COVID-19 and social protection: Impact in the agriculture sector

Access to credit increased farmers' expenditures on farm-related activities. (Image: Pixy.org)
Access to credit increased farmers' expenditures on farm-related activities. (Image: Pixy.org)

COVID-19 induced significant economic and social disruptions in India. Rural households, including smallholders, were affected by loss in migrant income, livelihood and farm and non-farm income. The biggest disruption of livelihood in both the developed and developing world affected the livelihoods of 1.3 billion population.

The national statistical office released the estimates of Gross Domestic Product (GDP) for the first quarter (April-June 2020), suggesting a negative economic growth of 23%. In comparison, the construction sector shows a negative growth of 50%, followed by the service sector (47%) and the manufacturing sector (39%). In contrast, agriculture and allied show positive growth of 3%.

During this lockdown, the Indian government enacted several emergency legislations to provide direct and indirect relief to workers and households. India’s COVID-19 social assistance package, namely, PM-GKY, announced in March 2020, was designed to provide immediate relief to the vulnerable population. The PM-GKY provided cash direct benefit transfers (DBT) and in-kind supports (IKS) through existing schemes.

The paper ‘India's COVID-19 social assistance package and its impact on the agriculture sector’ by International Food Policy Research Institute (IFPRI) examines the impact of India’s government assistance package (known as Pradhan Mantri Garib Kalyan Yojana or PM-GKY), announced immediately after the lockdown, on the procurement of agricultural inputs for the upcoming farming season.

The study uses a quasi-experimental method and survey data from 1,789 smallholder households in three northern Indian states (Rajasthan, Madhya Pradesh, and Uttar Pradesh).

Resilient agriculture sector

Agricultural policy experts posit several hypotheses to explain the resilience in the agricultural sector, including the pandemic's timing, immediate public policy response, and the creation of infrastructure for social transfers, among others.

Although the government's price stabilisation policies helped stabilise cereal prices initially, prices of essential commodities remained stable in May and June 2020 due to better supply chain management, and the procurement picked up in May and June, albeit with a slow start.

The time lag in the procurement of 2019–2020 rabi season production may have impacted the liquidity concerns of farmers for the upcoming 2020 kharif season (July-November).

Moreover, the trading in the agriculture sector in India is mainly physical, and the farmers failed to receive the payments for their produce immediately after the transaction. At the same time, 85% of Indian farmers are marginal and small, 50% of farmers rely on informal credit, and 20% bought agricultural inputs on credit.

The food grain production for the 2019–2020 rabi and 2020 kharif season has increased significantly by 5 and 2%, respectively, compared to the previous year. For the 2019–2020 rabi season, one can argue that the significant farming activities of the season were completed before the lockdown. In contrast, the 2020 kharif season (summer crop), is considered to be most impacted by the COVID-19 pandemic.

The delay in the receipt of farm revenue coupled with the COVID-19 pandemic affected farmers' credit and liquidity to meet input requirements for the kharif season. The present study explores the role of immediate public policy response by the Indian government in addressing the liquidity constraints of farmers.

The government of India announced the COVID-19 social assistance package of INR 1.7 lac crore (or 25 billion US$) under the Pradhan Mantri Garib Kalyan Yojana (PM-GKY) to provide immediate relief to the vulnerable population. The PM-GKY package uses existing schemes to provide additional benefits to farmers and rural households.

The study focuses on four major schemes potentially relevant to the benefits of the farmers. These schemes include Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), Pradhan Mantri Ujjwala Yojana (PM-UY), Pradhan Mantri Jan Dhan Yojana (PM-JDY), and Pradhan Mantri Ann Vitran Yojana (PM-AVY). Together, these four programs represent about 70% of the total budget of the PM-GKY package.

Under the PM-KISAN, farmers did not receive an additional benefit. Still, importantly the scheme payment was frontloaded in the first week of April 2020, which was quite important for farmers for addressing their liquidity constraints. However, the remaining three schemes provide an additional benefit under the package. Although these schemes are not directly meant for farmers, the benefits received through these schemes have implications for farmers' liquidity concerns.

The theory of fungibility suggests that spending is more sensitive to income and liquid assets as compared to assets such as houses. Empirical studies on the fungibility in microfinance for Bangladesh and India suggest that the funds received by farmers have diverted for involuntary commitments. Therefore, it is likely that farmers may use the benefits received here to leverage their investments in agriculture.

In the above context, the study has twofold objectives. First, to examine the impact of the PM-KISAN on the purchase of agricultural inputs. Second, the study investigates the complementary role of other PM-GKY package schemes (such as PM-UY, PM-JDY, and PM-AVY) in stimulating the PM-KISAN's impact on the procurement of agricultural inputs.

