Removing anti-farm bias

India’s early development strategy was based on rapid industrialization through import substitution. For rapid growth of industry, it was important to ensure that wages were kept low, and hence the price of “wage goods”, i.e. food, had to be controlled. Foodgrain prices were kept low through a combination of public procurement and distribution through fair price shops. But low food prices were unfair to the farmer. To compensate for this, input costs were highly subsidized. Fertilizer, credit, electricity, water and seeds were sold much below cost. The subsidy burden was borne by the general taxpayer, in the hope that high industrial and economic growth would justify this subsidy system. In addition there were severe restrictions on the export of food and agriculture products.

Did this strategy succeed? Hindsight is always 20/20, so criticism might seem unfair. But a frank assessment is necessary. After 69 years of independence, we still have more than half the population depending on farming and related activities for their livelihood. Large-scale absorption of workers into the industrial sector has been thwarted by stagnation in job growth. The Arthur Lewis model of infinite supply of low-cost labour from the rural sector has not worked as anticipated. It worked in China’s industrial push over three decades. Further, the various farm subsidies were cornered mostly by large farmers. The distribution of fertilizer subsidies across states and land holdings clearly shows this pattern. Even free or subsidized electricity, or cheap credit, benefits larger farmers. Subsidies also created distortions like overuse of urea, leading to soil salinity, and free power creating a hole in distribution company balance sheets.

The single instrument of public procurement and distribution was supposed to achieve three goals: ensure adequate prices to farmers, keep food prices low and stable and ensure food security to the nation. This too has had very limited success. Farm incomes did not rise proportionate to gross domestic product or industry. We have had periodic episodes of high food inflation, especially in crops for which there was no procurement. This entire system of mostly indirect subsidies for the farm sector, in fact, turned out to be a net negative for the sector. This was amply documented by various researchers during the pre-World Trade Organization (WTO) negotiations. By comparison, the Western nations had a net positive subsidy to their farm sector. India continues this battle in WTO of defending its farm subsidies, and rightfully so. From the early 1990s, the domestic terms of trade started shifting in favour of agriculture from industry. This movement to date is far from adequate.

That the farm sector is still in distress needs re-emphasis. We have recently had two consecutive years of a serious drought. The blight of farmer suicides is still with us. Farm income growth since 2011-12 has dipped to 1% or below, which is the main factor behind rural distress. Job creation in the rest of the economy is woefully inadequate. A national survey showed that 40% of those in farming would gladly leave, if only they can find a stable job outside.

The farm sector does not have a focused lobbying voice. Perhaps this is because the sector is too large and fragmented, and now exposed to globalization. Perhaps there are conflicting interests within the sector, and perhaps politics gets in the way.

Be that as it may, it is important to recognize that our policies need to remove their inherent anti-farm bias. Three recent examples may suffice to illustrate this. For instance, we recently introduced the concept of minimum import price (MIP) to help certain industrial sectors deal with the onslaught of low-cost imports being dumped in the country. By contrast, the farm sector routinely suffers from minimum export price (MEP) to discourage exports. In fact, exports of agricultural products are often banned periodically.

Another example is inflation targeting. The government and the Reserve Bank of India signed a contract making inflation control an exclusive mandate of monetary policy. The inflation measure to be used is the Consumer Price Index (CPI), which has 52% food-related components. So monetary policy will implicitly be deflationary on the farm sector. This could be an unintended consequence but worth noting. In developed countries, since the CPI has only 10-15% food weightage, the focus on a CPI-based monetary policy is not as harmful.

The third example is from the cotton sector. Prices have risen dramatically in the last few months. This has caused alarm in the textile sector, calling for restrictions like export ban or end-use restriction on cotton. This is against the interest of cotton farmers.

In light of the above, the recent recommendations of the pulses panel led by the chief economic adviser are welcome. The panel advocates that pulse exports be allowed, public procurement go up by six to 10 times, and minimum support prices be hiked immediately by 15%. Similarly, the Union budget’s promise that farm incomes be doubled in the next six years is a worthy high-level goal. This goal should recognize that farm incomes now come from a variety of sources like cultivation, livestock, wage employment and other non-farm activities. The government think tank Niti Aayog too has identified a five-pronged strategy to improve farm livelihoods. Another useful guide for farm policies is the October 2006 report of the National Commission on Farmers.

India, with its vast continental size, will have to forge a new path in achieving the rural-urban, industry-agriculture balance, unlike the trajectories followed by Western nations. Removing the anti-farm bias in our policies is a crucial prerequisite for this strategy.

Ajit Ranade is chief economist at Aditya Birla Group.

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