrative and fiscal services have been kept out of this estimation as it would not be feasible to shift this money for implementing PES.

The total budgetary allocation for agriculture development under the heads discussed above in the state and union budgets for 2017–18 is deduced by adding the allocations under the heads of agriculture and allied economic activities; relief on account of natural calamities; irrigation; and the various subsidies and subsidy-related schemes pertaining to agriculture. This amount is then compared with the annual PES amount estimated across the three adoption scenarios and calculated the additional budgetary allocation requirement, if any.

Operationalising Payment for Ecosystem Services

Values for agroecosystem services in the Indian context were generated from the estimates of Ploeg and de Groot (2010) and the TEEB database. This database estimates the global average total economic value (TEV) of agroecosystem services—food, water regulation, climate control, biodiversity, soil quality, and air quality—at $3,839 per year per hectare (ha) at 2007 prices (Table 1, column 2). This is made comparable to 2017 Indian prices by converting the dollar to rupee value using the PPP exchange rate of ₹ 17.76 per $1.2 A back-of-the-envelope calculation suggests that the TEV was about ₹ 70,000 per hectare per year in 2017, ceteris paribus (Table 1, column 3). The value of the non-marketed ecosystem goods and services, derived by deducting the value of the traded items from the TEV, is ₹ 42,000 per ha per year, or ₹ 3,500 per ha per month.

Adoption Categories

Would the government be able to fiscally support this transition? Estimates of the possible additional budgetary allocation requirements for PES are provided under different adoption scenarios (Table 2). All the expenditures for agriculture and allied activities under the different heads discussed above—irrigation and flood control; relief on account of natural calamities by the central and state governments; and subsidies and grants extended for farming—are combined to total ₹ 4,378.5 billion (revenue expenditure 2017–18, of which ₹ 1,519 billion is central and ₹ 2,859.5 billion for all states combined).

It is compared with the quantum of PES payment requiring budgetary support under the three scenarios discussed earlier (Table 2). If all farmers are low adopters, the annual PES payment proposed is ₹ 2,672 billion (Table 2, row 1, column G); under medium adoption, it is ₹ 5,344 billion (Table 2, row 1, column E); and under high adoption, it is ₹ 7,635 billion (Table 2, row 1, column C). Since the 2017–18 (revenue expenditure) budgetary allocation is ₹ 4,378.5 billion (Table 2, row 3), the additional budgetary requirement, if any, for transition to the PES mechanism is calculated. If there is low adoption, the current budgetary allocation for agriculture would be more than adequate (Table 2, row 4, column F/G); in fact, the government would be able to reduce expenditure in the process (₹ 1,706 billion). Even if all farmers turned medium adopters, the current budgetary allocation would be just short of being adequate; the shortfall would be about ₹ 966 billion (Table 2, row 4, column D/E). If all farmers were to become high adopters, the current budgetary resources would be inadequate; the additional budgetary requirement would be ₹ 3,256 billion per year (Table 2, row 4, column B/C). If the business-as-usual scenario occurs, and farmers do not adopt, they are not eligible to receive PES payments (column H).

The calculations above suggest that the PES mechanism under both the low-adoption and the medium-adoption scenarios are financially feasible even with the current level of budgetary allocation for agriculture. Only in the case of high adoption by all farmers will significant additional budgetary allocation be needed.

The centre and the states together spent ₹ 48,091 billion (states spent ₹ 26,624 billion and the centre spent ₹ 21,467 billion). The percentage of extra budgetary support needed is about 6.7% in the case of high adoption and 2% in the case of medium adoption; if adoption is low, the government will save 3.5% of the current budget. The requirement seems large, but it is justifiable—the PES mechanism holds significant potential for social gains, and it is expected to yield positive ecological and health spillovers.

If there is a fiscal buy-in for the PES mechanism, what would it imply for farmers’ incomes?

