Against having just 18.5% share in India's GDP, the agriculture sector is the 'way of life' for over 60% of the country's populations. This speaks of the scale of impact that growth/de-growth in this sector has on the 'masses' in this country.

And considering that the sector is estimated to grow by a mere 2.7% in FY07 (6% in FY06), should sound alarming bells for policymakers - not just from the demand perspective (as lower growth leaves lesser disposable income in hands of the 'agri-dependents') but also from the supply side, as seen from the rise in consumer price inflation due to rising prices of primary food articles like wheat, pulses, edible oils, fruits and vegetables, and condiments and spices.

The Economic Survey for FY07 (2006-07) lays the responsibility of the slack performance of the agriculture sector on "low investment, imbalance in fertiliser use, low seeds replacement rate, a distorted incentive system and low post-harvest value addition." Simply put, with every three out of five Indians directly depending on this sector, low agricultural growth has serious implications for the 'inclusiveness' of growth, as has been harped upon by policymakers and growth 'strategists'.

• Economic Survey 2006-07: Complete Coverage

Furthermore, as indicated above, poor agricultural performance can complicate maintenance of price stability (inflation) with supply-side problems in essential commodities of day-to-day consumption. For instance, as reported by the RBI, including manufactured products such as sugar and edible oils, food articles contributed as much as 27.2% to overall inflation of 6.7% as reported on February 3, 2007.

Monsoon dependence, yields and investment
The agriculture sector has not been able to distance itself from the vagaries of monsoons. In fact, the survey states that deficient rainfall in the monsoon in 2002, 2004 and 2006 during the Tenth Five Year Plan has led to poor agricultural growth, reduction in the share of agriculture in GDP, creation of inflationary pressure in some primary products, and reduction the potential growth of other sectors by dampening demand. We view these as serious hindrances for the sustainable growth of the Indian economy, which is looking to grow more internally and through increased investment and consumption in rural areas.

Low yield per unit area across almost all crops has also become a regular feature of Indian agriculture. For example, as the survey states, though India accounted for 21.8% of global rice production, the estimated yield per hectare in 2004-05 was less than that in Korea and Japan, and only about a third of that in Egypt, which had the highest yield level in the reference year.

Similarly, in wheat, India, which accounted for 12% of global production, had average yield slightly lower than the global average.

While the survey also talks of the potential of redressing some of the root causes such as low investment, poor quality seeds, and little post-harvest processing through greater focus on food processing and integration of the supply chain from the farm gate to the consumer's plate, we see little happening on ground.

If one were to take a look at the adjacent graph, which indicates the cumulative investment of public and private sectors in agriculture as a percentage of GDP, there emerges a clear picture of the discrimination that the sector (and its dependents) has suffered over the years. The share of agriculture sector's capital formation in GDP has declined from 2.2% in 1999-00 to 1.9% in 2005-06. As reported by the survey, this decline has been partly due to stagnation/fall in public investment in irrigation.

Reflections and outlook
As reported by the Reserve Bank of India (RBI), the agriculture sector in the recent years has been marked by low and volatile growth - real GDP growth in the agricultural sector during the first four years of the Tenth Five Year Plan has averaged only 2% per annum as against 4% envisaged in the Plan period (2002-07). A key factor underlying this low and volatile growth is the stagnation in domestic production in the case of major crops like wheat, sugar and pulses.

Illustratively, the production of wheat, after touching a peak of 76 million tonnes (MT) in 1999-2000 has since then been range-bound at around 70 MT. Similarly, the production of pulses has not been able to exceed the peak of 14.9 MT reached in 1998-99. In fact, the production of pulses at 13.1 MT in 2005-06 was even lower than the levels achieved more than 15 years back (14.3 MT in 1990-91). The stagnation in production, in turn, can be partly attributed to stagnancy in investment in the agricultural sector (see chart above).

We believe that for the Indian economy to attain growth rates of 8% (or 9% as estimated by the government for the Eleventh Five Year Plan � 2007-12), the stagnation in production of major crops and agricultural investment needs to be reversed. This could be done by:

1. Stepping up investment outlays on irrigation facilities along with focus on efficient use of water resources;
   
   

2. Putting in place proper risk mitigation policies given the several risks that farmers face such as future price and monsoon conditions;
   
   

3. Having greater focus on rural infrastructure to enhance the productivity of physical resources, and improve supply chain management and value addition in agriculture. In this context, the focus on rural infrastructure development under Bharat Nirman will be a welcome step;
   
   

4. Increasing diversification and value addition in Indian agriculture considering the shift in consumption pattern on the back of urbanisation and rising income levels;
   
   

5. Effectively linking agricultural production with marketing, agro-processing and other value added activities;
   
   

6. Greater focus on agricultural research; and
   
   

7. Intensive efforts from the financial system in terms of revitalising the rural cooperative credit system, strengthening regional rural banks, providing incentives to commercial banks for investments in rural economy and ensuring an adequate and timely delivery of credit at an appropriate price. (The government has decided that from kharif 2006-07, farmers would receive crop loans up to a principal amount of Rs 3 lakh at 7% rate of interest.
   
   As reported by the survey, this year, the government of India is providing interest subsidy of 2% to public sector banks, regional rural banks and cooperative banks on amount of short-term agriculture credit disbursed out of their own resources.
   
   Further, in order to provide relief to the farmers who have availed of crop loans from commercial banks, regional rural banks and primary agriculture cooperatives for kharif and rabi 2005-06, an amount equal to 2% of the borrower's interest liability on principal amount up to Rs 1 lakh has been credited to his/her bank account).

The economic survey has stated that "in the short-term outlook for agricultural sector appears bright. With a welcome rainfall in early February 2007, prospects of wheat and other rabi crops have brightened. There has been a sharp increase in the area under wheat with high domestic and international prices providing incentives to the farmers.

Together with better crop prospects, this augurs well for farm income. In the medium-term, the prospects for agriculture will be determined by the pace and quality of reforms in this sector, the ability to increase investment in surface irrigation, ground water recharge of aquifers and restoration of water bodies, and developing high-yielding varieties of non cereal food and cash crops."

All said and done, we believe that higher growth and long-term stability in the agricultural sector will be a factor of greater investment in irrigation (alongwith application of user charges for utilities like electricity and water supply) and development of high-yielding variety of crops.