India Transformed

by Rakesh Mohan

  As per the NSSO report on consumer expenditures, consumers’ diets are diversifying from cereals, with increasing consumption of high-value agriculture products such as fruits and vegetables, milk and milk products, fish, meat, and eggs. India is still a largely cereal-eating society, but trends are changing fast with growing incomes. Even in terms of value of production, the share of foodgrains (cereals and pulses) in the total value of output of agriculture and livestock has declined from 32 per cent in TE 1993–94 to 23 per cent in TE 2013–14. The share of fruits and vegetables increased from 14 to 19 per cent, milk from 16 to 20 per cent, and meat from 4 to 6 per cent over the same period.

  Comparison with China

  Since India aspires to compete with China in terms of economic growth, it may be interesting to briefly touch upon the Chinese experience of reforms, and if there are any lessons for India to learn. It is well known that China started off its economic reforms in 1978, primarily focusing on agriculture. In a three-sector economic pyramid comprising agriculture at the base, industry in the middle, and services at the top end, China’s economic reformers fired the economy from the base, i.e., agriculture. The commune system of landholding was dismantled and replaced with household responsibility system, and much of the agriculture prices were liberated from most stifling controls. This twin attack on existing policies boosted the Chinese agriculture sector, with AGDP growing at 7.1 per cent per annum during 1978–84 compared to just 2.3 per cent during the pre-reforms period of 1952–77. But more interesting was the rise in real rural incomes as a result of farm prices being liberated from various controls. The per capita real rural incomes increased at 15.5 per cent per year during 1978–84. This brought the Chinese poverty levels down from 33 per cent in 1978 to 15 per cent by 1984.This dramatic increase in real per capita rural incomes and decline in poverty served two important purposes: (a) it gave political legitimacy to further carry out the economic reforms with greater rigour; and (b) it created a massive demand for industrial goods, which were being manufactured by Town and Village Enterprises (TVEs), thus paving the way for manufacturing reforms and revolution. It was this home-grown demand from rural areas that was the catalyst for change in the manufacturing sector. China’s services sector picked up momentum much later.

  In contrast, the Indian reforms were more by stealth, and carried out under acute economic crisis. They were basically to stabilize the economy through adjustments in the exchange rate and some trade-policy and industrial delicensing reforms for the industrial sector. They did not focus on agriculture. In fact, agriculture was deliberately kept out of it in the initial phase of the reforms, and later too only piecemeal efforts were made to tinker with agriculture’s policy environment. Since masses in rural areas did not gain much in the initial years of reforms, it lacked the political legitimacy, which was in sharp contrast to the Chinese experience. There was always a lurking fear about the sustainability of the Indian reform process. Nevertheless, the reforms helped the Indian economy to stabilize on the macroeconomic front and to boost its overall rate of growth. But for masses in the rural areas, it was more like a trickle-down approach. As a result, India took eighteen years to halve its poverty—from 45 per cent in 1993 to 22 per cent in 2011 (as per the Tendulkar poverty line), compared to just six years in China. That’s the biggest difference in the nature of reforms carried out by China and India.

  The World Development Report of 2008 (World Bank 2007), after a major survey of the growth experiences of several developing countries over the last twenty-five years or so, pointed out that 1 per cent growth in agriculture is at least two to three times more effective in reducing poverty than the same growth coming from non-agriculture sectors. In the case of China, it was 3.5 times more effective, and in the case of Latin American countries, it was 2.7 times more effective. It is this centrality of agriculture that India needs to realize if it wants to abolish poverty at the fastest rate possible. Given that half of India’s workforce is still engaged in agriculture and almost 75 per cent of poverty is in rural areas, it is not difficult to get this message. And yet, direct and bold reforms in agriculture have remained elusive. Whatever benefit came to agriculture, it came primarily through indirect reforms of the exchange rate and the slashing of import duties on industrial products, and later on, from rising global prices (from 2004–11) and their transmission to Indian agriculture with hiccups and lags. It is high time that reformers in India realized this and adopted a bold agenda for reforming agriculture.

