By Santosh Mehrotra
The Union government has announced some agriculture-related reforms last week as part of a larger package to revive economic growth. These include relaxations in agriculture marketing rules, amendment of the Essential Commodities Act and, and a legal framework to facilitate contract farming. The jury is still out on what these reforms could do to improve the lot of farmers. Several experts have welcomed these steps saying they will give farmers more choices to sell their produce and get better prices. While these attempts to remove the bottlenecks faced by the farming community are welcome, they should not distract the policy makers and experts from the primary need of evolving a comprehensive strategy for the country’s agriculture sector. The country had been following a piecemeal approach while addressing the needs of this crucial sector that provides employment to 44% of India’s workforce and contributes around 14% of the GDP.
Many of the problems can be traced to their historic roots. The Second Five Year plan focused on import substituting industrialisation with an emphasis on heavy industry in the public sector. Agriculture that had received a fair amount of attention in the First Plan went out of favour. Sukhamoy Chakravarty, who was the chairman of the prime minister’s economic advisory council during Indira Gandhi’s time, used to call agriculture a bargain sector. As a result, the output and incomes in agricultural sector grew more slowly. This meant demand from the rural sector, which would have created consumer goods demand for new manufacturers, never materialised. We might have become self-sufficient in food since mid-1970s, but agricultural incomes grew much more slowly than incomes in other sectors.
Another problem was that the school system was not expanding, especially in the rural areas. Female literacy was not growing and this impacted adversely our population growth rate. We were a much smaller population than China in 1947. We were merely 330 million people when China was 500 million. We allowed the population to grow, which was a natural outcome of limited investment in education and basic health services, which included reproductive health, family planning and education of girls. We paid a price for that and have become the most populous country in the world. This impacted agriculture adversely because it meant that plot sizes kept shrinking, agriculture productivity hence grew slowly, the absolute number of workers in agriculture kept rising, with the numbers of rural poor rising, which kept demand for non-agricultural goods and hence non-farm job growth low. When farm productivity and rural incomes are not rising, how could the overall demand for consumer goods rise? This neglect of education and health thus had a catastrophic consequences for the entire economy.
If agriculture does not grow fast, you don’t generate income in rural areas. Without an increase in rural incomes, the demand for manufactured goods will be mainly from urban areas; overall demand for manufactures remained constrained. The problem of the manufacturing sector in the last six years is essentially a problem of lack of effective demand. There is latent demand — millions of people want to consume manufactured items, but their incomes are not growing. The dynamics is the following. When non-farm jobs growth is fast, especially in construction, people get pulled out of agriculture. This started happening at a fast pace after 2004. That tightens the labour market in rural areas and raises wages; rising rural wages spilled over to urban areas. This is precisely what happened between 2004-5 and 2011-12. As wages and incomes grew, the demand for non-agricultural products increased and the manufacturing sector was doing quite well; manufacturing jobs growth was reasonably strong. This is the process that we need to revive: a process wherein the absolute number of workers in agriculture is falling while that in non-farm jobs are absorbing them.
The structural transformation process picked up pace after 2004 with the unprecedented growth between 2003-4 and 2013-14. We achieved a growth rate of nearly 8% per annum over those 10 years, despite the global economic crisis in 2008, with 7.5 million non-agriculture jobs being created every year, when the number of entrants into the labour force was merely 2 million per annum. We have to revive that kind of trajectory. Between 2012 and 2018, the manufacturing jobs have fallen in absolute terms (for the first time in India’s history), the pace of growth in construction jobs has fallen; only modern services created jobs post-2012.
What has been the agrarian strategy India followed in the last 50 years? The government provides farmers subsidised power, seed, fertilisers, diesel and water – the five main inputs. And for the output, minimum support price is offered. It works for two commodities, despite the fact that MSP is announced for 23 agricultural commodities. So, there is also an output price support underpinned by input subsidies. Clearly that strategy has not paid off and we are reaching the end of the road for this agrarian strategy that we have followed so far. Despite the input subsidies and output price supports provided at considerable fiscal cost, the UPA government had to announce a farm loan waiver worth Rs 65,000 crore in 2008. Agricultural growth was reasonably robust for a five year period, but two successive years of droughts (2014 and 2015) followed by demonetization broke the back of this strategy again. Farmers in state after state after 2015 demanded farm loan waivers. This continued under the NDA and several state governments followed the strategy.
And this is clearly not the way forward. Farm loan waivers are destroying the banking system’s credibility and undermining those farmers who are conscientiously repaying their loans. So, when this strategy came a cropper, a couple of state governments decided to offer farmers income support. Rythu Bandhu in Telangana and KALIA in Odisha came before state elections. Then the central government came up with PM Kisan. So, when input subsidies, output price support failed, and farm loan waivers did not relieve rural distress, governments started income support for farmers.
This is not a sustainable strategy for improving agricultural output.
Then what is the way forward? The governments, state and central, will have to rethink the strategy characterised by input subsidies, output price support, farm loan waiver and income support. In the time of a fiscal crisis, limited resources should be allocated to investment in agriculture to improve productivity. Investment can take various forms. One there is a water crisis. You can improve the availability and affordability of sprinkler systems and drip irrigation. Also, there is this very ineffective application of fertilisers; the marginal output from increments in fertiliser application is stagnant. This is partly because of the knowledge base of farmers, most of whom are semi-literates.
We used to have a very good extension system prior to the Green Revolution that has collapsed. The private farmer associations and producer cooperatives have far more extension personnel than the state governments do. This is just the right time to push farmer associations and cooperative, which could provide this support. Thirdly we need to invest in research and development to develop new knowledge base to be passed on to the farmers. Fourth, we need greater investment in water conservation and watershed management, and natural resource generation, all of which will generate rural jobs. Fifth, we also need to invest money in creating storage capacity so that food does not lie out in the open covered with tarpaulin sheets. At least 15-20% of the vegetables and fruit output is wasted in India. Finally, big farmers are borrowing from banks at low rates of interest and re-lending to small and marginal farmers at exorbitant rates; this is both inefficient and inequitable.
The need of the hour is to have a comprehensive long-term policy for agriculture that is capable of tackling the many problems faced by the sector. The policy should target improvements in farm productivity and rural incomes that can lift the economy from the current crisis.
(Prof. Santosh Mehrotra teaches economics in Jawaharlal Nehru University, New Delhi. Kindle edition of his book Reviving Jobs: An Agenda for Growth is available.)