Crop diversification and risk management in Indian agriculture

The narrow dependence on paddy and wheat cultivation along with incentives such as free electricity and water has resulted in overuse of pumps and significant depletion of ground water resources in Punjab. Stagnating yields and soil degradation due to intensive cropping pose a significant threat to long-term agricultural productivity in the state. In this paper, we focus on the farmers' decision-making process and identify policy changes that are required to incentivize farmers to cultivate a diverse portfolio of crops and reduce dependence on paddy and wheat. Using data from four representative districts of Punjab, we quantify the impact of introducing alternate crops on the farmers' profitability. Our analysis shows that incorporating horticultural crops in the mix increases net expected returns from cultivation for all land size classes. We also find that including alternate crops reduces water usage by up to 30 % for most farmers, while increasing the labor and working capital requirements. We also examine risk factors-price, labor, credit and yield risk-that might be contributing to the status quo and suggest risk mitigation strategies to promote crop diversification.