Pursuit of rural prosperity

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The rationale for improving the terms of trade for farmers is that it spurs higher productivity
The rationale for improving the terms of trade for farmers is that it spurs higher productivity

Till such time as the rural non-farm economy gathers momentum, the farm sector holds the key to rural fortunes. While better prices can spur productivity, increasing the returns on investment in farm research is crucial.

The impact of population pressure on resources is manifest in the smaller land-holdings of farmers, and perhaps in the scarcity of uninhabited common land in urban areas. Employment growth in the modern non-farm economy has not kept pace with growth of the labour force; this has led to smaller farms, more marginal farmers and large numbers of rural landless labour.

The only credible sources of rural prosperity are agricultural growth and urban, or urban-like, job opportunities for rural labour. Rural industrialisation has not caught on, nor have rural BPOs. Roads going through farm-land, or industries being set up on farm land, have attracted sharp protests as these alternative land uses are a cause of uncertainty to the affected farmers, throwing a question mark on their lifestyles and livelihoods.

Tractors replacing bullock carts, irrigation tubewells replacing old tanks or even changes in cropping patterns did not attract such protests. However, the protests were forceful when farm lands were submerged to irrigate land elsewhere. The pressure on available land resources now leaves little opportunity for land-for-land offers. Nevertheless, fair compensation is necessary.


While rural prosperity has traditionally depended on the fortunes of agriculture, there has, over the years, been some income diversification among rural households; villages have become larger and infrastructure for social and economic services has expanded. Household surveys do show diversification of household income in rural areas.

This occurs because land-based activities are not enough to provide adequate subsistence earnings. This expansion of occupational presence becomes profitable when rural-urban economic links strengthen. Rural infrastructure development may be laying the ground for a quiet transformation. But until this change occurs, rural prosperity would have to rely largely on agricultural prospects.

Given the low rate of increase in productivity of severely supply constrained resources, such as land, the task of bringing about prosperity is left to prices. With agricultural growth rate barely exceeding 2.5 per cent per year in the last 10 years, the average per capita growth of income for the farm households is just above 1 per cent.

The mid-term appraisal of the Eleventh Plan is hopeful of achieving an annual growth of 3 per cent, if not the targeted 4 per cent. This is still a modest income growth for the sector, which is expected to be a source of prosperity for a very large section of the population.

Good rain is only a random source of happiness, as land productivity rises sharply in these times. The more enduring methods to improve farm prospects are higher yielding varieties of crops, better breeds of livestock, and, of course, irrigation.

However, if the overall rate of output growth continues to be modest, an improvement in terms of trade becomes the only other window of prosperity. The dilemma is that terms of trade should increase along with an improvement in productivity. In reality, the converse may occur more often.

There has been a long-standing debate on the role of price and non-price factors in bringing about productivity growth. Output prices have two effects: they improve profit margins so that farmers can raise the intensity of use of other inputs; secondly, they also increase cash inflows, making new investments possible.

An increase in the prices of sugarcane, cotton, rice or wheat improves the economic activity in the villages when it is combined with a good harvest. Effective support prices and access to inputs to raise productivity helped bring agricultural prosperity to the north-west. Farmers made investments as they saw large returns. The rationale for improving terms of trade, or more accurately ‘remunerative prices', is that it achieves higher productivity through new investments.

There is, of course, the other half of the story, when the crop output growth is not good enough, and prices rise. Those who are ‘net-buyers' in rural India pay more for the farm produce. The MG-NREGS and PDS have partly offset the adverse impact of high farm prices on landless labour for now. A faster-growing non-farm sector may have provided some opportunity to rural households to diversify their income sources away from reliance on just agriculture.


What is clear from the large canvas of policy interventions to push farm productivity is that it is an extremely slow process. While there are major differences in productivity between one region and another, from the laboratory to the field, continued focus on farm research appears to be the only way to expand investment options available to the farmer, when he has more cash in hand.

Raising the returns on investment in farm research and dissemination is perhaps the most likely route in which rural prosperity can be realised.

(The author is a Senior Research Counsellor, NCAER. The views are personal.

(This article was published in the Business Line print edition dated September 8, 2010)
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