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Agriculture, the final frontier?

Arvind Panagariya

Two propositions have occupied the policy space in India recently: first, 10% growth in the GDP is possible but only if agriculture grows at the rate of 4% and, second, the acceleration in agriculture is essential to make growth more inclusive.

Most Indians view growth in agriculture instinctively important and therefore accept these propositions at face value. But since their acceptance has important implications for which policies get adopted and which ones get short shrift, hard-nosed economists like to examine them more critically. Such examination leads to a more nuanced view of what place we must assign agriculture in the overall development strategy and what else must be done to accelerate poverty reduction.

While many may find this unsettling, the hard reality is that agriculture has become virtually irrelevant to the overall GDP growth in India. Faster growth in industry and services than in agriculture over the last several decades has reduced the share of core agriculture in the GDP to only 16%. Therefore, even 4% growth in this sector can contribute only 0.64 percentage points to the GDP growth.

In recent years, agriculture has been growing at the trend growth rate of 2.5%. Therefore, when we propose pushing its growth rate to 4%, we are proposing to add only 1.5 percentage points to its growth rate. And given its 16% share in the GDP, such a change would add only 0.24 percentage points to the GDP growth. This contribution will turn even smaller as the GDP composition continues to move away from agriculture and towards industry and services in the next decade.

The proposition that 10% GDP growth is feasible only if agricultural growth accelerates to 4% is, thus, quite unpersuasive. Just 0.5% extra growth in services can contribute to the GDP growth more than what an extra 1.5% growth in agriculture would contribute.

But what about the proposition that 4% growth in agriculture is required to make growth inclusive? This proposition requires even greater caution. Its uncritical embrace can mislead one into concluding that acceleration of agricultural growth to 4% offers a simple formula for bringing the benefits of rapid growth to the doorstep of the vast rural population. The reality is more complex.

Three years ago, the United Progressive Alliance (UPA) attributed its unexpected election victory to the failure of the reforms to benefit the rural poor. The “India shining” policies of the National Democratic Alliance (NDA), it argued, had bypassed the rural poor. This absence of inclusiveness led the rural poor to vote the NDA out of power. The UPA now sees the acceleration in agriculture as a means of restoring the balance in favour of the rural poor.

But all evidence contradicts the diagnosis of the UPA and therefore casts a shadow over its prescriptions. Analyses of the National Sample Survey data by a large number of independent researchers uniformly show a declining trend in poverty in both rural and urban areas during the last 20 years. Even if one accepts that reforms left agriculture untouched (since they were aimed at industry and services), one must recognise that they created non-farm job opportunities for the rural poor.

Indeed, in the 2004 elections, there was no rural-urban divide among the voters. In the states where the NDA did well, it won both rural and urban votes. And the states in which it did poorly, it lost in both rural and urban constituencies. The final key to the outcome turned out to be the DMK that migrated with the balancing votes in Parliament from the NDA to the UPA.

While the premise that the reforms-driven growth has not helped the poor is thus proven empirically false, the proposition that 4% growth in agriculture would make growth hugely inclusive is also on shaky grounds. How far such growth improves the lot of the poor depends on what happens to agricultural prices.

Given India’s relatively autarkic trade policies in agriculture, it is not inconceivable that the expansion of agricultural output would be accompanied by a sharp decline in agricultural prices and, thus, pass on the benefits of extra growth to urban consumers rather than farmers. Even assuming the price decrease to be modest, we must ask how much the extra 1.5% growth in agriculture can benefits smaller farmers and landless workers.

The point of this critique is not to underplay the importance of reforms in agriculture: major reforms in this area have been long overdue. The point one wishes to drive home is that a mere acceleration of agricultural growth to 4% will not go very far towards eliminating rural poverty. That would require a much greater effort both within and, especially, outside agriculture.

Reforms are very much required to modernise agriculture and better connect it to the formal economy.

Unfortunately, despite assertions of strong commitment to agriculture, the track record of the current government in this regard has been disappointing. For instance, the 2001 Planning Commission Taskforce on Employment Opportunities, which the current deputy chairman of the Planning Commission had chaired, had strongly advocated the repeal of the archaic Essential Commodities Act, 1955.

But the government has made no effort to make progress in this direction. Some progress has been made towards improving the policy environment for the growth of food-processing industry but it too has been limited and slow. It has been nearly a year since the passage of the Food Safety and Standards Act, 2006 but the government is yet to appoint the Food Safety and Standards Authority.

Contract farming and commercial farming, which have the potential to transform Indian agriculture along a variety of dimensions, remain hostage to stringent land leasing and land transfer laws.

While state governments must undertake many of the reforms necessary to modernise agriculture, the central government can do much to bring about short-term relief to the rural poor as well as to improve their long-term economic prospects. But this will require thinking outside the box and taking bold actions. Short-term relief requires reorientation of redistributive policies and the better long-term prospects demand reforms to expand non-farm job opportunities.

With rare exceptions, India’s redistributive policies have been regressive. The government uses the tax revenues to give subsidies on food procurement, fertiliser, electricity, water and priority sector lending. In each of these cases, the more land a farmer has the larger the quantum of subsidy he collects. In the extreme case, a landless farmer receives virtually no subsidy at all (except a small one available on food purchases through the public distribution system). The government can make its subsidy regime highly progressive by replacing the existing subsidies by cash transfers to the bottom 30% of the population. Given the latest advances in information technology, such transfers can be made without leakage.

To sustain poverty reduction, the government must return to reforms aimed at generating non-farm job opportunities for the rural poor. No high-income nation today employs even 10% of its labour force in agriculture. An essential element in modernisation is the creation of conditions that lead the vast majority of the rural population to migrate out of agriculture into industry and services including food processing. It is only through a large reduction in the labour-to-land ratio that farmers will be able to achieve the standard of living comparable to those available in industry and services.

(The author is professor at Columbia University)

Economic Times July 30 2007

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