India's COVID-19 social assistance package

PM-JDY scheme aims for financial inclusion by opening a savings bank account for the unbanked adult person. The existing benefit includes INR 2 lac insurance coverage. Under PM-GKY, there is a provision of additional benefits in cash transfer of three instalments of INR 500 each to the 204 million women account holders for April, May, and June 2020.

Results and discussion

Impact of cash transfers to farmers on input procurement

Findings show the cash transfer scheme had a positive and significant impact on the procurement of agricultural inputs. In terms of magnitude, the results indicate that beneficiaries of the cash-transfer program were about 16 percentage points more likely than non-beneficiaries to purchase the agricultural inputs for the 2020 kharif season immediately after receiving the assistance. 

In the case of seeds, the result shows that program beneficiaries were about 14 percentage points more likely than non-beneficiaries to purchase the seeds for the 2020 kharif season immediately after receiving the assistance. However, the impact on the procurement of fertilizers and pesticides is modest (2.2 percentage points at a 10% level of significance). Thus, the increased procurement of agricultural inputs may be driven primarily by increased purchases of seed.

The above findings underscore the importance of the government relief package under COVID-19 on farmers' behaviour in farm inputs procurement. The results, in the case of small and marginal farmers, are similar to those of all farmers. As expected, the magnitude of the impact is lower than for all farmers, even though small and marginal farmers are more vulnerable.

Impact of the PM-GKY scheme on input procurement

Estimates of the overall assistance package's impact on agricultural inputs' procurement for the 2020 kharif season show similar patterns for both kernel and nearest-neighbour matching procedures. For all farmers, we find the assistance package had a significant positive impact on the acquisition of agricultural inputs.

In terms of magnitude, the result shows that the package's beneficiaries were 17 percentage points more likely than non-beneficiaries to purchase the agricultural inputs immediately after receiving the government assistance. In the case of seeds, the results reveal that beneficiaries of the assistance package were about 14 percentage points more likely than non-beneficiaries to purchase seeds for the 2020 kharif season immediately after receiving the assistance.

Note that the magnitude of the impact of the government assistance package on the procurement of agricultural inputs and seeds is significantly higher than that of the program transferring cash to farmers. A plausible reason could be that when farmers received multiple benefits under the overall package, they had additional benefits (such as cash transfer for women, conditional cash transfer for buying cooking gas, and free food rations).

As a result, they could afford to shift their additional spending on purchasing agricultural inputs. Our result is consistent with, who found that access to credit increased farmers' expenditures on farm-related activities.

Interestingly, we find the government assistance package had a positive and significant impact on the procurement of fertilizers and pesticides (about a 4% increase). An explanation for this finding could be that the additional assistance under the package relaxed the liquidity constraint to a large extent, such that farmers purchased expensive agricultural inputs such as fertilizer.

It reveals that other components of the government assistance package and the component transferring cash to farmers resulted in increased spending on agricultural activities by all farmers in general and by small and marginal farmers in particular. We find a similar pattern of results for the smaller and marginal farmers.

Summary and conclusion

  • The Indian government passed the most extensive relief package in the country's history. Under the Pradhan Mantri Garib Kalyan Yojana (PM-GKY) legislation, the Indian government provided cash transfers and in-kind support to Indian households for the first three months of the lockdown (April, May, and June).
  • The disbursement of cash transfers in the three states showed that emergency relief packages had reached the vulnerable sections of Indian society. Overall, 89–94% of households benefited from direct cash transfers.
  • The study found that the minimum income support program providing cash transfers to farmers increased small and marginal farmers' procurement of seeds for the upcoming cropping season (2020 kharif season) in the three northern states of India.

However, the study found that farmers who received benefits under other components of the overall government assistance program and the cash transfer to farmers spent more on the procurement of seeds, fertilizers, and pesticides than farmers who did not receive benefits under other components.

  • The heterogeneous impact of the overall program on input procurement showed the effect of COVID-19 relief packages in addressing the liquidity constraints facing vulnerable small and marginal farmers in northern India.
  • Perhaps lower transaction costs, minimal leakages, and immediate delivery make a strong case for direct cash transfers. The above advantages facilitate the provision of relief to a large proportion of vulnerable sections of Indian society in a short period.

However, whether these relief measures continued to reach and affect vulnerable farming households in May and June 2020 remains a question for future research. The above finding has broader implications for other countries in efficient and effective disbursement of aid from government relief packages to private citizens.

The paper can be accessed here