Agriculture: a long road ahead

By Abhijit Sen

THERE WAS optimism about agriculture a decade ago. Of course, long-run problems of overcrowding and inequality continued, putting pressure on soil and water resources. But agriculture withstood unfavourable weather and, with massive public works effort, rebounded strongly. The ``green revolution'' spread to new regions and there was diversification into oilseeds, horticulture and livestock. As a result, 1980s agricultural growth turned out to be higher than in earlier decades and had better regional distribution. The 1980s saw unprecedented increase in rural non-agricultural employment, bringing new income opportunities to rural areas and easing the pressure on natural resources.

When reforms began, it was assumed that these trends in technology diffusion and diversification of rural activity would continue. It was also assumed that India had comparative advantage in agriculture and gains from trade would magnify with the WTO. Indeed, it is from such optimism that agriculture got less mention in the reforms agenda than trade, finance or industry. Since the reforms philosophy considers direct public intervention less important than creating a climate favourable to private investment, the emphasis was that initiatives in these other areas would boost incentives and resources for private investment in agriculture, mainly by improving agriculture's terms of trade.

Agriculture's terms of trade did improve during the 1990s, and private investment in agriculture doubled. But despite this and continuous normal monsoons, post-reform agricultural performance has been disappointing. The average annual growth of GDP in agriculture and allied sectors, which was 3.6 per cent during 1981-82 to 1990-91, is down to 2.7 per cent with latest data for 1991-92 to 2000-01. The Index of Agricultural Production based only on reliable data for forecast crops shows growth collapsing from 4.1 to 1.5 per cent per annum, below population growth.

Foodgrain production lagged population throughout the 1990s, with per capita output never crossing the peak reached in 1988-89. Per capita production of oilseeds and fibres also failed to increase because rapid growth in the first half of the 1990s was nullified by output decline after 1996-97. Indeed, 1996-97 appears to be a turning point, with stagnation even of per capita agricultural GDP. In part this reflects weather, but from this point on there was also reduced growth of private investment and a reversal of area diversification towards non-foodgrains. At least for some crops this is related to the failure of the WTO to deliver on its promise of higher and more stable world agricultural prices. These have spiralled down after 1996, exposing weaknesses of existing policy instruments to cope with large international price fluctuations.

However, the main factor behind relatively poor post-reform production performance was a sharp deceleration in yield growth for almost every crop, particularly rice and wheat. Cutbacks in public investment and agricultural credit during the early stabilisation phase had severely disrupted the spread of the `green revolution' to new areas. With State finances worsening and banks reducing rural credit-deposit ratios further, earlier hopes from technology diffusion remain unfulfilled. Data on per capita state domestic product from agriculture show poorest post- reform performance in Assam, Bihar, Orissa and Uttar Pradesh.

Moreover, expenditure cuts on infrastructure and agriculture research and extension reduced technological progress more generally. This increased production costs, raising doubts about earlier comparative advantage assumptions, and shows up in poor growth in Andhra Pradesh, Haryana and Punjab. This also belied earlier hopes about rural workforce diversification. Non- agriculture had absorbed almost the entire increase in rural workforce during the 1980s, but the early 1990s saw a shift to agriculture. Despite subsequent non-agricultural growth, the rural workforce was more agricultural in 1999 than a decade earlier. This put more pressure on natural resources and meant that the high overall GDP growth touched rural India only at the margin.

This turn of events has led to two types of reaction. There is criticism that `reforms' ignored agriculture and certain aspects had a negative impact. The counter is that `reforms' were too little and need intensification. However, the word `reforms' is used differently. Critics define this widely, including not only policy changes relating to trade and finance but also the fiscal stance which led to cuts in public expenditure.

The original reform agenda had in fact envisaged increased public investment, to be financed by input subsidy cuts which were also expected to improve input-use efficiency and discourage environmentally unsustainable practices. Since this effectively meant taxing farmers in regions with better infrastructure, resistance was sought to be muted by increasing support prices to remove `negative subsidies' in trade. In the event, subsidies have not reduced but support prices have become too high to be consistent with free international trade at present lowworld prices.

With this option no longer available, the talk is again of freeing markets. But import controls have gone, very few restrictive orders are actually being invoked under the Essential Commodities Act, and removal of remaining export restrictions is unlikely to yield much in global market conditions. This leaves only thornier and earlier unthinkable options, such as dismantling the support price/PDS system and allowing the corporate sector to take over trade, processing and extension. It is this possibility, and implications for income distribution, that disturbs critics most.

However, it remains true that in a small farm economy such as India's, economies of scale require larger entities to provide critical inputs in technology, infrastructure, marketing and risk management. There are only three ways this can be done: by Governments, through cooperation among farmers, or by allowing corporate control. Much of the problems of the past decade stem from the fact that even as farmers have been exposed to new uncertainties from liberalisation, the state has retreated from these responsibilities and left cooperatives sidelined without creating conditions for corporate entry. Rather than the current drift, many would prefer greater corporate involvement.

It should be understood, however, that what is at issue is not just the remaining controls on trade, or small-scale reservation, or even privatisation of Government agencies. To replace Government agencies fully, corporations would need control, involving new property rights and contract enforcement mechanisms that will change agrarian relations, in ways which have often turned ugly even in the U.S.

The sector's problems, in addition to public investment, are three. First, a fall in demand for agricultural goods, not just cereals, which despite claims of large poverty reduction must be attributed to stagnant rural incomes. Second, environmental problems, heightened not only by price distortions but also by temptation for the mobile to milk an area dry before moving on. Third, increased risks, because of both greater transmission of world price volatility and uncertainties inherent in diversification. None of these has a solution in profit maximisation, but can be mitigated by cooperation. The States with highest post-reform growth in agricultural GDP are West Bengal, Tamil Nadu, Maharashtra and Kerala.

Of course, corporate investment is needed in processing. But what Indian agriculture needs most today are Governments which do not assume that markets will always get it right, have a strategic view of the future, nurture not stifle local cooperation, and, most importantly, use resources efficiently: for example, by recognising that a massive food-for- work programme makes infinitely more economic sense than to build up grain stocks to satisfy fiscal orthodoxy.

(The writer is Professor of Economics, JNU, New Delhi.)

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