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India's farm economy — Protect domestic producers wholeheartedly

G. Ramachandran
T. Vidyasagar

High implicit taxes, severe constraints to the expansion of domestic markets and unreasonable restrictions on competition in the domestic market for farm inputs make the farm economy risky and poor. India has to set a timetable to liberate the farm economy by March 31, 2003.

"The farm bill will strengthen the farm economy over the long term. It helps farmer independence, and preserves the farm way of life for generations. It helps America's farmers, and therefore, it helps America."

Mr George Bush, US President, May 31, 2002.

IF the US, a country reputed for high-technology, thinks that its well being is dependent on the well being of its farms, what should India do for its farm economy? The answer is clear. Root to shoot, farm to silo, barn to train to table, we should emulate America's efforts aimed at strengthening the farm economy.

Policy-makers and doers should do everything to revitalise India's farm economy. And, we should do more than emulate

America's efforts because India's farm sector is too central to the aggregate economy, and far more pivotal to the aggregate economy than America's farm economy is to its aggregate economy.

India employs nearly 60 per cent of its workforce in agriculture. No other country employs a higher percentage. Agriculture generates about 27 per cent of gross domestic product (GDP), and agriculture products account for more than 65 per cent of private final consumption expenditure of more than 80 per cent of households. Agriculture comprehensively determines the aggregate purchasing power of the economy. It explains the geographic dispersion and

statistical distribution of household incomes. Therefore, what is good for the Indian farm economy is very good for the total economy.

The Minister for Consumer Affairs, Food and Public Distribution, Mr Sharad Yadav, has stated that liberalisation of trade in agriculture commodities will be a slow process because the Government needs to protect the interests of domestic producers (Business Line, August 27). Mr Yadav's emphasis on protecting the interests of domestic producers is consistent with the centrality of the farm economy to the aggregate economy, and it would be incorrect and absurd to interpret Mr Yadav's assertion as one that is confined to the farm economy in terms of cause and effect.

When the interests of the domestic farm economy are promoted, the interests of producers of consumer and industrial goods are promoted. When the interests of the domestic farm economy are promoted, the interests of providers of consumer and commercial services are promoted. If India's farm economy is hollowed out, there would be fewer customers for consumer and industrial goods and consumer and commercial services. Domestic producers and global producers would be adversely affected.

It is in the interest of every economy — big or small, developed or developing — to protect the key determinants of its gross output and household incomes. Economies and global companies that seek to earn profits based on sustainable demand from nearly 200 million households win when India strengthens the key determinants of domestic demand. Sustainability is a bread-and-butter issue, and the adverse outcomes of undermining domestic demand go beyond bread and butter. The hollowing out of the farm economy in sub-Saharan Africa has resulted in the hollowing out of demand for a range of consumer and industrial goods. Mr Yadav has correctly reckoned with the centrality of the farm economy and its critical linkages with the aggregate economy.

Central engine

The farm sector is not at the core of the American and the European Union economies. The farm sector is very small relative to manufacturing and services. Agriculture accounted for 3 per cent of the workforce in the US, and 2 per cent of GDP in 2000. It accounted for 5 per cent of the workforce in the EU and nearly 4 per cent of GDP. But the US and the EU have been most unwilling to open their agriculture produce markets to imports. Their protectionism shows that agriculture is not an activity of the past.

Though many view agriculture to be messy and incompatible with a hi-tech society, the US and the EU are aware that agriculture has sustained, over the long term, the highest rate of productivity increase of any sector in the world. The total output has increased steadily, and the sector is a vital generator of broadly diffused wealth and technical innovation.

Hands-on mastery over agriculture has been the source of a substantial quantity of industrial and service employment.

The large industrial and service output has made it possible for developed economies to promote and protect their farm sector.

The value of their total efforts aimed at promoting their farm economies far exceeds the scope and impact of farm subsidies. But farm subsidies — export subsidies and domestic support — in the developed economies have become one of the central issues in negotiations prior to and following the November 2001 Doha Ministerial Declaration.

