Agriculture

Agricultural growth is much more impactful in reducing poverty as compared to other sectors- GDP growth originating in agriculture is at least twice as effective in reducing poverty as compared to growth originating outside agriculture.

Since 1950, India’s population has grown by about 3 times, while the foodgrain production has increased by 5 times, and milk by 7 times. India is today a net exporter of foodgrains, and state holdings of grains have been increasing steadily (74 million tons in 2013).

Despite these achievements, we need to realize that the growth in agricultural sector has remained stuck at about 3% p.a., even when the rest of the economy shows much higher growth rates. Also, size of an average landholding in India is only 1.15 hectares.These need to be remedied.

Historical context and trends

  • Share of agriculture in national income has been declining: was 56% in 1947, and only 14% in 2013-14. This implies that the growth rate of agriculture has been much slower as compared to the overall growth rate
  • Share of agriculture in employment, however, remains very high at around 55% (was 72% in 1947). This, combined with the fact that agriculture is supplier of food, fodder, and raw materials for a vast segment of industry, demonstrates that without growth in agriculture, growth in India cannot be inclusive
  • Given the overwhelming reliance of the country on agriculture, land reform received top priority on the policy agenda at the time of independence
  • The constitution left the job of bringing in land reform legislation to the state governments
  • Four main objectives were:

Abolition of rent-seeking intermediaries

Tenancy regulation

Imposition of land ceilings

Consolidation of disparate landholdings

Aside from abolition of intermediaries, the rest of the reform initiatives have been unequivocally unsuccessful; also, given politically strong farmer lobbies now, it is unlikely that radical land reform will take place

  • During the 50s and 60s, most of the growth in agriculture came from increase in area; after that, productivity growth led agricultural growth
  • During the first 3 FYPs (1950-66), the government’s reform focus was on institutional factors (land reforms), and public investments (irrigation, distribution systems). However, given the relative focus on industry, agriculture suffered (and grew only at about 2.1% per annum).
  • Even though the focus was on industry, institutional reforms went a long way in improving agricultural productivity- during the first 3 FYPs (till 1964, excluding 1965), agriculture grew at about 3% p.a.; between 1891 and 1946, the average annual growth rate was only 0.4%

Despite this high growth rate, given the massive jumps in population growth rates, food production did not keep pace with population growth.

After independence, India invested heavily in capital goods and industrial plants, but given their long gestation periods, overall economic growth was slow, and consequently there was no surplus to invest in agriculture. Thus, in absence of investment and new technology, food production failed to keep pace with growing population, and from 1956 onwards India had to depend in food imports and aid from the west (the agreement signed with the US was called ‘PL-480’)

Two wars in the 1960s, followed by two successive drought years in 1965 -66, and USA’s subsequent political arm-twisting in return for food aid, pushed India to aim for self-sufficiency in foodgrain production. This led to the ‘Green Revolution’

  • The First Phase: 1966-72 (‘Green Revolution’ starts; focus of government reforms was on both input and output incentive policies, and public investment):

With India’s production of wheat at around 10mt, imports had risen to about 7mt

To end dependence on food imports and aid, India decided to take a two-pronged approach: use of better inputs such as HYV seeds, chemical fertilizers, agricultural machinery, education programmes etc. to boost production, combined with incentives to farmers in the form of MSPs, better credit etc.; for the former, HYV seeds were adopted from Mexico, and for the latter, APC and FCI were set up in 1965

Initially, the focus was on areas which had assured irrigation and other natural and institutional advantages, drawing from geography and colonial investment policies

FCI was mandated with 3 objectives: providing price support to farmers, procure and supply grains to PDS for distributing subsidized staples to economically vulnerable section, and maintain strategic buffer stocks

The HYV seeds were first distributed to well-irrigated states such as Punjab, Haryana, and Western UP, and were supported by input subsidies and public investments in fertilizers, power, irrigation, and credit(institutional credit doubled between 1968 and 1973)

Similarly, output subsidies were provided in the form of MSPs

The results were miraculous:

  • Between just 1967 and 1970, food production rose by 35%
  • India was food self-sufficient by 1971-72, with imports falling nearly to zero
  • By the 1980s, India was regularly maintaining huge buffer stocks, using food exports to pay back earlier loans, and issuing loans to food-deficit countries

Impact (increased food availability, decline in relative prices of food, employment generation in both agriculture and other areas, rise in wages etc.):

  • Through increase in agricultural yield, rather than increase in acreage, India was able to maintain, once again, the high rates of agricultural growth achieved since independence
  • Rapid increase in marketable surplus of foodgrains (use of labour per unit of output declined; initial yield improvements occurred in areas that were already relatively well off)
  • Decline in rural poverty- it declined by 10% between 1963 and 1973
  • Small farmers, as a class, commanded more productive assets and inputs per unit area of land that larger farmers. Thus, the Green revolution was not only scale neutral, but also evolved an inverse relationship between scale and productivity
  • Led to increased rural incomes
  • Apart from growth in agricultural employment, the revolution generated non-agricultural rural and semi-urban employment, in food processing,warehousing, marketing, transport, repairs of agricultural equipment etc.
  • The Second Phase: 1973-80 (government policies still focus on input and output subsidies, and public investments):

