The Hindu Business Line : Why agro-trade is the key to agriculture

LATELY, there has been a lot of discussion on agro-trade. The next round of the Agreement on Agriculture (AoA) is scheduled for December, in Hong Kong. What are the implications of agro-trade for the Indian economy?

Agro-trade can benefit India in two ways. One, it can help India's external sector situation and sort out some of the problems the country is facing there. Second, it can help Indian agriculture itself.

Agro-exports (what is defined as `agriculture and allied products' by the Reserve Bank of India) account for 11-12 per cent of India's total exports.

However, till a decade ago, its share was close to 20 per cent. Over the last decade the share of agro-exports has declined.

Agro-imports, (called `bulk consumption goods' by the RBI) have, for a decade now, accounted for 3-4 per cent of the total imports. The government policy has been to allow imports only when domestic supply falls short. Thus, agro-imports are `policy managed'. In terms of absolute values, in the last decade, the agro-exports have been twice or thrice the size of the imports.

How can agro-trade impact agriculture? The share of agro-exports in total agricultural output has been 5-6 per cent and that of agro-imports 2-3 per cent, for the last ten years.

Thus from the trade and agriculture perspective, the share of agro-trade is fairly small. Can agro-trade impact the Indian economy in spite of its small share?

To that end, it would be meaningful to divide agriculture into export-oriented and import-affected and then examine the features of each. The benefits of export-oriented agriculture are similar to those that accrue from manufacturing/services sector exports.

Export-oriented agriculture is likely to be highly productive and internationally competitive.

This part is, and will continue to be, like an island of prosperity with greater backward and forward linkages with manufacturing and services sectors than with the rest of agriculture. It will be a `modern' sector, while the rest of agriculture is `traditional'.

Per contra, its problems are closer to what any other export-oriented sector faces rather than agriculture per se.

For example, while much of the agricultural sector is affected by non-availability of credit, agro-exports do not face this problem.

Rather, they are more likely to face problems arising out of the need to meet international quality standards and so on.

What opportunity does this export-oriented agriculture offer? One of the advantages of liberalising trade is that it can help construct a high quality institutional environment.

The institutional structures in the agricultural sector have, over the years, become extremely rigid. To make a change would be politically difficult and risks affecting millions of people. However, it is easier to bring about change in export-oriented agriculture and see what the results are.

Export-oriented agriculture is an opportunity to get some empirical feedback. But, of course, if some thing has worked in export-oriented agriculture, it does not imply that it will for agriculture as a whole.

The institutional reforms could be contract farming, social security for farmers and the labourers, creation of export processing zones in agriculture and so on. Contract farming has been around in some form, and can be implemented in export-oriented agriculture in a purely `private, commercial agriculture' framework. Making headway in social security for farmers and agricultural labourers will be much easier in export-oriented agriculture.

As for import-oriented agriculture, India has been protecting its farm producers in much the same way as in the manufacturing and services sectors. This situation is likely to continue at least for a while.

Further, though the share of agro-imports in agro-production is quite low, it is for two crops that the imports play an important role — edible oils and pulses.

Here the government policy is to allow imports when the domestic production falls short of demand, usually due to natural conditions.

However, domestic production in these two crops is woefully short of what is required. If higher imports are allowed, the prices can decline which would benefit the consumers but harm the producers.

The agricultural sector is beset with many chronic problems. A large number of people are dependent on it and there is need for a significant proportion of them to shift into manufacturing and services.

Second, the government seems to have lost its focus with respect to agriculture. In the 1960s and the 1970s, the policy focus was quite clear: It was to increase output. The reason: The severe drought in the mid-1960s and the early 1970s

Now, in spite of India's self-sufficiency, a large number of Indians have no money to buy foodgrains. What the government needs is to increase their purchasing power.

This objective will, in fact, be achieved if a sizeable number of the people shift out of agriculture.

Then, of course, there are problems of low productivity and falling government investment.

The problems facing agriculture are quite different from those facing agro-trade. While negotiating at the AoA meeting, policymakers would well to keep this in mind.

There is no doubt agro-trade is important, but let us not overestimate what it can do for agriculture. It is not a panacea that can transform Indian agriculture. To believe so, would be unfair to both.

(The author is Head of the Department, Economics, University of Pune. Feedback may be sent to dsathe@unipune.ernet.in)

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