Economics of Indian Agricultural Sector

 

“Agriculture is not a commodity machine but the backbone of the livelihood security system in India, where 70% of the population is in the villages. So, agriculture is not just a question of economics and trade but of dignity and survival. We need to develop a long-term stake in agriculture. This will pay enormous dividends.”

-      Dr. M S Swaminathan, Renowned Agriculture Scientist.

Agriculture in India plays a vital role. It contributes more than a fifth of the country’s Gross Domestic Product (GDP) and generates 60% employment. The country has 170 million hectares of vast arable land and a range of agro-climatic conditions to produce a wide array of primary food crops. To its credit, India is the world’s largest producer of fruits, vegetables, milk, pulses, wheat and rice. The crop production dominates the sector, representing 70% of the total value of agriculture output. Of the total value of crops, fruits, and vegetables account for 32%, rice 15%, and wheat 10%. In the remaining value of total crop production, oil seeds represent 7%, sugar cane 7%, pulses and coarse 4% each and cotton 2%.

Indian, being an agrarian economy, the performance of agriculture is very important not only from the point of view of economic growth but also for the well-being of the majority of the population. There is no economy in the world impacted more by agriculture than India. Given the sector’s importance, the fate of the economy in India is directly linked to the pulse of agriculture. Though the service sector is booming as the engine of economic growth in the recent past, there is no argument over that India is still agrarian economy.

Agriculture has turned the country’s begging-bowl image to self-sufficiency in food grains. However, critics say that it will be difficult for India to sustain its success without a dramatic change in policy. Since independence, achieving food security or self-sufficiency at national level and household has been one of the main focuses of the sector. These policies have cost exchequer immensely. During the last five decades, the food subsidy (the cost of price support and food distribution) has risen sharply and is estimated that it will increase to Rs.270 bn ($5.9 bn) in 2004-05. These policies also indirectly caused lower levels of infrastructure and this attributed to lower rates of productivity improvement. Experts say that food management policies must, therefore, be geared up to meet the daily food needs of the people rather than be confined to creating huge buffer-stocks in the name of food security.

The Challenges

The sector that provides 60% of employment is virtually stagnant and its development has largely been ignored both by the central and the state governments. During 1980s, the sector witnessed 4% annual growth. Since the outset of reforms process, economists say that whatever money was going into the sector it was increasingly in the form of subsidies, but not investment. This resulted in only 2% annual average growth in 1990s. Besides, the sector is facing several internal and external challenges. Internal challenges like farm production, processing industry and marketing have been there for some time. Further, heavy dependence on monsoons, fragmented land-holding, which are sinking with each generation, low level of input usage, poor pre-and post-harvest practices and inadequate marketing infrastructure are some of the well-known weaknesses that lead to low yields and high cost of the farm produce. These are well recognized and need to be tackled on a war footing. The external challenges have emerged in recent past and are threatening to weaken the sector.

The industry chamber, the Federation of Indian Chambers of Commerce and Industry (FICCI) recently highlighted the alarmingly poor infrastructure in agriculture. Accordingly, about 30% of the villages do not have a metal road within a five km radius, 55% don’t have a seed store, over 80% don’t have repair facilities for agricultural implements, 75% don’t possess warehousing facilities and 60% don’t have a market center. These constraints are inducing low productivity and are plaguing the sector. For instance, from 170 million hectares, it produces 600 million tones, whereas the neighboring country, China harvests from 96 million hectares 860 million tones of food grains. Accordingly, its share in global trade in processed foods is not more than 1% of the global processed food trade and only 1.3% of the total fruits and vegetables produced are processed as against 40% for some developing countries and 70% for developed countries. Around 40% of the India’s produce goes waste every year. The quantum of fruits and vegetables wasted in India is equal to the annual consumption of the UK! In value terms, the loss due to wastage of food grains is Rs.50, 000 crores per year, which is six times the annual food subsidy. In the days to come, the sector will face significant challenges and an opportunity to raise food production, going by the population growth, which is projected to rise to 1.5bn by 2030 from 1bn now. Therefore, the country cannot ignore the challenges of food production and productivity. If we continue to treat the sector in the same way, going by the population growth, it is not ruled out that we may have to import food grain once again.