It would be unwise to yield to embitterment while confronting issues related to export subsidies and domestic support in the developed economies. Farm subsidies in the developed economies are an integral part of the total `plumbing' and are there in the economic loop because they are affordable, and because they energise the loop. The large industrial and service base makes subsidies affordable there. It is easy for 96 per cent of the economy to subsidise 4 per cent of the economy, and politically acceptable for 95 per cent of the workforce to subsidise the remaining 5 per cent. Subsidies are sustainable, and sustain the loop.

Market access is the issue

Article 20 of the Agriculture Agreement says WTO members have to negotiate to continue the reform of agricultural trade. The mandate given by Article 20 has been described as a `tripod' whose three legs are export subsidies, domestic support and market access.

Market access is unrelated to export subsidies and domestic support, but is the most important component of trade liberalisation. Domestic support and export subsidies pertain more to fair play than to trade liberalisation. Mr Yadav's emphasis on the protection of the interests of domestic producers should be evaluated with this distinction in mind. The emphasis pertains to market access, and market access is negotiable.

Subsidies are not really negotiable because they are either rewards for energising the total economy or are compensatory devices to overcome deficiencies in the total economy. Subsidies are rarely abhorred. Would not India accept subsidised crude oil from West Asia at $14? Would not India accept subsidised infrastructure loans at 1 per cent interest, and payable over 30 years without any exchange rate risk? The problems with subsidies are the result of affordability and rivalries, and are not based on ethical considerations.

India — if it had the resourcefulness and the income — would do exactly what the US and the EU do. It would have large subsidies to promote and protect the farm economy if its industrial and service sectors were big.

Unfortunately, these sectors are not big to subsidise the farm sector. Moreover, the farm sector employs nearly 60 per cent of the workforce.

That is too big to be sustained politically in the long term. But the farm economy can be promoted without being dependent on subsidies. India has to work on market access.

Liberate, then liberalise

Global marketers play a critical role in influencing political and bureaucratic decisions related to trade. Global marketers seldom try to pry open doors to a poor domestic economy with unattractive purchasing power. Yet, they would use every resource available to enter a strong economy with attractive purchasing power. India's success in issues related to market access is, therefore, predicated on the strength of its domestic market. Its negotiating power increases directly with the purchasing power of its domestic consumers.

To leverage the power endowed by market access, it should liberate its farm economy. It should use its enormous purchasing power — fourth largest in the world in purchasing power parity terms — to negotiate market access elsewhere.

A poor domestic economy with unattractive purchasing power will reinforce India's disadvantages. A strong domestic economy with attractive purchasing power will reinforce India's advantages and open the doors to attractive markets.

Statistical analyses show that agro-climatic zones and agriculture drive household incomes in India. The structure, organisation and administration of the farm economy have an important effect on the mean and modal incomes in India. They are not too high. Per capita income is around $460 and the modal income is less than $100.

These can be explained by the structure of implicit taxes, constraints and restrictions pertinent to the farm economy, and entitlements and preferred allotments pertinent to the general economy.

High implicit taxes, severe constraints to the expansion of domestic markets and unreasonable restrictions on competition in the domestic market for farm inputs make the farm economy risky and poor. It is squeezed from all sides.

India has to make important decisions towards determining the targets and modalities related to its commitments to the WTO by March 31, 2003. It has to submit draft commitments before the WTO ministerial conference in 2003 in Mexico.

It could commit to the comprehensive liberalisation of trade in agriculture commodities, but no one would win. India's per capita income and modal income may decline further.

Or, it could choose to go slow in liberalising trade in agriculture commodities, but set a timetable to liberate the farm economy. It could set March 31, 2003 as the deadline for liberating the farm economy from the high implicit taxes, constraints to the expansion of domestic markets and restrictions on competition in the domestic market for farm inputs. The latter choice is recommended. It would promote and protect the farm economy and the total economy; it would make comprehensive liberalisation possible by 2005.

(G. Ramachandran is a financial analyst. T. Vidyasagar is a specialist in commodity markets organisation. Feedback may be sent to indiagrow@sify.com)

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