  Reforming Indian Agriculture: The Way Forward

  Agriculture being a state subject under the Constitution, the central government requires wider consultation with the states for any comprehensive reform package, and that in turn, depends on political will, leadership and time. The 1991 reforms happened in stealth and under acute pressures due to the foreign-exchange crisis; agriculture, however, was never on the reform agenda. The central leadership did not have a champion for the agriculture sector: not surprisingly, the sector limped from one intervention to another, which were only marginal in nature and did not add up to a cohesive reform agenda for the sector.

  There are no doubts about the urgency for reform in India’s farming sector today. However, the strategy of reform will need to subscribe to four larger constraints/objectives. One, the reform process needs to be inclusive of the close to 85 per cent of India’s total farm holdings that are less than 2 hectares. Unless these small and marginal farmers participate in the reform process and diversify their production baskets by moving towards high-value agriculture, the Indian agri sector will not get transformed. Second, unless farming becomes economically and financially viable, the problem of retaining efficient and effective resources, including human resources, will only intensify. Third, in light of the extensive over-exploitation of scarce resources such as water and land, environmental sustainability needs to be incorporated deep into the systems and policies. Fourth, Indian farm products, and thus policies influencing their production, should ensure their global competitiveness. Within these constraints, is it feasible for India’s AGDP to sustainably grow at a rate of more than 4 per cent ? The answer in brief is ‘yes’, provided we are able to carry out at least three sets of reforms as given below:

  Getting the Markets Right

  We do this primarily by setting right the incentive structures for farmers in terms of getting the best prices for their produce. A five-pronged strategy—liberalize global trade, repeal/reform trade-restricting policies such as APMC and ECA, create mechanisms for risk mitigation and augmentation, deepen and expand the physical (national and global) and financial markets, and invest in agri infrastructures—should set the stage.

  This would amount to opening up exports of all agri commodities, even pulses and edible oils/oilseeds, which are highly restricted today. Also, it would amount to abolishing or drastically pruning ECA, and allowing the private sector to move and store commodities freely across the length and breadth of this country. To check on the fear of ‘hoarding’ by unscrupulous traders, making registration of the stocks—say, above 10,000 MT—compulsory with the National Warehousing Development Authority (NWDA) can do the trick. This can only be a transition mechanism towards freer domestic trade and stocking in the future. Further, imports could be liberalized with moderate duties to ensure that domestic ‘hoarders’ get enough competition through open imports that would keep in check their ‘rent-seeking’ behaviour, if any.

  Further, one needs to reform the APMC Act and allow private mandis to come up in competition with the existing APMC markets. The government should allocate land for that purpose, subject to rationalization of commission fees, mandi taxes and other cess (all combined to be not more than 3 per cent), and allow direct buying by processors and organized retailers from farmer groups (Farmer Producer Organizations). Introducing negotiable warehouse receipt system for farmers, wherein they can get, say, 75 per cent advance against their commodity, and can choose to sell later, would also be of much use to
farmers in getting better prices for their produce. Same would be true for forward and futures trading in agri commodities. These institutional reforms (reforming the ‘rules of the game’) towards getting the markets right will go a long way in attracting private-sector investments all along the value chains—modern markets, storages, food processing and organized retailing (including e-commerce)—that are needed so desperately. The private sector can then resolve the issues of grading, assaying, packing, traceability, delivery platforms, etc. Through better prices for their produce, farming will become more remunerative.

  Rationalize Food and Agri-input Subsidies and Enhance Investments in Scarce Resources, Mainly Water Management and Agriculture R & D

  The overall resources going to food and agriculture sector in India are not meagre. The total input subsidies on fertilizer, power, canal irrigation, and agri credit alone were Rs 1,88,158 crore in FY 2016, while public-sector investments in agriculture were to the tune of Rs 48,757 crore. As a percentage of AGDP, input subsidies amount to about 9 per cent and public investments to about 3 per cent. If one adds to this the food subsidy bill, which in the FY 2017 Budget stands at Rs 1,34,835 crore, and the pending bills of food and fertilizer subsidies that together account for another Rs 1,00,000 crore, the total amount of food, fertilizer, power, canal irrigation, and agri subsidies in FY 2017 would be more than Rs 4,00,000 crore.

