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8 June 2016, Gateway House

A new era for Indian agriculture

This year’s union budget indicates a seismic shift in Indian Government thinking on agriculture, viewing it as not just as a ‘survival’ industry, but as one that generates income and growth. But to take Indian agriculture out of the time warp it is in currently, the government must entice increased engagement from the private sector.

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In this year’s budget, Narendra Modi’s government set a target to double farmer incomes by 2022. Finance Minister Arun Jaitley announced a number of measures to support agricultural income growth. These include the development of a long-term irrigation fund valued at INR 20,000 crore, raising agricultural credit to INR 9 lakh crore for the fiscal year 2016-17 and a 0.5% Krishi Kalyan Cess – a dedicated levy for the improvement of agricultural facilities – on all taxable services.

Sums aside, perhaps the most significant point of this Budget lies in the seismic shift in Indian Government thinking which moves agriculture away from being a “survival” industry to one that should generate significant returns. For the first time in post-Independence India, there is explicit recognition that agriculture need not be just about food security and poverty reduction but about income generation and growth. This thinking could potentially see agriculture as a conduit for greater international trade. M.S. Swaminathan, father of India’s Green Revolution, welcomed the income orientation of this year’s budget saying, “The dawn of a new era in farming is in sight”.

The responsibility for driving growth cannot remain solely in the hands of the government. The private sector must play a part but will not do so unless it sees signals from the government that it is serious about agricultural change. Agriculture-Industry and Public-Private partnerships are key to deepening  R&D in the sector, and to developing markets. Public spending on basic infrastructure – irrigation, roads, electrification, storage and access to markets – as well as priority sector lending are requisites to inducing the private sector to invest in areas such as supply chain infrastructure and services (e.g. R&D and global markets) for value added.

A doubling of incomes will require large-scale changes in the output that India currently produces and how it goes about producing it. First, there must be greater diversification towards high-value crops and enterprises. Staple crops alone will not raise farm incomes. Indian National-level data reveals that shifting to high-value crops can more than quadruple income from the same piece of land. Second, more cutting-edge technologies and new approaches to farming must be brought in. IT and biotechnology alongside irrigation are integral to raising productivity. Third, farmers must receive better prices but this can only be done through more competitive markets, better value chains and improved linkages between field and fork. The fourth requires a re-skilling of farmers away from cultivation. Fifth, the Minimum Support Price needs review because at present, funding is unsustainable and will be put to better use elsewhere.

If PM Modi wants further incentive for change then he need look no further than our neighbour. China has outperformed India in agriculture even though China has less arable land (135.4 million hectares to India’s 159.7 million hectares). Wheat in India and China is grown on irrigated land but the Chinese yield (output per hectare) is 60% higher than India’S. In the U.S., wheat is on marginal, non-irrigated land, and U.S. wheat yield is the same as India’s. In dairy, sugarcane and oilseeds, India outstrips China.

How has China managed this? China invests more than India on Research and Development for technological innovation. Sustained public investment in rural infrastructure and intensive cropping practices have allowed for superior yields. China also followed an increasingly liberalised agricultural policy focussing on competitive advantages. Support to farmers was through investment rather than subsidies.

The year 1991 marked a new era for India in the global economy but agriculture got left woefully behind. Twenty-five years on, playing catch-up is not easy and requires commitment. It is not clear whether the government has set a target for a nominal or a real doubling of farmer incomes. The former, then the target is likely to be achieved with little further intervention as incomes will necessarily adjust to inflation. However, a doubling of real incomes implies that output would, all other things being equal, have to grow at an annual rate of about 15% – a major leap compared to the average output growth of Barely 2% For the last four years. In the long term, real increases in income matter. There must be an urgent rethink of the labour force in agriculture. Alongside investment, reform and private sector engagement, the government should consider pursuing policies that aren’t just about increased farm incomes but also on making farming less-labour intensive and thus promoting non-farm employment in rural areas.

The sums announced in the budget appear impressive but closer inspection reveals that the increases are modest and certainly not enough to spearhead a revolution. Last year the Ministry of Agriculture and Farmers’ Welfare was allocated INR 16,000 crore. This went up INR 36,000 crore this year; a whopping increase of 127% but much of this was simply a transfer from the Ministry of Finance. There are, of course, genuine increases and new allocations to agriculture but after taking all inter – ministerial transfers into account the total allocation is not as large as figures initially suggested. This begs the question whether the budget announcements were aimed at garnering political support following drought years rather than part of an operational strategy needed to transition the sector. If the government’s budget focus on agriculture income is to have meaningful effect, the spending and reforms need to work at addressing underlying structural issues for the next five years.

This year’s budget is one step in the right direction with a clear focus on the supply-side factors needed to increase productivity. However, increased agricultural output needs to find itself in markets beyond domestic borders to avoid potential price collapses in the home market. Both supply and demand issues have to be at the heart of the government’s program for change. Agricultural reforms such as the e-trading initiative have started to address these issues but more needs to be done.

That Indian agriculture has been in a time warp for over 40 years comes as no surprise. Although India has made tremendous progress towards achieving food security since Independence, crop yields in India are 30%-60% of those achieved in other developing countries. Out-dated farming practices, shrinking average plot size (from nearly 2.3 hectares in 1970 to less than 1.2 hectares today); untenable land leasing arrangements, poor infrastructure and inadequate insurance facilities have inhibited sector development. India has one of the world’s highest levels of post-harvest food loss because of poor infrastructure and access to markets. Growth this year stands at 1.2%, up from -0.2 % last year.

For all this, India’s agriculture has the potential to be a big hitter. India comes second only to the U.S. in arable land. India is the world’s second largest producer of fruits and vegetables yet only ranks tenth among exporting countries. This year’s Budget can set the ball rolling and herald in a new era for Indian agriculture. With the right mix of public sector investment and reform to engage the private sector more seriously in agriculture, PM Modi can move closer to the near impossible  – taking Indian agriculture out of a time warp, doubling farmer incomes in real terms and putting Indian agriculture firmly on the global map.

Yasmeen Khwaja is an independent economist specialising in anti-poverty and growth strategies/ policy. She previously worked for the UN Food And Agricultural Organisation, the World Bank and the Overseas Development Institute.  She has also carried out consultancies for UNDP and the Bill and Melinda Gates Foundation. In addition she is a member of the teaching faculty at the School of Oriental and African Studies, London. 

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