Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

The root of India’s farm crisis

Politics and bad economics have led to the current agricultural crisis in India

With around 65% of India’s agriculture depending on rain and more than half the population on agriculture, too little or too much rain is always a harbinger of trouble. On occasions like these, accusations of the government of the day being anti-farmer replace all other charges in polemics. Something similar has happened this year, as erratic weather has fuelled a new cycle of distress in rural India.

What is often lost in the din though is what exactly the anti-farmer policies being referred to are. After all, a government cannot be blamed for the fury of the rain god. Is it only a question of providing temporary relief? Or is it the case that a particular set of policies has been used to favour the non-farm sector over agriculture?

A debate over agrarian policy is by no means unique to India or the present period. Its origins go back to the advent of classical political economy. According to several economists, consolidation of farm land was one of the key drivers of increased agricultural productivity in England.

Notwithstanding debate on whether or not this increase merited an agricultural revolution, it is a fact that the dispossession provided footloose labour for England’s industrial revolution. Struggles against the corn laws in 17th-century England, when workers came onto the streets demanding the removal of tariffs on import of corn, is another such example. Corn laws had their advocates in domestic landlords who stood to lose from cheaper imports. David Ricardo, one of the earliest and most influential economists, was an active participant in the debate, demanding the scrapping of the corn laws.

During the colonial period, agriculture became an important instrument for plunder of colonies. Famines became commonplace, from Ireland, England’s first colony, to India, its largest. In his book Late Victorian Holocausts: El Nino Famines and the Making of the Third World, American political scientist Mike Davies gives a vivid account of how unfettered resource extraction through taxes pushed farmers into destitution across the Victorian empire. The terror of land tax, or lagaan, has found expression beyond the realm of economics. It is no wonder that farmers were an important constituent of the freedom struggle in India. Their aspirations, undoubtedly, were of improvement in living standards and quality of life.

Such aspirations have not fully materialized in independent India. Although farm incomes have risen in absolute terms, the sector has lagged behind the rest of the economy. The ratio of agriculture’s share in national output to its share in employment fell from 0.52 in 1980 to 0.33 in 2010, indicating that the relative income share of households dependent on agriculture has been declining over the past three decades. The biggest fall in the ratio was during 1990-2000. Although this ratio had increased slightly to 0.34 in 2013, plummeting growth rates in agriculture might jeopardize the recovery.

While the past decade has seen an improvement in rural fortunes, it has not been enough to bridge India’s rural-urban divide. While rural monthly per capita expenditure grew at an anaemic annual rate of 0.8% between 1993-94 and 2004-05, it grew at a much faster pace of 3.3% a year between 2004-05 and 2011-12 (at constant 1987-88 prices).

Yet, urban incomes grew faster, and the difference between rural and urban consumption increased slightly over this period. Thus, despite rising rural incomes and falling rural poverty, disenchantment with farming has only grown in the countryside. A 2014 survey by Lokniti found that around 40% of farmers were dissatisfied with their economic condition. The figure was more than 60% in eastern India. More than 70% thought city life was better than village life.

What is the explanation for this predicament? Left-leaning economists viewed land inequality as the root cause of agricultural stagnation. In a 1986 paper, Utsa Patnaik, a professor of economics at Jawaharlal Nehru University, developed the concept of a rent barrier to the development of capitalist relations in Indian agriculture.

Patnaik argued that under the landlord-tenant farming arrangement, all production expenses were borne by the latter because of the competition to secure tenancy. Lack of any investible resources with the tenants adversely affected agricultural productivity. It would take extraordinarily high rates of profits for the landlord to undertake investment in agriculture instead of investing capital in otherwise high-return activities like usury, which had assured returns, Patnaik argued. As a result, investments in agriculture were lacklustre and the sector suffered.

The Green Revolution strategy, which was a combination of state-sponsored new technology, subsidized inputs and guaranteed prices in the form of procurement, could provide this stimulus. Such a strategy had its own limits. In a 1991 paper published in the Cambridge Journal of Economics, Amitav Krishna Dutt, a professor of economics at the University of Notre Dame, identified public expenditure in agriculture as an important constraint to agricultural growth under such a strategy.

The Green Revolution strategy has also created other problems. Procurement-driven cultivation of rice in areas of Punjab has raised serious questions of sustainability. A warped fertilizer subsidy regime has created a severe imbalance from desired levels of nitrogen-phosphorus-potassium balance in the soil.

Market-friendly economists viewed the gamut of state interventions as the root of the problem since they distorted price signals and led to an unhealthy dependence on subsidies. The state-led push for industrialization in developing economies inspired by the Soviet experience offered heavy protection to industries. But such protection was in effect a tax on agriculture.

