Ashok Gulati | Revamping agriculture and PDS
To alleviate poverty and extend true food security to its people India must bring efficiency to public expenditures
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In the Indian economy, where almost half of the average household’s expenditures goes toward food and half the labour force is engaged in agriculture, one cannot simply wish away the centrality of agriculture just because its contribution to gross domestic product (GDP) hovers around a comparatively low 14%.
India’s agriculture is responsible for feeding 1.25 billion people, a population that is projected to exceed that of China by 2035. While India focuses in this election season on accelerating overall growth, the nature of growth matters a lot for the alleviation of poverty. The objective of faster growth with inclusiveness, as elucidated in the 11th and 12th Five-Year Plans, will have little meaning unless agriculture takes its rightful place in the policy reform agenda.
It is worth recalling China’s experience. It began its reform process in 1978 primarily with agriculture, dismantling the commune system and largely dismantling price controls. As a result, farm GDP in China grew by 7.1% per annum during 1978-84; with liberalizing prices, farm incomes grew by almost 14% per annum. High growth in farm incomes boosted demand for manufactured goods, kick-starting China’s manufacturing revolution.
In contrast, India started its economic reforms in 1991 with the correction of its exchange rate and by rationalizing its trade and industrial policies. The government gave agriculture only a small dose of liberalization. Through it all, agriculture was never brought to the forefront of any direct reform agenda. Long-term growth in agri-GDP since 1991 has remained at 3.4% per annum, well below the targeted rate of 4%.
India’s obsession with grains as a means of food security has led to crippling price inflation and a dearth of nutritious food. For growth to accelerate, policymakers need to adopt a demand-driven approach and reform the broken public distribution system.
Long-term performance and constraints
If one reviews the overall performance of agriculture since 1950, it looks like a reasonably successful story. The production of food grains increased by more than five times, for instance, and the production of milk by more than seven times. During this period, the population increased by a little more than three times.
India has thus been able to produce food faster than its growth in population. The Green Revolution in wheat and rice in the late 1960s and early 1970s, the White Revolution in milk in the 1970s, and the Blue Revolution in fisheries have all contributed to that success, making Indian agriculture a net exporter. Meanwhile, public agencies have accumulated massive stocks of grain. The private sector’s share of investments in agriculture has increased, accounting for more than three-fourths of the total, from about half in 1980–81.
With all these positive signs, the picture seems reasonably optimistic, and even rosy at times. Yet one also hears about farmers’ suicides and complaints about insufficient returns. And the overall farm GDP growth rate has been muted at an average of 3% per annum since 1997.
There is certainly a serious problem at the consumer end. For the past five years, food price inflation has been at uncomfortably high, in double-digit figures. In the past few years, inflation in high-value products, which typically have more vitamins and proteins, is much higher than in staples. With rising incomes, people are spending more on fruits, vegetables, milk and milk products, eggs, meat and fish. Supplies of these products are lagging behind demand, pushing up prices.
Thus, the key disconnect in Indian agriculture: while the policy environment is largely focused on grains for food security concerns, inflation is painful, with high-value products leading the charge. People are not getting enough nutritious food. It is this policy disconnect that is holding back growth.
Cereals have an expenditure elasticity of almost zero, meaning that despite rising incomes, consumers are not going to eat more cereals on a per capita basis. The real growth in agriculture, therefore, has to come from high-value products. These commodities are perishable and require fast-moving supply lines. The whole paradigm of India’s agriculture policy, from farming to value chains, needs to change if 4% growth is to be achieved.
Toward a demand-driven approach
Supply chains for high-value products are unduly long and fragmented, leading to much waste and a disproportionate capture of value by middlemen. This outcome is at the expense of producers, who get a lower price, and consumers, who pay a higher price.
The situation must change. To create value, supply lines need to be compressed to connect farmers directly to organized processors, retailers and exporters. It may be recalled that this is what was done under Operation Flood, which turned India into the world’s largest milk producer. Through the Amul model, milk was aggregated at village from all farmers, even small and marginal holders; chilled in villages and then transported to homogenizing and pasteurizing plants in refrigerated trucks; and finally distributed to retail outlets in mega cities. A similar approach, possibly on an even bigger scale, is needed for fruits and vegetables (vitamins segment) and eggs, meat and fish (protein segment).