  The problem with subsidies is that they lead to very inefficient use of resources, and in the case of food, it leads to large leakages, around 46 per cent in 2011–12. In addition, the food subsidies are also iniquitous, as only the large farmers get larger part of the subsidies because of the sheer size of their holdings. The current thinking on substituting this ineffective, subsidized physical grain distribution system with direct benefit (cash) transfers (DBT) (with an unconditional cash transfer made directly into the bank accounts of the identified beneficiaries) is a step in the right direction. This shift away from a price-policy instrument (PDS) to an income-policy instrument (DBT) will not only make better economic sense but will also help the country achieve its set welfare objective under the original scheme of the NFSA. Calculations show that depending on the nuances of the DBT scheme, the country’s exchequer can save up to Rs 48,657 crore per annum. These savings, when recycled into agriculture as investments—primarily on water augmentation and better management of its use—can transform the sector. This will give a big boost to agri productivity, bring resilience in the system to cope better with droughts and also save on water and fertilizers. Such a reform would be transformational, and has already been recommended by the high-level committee headed by Shanta Kumar set up by the Modi government in 2015 to restructure India’s food management system. The political will is now needed to implement it over the next two to three years.

  In terms of investment on agri R & D, India spends only 0.46–0.7 per cent of AGDP as against the recommended norm of at least 1 per cent for developing countries. This percentage expenditure on agri R & D goes up to 3 per cent in the case of developed countries. However, it is not just the paucity of resources that needs to be blamed, it is also the missing institutional reforms in the Indian Council of Agricultural Research (ICAR) system that is mandatory for making the whole system transparent and accountable to the scientific community.

  Get the Best Technologies within Reach of Farmers

  From the Green Revolution of the 1970s, the White Revolution of the late 1970s and 1980s, and the Gene Revolution (cotton) of the late 2000s, the role of agricultural research, technologies and extensions services has been pivotal. If not for the continued agricultural R & D, none of the global and national lab work would have translated into successful and transformative land (agri) stories. Therefore, the importance of access to the best technologies cannot be overstated.

  The Green Revolution came in this country by accessing the HYV seeds of wheat from CIMMYT in Mexico and rice from IRRI in Philippines. The cotton revolution from 2002 onwards occurred by accessing genetically modified seeds from Monsanto–Mahyco. The world is currently moving from green to gene to brown revolution, which emphasizes the role of precision agriculture while taking care of soil and water. Precision agriculture—be it drip irrigation or fertigation, robotics in agriculture, field scripts, drones and doves to monitor agriculture—is the way forward. India cannot afford to remain insulated to these new developments in more advanced countries. Therefore, issues of R & D—in terms of quantum of resources put in, their IPR questions, and how to access from private-sector global companies—will have to be settled for the benefit of millions of farmers and to ensure that Indian agriculture remains globally competitive. The challenge will be in making the technology accessible to small and marginal farmers of India. It could be through an Uber-like model for tractors, harvest combines, or even for drones and doves, to serve the needs of agriculture.

  A forward-looking vision is needed, one that is science based, aligned to market forces, and backed by ample financial resources operating in a global framework. Only such a vision will make Indian agriculture environmentally and socio-economically stable, viable, effective and efficient. A champion who has a vision and has the capacity to persevere to involve states into not just reforming but transforming the Indian agriculture sector will give the needed political legitimacy to the reforms, thereby accelerating agriculture and alleviating the deep-rooted problems of poverty and malnutrition much faster.

  Bibliography

  Acharya, Shankar. Essays on Macroeconomic Policy and Growth in India. New Delhi: Oxford University Press, 2006.

  Ahluwalia, M.S. ‘India’s Economic Reforms’. In India: The Future of Economic Reform, edited by Robert Cassen and Vijay Joshi. Bombay: Oxford University Press, 1995.

  Ahluwalia, Montek Singh. ‘How Home-grown Were They? The 1991 Reforms’. Economic and Political Weekly 51, no. 29 (2016): 39.

  Anand, Rahul, Ding Ding, and Volodymyr Tulin. ‘Food Inflation in India: The Role for Monetary Policy’. IMF Working Paper 14/178. Washington: International Monetary Fund, 2014.

  Bhagwati, J.A. Barua, and M.S. Khan. ‘Is the Rupee Over-valued?’ ICRIER Working Paper no. 304, 2015.