In contrast, developed countries offered heavy protection to their farm sector, skewing global trade patterns. The World Bank’s 1986 World Development Report called for reforms to ensure that profitability of farming is not artificially depressed because of macroeconomic or sectoral policies.

A 1992 research paper by agricultural economists Ashok Gulati and A.N. Sharma pointed out that effective protection to farm products was much higher in Japan, the European Union and the US than in many developing countries, including India. They argued that trade liberalization under the aegis of the World Trade Organization (WTO) would lead to an improved trade balance and efficiency gains.

Some of their predictions have come true. While developed economies continue to subsidize agriculture, developing economies such as India have raised farm exports significantly over the past two decades. A 2013 research paper by Gulati and his co-authors showed that India’s share in total global exports of agricultural products has increased from 0.8% in 1990 to 2.1% in 2011. This share is more than the share that India has in global merchandise exports—1.7% in 2011 (0.6% in 1990). Such gains in trade have occurred despite ad hoc restrictions on farm trade, and the absence of a stable farm trade policy.

Yet, despite these gains, vulnerabilities in the farm sector remain. With increasing integration with global markets, the Indian farmer has also become more susceptible to price shocks.

Internationally, matters are no different. A food price spike in 2008 has sobered the free-market enthusiasts in agriculture. International food prices have become deeply entangled in complex financial systems such as futures markets. Questions are being raised both in the developed and developing worlds about the extent to which price movements are due to speculation or are a reflection of actual demand-supply mismatches.

Various reports of the United Nations’ Special Rapporteur on Food have underlined the importance of state intervention in food and agriculture policy. Even the US is expected to spend $956.4 billion on its farm bill over the next 10 years. The extent of government intervention in agriculture is still a matter of debate within the economics profession but there is a broad consensus that such interventions must prioritize investments which lead to sustainable long-run growth over subsidies which offer short-term fixes, both in developed and developing countries.

While two of India’s leading economists, Jagdish Bhagwati and Amartya Sen, have sparred on India’s development trajectory, they are, however, on the same page when it comes to the question of eliminating regressive input subsidies such as those on fertilizers, which benefit rich farmers more than smaller ones.

There is also a broad consensus on the need for a coherent farm policy that addresses issues of sustainability and productivity growth in Indian agriculture. The US, a country with a few hundred thousand farmers, debates its farm bills for years. More than six decades after independence, India does not even have a national agriculture policy.

There are both political and economic reasons for the neglect of broad-based farm interventions by the Indian state over the past decades. According to Brown University political scientist Ashutosh Varshney, social divisions within the countryside have been the main reason why India’s rural voters have failed to push for policies that boost farm and rural incomes.

Varshney argues that while rural voters are a powerful voice in Indian democracy, their large size and heterogeneity limits their influence on public policy. Farmers’ refusal to give precedence to their economic interests over their other interests and loyalties (such as to castes and ethnic groups) have limited the power of rural India, Varshney suggests.

Development economist Pranab Bardhan made a similar argument in his 1984 classic, Political Economy of Development in India, when he pointed out that long-term investment suffers in a country such as India because even the elite is fragmented, and finds it difficult to agree on doing something that will benefit most members over the long run.

In a recent Economic and Political Weekly article, reflecting on his earlier arguments, Bardhan suggests that the collective action problem has become even more acute over the past three decades, with group identities becoming more important than earlier. “In such a context, commitments on the part of the state are often not credible, and anticipating that, different interest and identity groups settle for short-run patronage and subsidies," writes Bardhan.

The economic reason for the lack of effective farm policies lies in the pattern of state-led development pursued by most developing countries after they gained independence in the second half of the past century. The push towards industrialization was influenced by the work of the Nobel winning economist Arthur Lewis, who argued that a rapid movement away from subsistence agriculture to factory jobs would raise productivity in both the traditional and modern sectors, helping develop under-developed economies. But while Lewis emphasized agricultural development, that emphasis was widely ignored. Agriculture emerged as a key constraint to the expansion of domestic markets in countries such as India, which could not tackle land inequality, and failed to raise rural demand adequately.

As long as the pace of industrial job creation continues to be sluggish, and a vast majority of the rural workforce continues to depend on farms for livelihood, there is no alternative to agricultural development in India. Even if a Lewisian transformation happens, it will take a long time. Besides, it will not be possible to sustain non-inflationary growth in India without rapid farm growth. Unless our policymakers realize this, agriculture will continue to face neglect.

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