Failing the farmer

Outcomes of the patterns of growth induced by neoliberal economic reforms have increased the

disproportionality between agricultural and non-agricultural growth, and with costs rising and prices not keeping pace, agriculture is becoming increasingly unviable. By C.P. CHANDRASEKHAR

FARMERS across northern and central India—in Maharashtra, Madhya Pradesh, Rajasthan, Haryana and elsewhere—are distressed. Unseasonal rains have damaged their standing crop and help from the government has been meagre and slow in coming. This, however, is only the most recent cause for resentment among small peasants and rich farmers alike. Sugarcane farmers have routinely protested against the fair and remunerative floor prices set by the Union government and the State-advised prices recommended by some State governments, arguing that they are unreasonably low. For some crops, market-driven or administered prices (linked to international prices) have been falling, worsening the problem. Overall, across many crops, the sense is that prices are not keeping pace with increases in cost of production. With indebted farmers not being able to service their loans, suicides have grown in number.

Underlying these short-run sources of discontent are two larger problems. The first is the increasing non-viability of agriculture, with costs rising and prices not keeping pace. A number of factors are responsible for this. One is the increase in input prices, resulting partly from the government’s effort to reduce the subsidies provided on a number of inputs varying from fertilizer and diesel to irrigation. Another is the unwillingness of the government to offer significant increases in the official “support prices” for a number of commodities which often serve as the floor for market prices. And finally, in many areas trade liberalisation is having a dampening effect on prices.

These challenges to economic viability combined with other forms of neglect, varying from reduced public capital formation in agriculture to curtailed spending on extension services, account for the second of the sector’s problems: the low rate of growth of production both in absolute terms and relative to the other sectors of the economy. For the past three years, for example, while evidence points to another round of acceleration in gross domestic product (GDP) growth in India, aided by the revision in the base year used for constructing the estimates, this revival, even dynamism, seems missing when it comes to agriculture. According to new official figures, GDP growth will average 6.5 per cent over the three-year period from 2012- 13 to 2014-15 and is likely to be in the 7 to 8 per cent range in 2015-16. Since this acceleration has occurred in a context of limited inflation, the government is now targeting a further rise in growth rate to two-digit levels.

Structural shift

However, agriculture is still languishing. As against the growth of gross value added at basic prices in manufacturing of 6.23 per cent and 5.32 per cent in 2012-13 and 2013-14 respectively, and in services of 6.16 per cent and 7.64 per cent, the figures for agriculture were only 1.19 per cent and 3.66 per cent. In fact, other than during short periods since the 1980s, the disproportionality between agricultural and non-agricultural growth has been growing. The disparity in the rate of growth of agricultural and non-agricultural GDP increased significantly after the 1970s, with the process being particularly marked after the mid-1990s. What is particularly remarkable is that the acceleration of non-agricultural growth during the 1990s was accompanied by a decline in the rate of agricultural growth. In the period from 1999-2000 to 2004-05, while agricultural GDP grew at 1.7 per cent, the trend rate of growth of non-agricultural GDP exceeded 7 per cent.

One implication of these trends is that domestic agricultural growth has for some time now not been a constraint on the growth of the non-agricultural sector. This does mark a structural shift in the pattern of growth when compared with the first three decades of post-Independence development, when the agricultural bottleneck was seen as an important constraint on development. A common view was that the government had underestimated the agricultural constraint and treated agriculture as a bargain sector in which output growth could be accelerated without much investment, by making suitable institutional  adjustments.

There were four ways in which the inter-sectoral growth linkages between the agricultural and non-agricultural sectors were manifested. First, since agriculture accounted for a high share of the nation’s GDP (61 per cent of non-residential GDP in 1950-51 at constant 1993-94 prices) and employment (76.2 per cent), demand from the agricultural sector was seen as crucial for growth in the non-agricultural sector, especially manufacturing. Second, since agricultural commodities constituted a significant share of input costs in some industries and of the basket of commodities on which wages were spent, increases in agricultural prices were bound to affect industrial costs and performance. When costs rise in agro-based industries or industrial money wages had to be raised to take account of food price increases, manufacturers experienced an increase in costs that was not always neutralised by an increase in final product prices.