After a great run, two consecutive drought years followed in 1972-73, and India slipped back into depending on food aid from the USA

After the oil shock in 1973, fertilizer prices rose. To prevent a fall in use of fertilizers, the government increased fertilizer subsidies, and also provided huge subsidies for power usage in agriculture

There was also a substantial increase in groundwater irrigated area, aided both by public and private investment

HYV seeds for rice were also used now, in addition to wheat; this, combined with above mentioned subsidies, led to a rise in foodgrain production from 1972-73 to 1979-80

As a result, rural poverty declined by about 6% between 1972-73 and 1979-80

  • The Third Phase: 1981-90:

In this phase, India further consolidated its position as a food independent nation, and when a really bad drought hit in 1987, we were able to meet our food needs without any loss of lives

As mentioned earlier, during the first phase of the Green revolution, gains were mostly seen in Punjab, Haryana, Western UP, and parts of AP and Tamil Nadu. However, beginning in 1980s, many poor states such as Assam, Bihar, Odisha, MP, and West Bengal showed significant growth, thereby reducing some of the regional inequality

HVY technology spread eastwards, to Bengal and Bihar, which started being rice-surplus

However, in the rest of the country, Green Revolution ran out of steam, given that it had now been a while since the introduction of HYVs; as a result, to sustain growth in food grain production, input subsidies were steadily increased

  • Post-Reform Phase: 1991-present (there wasn’t a concrete reform plan for agriculture as such, but it was thought reduction of protectionism to industry would provide price incentives and increase investment and output in the sector):

(Post-reform phase can itself be divided into three distinct phases, based on rates of growth of agricultural GDP)

Since 1965, Indian agriculture operated under a strictly regulated policy regime; internally, there were production controls, pricing controls, and restrictions on private trading. Externally, there were various barriers to export and imports of agricultural goods

Also, the focus generally was on protecting industry; this created adverse ToT for agriculture as compared to industry (industrial goods in short supply => rising industrial prices), and made agriculture less profitable

Also, rupee was overvalued, thus creating an anti-export environment for agriculture

1991- 1996: Increase in agricultural GDP growth rate (≈ 3.7% avg.), but minimal decline in rural poverty

The reforms in 1991 focused on liberalization of the economy; this meant that industrial goods faced more competition, and hence industrial prices reduced. Also, the boom in economic growth created higher food demand, thus increasing prices of food grains. Hence, ToT for agriculture increased

  • However, this growth in agricultural GDP did not lead to a significant reduction in rural poverty: rural poverty actually increased to 43% in 1991, from a pre-reform level of 35-39%, and again declined to about 37% in mid-1990s. Reasons:
  1. The growth was mostly in the off-farm sector
  2. Much of the growth came from the services sector, which is relatively skills-intensive, and hence couldn’t accommodate a primarily agricultural workforce
  3. IMF conditions led to a general fiscal contraction, and thus the state intervention was scaled back all around, including in agriculture
  • This notwithstanding, there was some increase in private investment in agriculture due to increasing ToT, and this led to the agricultural GDP growth at about 4% per annum between 1991-96, as against 3% in the 1980s
  • Exports rose (doubled between 1991 and 1996) because of considerable reduction in import duties and devaluation of the rupee; thereafter, declined

1996- 2005:Slowdown

Slowdown in agricultural growth to about 2% p.a., and this slowdown happened across the board (in all agricultural sub-sectors) andacross all regions

Exports declined after having significantly shot up post 1991, largely because of East Asian Crisis and sharp reductions in global commodity prices

2005- present: growth revival

From 2005 onwards, the rate of growth has hovered around 4% p.a. (the 12th plan period showed an average growth rate of 4% p.a., which was the highest ever for any plan period), as compared to the average of around 2.5% p.a. growth between 1992 and 2002. Also, there has been no year since 2005 when agricultural growth has been negative; the variability in growth rate has also been minimal.

A few characteristics of the growth revival:

  • Geography: Most of this growth came from areas that have traditionally been characterized bylow-productivity and low-irrigation, such as Jharkhand,Chhattisgarh, Rajasthan, Maharashtra etc. Growth revival was weak in areas with high land productivity and high levels of irrigation, such as Punjab, Haryana, Western UP, West Bengal etc.

The clear lesson here is that without new technology, growth is difficult to accelerate in areas with high productivity

  • Growth since 2005 has been broad based, that is, the increase in output hasn’t been confined to a few segments or commodity groups; crops, fruits, livestock, fisheries; everything has shown an upward trend.

