S. D. Naik

The performance of the farm sector is worrying. Urgent measures are needed to make agriculture a profitable activity, not only to benefit farmers and a large section of the rural poor but also to give a boost to the economy through backward and forward linkages, says S. D. Naik

The farm sector's fortunes are stooping low. - R. Shivaji Rao

DECLINING capital formation in agriculture, from 1.9 per cent of GDP in the early 1990s to 1.3 per cent since 2000-01, is a matter of concern. This has dragged down not only the growth rate of the sector but also prevented the economy from attaining its real growth potential. Not surprisingly, at the recent meeting of the Planning Commission, the Prime Minister, Dr Manmohan Singh, said that the performance of the farm sector was a matter of worry.

The Prime Minister said the loss of dynamism in the farm sector, hit lately by a lack of buoyancy in product prices, lower profitability and falling income, was a major cause for rural distress. He has, therefore, called for a number of measures to revitalise agriculture and allied sectors. These include:

Examining ways to step up investments, particularly in irrigation where the progress in completing the ongoing projects has been disappointing;

Looking at ways to enhance domestic demand; and

Apart from promotional measures for agriculture exports, addressing the fundamental issues of competitiveness.

The Prime Minister also said measures were needed to improve the productivity and quality of exportable farm products. "The development of dryland and rain-fed areas, which constitute 60 per cent of the new sown area, poses a major challenge," he said.

Dr Manmohan Singh's concern over the loss of dynamism in agriculture should prompt policymakers to devise urgent measures to revitalise the sector. The growth rate of the sector fell from 3.2 per cent during 1980-1996 to 2.1 per cent in the Ninth Plan (1997-2002). The cornerstone of the Tenth Plan strategy was a reversal of this trend, targeting a growth of 4 per cent per annum. Unfortunately, however, the growth rate has decelerated even further, dropping to just around 1.5 per cent during the first three years of the Plan (2002-05).

Post-reforms, largely because of the big decline in public investment, the share of agriculture and allied activities in GDP has fallen steadily, from 32.2 per cent in 1990-91 to about 23 per cent now. However, this sector continues to provide employment to about 58 per cent of the country's labour force and sustains over two-thirds of the population.

It is not surprising, therefore, that a major proportion of the population which depends on agriculture for its livelihood is getting increasingly impoverished. As the Reserve Bank if India's Annual Report for 2004-05 points out, agriculture had a limited or no role in providing additional employment opportunities in the 1990s; employment in agriculture remained virtually unchanged at about 190 million over this period.

To add to the farm sector's woes, there was a downtrend in world commodity prices (especially of oilseeds) after the mid-1990s. In a recent study, Farmers at the Millennium, Abijit Sen and M. S. Bhatia have shown that the net farm business income grew at just about one per cent per annum over this period, which is not sufficient even to neutralise the effect of inflation.

Over the past few years, the debt burden in the sector has increased significantly. According to the findings of the National Sample Survey Organisation (NSSO) 59th Round, almost half of farmer households are in debt. In Andhra Pradesh, this percentage is as high as 82, followed by Tamil Nadu (74.5), Punjab (64.5), Kerala (64.4) and Karnataka (61.6). Crop failures and growing debt burden have also led to large-scale suicides by farmers in different parts of the country pointing to the gravity of the problem.

Urgent measures are, therefore, needed to make agriculture a profitable activity at the earliest, not only to benefit farmers and a large section of the rural poor but also to give a boost to the economy through backward and forward linkages of agriculture with the rest of the economy. It has been well recognised that higher yields and diversification away from cereals to high-value and labour-intensive crops and allied activities are crucial to achieving a sustained 4 per cent-plus per annum growth in agriculture and allied activities. Rationalisation of the minimum support price (MSP) regime, introduction of more risk-mitigation measures and improvements in rural infrastructure can go a long way in achieving this objective.

Two key measures to reduce the risks faced by Indian farmers are: a) improvement and expansion of crop insurance schemes; and b) sustained expansion of institutional credit to the sector at affordable rates of interest.

Unfortunately, the progress in both these areas continues to be disappointing, notwithstanding a significant increase in commercial bank credit to the sector over the last two years. A large number of small farmers still depend on unscrupulous moneylenders for their credit needs, particularly in times of distress. The reach of institutional credit is still restricted to the relatively better-off farmers.

There is also a need to strengthen the marketing infrastructure for agricultural products and encourage all State governments to carry out amendments to the State Agricultural Produce Marketing Committee (APMC) legislation in line with the Model Act (2003). This will improve market efficiency and help promote agricultural exports and agri-processing industries, apart from encouraging public-private partnership in these areas.

Another major neglected area is water management. As the Agriculture Minister, Mr Sharad Pawar, has pointed out, water management holds the key to farm growth. "About 20 million hectare of additional land could be brought under irrigation by completing the ongoing irrigation projects," he pointed out.

Apart from early completion of irrigation projects, there is an urgent need to promote micro-irrigation technology (comprising drip and sprinkler) on a large scale to improve efficiency of water use. RBI studies and a number of experts have pointed out that water use efficiency in Indian agriculture is one of the lowest in the world. This cannot be allowed to continue at a time when water scarcity is on the rise.

Simultaneously, efforts are needed to boost the food-processing sector, both as a means of value-addition and employment promotion in the sector. At present, over 30 per cent the agricultural produce gets wasted because of poor processing facilities. It is also desirable to introduce post-harvest management technologies and legislative reform so as to have a common market for agricultural products.

The over-riding priority, of course, is to reverse the declining trend of public investment in agriculture. As the Economic Survey 2004-05 has emphasised, there is a need to move Indian agriculture beyond its centuries old dependency on monsoon by bringing more area under irrigation and better water management. This has rightly been identified in the National Common Minimum Programme (NCMP) as one of the areas with the highest investment priority.

In this context, the Survey also recommends appropriate design of the fiscal support to be given to agriculture. It further adds that given the compulsions of fiscal consolidation, the choice is between price subsidy for crops, fertilisers, irrigation and power, on the one hand, and higher public investment in supportive infrastructure for irrigation, roads, electrification, agricultural extension and research, on the other.

With a chunk of budgetary resources now being diverted to foot the growing subsidy bill, there have been significant cutbacks in public sector outlays for agriculture. Unfortunately, the growing subsidies have not really benefited the resource-poor farmers and those in un-irrigated dryland areas. Worse, apart from running down the exchequer, the policy has prevented the much-needed diversification of the cropping pattern.

Evidently, serious efforts are needed to cut down the subsidies and step up public investment in agriculture. However, given the political compulsions, any cutback in subsidies — be they on food, fertiliser, power or water supply — to agriculture appears remote, at least in the near term. At the same time, the problem of fiscal deficit continues to remain formidable both at the Centre and in the States, making it difficult for the governments to increase the outlay on agriculture.

It is in this context that the Prime Minister has underlined the need to explore the scope for converging resources to be allocated under `Bharat Nirman' and the National Employment Guarantee Scheme to boost the asset base of the agriculture sector. In any case, under the ambitious Bharat Nirman project, it is proposed to bring one crore hectares of additional land under irrigation.

The World Bank has also shown its willingness to lend up to $3 billion over the next three years to support a rural infrastructure development programme under Bharat Nirman, especially to build roads, provide drinking water and establish irrigation facilities in villages, mostly through State-level projects.

Thus, it may not be too daunting a task to mobilise resources for development of agriculture and rural infrastructure if there is adequate political will.

The real challenge, however, is identifying asset-creating projects and implementing them speedily. These necessitate the active involvement and co-operation of the State governments. The participation of local governments and communities will also be required.

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