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Tuesday, July 10, 2001



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Become earthy, reap more

G. Ramachandran

POLICY-MAKING, especially economic policy-making, in the new millennium, has been transformed into policy-making for the new millennium. It is now a complicated activity that involves a raft of hypotheses and a range of normative approaches aimed at mana ging growth. Fiscal and monetary management and the management of trade and capital flows have become high profile activities preceded by research and characterised by glamour. In such a setting, agriculture is unglamorous in many economies. Agriculture is a boring statistic in the analysis of national incomes.

Quite fortunately, the discussion of the primacy of agriculture to the economy has becoming loud and clear simultaneously. In the past, it was not clear when it was loud. When it was clear it was not loud. The Government of India had announced the Nation al Agriculture Policy (NAP) in July 2000. Task forces and expert committees have made important recommendations aimed at strengthening agriculture. The NAP and the recommendations show that policy-making can be very earthy.

Given agriculture's earthiness, it is tempting to assert that we reap what we sow. Yielding to the temptation would not make economic analysis old-fashioned nor would it thrust hackneyed and dog-eared ideas on policy-making. The economy has enormous stre ngths in manufacturing and services. However, these strengths do not necessarily translate into substantial purchasing power nor do they possess the vitality to prod and spur rapid growth. For example, the redoubtable strengths of Indian information tech nology companies and their rising incomes in the late 1990s did not have a significant impact on the rate of growth. Similarly, their somewhat troubled engagement with the American economy has not had an adverse impact on the Indian economy. Quite fortun ate, say the analysts.

Perspicacious analysts have identified agriculture as the apt target for dispelling despondency and boosting growth. In ``Sowing more, reaping less'' (Business Line, June 27), the author has correctly emphasised the futility of remedies aimed at increasi ng farmers' incomes by merely producing more. The rejection is based on the impact of a glut on prices. A glut is a situation in which supply exceeds demand at a given price. Falling prices lead to falling incomes. The author suggests a range of supply-s ide remedies aimed at improving the efficiency of agriculture, lowering input costs and increasing marginal returns. Sowing better scores over sowing more and the contrast has been presented elegantly.

While lower costs and increasing returns would lead to an increase in producer surplus at a known demand and price, they may be insufficient to nullify the effect of inadequate demand. All gluts are relative. Supply-side remedies are most useful in tackl ing inefficiencies and problems in production and distribution.

In contrast, demand-side policies are most useful in tackling the dynamic problems stemming from inadequate demand. Demand-led growth is based on the important premise that the purchasing power of consumers drives demand and that discerning producers wou ld operate along a range of supply curves with the objective of minimising long-run average costs and maximising long-run average returns.

If policy-makers in an economy removed the hurdles to demand, producers would make the right supply decisions in their self-interest. Producers would work towards lowering input costs and improving efficiency in their self-interest. They would focus on d ynamic efficiency and share the resulting gains with consumers in a competitive environment.

Demand-led growth, therefore, does not make supply-side policies irrelevant. It shifts the supply-side responsibility to producers. More importantly, it shifts the demand-side responsibility to policy-makers who are charged with the responsibility of man aging an economy. The economy has for long been driven by supply-side policies, even if ineffectively and with modest success. The time to shift to demand-side policies -- which are the policies for the new millennium in India -- has come.

India's economic nirvana lies in bolstering the purchasing power of households. Its economy and the growth rate cannot be bolstered merely by an increase in output. A shift to demand-side policies has become a necessity to bolster purchasing power. India 's aggregate purchasing power cannot be bolstered without a concerted attempt to bolster the purchasing power of households that are directly and indirectly engaged in agriculture.

A report published by the Business Intelligence Unit (BIU) shows that agro-climatic zones (ACZs) and agriculture comprehensively explain the geographic dispersion and the statistical distribution of household incomes and purchasing power in India. Since agriculture and ACZs explain the dispersion and distribution of household incomes at the national level, it would be apt to infer that India should sow better to reap more. Sowing better should begin at the farm and extended to every activity related to the management of our society and economy. A return to earthy ways holds great promise. To reap more from agriculture and every other economic resource and activity, policy-makers may keep in mind seven rules of the game.