Compressed and efficient value chains are not feasible without changes in policy, new institutional structures and large investments in logistics, processing and organized retailing. The private sector can do much of this work, provided that the policy environment incentivizes it. So far the gap in policy and what is needed on the ground is large. So what needs to be done?
First, the Agriculture Produce Marketing Committee (APMC) Act needs to be amended by de-listing fruits and vegetables, which would allow farmers to sell to anyone inside or outside APMC markets. This amendment has been overdue for more than a decade. A simple way to get it done is to make allocations to different states under the National Horticulture Mission contingent on reforms in the law.
Second, streamlining supply chains requires institutional innovations and major investments. Organized retailers will be interested in streamlining the back-end operations only if they have full freedom to scale up their operations in the front end. Normally, in organized retail, handling fresh produce and sourcing directly from small and marginal farmers is the last bastion to conquer as it is the most difficult. Eighty to ninety per cent of produce in organized food retail is processed. So, attention must first be paid to scale up food-processing activity and to connect farmers to the processors.
Thus, the third policy change is to treat food processing as a priority sector and remove it from the list of small-scale industry reservation, which limits the investment and scale of operations in these units. Large modern plants are what is needed.
Given how expensive food is for most Indians, it must be the country’s next sunrise industry. But for that to happen, reforms are needed on two fronts: (a) taxes and commissions on food articles need to be brought to zero or at most less than 5%, and taxes on processed food must also be kept at less than 5%; and (b) farmers need to be organized in clusters, known as farmer producer organizations, to create economies of scale at their level. A public-private partnership model can be developed to help industry invest at the back end to streamline value chains.
Fourth, massive reforms are needed to get the markets right for staple cereals. This is a policy issue since it is related to the National Food Security Act (NFSA) of 2013 and involves public procurement, stocking and distribution at a large scale.
Conditional cash transfers
NFSA basically provides 5kg of cereals per capita per month at highly subsidized rates to two-thirds of the population. It relies on the public distribution system (PDS) to perform this task.
The biggest challenge facing NFSA is stopping the big leakage of food from the existing distribution system, even when the food is released from government stocks. At the national level, as much as 40% of earmarked food never gets to the intended beneficiaries because of inefficiencies and corruption. The rate varies at the state level, from a high of 71% in Bihar to almost zero in Tamil Nadu and Chhattisgarh.
So the big question remains: how can one achieve economic access to food more efficiently? The answer is simple: rather than state agencies physically distributing grain, India should adopt a policy of conditional cash transfers based on the Aadhaar unique identity scheme. Because this method would require fingerprints of all those drawing benefits from the government and would deposit the cash directly in their accounts, the leakages could be dramatically reduced.
Brazil, Mexico, the Philippines and even Pakistan have all adopted conditional cash transfers, while India is stuck with its inefficient and costly system. It is not too late to change. India could introduce cash transfers to at least 51 cities with populations greater than one million and then extend the system to farmers, giving an option to deficit states to receive payment in cash or physical quantities.
The government would need to keep critical reserves of only 15–20 million tonnes against any possible drought—much less than the 80 million tonnes it had on hand in July 2012—which would help reduce and stabilize prices of staples in the open market. Moving to cash transfers would allow the natural process of diversification towards high-value products, augment farmers’ incomes, and allow consumers to eat more nutritious food, a win-win situation for the government and consumers.
India is too large a country to have just one model. It must innovate and bring efficiency to public expenditures if it is to alleviate poverty and extend true food security to its people.
Ashok Gulati is chair professor for agriculture at the Indian Council for Research on International Economic Relations.
This is adapted from a chapter in the upcoming book Getting India Back on Track edited by Bibek Debroy, Ashley J. Tellis and Reece Trevor. It will be published in June by the Carnegie Endowment for International Peace and Random House India.
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