Excerpts from ‘Revamping Agriculture and the Public Distribution System’, an essay by Ashok Gulati
In the Indian economy, where almost half of an average household’s expenditure goes toward food and where half of the labour force is engaged in agriculture, one cannot simply wish away the centrality of agriculture just because its contribution to GDP now hovers around 14 per cent.
That would be an overly narrow viewpoint, and perhaps a misguided one. India’s agriculture is responsible for feeding a large and growing population that numbers 1.25 billion today and that is projected to exceed that of China by 2035.
But even more importantly, while India focuses on accelerating overall growth, the nature of growth matters a lot for poverty alleviation. The objective of “faster growth with inclusiveness,” as elucidated in the Eleventh and Twelfth Five Year Plans, will have little meaning unless agriculture takes a central position in the policy reform agenda.
This is because research in the developing world over the past twenty-five years or so has revealed that every percentage point of growth in agriculture is at least two to three times as important in alleviating poverty as the same growth in other sectors. In case of China it was 3.5 times as effective, and in case of Latin American countries, especially Brazil, it was 2.7 times as effective.
It is worth recalling the Chinese experience in this regard. China began its reform process in 1978 primarily with agriculture, dismantling the commune system and liberating price controls to a large extent.
As a result, agri-GDP in China grew by 7.1 per cent per annum during 1978–1984; with liberalising prices, farm incomes grew by almost 14 per cent per annum. It is this high growth in farm incomes that boosted demand for manufactured goods produced by Town and Village Enterprises, kickstarting the manufacturing revolution in China.
In contrast to the Chinese experience, India started its economic reforms in 1991 with the correction of its exchange rate and rationalising its trade and industrial policies by reducing industrial protection in a calibrated fashion and to a large extent dismantling the licensing regime for industry. The Indian government gave agriculture only a small dose of liberalisation. For example, it opened up exports of rice, wheat, and some other key commodities in 1994, but this policy soon had to be reversed. Export bans were brought back in 1996 as domestic prices started rising. Similarly, on the imports front, the imports of edible oils were relaxed from quantitative restrictions.
They were brought under import duties, albeit high ones to start with (65 per cent in 1994). The duties were gradually reduced to 15 per cent by 1998, but thereafter were raised exponentially to more than 92 per cent by April 2001 in the wake of the East Asian crisis and falling commodity prices.
Through it all, agriculture was never brought to the forefront of any direct reform agenda in India. Nevertheless, Indian agriculture did gain indirectly from corrections in the exchange rate and reforms in the trade and manufacturing sector, so that in the initial years (1992–1996), agri- GDP did increase by 4.8 per cent per annum and agri-exports accelerated.
But for the next ten years, agri-GDP remained below 2.5 per cent. It revived to 4.1 per cent (revised figure) only in the Eleventh Five Year Plan (2007– 2012). It still remains very volatile, falling to 1.4 percent in 2012–2013, and is expected to rebound to 4.6 per cent in 2013–2014 (second estimate). Long-term growth in agri-GDP since the economic reforms began in 1991 has remained at 3.4 per cent per annum, well below the targeted growth of 4 per cent per annum.
(However,) If one looks at the overall performance of agriculture over the past six decades or so, from 1950–1951 to 2012–2013, it looks like a reasonably good success story. The production of foodgrains has increased by more than five times, from 50 million tonnes (mt) in 1950–1951 to 259 mt in 2011–2012; production of milk by more than seven times, from 17 mt to 127 mt over the same period; and so on.
During this period, the population has increased by a little more than three times, from 361 million to 1.21 billion. What this indicates clearly is that India has been able to produce food faster than its growth in population.
Interestingly, in 2012–2013, India exported cereals to the tune of 22 mt, a level it had never reached since independence, according to the Commission for Agriculture Costs and Prices’ Report on Price Policy for Kharif Crops, 2014–2015, and perhaps also not in the last three thousand years of written history of India.
Notwithstanding these achievements, problems in Indian agriculture have prevented it from achieving sustained growth of more than 4 per cent per year.
In this context, one key thing to note is that agriculture is much more comprehensive than just foodgrains. While policy discussions often become cereal-centric, the potential for agrigrowth has to come more and more from fruits and vegetables, dairy, eggs, meat, and fish, which together are considered high value agriculture.
Over the past few years, inflation in products, which typically have more vitamins and proteins) is much higher than in staples.
This indicates a clear trend: that 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. This demonstrates the real dilemma of Indian agriculture: while the policy environment is largely focused on grains for food security concerns, food price inflation is out of gear with high value products leading the charge.
That means people are not getting more nutritious food in the quantities that would be desirable. The cereals have an expenditure elasticity of almost zero, meaning that despite people’s rising incomes and expenditures, they are not going to eat more cereals on a per capita basis. Instead, the pressure of demand will go to high value products. Domestic demand for cereals will increase largely in line with the rate of growth in population, which is around 1.4 percent per annum.
There could be some pressure coming from the animal feed side with rising demand for poultry. So, anything more than, say, 1.7 per cent growth in cereals (1.4 per cent coming from population growth and roughly 0.3 per cent coming from feed demand) will lead to their surpluses that would have to be either exported or accumulated in government stocks.
The real growth in agriculture, therefore, has to come from high value products (horticulture, milk, and protein foods). These commodities are perishable in nature and require very fast-moving supply lines.
The whole paradigm of India’s agriculture policy, from farming to value chains, needs to change if 4 per cent growth is to be achieved. And it is here that policies are not very conducive to growth.
MEET THE EDITORS
Bibek Debroy is an economist and author of several books. Currently, he teaches at the Centre for Policy Research in New Delhi. Ashley J Tellis is a senior associate at the Carnegie Endowment for International Peace specialising in international security, defence, and Asian strategic issues. Reece Trevor is a Research Assistant with the South Asia programme at the Carnegie Endowment for International Peace.
With permission from Random House India