The resulting profits squeeze affected manufacturing investment adversely. Thirdly, increases in agricultural prices constrained the growth of demand for the manufacturing sector since consumers allocated a larger share of their incomes to food consumption and a smaller share to manufactures demand. Finally, in response to the inflation in agricultural prices, the government is often forced to cut back on public expenditures to moderate the price increase, undermining an important source of demand for the non-agricultural sector.

Given these effects of an agrarian constraint on non-agricultural growth, any excessive dis-proportionality in growth tended to be self-correcting. Faced with the decline in economy-wide performance, the government soon sought to improve agricultural performance in order to revive non-agricultural and overall growth. In fact, the adoption of the Green Revolution strategy was a response to the overall impasse in development resulting from poor agricultural growth.

It needs to be noted that these mechanisms are operative only if there are limits on altering domestic supply with imports. If foreign exchange can be accessed easily to finance such imports, commodities for which domestic demand exceeds domestic production can be imported to hold down the price level. During the 1950s and early 1960s, India recorded rapid noninflationary growth in manufacturing even when agricultural growth was moderate because of access to food imports through the P.L. 480 route, which enhanced supplies and helped dampen price increases. It was when access to such imports was closed for political reasons that the agricultural constraint proved binding, leading to the deceleration of manufacturing growth in the late 1960s and the 1970s.

Reforms and the growing hiatus

It is against this background that we need to assess the changed circumstances since the 1990s, when the dis-proportionality in non-agricultural and agricultural growth seems to have widened considerably without triggering alarming rates of inflation that limited non-agricultural growth. Changes in the environment and pattern of growth seem to have changed the nature of inter-sectoral relations. One element of change in the environment of obvious relevance was the transformation of the world of international finance that, for the first time, provided “emerging markets” like India access to private international finance. The Indian government exploited that opportunity during the 1980s to overcome the development impasse of the 1970s. Deficit-financed expenditure was used to accelerate non-agricultural growth, and the resulting disproportionality between non-agricultural and agricultural growth was managed by using imports financed largely with external debt to change the structure of domestic supplies and dampen inflation. This was truer in the 1990s than in the 1980s.

However, this alone does not constitute the full explanation. Rather, changes in the economic policy regime, especially since 1991, have changed the pattern of growth in ways that have transformed the nature of inter-sectoral linkages. The use of more capital-intensive techniques, greater reliance on imported inputs and synthetic substitutes, and changes in the pattern of demand (with shifts in favour of metal- and chemical-based industries) have meant that the derived demand for agricultural products (as wage goods or inputs) from a unit rise in industrial output has declined over time. This reduction in the dependence of the non-agricultural sector on agriculture has been intensified by the high rate and peculiar nature of growth of services in India.

While services accounted for 43 and 48 per cent respectively of the increment of the GDP at current prices in the 1970s and 1980s, the figure rose to 60 per cent and more during the 1990s and 2000s. Given the much lower agricultural input dependence of services, this would have strengthened the tendency noted above. Moreover, the expansion of the service sector has been accompanied by the growth of services (such as business and financial services) where revenue growth is far ahead of employment growth and the share of higher-paid employees is larger. As a result, even the derived demand for agricultural wage goods would grow at a much lower rate than output partly because of the slower growth in employment and partly because increases in per capita incomes accrue to those whose demand for food is satiated.

Finally, there is evidence that even among the relatively poor the share of income allotted to food consumption is being squeezed by the growing requirements set by expenditures on health, fuel, transportation and education. The reform-driven collapse of public provision in some of these areas, requiring purchases from private suppliers, and the increase in prices in others, are responsible for the enforced shift away from food consumption in the household budget.

The net result of all this is that agriculture is increasingly faced with a growing demand constraint at a time when input costs are rising. This worsens the margin squeeze. While the global commodities boom provided some relief in terms of increased relative prices favouring agriculture during the 2006-10 period, that was just about adequate to reverse the decline in the period after the 1997 South-East Asian financial crisis. These medium-term outcomes of the patterns of growth induced by neoliberal economic reform underlie the agricultural crisis and agrarian distress being reported from different parts of the country, at a time when the non-agricultural economy is on a roll and the GDP is rising rapidly. What is disconcerting is that, as a consequence, the pressures to redress the neglect of agriculture and adopt policies that restore a semblance of balance between agricultural and non-agricultural growth are now much weaker.

(Published in Frontline.in)