Friday, May 05, 2006

Indian Agriculture and its Unending Crisis


Sukumar Muralidharan
April 23, 2006

As a decade in the life of a nation, the 1990s could attract a variety of descriptions. For one thing, it was the decade of liberalisation, when India, after a seeming eternity of hesitation, finally decided to engage with the global economy. For another, it was when the Indian middle class, thwarted in its ambitions for generations, carried through its revolution of rising aspirations. And it was also a period of the unabashed celebration of the good life, when older notions of austerity and social responsibility, nurtured in the Gandhian strain of the Indian freedom struggle, were thrown overboard.

With all this, the 1990s could also be remembered as the decade when agriculture fell off the radar screen. Two points in time when the Indian economy was severely buffeted by weather adversities, capture the essence of this transition. In 1987, when the monsoon failed to an unprecedented degree, the economy as a whole went into recession. Agricultural output fell by over 2 percent and with industry and services also feeling the impact, the overall growth rate slumped. The next time around when the monsoon turned in a performance quite so disastrous was 2002. And yet, even as agricultural output shrank by as much as 7 percent, industry and services maintained their brisk rates of growth. The overall impact of the drought on the economy, at least in terms of growth rates, was relatively subdued.

Prior to the decade of globalisation, the financial press through the month of April seemingly had its priorities clear. With the winter crop of grain being harvested, attention would be focused on market arrivals in the mandis of Punjab, Haryana and western Uttar Pradesh, for pointers about the security of essential supplies over the year ahead.

Today, though, the concerns of the financial press are confined, as at any other time of the year, to the level of the stock market. Indeed, April 2006 was a historic month for the Indian stock markets, with the sensitive share price index on the Bombay Stock Exchange, the Sensex, touching 12,000, after a steep climb from the landmark level of 11,000 it had touched just days before. The new record meant that market capitalisation in Indian stocks was, for the first time, of the same magnitude as GDP. This was, in the estimation of the financial press, occasion for joyous celebration. It was state of the art economics, they pointed out, that market capitalisation should be at the same level as the country’s GDP. This was the story in the advanced capitalist economies and it would be the story in India too. Globalisation and the Indian middle class’s revolution of rising aspirations, had transformed the stock market, with its 40 million investors, into a higher national priority than agriculture, with its 600 million people. That was fair going if inherent values, as denominated in monetary terms, were to be considered. Even as the stock markets touched their unprecedented heights, agriculture, the sole source of livelihood for over 55 percent of the country, was plunging towards the 20 percent mark in terms of its contribution to India’s GDP.

As the rabi harvest for the current year gets underway, there is little reason to believe that the wheat crop will be any less than anticipated. Yet, even before procurement began, the Union Government had announced plans to import wheat from Australia for supplying the country’s southern markets. These markets could be more cheaply supplied with imported wheat, says the government. Farmers, needless to say, are unimpressed, and see in the import decision and especially its timing, an effort to cut back wheat procurement operations. The price at which imports have been contracted is much higher than the procurement price for Indian wheat. And if the background to this decision is kept in mind, which is the export of almost 20 million tonnes of wheat from the country’s overflowing granaries since 2002 – at a price below that reserved for the population below the poverty line – then the numerous anomalies in policy approaches to agriculture would become still clearer.

Matters would have been murky enough if they had ceased there. But a mere three weeks into the procurement season, the Government announced a decision to import an additional 3 million tonnes of wheat. When concluded, this would be the biggest food import contract since the Green Revolution, as it is called, supposedly established India as a country that had no cause to worry about food security any longer.

The rapid decline in agricultural fortunes would in most circumstances, except in cases of policy-induced myopia, be serious cause for worry. Through the decade of globalisation, the per capita availability of foodgrain showed a persistent decline for the first time since the 1960s. And this recent phase of agricultural decline has been more alarming since the earlier episode had identifiable climatic adversities that could be held responsible. And despite all the climatic fluctuations through the 1990s, it is nobody’s case that the erosion of Indian agricultural output has had anything to do with natural phenomena, or with unavoidable causes.

Indeed, manmade causes have more to do with the adversities that agriculture today faces. Since structural reforms began in the Indian economy, there has been a steep decline in the proportion of the central government’s budgetary outlays that go into agriculture. This has also been the case with industry, energy, and other sectors. But in certain sectors like industry – though uncertainly so in energy -- budgetary cutbacks could be made good by private initiatives. This in any case is a decided impossibility when it comes to agriculture. Indeed, gross capital formation in agriculture after a gradual decline over the years, began to fall rapidly in the 1990s. And most expert analysis is agreed on the fact that this decline is primarily on account of the fall in public investment in agriculture.

