Agriculture, The Engine Of Growth

The structural deficiency of the agricultural economy as a whole and the slipover impact from the rise of crude prices on fertiliser prices as well as on transport costs for ferrying food items need to be tackled urgently

THE meeting of heads of state from G-8 and eight other economically important nations (which included Indian Prime Minister Manmohan Singh) in Japan this week got headlines in the Indian media for all the wrong reasons. While the PM’s presence there provided the focal point of all political action in Delhi, the conclave wound up on Wednesday without reaching any meaningful action plan on the two most contentious issues: combating climate change and controlling global inflation caused by rising food and fuel prices. Preoccupied as he might be with all the political drama, Manmohan Singh should also be worried about food security. Especially, since Maharashtra faces a drought-like situation this year.

The greatest disappointment of the G-8 meeting, however, seemed to be the failure of global leaders to come up with a concrete plan to tackle the food crisis. News agency Reuters filed this report: “The G-8 leaders also acknowledged the economic threat from surging oil and food prices…but came up with no fresh initiatives to tackle what they said were complex problems requiring long-term solutions.” What’s strange is the absence of any acknowledgement from the G-8 leaders that the major reason for the rise in food prices is increasing bio-fuels production in the US and, to some extent, in Europe. The rich countries made no promises to remedy this structural issue, which promises to pull another 100 million people below the poverty line this year, but shifted the responsibility to other big emerging countries. Reuters also filed this report: “The G-8…called for countries with sufficient food stocks to make available a part of their surplus for countries in need.”

The World Bank says this upfront in a position paper (Rising Food Prices — Policy Options and World Bank Response): “Concern over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. The has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland…Other developments, such as drought in Australia and poor crops in the EU and Ukraine in 2006 and 2007, were largely offset by good crops and increased exports in other countries and would not, on their own, have had a significant impact on prices. Only a relatively small share of the increase in food production prices (around 15%) is due directly to higher energy and fertiliser costs.” On a more pessimistic note, the World Bank’s note prepared for the G-8 meeting — Double Jeopardy: Responding to High Food and Fuel Prices — states clearly that food prices are likely to remain above the 2004 levels till at least 2015.

All this raises worries about India’s food situation, particularly since repeated studies have shown that any rise in food prices, rather than fuel prices, is seen to have a greater impact on the common man’s inflationary expectations. This assumes greater importance in the case of the urban poor and the rural landless workers, where food has the lion’s share of the total consumption basket, compared to fuel which is either subsidised or almost free. What is likely to exacerbate the situation is the structural deficiency of the agricultural economy as a whole and the slip-over impact from the rise of crude prices on both fertiliser prices as well as on transport costs for ferrying food items from production centres to consumption hubs. Here are some of the urgent issues that need tackling immediately.

THE first anomaly lies at the macro level. Over 60% of the country’s population is today dependent on agriculture, which contributes to only 20% of GDP. This translates into low income per rural family, which then makes most of them vulnerable to debt traps and pushes them into distress every time there is an exogenous shock. The need is to wean away part of each family into skills-based training, without necessarily alienating the entire family from its agricultural roots. The solution is not to provide them with only urban-based jobs, but to create a talent pool for rural industry, whether it is manufacturing or services-based. Such an industrial base, through linkages, has the potential of bringing about qualitative changes in agriculture as well.

• As a result of so many people depending on agriculture for income, land holdings are exceedingly fragmented, leading to falling crop productivity. According to official statistics, close to 60% of all land holdings in the country are marginal holdings (where land ownership is less than 1 hectare). Consequently, the average size of operational holdings is not even half a hectare, or about 1 acre. Average foodgrain yields, therefore, have been almost stagnant.

• Diversion of crop land into non-agricultural use is growing and could be another cause for worry in the long run. New ways should be found of converting non-agricultural land into agricultural land (without actually reducing the forest cover) and employing technology to increase the productivity of these tracts. Antiquated legislation regulating sale and purchase of agricultural land also needs to be updated, with adequate safeguards, to allow for consolidation of farmland.

• A solution for improving the income and the yields would be to introduce contract farming in a big way. This allows a large corporate to tie up with a large number of farmers with contiguous plots. Both win: while the farmer does not lose his homestead and is assured of an income at the end of the harvest, the corporate is ensured a steady supply of output, which takes some of the uncertainties out of his supply chain.

• Finally, the government has no choice but to rise above petty vote-bank politics and take a hard look at all the handouts (such as loan waivers or cheap credit) and the subsidy structure. According to the World Development Report, 2008, 75% of India’s agricultural budget is spent on such private goods, instead of investing in public goods (such as rural roads, or increasing outlays for agricultural R&D).

In short, agriculture has the potential to become the engine for future growth in the economy, but only if the right cards are played now.

Published as an Op-Ed in The Economic Times (July 11, 2008)