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The great agricultural imbalance

June 21, 2004

Last week, the government made its first policy announcement on agriculture, putting into motion the process of doubling the flow of credit to the sector, as promised by the Common Minimum Programme.

The target for the first year is to increase credit by 30 per cent, implying that doubling will be achieved in three or four years.

A significant component of the first policy package (indications are that there is a lot more to come) is the rescheduling of debt of farmers who are in distress because of drought or other factors as well as farmers who are in arrears with their dues.

This approach will obviate the need for lenders to classify these borrowers as defaulters, thereby ensuring that the population of eligible borrowers does not shrink.

That things are not entirely right with Indian agriculture is widely accepted. One can, therefore, entirely sympathise with the government's compulsions to do something, and quickly, to ease the level of discomfort in a sector that employs more than half of the country's workforce.

Reducing the vulnerability of households dependent on agriculture to various kinds of shocks is an integral part of any strategy. The expansion of credit availability and the restructuring of existing debt are entirely legitimate instruments in achieving this objective.

But, how effective these will be depends entirely on the broader context in which they are implemented.

The question is: are the structural characteristics of Indian agriculture in a state in which the availability of credit and the prevailing debt burden are the only significant constraints to stable growth?

The answer to that is an obvious "no". Indian agriculture today is characterised by a series of imbalances, which are the result of two factors: price distortions and inadequate public investment.

In both these, the government's hand (Centre and state) is clearly visible. The combined impact of these factors on the growth and volatility of agriculture is huge. Streamlining credit flows could well be an ancillary component to any real solution, but it simply cannot substitute for the more fundamental corrections that need to be made.

But before we get to the imbalances in the agricultural sector itself, we should focus on a bigger imbalance between agriculture and the rest of the economy.

Over the last two decades, the share of agriculture in the GDP has shrunk from around 40 per cent to somewhat less than 25 per cent. Over the same period, the share of the workforce employed in the sector has dropped from around 70 per cent to around 60 per cent (in 1999-00, according to the National Sample Survey).

The transformation in the GDP is typical of developing country experience. The rigidity in agricultural employment is not. All successful developing economies moved significant numbers of people out of agriculture as the share of agriculture in the GDP declined.

In essence, this meant that the relative position of the people who remained in agriculture did not deteriorate to the same extent that we have obviously seen in India.

This is lesson number one for the government: conditions in agriculture will improve if large numbers of people are quickly provided employment opportunities in other sectors. There has to be some proportionality between the share of the GDP and the share of employment for the development process to be perceived as equitable.

Coming to imbalances within the sector itself, these have been analysed and recommended on many times over. People who have prominent positions in the new government have been significant contributors to the debate.

The longer it takes to get moving on these, the more damage is being done and the more difficult it will become, politically and financially, to put solutions in place.

I am, therefore, repeating what many people have said before, but it might be useful to classify the problems in categories, which relate directly to problems that agricultural households face, at least as perceived by policymakers.

The critical issue, as I suggested above, is risk. In a food shortage situation, the government is legitimately concerned with food security; it puts in place policies that reduce risk for the mass of consumers.

However, in food surplus (at least at the macroeconomic level), it is tempting and easy to use the same tools to mitigate risk for the cultivator. In effect, the procurement and input subsidisation policies have become government-funded risk management systems for farmers in some parts of the country.

Rigorous analyses of probabilities of crop failure have led to buffer stocking norms in the region of 22 million tonne of foodgrains.

That we are regularly crossing the 60-million tonne mark at the end of a good year is a measure of how far we are going to induce farmers to produce what the system simply refuses to absorb.

There have to be cheaper ways of providing protection against risk than what we have in place today. Not only is it expensive, it is also discriminatory against regions, which are not inherently suited to the production of the protected crops.

A specific dimension of risk is water availability. Irrigation coverage has, for most of the country, not increased appreciably over the past several years.

Projects like the Sardar Sarovar dam do promise to bring large new areas under irrigation, but the controversies that they have created in respect of the distribution of benefits and costs have made them an endangered species. Smaller, localised schemes appear to be the only viable solution.

But, even for these, investment is needed and maintenance needs to be done.

The reluctance of states to impose, or appropriately adjust, user charges is the death of maintenance. When farmers choose to cultivate water-intensive crops because of distorted incentives, but the water supply situation is in a state of accelerating deterioration, their vulnerability increases manifold.

Finally, whatever farmers produce, the greater the proportion of it that can be sold under reasonable terms, the better off they will be.

Storage, processing facilities and transportation are critical requirements for adding to and preserving the value of raw agricultural produce.

We are forced to discard a huge proportion of our fruit and vegetable production because of inadequate infrastructure. Investment is needed and nothing can make up for the lack of it.

To conclude, the problems of Indian agriculture need three transformations: move people out of agriculture; get farmers to cultivate crops that are best suited to local ecologies and hydrologies; and, find ways to add/preserve the value of whatever is grown. Without these, as far the emphasis on credit expansion is concerned, the expressions 'good money after bad' or 'pouring water into a leaky bucket' come to mind.

The writer is chief economist, Crisil. The views expressed are personal.

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