  Bhattacharya, R., and A. Sengupta ‘Food Inflation in India: Causes and Consequences’. National Institute for Public Finance and Policy Working Paper 151, 2015.

  Commodity Review and Outlook 1993–94. FAO Economic & Social Development Series no. 62,. Rome: FAO, 1994. http://www.fao.org/docrep/t1980e/t1980e0g.htm.

  Fan, Shenggen, Ashok Gulati and Sara Dalafi. ‘Overview of Reforms and Development in China and India’. In The Dragon and the Elephant: Agricultural and Rural Reforms in China and India, edited by Ashok Gulati and Shenggen Fan. Baltimore: Johns Hopkins University Press, 2007.

  Gaiha, R., and V.S. Kulkarni. ‘Foodgrain Surpluses, Yields and Prices in India’. Global Forum on Agriculture: Policy Coherence for Development. Paris, 30 November–1 December 2005.

  Gulati, A., and P.K. Sharma. ‘Government Intervention in Agricultural Markets: Nature, Impact and Implications’. Journal of Indian School of Political Economy 3, no. 2 (April–June 1991).

  Gulati, A., and S. Bathla. Capital Formation in Indian Agriculture: Trends, Composition and Implications for Growth. Mumbai: National Bank for Agriculture and Rural Development, 2002, 24.

  Gulati, A., and S. Saini. ‘Leakages from Public Distribution System (PDS) and the Way Forward’. ICRIER Working Paper under the ICRIER–ZEF Project, 2015.

  Gulati, A., and S. Saini. ‘Taming Food Inflation in India’. Discussion Paper no. 4. Commission for Agricultural Costs and Prices (CACP), GoI, 2013.

  Krueger, A.O., M. Schiff and A. Valdes. ‘The Political Economy of Agricultural Pricing Policy’. USA: World Bank, Washington, D.C., and Johns Hopkins University Press, Baltimore, 1991.

  Mishra, Prachi, and Devesh Roy. ‘Explaining Inflation in India: The Role of Food Prices’. Indian Policy Forum 8 (2011).

  Pursell, G., and A. Gulati. ‘Liberalizing Indian Agriculture: An Ag
enda for Reform’. Policy Research Department, World Bank, September 1993, WPS 1172; also published in Robert Cassen and Vijay Joshi, eds. India: The Future of Economic Reform. New Delhi: Oxford University Press, 1995.

  Rajan, Raghuram, governor, RBI. ‘Fighting Inflation’. Inaugural speech at FIMMDA–PDAI annual conference. Mumbai, 2014.

  Report of the High-level Committee on Reorienting the Role and Restructuring of Food Corporation of India. FCI, 2015. http://www.fci.gov.in/app2/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English_1.pdf.

  Saini, S., and A. Gulati. ‘Studying Price Distortions in Indian Agriculture’. Submitted to World Bank, 2016.

  Sonna, T. H. Joshi, A. Sebastin and U. Sharma. ‘Analytics of Food Inflation in India’. Reserve Bank of India Working Paper Series, no., 2014.

  World Development Report 2008: Agriculture for Development. Washington, D.C.: World Bank, 2007. https://openknowledge.worldbank.org/handle/10986/5990.

  Data Sources for Country-wise MSP:

  MSP of Wheat in China: National Development and Reforms Commission, China, http://www.ndrc.gov.cn/xwzx/xwfb/201310/t20131012_562026.html. Accessed on 21 November 2014.

  MSP of Wheat in Pakistan: Pakistan Agricultural Research Council, http://www.parc.gov.pk/index.php/en/component/content/article/122-news-flash/806-12th-meeting-of-standing-committee-at-parc. Accessed on 21 November 2014. MSP of Wheat in India: Press release of the Ministry of Agriculture on 17 October 2013. Press Information Bureau, http://pib.nic.in/newsite/erelease.aspx.

  MSP of Rice in India: Press release of the Ministry of Agriculture on 25 June 2014. Press Information Bureau, http://pib.nic.in/newsite/PrintRelease.aspx?relid=105862. Accessed on 21 November 2014.

  MSP for Rice in China: Press Release, National Development and Reforms Commission, China, http://www.ndrc.gov.cn/xwzx/xwfb/201402/t20140211_578631.html.