The Remedies

The need of the hour is a foolproof approach to address agriculture-related issues. Experts say if the Indian Government prioritizes the encouragement of massive investment, especially on rural roads, agricultural research and soil conservation, irrigation, then the sector can play a really effective role for the economy. The Indian government has announced some measures in order to put agriculture and rural development in the spotlight. The government must ban the movement of agricultural products between states so as to enable farmers take advantage of the domestic market. Accordingly, the policy of curbing exports of agricultural products should be reconsidered so as to create export market for the sector. According to a study by CII-McKinsey, India can be the largest food factory given the fact that its food production is equal to that of the US and is second only to China.

The Value Addition

The development of agro-based industries including animal husbandry, fisheries, forestry and food processing are very decisive for the sector. Experts feel that it is time we looked at agriculture from the global standpoint. To its credit, the sector is the world’s largest producer of fruits and vegetables and has enormous prospect for business. Currently, only one per cent of its output is processed. Modernizing the food chain is expected to help inspire a food revolution, raising yields and incomes. This will benefit the nation as well as the industry.

However, the food-processing industry is stated to be caught in a vicious cycle of inefficiencies, wastage. The country’s food processing involves only primary processing which accounts for 80% of the value. Overall, 42% of the food industry is in the organized sector and 33% in the small-scale, tiny and cottage sectors. Also, there are inherent inefficiencies of high cost, scale diseconomies and inadequate logistics support. Even with this stage, by 2005, it is expected to grow up to Rs. 4,80,000 crores, of which Rs. 2,25,000 crores would be value- added foods. Going by the potential of food processing, further development of food processing has a multiplying effect. Experts say that if India has to compete globally, then agricultural production and processing must take place at international costs. In other words, efficiencies need to be built into the agricultural production and processing systems. Newer production technologies need to be examined. However, to maintain this growth tempo, the CII-McKinsey study estimates that large investment of Rs. 1,40,000 crores by 2005 in technologies, skills and capital equipment is necessary.

The Need of the Hour

Being an agrarian economy, the development of sector is extremely important for India. The promotion of cold storages, post-harvest technology and the strong food processing industry are the need of the hour. Ashok Gulati, Director, International Food Policy Research Institute, Washington, USA, says, “If Indian agriculture has to be embrace globally competitive, it does not need sops of free power or even cheaper credit. What it desperately needs is investment in rural infrastructure, agriculture R&D, and effective institutions that can promote efficiency by reducing transactions costs and market risks.”

The industry body, Confederation of Indian Industry (CII), articulates that agriculture in 2004 is similar to it was in 1991. It says that the private sector was awaiting policy reforms that would allow it to make much larger investments in the sector. It believes that agriculture reforms and increased private investment must benefit farmers, especially small farmers by greater corporate investment in getting competitive source of finance, competitive markets to sell to; and competitive suppliers of knowledge. To improve the sector further, economists emphasize that enhancement of farm production through substantial investment in agricultural infrastructure is the only effective instrument for eradication of rural poverty. India has to gear up to exports primary commodities, one of the great challenges of the sector. For instance, Guatemala, a small country, earns more from pepper export than India do because of value addition.

To sustain the growth tempo, it is imperative to make the sector both economically rewarding. It is equally important that the economic benefits of food processing and agri-business are taken to the rural areas. This, in turn, would lead to mechanization of farming and processing. Besides, as experts suggest, privatization of agriculture could be the solution to the problems faced by farmers. Their land holding could be merged in a proper manner, though it need not tantamount to cooperative farming. With larger holdings, farmers can make use of advanced technologies in farming apart from making their voices heard. Finally, to sum it up, as Dr. M.S. Swaminathan recommends, “Marketing is the best fertilizer for the farmer. Once the infrastructure is in place, we can definitely usher in another Green Revolution.”

N Janardhan Rao, Lead Economist.