Farm productivity gains come with risks

V. Kumaraswamy | Updated on March 12, 2018

Food processing can lift the rural economy.

There have been strident demands for increasing India's agricultural productivity. The recent Economic Survey (p179) calls for incremental productivity growth and technology diffusion as a pre-requisite for inclusive growth. There are calls for farm mechanisation, corporate farming, use of man-made or modified seeds, introduction of futures, besides, of course, better irrigation, research, and agricultural labour skill upgradation.

However, these are not without risks. Any sharp or sustained productivity gains might prove socially catastrophic. A look at some of the risks and how to mitigate them.

Fall in prices

Firstly, agri products prices tend to fall steeply with increases in supply, especially in closed markets such as India. This is both due to rigidities on the demand side and the perishable nature of most commodities. As articulated by the well-known international trade theorist, Jagdish Bhagwati, as the ‘Theory of Immiserisation', total incomes of suppliers tend to fall in response to increases in supply beyond a point. Perishability (vegetables and fruits), high storage and carrying costs (rice and wheat), and threat of price erosions due to fresh arrivals from the next crop (tea and coffee), all have a dampening influence on prices.

Price slumps benefit the urban poor. But income shrinkage can seriously affect the land owners and landless agri-labour. Landless rural labour is mostly paid in kind and, hence, at first glance, may not suffer from price reductions. But they will definitely suffer due to the likely shrinkage in crop area, as discussed below.

Shrinkage of area

Second, according to various estimates, India currently wastes nearly 25-40 per cent of its foodgrains. Further, productivity jumps (Indian productivity for various crops is only between 30 per cent and 60 per cent of the best achieved globally), will lead to a rapid shrinkage of area under cultivation, unless accompanied by increased offtake (our buffer stocks with FCI are 221 per cent of norms today, indicating sluggish offtake even at low PDS prices).

A modest 10-15 per cent increased productivity and similar reductions in wastes will potentially release nearly 30 per cent of the land and people engaged in agriculture (58 per cent of population) — more than 15 per cent of the population. These people have no marketable alternative skills and suffer occupational rigidities.

With no (or declining) incomes and no jobs, there is a huge risk of malnutrition and hunger, besides frustration becoming a readymade hunting ground for naxalism.

Third, productivity gains will, no doubt, increase the value of high-yielding land. But the lesser productive lands will mostly become surplus and vacant. If even 10-15 per cent of our agricultural land becomes surplus, it will lead to a steep fall in prices, since industry and infrastructure cannot just take in such vast amounts of land.

Owners of such land will have no (or declining) income besides seeing rapid decline in their land values. It will increase the inequalities in rural areas much more. All these have adverse side-effects.

Build up demand

It is as important to manage the demand side as also the supply and productivity. Soft issues are generally the hardest to handle in the social sphere. Changes in consumption patterns are not easy to achieve in a short time. To build the demand side, it may be necessary to encourage food processing. Increased meat consumption will utilise five times equivalent grains for a given level of human protein consumption. Demand build-up has to lead to supply and productivity increases if social tensions are to be minimised.

Secondly, the adverse effects (income declines and land price deflation) are a more in a closed system than when we can build export linkages. India should strategically choose those crops where the increased yields can make it a globally cost-competitive player.

This would require careful and consistent policies — not like the ban imposed on cotton and removed in a week. This will make any international trader wary of Indian supplies.

Thirdly, we need to carefully assess those land areas which are most likely to be rendered surplus, and incentivise their alternative use. Singur or Nandigram may not be the best examples of identifying or transferring land for alternative use, besides agriculture. We need to put in place a more credible mechanism — one which is more voluntary as well as socially cohesive. A significant shift in our laws (which were mostly formed in the late 19{+t}{+h} or early 20{+t}{+h} century) governing land use, acquisition and transfer is necessary.

Fourth and, most important, is to equip landless labour with skills required in alternative occupations. Besides re-skilling, actual deployment in alternatives is a must for a smooth transition. Blind mechanisation and its indiscriminate incentivisation may suddenly release surplus labour into sectors which may not absorb them at the desired rate.

In fact, many of the current drawbacks in agriculture — low yields, high wastes, low labour productivity, low mechanisation, and so on, may all be a blessing in disguise. This delicate balance needs to be unravelled carefully and thoughtfully sequenced if we are to avoid catastrophic social consequences.

(The author is the CFO of a paper company.)

Published on April 13, 2012

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