Through the 1990s, the reigning mantra of economic policy was that public investment in sectors where there was no alternative to the energetic economic leadership of the State, would not suffer. The burden of adjustment rather, would fall on unproductive public expenditures, like unmerited subsidies and the establishment costs of the vast government bureaucracy. But this political program for obvious reasons, has been impossible to carry through. Agricultural subsidies have if anything, only increased in the period of structural adjustment, to the extent that the reigning slogan now within official circles is that the priority should shift from unproductive subsidies to productive investments. But there are obviously politically influential farm lobbies that benefit from the subsidies paid out and any effort to ensure a transition to productive investments that benefit a larger cross-section of the agricultural population, would have to run the gauntlet of their resistance.

To take the component parts of food subsidies, there is first, the difference to reckon with, between the price at which the Food Corporation of India procures grain from the farmer during the harvest and the price at which it issues grain to the public distribution system. Then there is the cost of operations, stockholding and transportation that the FCI bears. For much of the 1990s, stock levels were far in excess of prescribed norms. Figures compiled in a recent study commissioned by the Ministry of Finance of the government of India, tell a compelling story. As of January 1, 2002, stocks of wheat and rice with the government and its agencies were over three times the prescribed level – in the case of wheat, almost four times. The volume has been drawn down in subsequent years, until now the seeming embarrassment of riches has been transformed into a deficit. But this has been achieved only by exporting grain at a price below that reserved for “below poverty line” (BPL) families in India. A part of the food subsidy, in other words, is going towards subsidising the consumption of Indian grain abroad.

The report on subsidies makes note of the phenomenon of rising food stocks coexisting with endemic hunger and “reported starvation deaths” in the country. It notes that the price reserved for BPL families, of both wheat and rice, has risen cumulatively by over 60 per cent since 1997-98, against an increase in the consumer price index of only 26 per cent. And despite this rapid increase in the issue price of foodgrain, the aggregate food subsidy burden has increased tenfold since 1990-91 – from a figure of Rs 2,450 crore to over Rs 25,000 crore.

The reasons are twofold: firstly, the costs of stockholding have increased enormously; and secondly, the procurement price paid to the farmer has multiplied several-fold. Increasingly, the food subsidy has lost its function of safeguarding food security and become a system of underwriting an unnecessary and wholly irrational accumulation of food stocks with official procurement agencies, and of keeping the politically voluble farm lobby quiescent, especially in the grain surplus areas.

The rapid increase in procurement prices has been partly justified as a necessary compensation for the sharp curtailment of the fertiliser subsidy, which has contributed to a steep escalation in the price paid by the farmer for this essential input. But the situation here still remains anomalous. According to a recent calculation, if import parity prices were to be used as the benchmark, only an average of about 56 per cent of the total fertiliser subsidy borne by the government is the farmers’ share. The rest is a subsidy for the fertiliser industry.

Official policy, in its reach towards the agricultural sector, is becoming increasingly limited. And the 1990s have also been a period when farmers were once again subject to a gradual but inexorable process of marginalisation. After the robust period of integration with the institutions of the mainstream economy, beginning with the nationalization of the country’s main banks in 1969, this was a serious setback for the millions dependent on agriculture for their livelihood.

Figures tabulated by the National Sample Survey Organisation, show that cultivator households till as late as 1971, were drawing at least 68 percent of their credit requirements from the non-institutional sector – in other words, the local mahajans and moneylenders who would charge extortionate rates and not hesitate to seize their land and other assets in case of a default on repayment, even one induced by severe climatic stress. The picture began to change from the time that the banks nationalization occurred, to the extent that by 1981, the share of the non-institutional sources in total agrarian credit had fallen to 36.8 percent. Over the next decade, the figure fell still more, to 30.6 percent. But once the philosophy of liberalization kicked in, the farm sector became a relatively low priority for profit-oriented financial institutions. In consequence, the share of the non-institutional sources of credit in total agricultural lending, had increased to 39 percent by 2002.

It is possible to make the case that the more accurate measure to use for assessing the adequacy of credit flows to agriculture would be to take these in proportion to GDP. With the share of agriculture in GDP having fallen progressively over the years, it should occasion no surprise that the flow of institutional credit to the sector too, should diminish. But this does not take into account the fact that 60 percent of the country still depends on agriculture for its livelihood. With the shrinking of its access to institutional sources of support – whether budgetary or through the credit system – the agrarian sector becomes more vulnerable to transient parameters, such as weather fluctuations, pest infestation, or natural disasters. The consequence has been a huge increase in agricultural indebtedness, which the most recent survey of the NSSO testifies to in an abstract sense, and the spate of suicides by debt-ridden farmers bears witness to in a rather more intimate and alarming way.

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