There are some notable exceptions to this trend; particularly, oilseeds didn’t show much growth, and India’s dependence on oilseeds imports has been increasing, accounting for more than 50% of domestic use

  • Growth has been driven by increase in productivity, rather than in area under cultivation, or by change in area allocation among crops
  • Exports: Apart from achieving self-sufficiency in food, India has also emerged as a large exporter of agricultural goods; growth in exports has been much larger than growth in imports

Reasons for growth revival:

  • Better prices: ToT improved, because of increase in MSP, in procurement, in domestic demand, and increases in international prices of agricultural commodities
  • Higher use of inputs: Increase in use of quality seeds, fertilizers etc.
  • Increased credit flow: Doubling of credit flow to agriculture within a period of 3 years between 2005 and 2007 (MOST IMPORTANT); also, by 2011-12, institutional credit supplied to agriculture turned out to be 33% higher than the value of inputs used in agriculture (a.c.t. 2004); this means that the proportion ofcredit requirement of agriculture sector met by institutional sources has been increasing substantially
  • Increase in irrigation, and technology for drought proofing: % of irrigated arable land increased from 20% in 1981 to 35% today (mostly using groundwater);
  • Capital formation: Gross capital formation in agriculture increased to about 20% in 2010, as compared to an average of around 7% of agri-GDP in 1994; Investments in on-farm and watershed development projects
  • Broad based growth: Greater diversification in crops grown, fertilizers used, technologies adopted etc.
  • Other initiatives:

Increased budgetary support to agriculture related departments (increased from about 12% of all development expenditure in 2003 to 15% in 2008)

Operationalization of a National Horticulture Mission, that extended its programme beyond fruits and vegetables

Agricultural extension system (application of scientific research and new knowledge to agri practices through farmer education) begun to be reformed, leading to extended information reach

  • Due to the above government initiatives, there was also a marked improvement in private investment; although increase in public investment was moderate, it aided significant increase in private investment (which increased from its long term 10% level to about 14% in 2008, and stayed there)
  • As the 12th plan document states, high growth in agriculture since 2005 is a consequence of much greater flexibility being given to the states, and ensuring focus on filling yield gaps using existing technology rather than pushing states to prefer new technologies where there hasn’t been much success so far

The upshot of these measures has been a quantum leap in productivity for nearly all crops.

Capital Formation in Agriculture

Capital formation in agriculture means investments in agriculture, both by the government as well as the private sector (which includes agricultural households). Examples of public sector capital formation would be investments in major and medium irrigation, power, roads, markets etc., whereas private capital formation would include minor irrigation, agricultural implements, machinery, tools, transportation etc.

Among the four major heads of capital items (land, animal capital, farm machinery, irrigation capital), the share of land is still close to 95%. As a country develops, evidence shows that the ratio of land should decrease, as should the ratio of animal capital, and that of irrigation and machinery should rise.

There is an intense debate in the country that says that capital formation in agriculture has either been stagnating or falling since the 1980s, and it does not augur well for the country’s agricultural growth prospects. People also point out that public sector investments induce (‘crowd-in’) private sector investments in agriculture: non-land capital stock (animal capital, farm machinery, irrigation capital etc.) grew only by 0.72% between 1994 and 2007.

We need to note that public sector capital formation in agriculture is of a qualitatively different nature than private capital formation. Public sector CF has long gestation periods, and thus the effects of this year’s public CF will only be seen after a considerable time lag of many years (upto a decade in large dams etc.). Thus, even though public GCF has a strong inducement effect on private GCF, the effect is seen with a considerable time lag.

In any case, the observed declining trend in public GCF is due to rising subsidies, growing opposition to big dams (environmental concerns), diversion of resources to other sectors of the economy etc.Since the 1980s, while public GCF has been falling, private GCF has been rising, but hasn’t been enough to cover the shortfall in public GCF. This has adverse consequence for overall agricultural productivity.

Policy suggestions:

  1. Evidence shows that long-term public investment in capital projects will give rise to more than double the rate of return from subsidies. Gradual withdrawal of state subsidies for irrigation, water, electricity, fertilizers, pesticides etc. would provide a large pool of resources for public investments
  2. There are wide regional disparities in agricultural development; investments in backward states will have greater productivity enhancement effect
  3. To stimulate private GCF, alongside public GCF, there is an urgent need to prioritize institutional credit, favorable terms of trade, flow of technology, farmer education, and appropriately targeted subsidies, as these have a strong positive effect on household-level investments

Shifting patterns of food demand

  • There is currently a significant imbalance between emerging food consumption and production patterns in India

Producers are focusing on foodgrains, which leads to buildup of stocks, while consumer are moving towards edible oils and pulses, leading to imports. Average per capita consumption of foodgrains has shown negative growth => consumers moving towards high-value commodities)

MSP policy should be rationalized in light of this (however,keep in mind that cereals account for a major fraction of daily calorific consumption, and hence should always remain a focus area)

  • Future growth in agriculture will come from high-value segment: There has been significant shift towards producing high-value commodities such as fruits and vegetables, livestock, and marine products. Share of such high-value commodities in total value of agriculture stands at about 47%

Given modernization and lifestyle changes, consumption of processed and semi-processed food is also rising

Food processing sector in India is at a very young stage (only about 8% of the produce is processed, as against about 80% in developed countries)

Secondary agriculture sector (encompassing all activities that add value to primary agricultural commodities) has immense untapped potential; aside from food processing, the demand for agro-bio resources to supplement depleting natural fuels is also rising