First, India is fundamentally an agrarian society and an agrarian economy. The policies aimed at establishing a large base for manufacturing and services have been successful. However, the success has not broken the influence exerted by purchasing power derived from agriculture. The distribution of household incomes in urban Bangalore is not significantly different from the distribution of incomes of all households in the ACZ in which urban Bangalore falls. This perspective may be extended to Bhubaneswa r, Jamnagar, Tirupur and Visakhapatnam and every other town, city or district that is believed to have been transformed into an industrial and service hub. The demand from rural Bangalore is as important as that from urban Bangalore. If urban Bangalore i s made into a favourite for supply-side concessions, households would shift into urban Bangalore until all households in urban and rural Bangalore had income per household that conformed to that ACZ's income distribution.

Second, policy-makers should not be seduced into making supply-side policy that is based on dubious systems that classify economic activities into agriculture, mining, manufacturing and services. Policy-makers should aim at bolstering incomes of all hous eholds. Households would decide how they spent their purchasing power on activities related to agriculture, mining, manufacturing and services. Producers would decide how they allocated capital to such activities.

Third, Mr Surjit Bhalla, an economist, has asserted that growth is necessary and sufficient for poverty reduction (Outlook, June 25). Data on the purchasing power of the ACZs validate his assertion. Growth predicated on responsible fiscal policies and re sponsive monetary policies would promote purchasing power across all households and alleviate poverty simultaneously with agriculture as the core and the hub of the economy.

Fourth, the suggestion made by Mr Mukesh Ambani, vice-chairman and managing director, Reliance Industries Ltd, that agriculture should be unfettered, is well-founded (Outlook, June 25). The economy would grow at rates in excess of 8 percent if agricultur e were unfettered. If agriculture remained fettered, the economy would remain fettered. Also, Mr Ambani's emphasis on water resources management is particularly apt.

Temperature, humidity, geology, soil and precipitation (rain and snow) distinguish one ACZ from another. Among these, water, a result of precipitation, can be managed with the most effectiveness. If water resources were better managed through technology and vision, the economy would grow at more than 10 per cent.

Fifth, there should be a comprehensive national legislation that prohibits States from fettering agriculture. Almost all ACZs in India transcend State boundaries. Supply-side and demand-side policies would have a better effect if the States exploited all characteristics of an ACZ. Moreover, two or more ACZs may constitute a State. Policies that are based on the administrative ethos of the State may become both ineffective and irksome.

Sixth, the NAP emphasises the importance of demand-led growth. Towards achieving a rate of growth of 4 percent, it includes several components of policy, pleas and suggestions. In particular, the NAP invites the States to implement the NAP in a spirit of partnership. Only a few States have expressed their keen desire to implement. There is little appreciation of the merits of demand-side policies. There may well be egregious violations of the primacy of demand.

For example, a State may prohibit its onion growers from exporting onions. It may do so with the erroneous belief that consumers within the State would get a favourable quantity and price. The State and the producers would lose on account of the diminish ed purchasing power of the onion growers. Curbs on export militate against demand. Curbs on imports may augment the incomes of some producers within the State. But they would force a smaller allocation of purchasing power by consumers within the State on other goods and services offered by other producers within that State. The State merely shifts wealth from one producer to another. Curbs on free trade across the boundaries of States and districts do not augment purchasing power and demand.

Seventh, there are nearly 200 million households in India, and their purchasing power is driven by agriculture. There is no other comparable economic activity in any other contiguous part of the world that drives so much of the world's purchasing power. Exploiting the strengths of Indian agriculture is in India's interests; it is its greatest comparative advantage. India should exploit its onshore demand. Else, we would fail in other efforts aimed at growth. Let's get earthy; let's sow better.

(The author is a financial analyst.)

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