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Pushing The Agriculture Sector – Incorrectly

Posted on April 14, 2011 in Specials


By Anirudh Nimmagadda:

Our Union Budget:

The Indian economy has emerged from the global recession relatively unscathed, a fact not left unmentioned by our finance minister Pranab Mukherjee in his speech introducing the annual Union Budget for 2011-12. We are, it is claimed, back on the “pre-recession growth trajectory”. A significant increase in private investment is expected to drive real GDP growth back to a sustainable 9% per annum, and possibly higher. The services sector continues to grow at near-double-digit rates and the manufacturing sector, which achieved record growth rates last year, is expected to keep its momentum robust for the foreseeable future.

All is not sunny, however; the agriculture sector, which has long been counted on as being recession proof and which accounts for the livelihood of nearly 52% of the Indian population, has registered negative growth over the past couple of years owing to erratic monsoons and drought in large parts of the country. Food inflation, even after falling 50% since February 2010 (when it was 20.2%), is at an alarming 9.3%.

In a country where over 200 million people are insecure about their daily bread, these facts indubitably are causes for concern and have led to the Finance Minister choosing to give precedence to this, the largest economic sector in India, in the yearly budget.

Thousands of crores of rupees have been earmarked for pumping into agriculture and allied sectors for a variety of ends including the extension of the Green Revolution to eastern India, the enhancement of productivity in dry-land farming areas, the launch of a ‘climate-resilient agriculture initiative’ (which presumably will reduce the dependency of Indian agricultural productivity on the monsoons) and the provision of state-of-the-art infrastructure to producers in the food processing sector via the setting up of fifteen ‘mega food parks’, each of which will have facilities for storage (cold warehousing), processing (grading centers) and research.

Additionally, with a view to increasing agricultural productivity through better accessibility of good quality seeds and fertilizers, the government has approved the tax-exemption of the testing, certification, and transportation of agricultural seeds, and the provision of subsidies on fertilizers (subject to nutrient composition conditions). The increased number of suicides by farmers in rural India has not been overlooked either; regional rural banks (RRBs), which play an important role in providing credit to the poor, are set to receive a boost in capital commensurate with the increase in agricultural credit cash flow targets.

While it is obvious that the finance minister and (by extension) the government have made all the right noises with respect to endearing themselves to a public that is hungry for handouts, and that some important measures have been taken to improve the economic conditions of farmers over the short term, that important long term increases in productivity, among other benefits, are to be had from this budget is much less clear. The World Bank has long maintained that the low productivity in India is attributable to large agricultural subsidies (among other public spending) that crowd out investments in research and extension, over-regulation of domestic agricultural trade (that has resulted in increased costs, price risks, and uncertainty, and has undermined competitiveness within the sector) and inconsistent government policy. With this established, one can’t help but think of the proposed subsidy on fertilizers as an instance of the government insisting the economic laws of supply and demand aren’t applicable to them.

The population of India is increasing at a rate faster than is our aggregate food production. Nationwide shortages of food in the future can only be circumvented if the total land available for agricultural production increases along with an increase in the productivity per unit of the land. Since the government has not made appreciable headway in making wastelands fit for production in the past few decades, the most straightforward way to increase agricultural produce is the development of better ‘raw materials’ – fertilizers, seeds, etc. By subsidizing these very goods, the government limits the profits to be made from engaging in their production, and disincentivizes private research in all related fields. Interventionist measures may effect an increase in the affordability of the aforementioned goods while also generating goodwill for the government, but they will leave us perennially hungry and facing a mountainous fiscal deficit, if sustained for long.

The present budget also leaves a critical part of the existing status quo unchanged; youth seeking employment in the agriculture sector do not benefit noticeably from the measures introduced in the budget nor are their prospects diminished (unless they wish to undertake research in the science of food production, in which case they may gain marginally from the increased spending on research to be initiated by the government). By and large, however, educated youth will probably continue to shy away from this sector since there are greater rewards to reap elsewhere — a fact deregulation can help change.

While the deregulation of a hitherto tightly controlled agricultural sector will undoubtedly increase food inflation further (undesirable, given present circumstances), it should be observed that only in an environment relatively free from stifling regulations and artificially imposed price floors and ceilings, can there exist the variety and diversity that are essential for experimentation — experimentation that will, in time, bring the living standards of tomorrow’s ‘poor’ above those of today’s ‘middle class’. History is full of instances of innovations that have arisen in response to pressing needs. The 1973 oil crisis, which indirectly ended the oil-dependency of a host of nations around the world and originated a global interest in renewable sources of energy, is a prime example.

This year, Indian agriculture should have, at the very least, hinted at taking a bold step forward; choosing to meet and conquer the storm of uncertain demand determined by the dynamics of a global market with unflinching resolve. And it could have. But it didn’t.

Perhaps next year…