Impact on Farmer Incomes

Data on farmer incomes are used by size class to analyse the impact on farm incomes (Table 3). The total annual income from agriculture in 2017 ranges from ₹ 25,064 for marginal farmers to ₹ 6,05,845 for large farmers (Table 3, column D).3 The average income for all class size is ₹ 65,850. Adding the PES payment proposed for high adoption (according to size of operational holding, column E) raises farmer incomes from ₹ 41,438 to ₹ 13,35,538, depending on size class, and the average income to ₹ 1,14,132. These estimates suggest that farmer incomes by size class would increase 1.7 times on average (ranging from 1.3 times to 2.2 times) if adoption is high. If adoption is medium, the enhanced income would range from ₹ 38,018 to ₹ 11,87,742 depending on size class; the average income would increase 1.6 times on average to ₹ 1,04,480. If adoption is low, the gains are lower, and it provides the floor values.

When the PES payment proposed for low adoption (according to the size of operational holding, column H) is added, farmer incomes are enhanced, and range from ₹ 30,795 to ₹ 8,61,240 depending on size class; the average income would increase to ₹ 82,749. These estimates suggest that if adoption is low, farmer incomes by size class would increase 1.3 times on average (ranging from 1.1 times to 1.4 times).

Whether adoption is high or medium, farm incomes will double for farmers in the large size class, and even marginal farmers will see substantive gains. The estimates in this study are on the conservative side, and these could be treated as indicative floor values.

The implementation of PES often poses numerous challenges. Typically, PES mechanisms are linked to two groups involved in a voluntary and direct exchange of ecosystem services. In certain parts of India, like in the Sukhomajri watershed in northern India, PES-like schemes are already in operation (Kerr 2002). However, the use of PES in environmental management in India is still in its early stages (Behera et al 2011).

India’s National Environment Policy of 2006, which provides a framework for introducing PES, introduced market-based instruments for managing the environment (MOEF 2006). Since implementation is being conceptualised at the national level for all agroecosystems, it would require a different scale of institutional innovation. Fortunately, there is already a government scheme in India for creating farmer producer companies (FPCs) that are supposed to provide farmers end-to-end support (Alagh 2018). In the context of PES, these FPCs can represent farmers in marketing their ecosystem services.

The FPCs could enhance the collective bargaining power of small and marginal farmers (Chand 2017). They could be tuned to do business involving sustainable farming practices, technology for efficient use of water resources and conservation, product development, and innovative promotional marketing strategies. Most of these FPCs are formed with technical and managerial support from NGOs. These could provide the support required for the inclusion of an incentive system in their rules with a higher share of profit for those who adopt ecologically sensitive agricultural practices. Alternatively, much command-and-control-type legislation and many policies could be modified to implement PES. It could be incorporated into existing national and state legislations like the
Environment (Protection) Act (1986), the Water (Prevention and Control of Pollution) Cess Act (1977), the Biodiversity Act (2002), the Companies Act (2013), and the Andhra Pradesh Water, Land and Trees Act (2002).

Conclusions

The 2018–19 budget has signalled a strategy of increasing farm income by fixing the MSP equivalent to the variable cost of producing the crop plus the value of one-and-a-half times the cost of production. Estimating the average cost of production across seasons and regions is a problem. Also, this strategy does not incentivise farmers to reduce production cost; instead, they may increase the cost to gain more compensation. The ecosystem-based approach, on the other hand, would have long-term beneficial outcomes of sustaining agriculture, enhancing the natural capital base, and resolving the deep ecological crisis afflicting the Indian agriculture. This could also be a mechanism for protecting farmers who undertake ecologically sensitive agricultural practices from cheaper imports that do not comply with the high environmental standards of the World Trade Organization regime. Ecologically sensitive practices could potentially be an opportunity for carbon trading.

The PES strategy, therefore, has numerous advantages, apart from making the goal of DFI fiscally and institutionally feasible.

Notes

1 The crop-wise MSP is recommended by the Commission for Agricultural Costs and Prices (CACP). This commission was established in 1965 and was earlier called the Agricultural Prices Commission. It was renamed in 1985. Currently, 25 agricultural commodities are covered by the CACP. The literature on the historical focus of public policy is not relevant to the main aim of this article.

2 This technique is routinely applied under the benefit transfer mechanism in this strand of literature when local estimates are unavailable.

3 Farm income data was available for 2012–13 (NSSO 2016). This was adjusted to make it compatible for comparison to 2017 figures by using a CPI-rural deflator.

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