Financial Daily
from THE HINDU group of publications

Monday, July 16, 2001



Opinion | Next

State of agriculture

S. Venkitaramanan

IN A thought-provoking address published in the RBI Bulletin, May 2001, the RBI Deputy Governor, Dr Y. V. Reddy, has discussed major issues concerning the agenda of Indian agricultural reforms, particularly in the light of the decline in agricultural out put.

The movements of the index of agricultural production suggest that the recent downturn is part of a long-term trend. The trend growth of agricultural production had decreased to 2.2 per cent per annum in the 1990s compared to 3.1 per cent in 1980s.

The lack of adequate development of agriculture is the Achilles' heel of India's economy. Agriculture contributes almost one-fifth of India's exports. Agricultural decline affects all other sectors, in particular, the demand for products of the manufactu ring industry. It is not surprising, therefore, that there is considerable anxiety regarding the poor performance of agriculture in the 1990s.

Dr Reddy has no patience with critics who urge that the decline in rates of growth of agriculture has something to do with structural change in the Indian economy. While he concedes that the contribution of agriculture to India's GDP has necessarily decl ined from 35 per cent in 1980-81 to 25 per cent in 1990-91, he emphasises that even now two-thirds of the population depends on agriculture. Agricultural growth is vital for India's economic health.

Has the process of reform bypassed the farm sector? While there has been adequate emphasis on reform in trade and industry and the financial sector, reformers, in general, have not given the same emphasis to agriculture.

Comparing China and India, Dr Reddy expresses agreement with the view that in the reform cycle in China, agricultural reforms started at an early stage, which helped increase in China's growth profile, thereby placing it on a higher growth path. In India , the agricultural sector has not been as much in the forefront, either in terms of sequencing or in priority. Dr Reddy emphasises the need for reexamination of this trend, in view of indications of a possible long-term deceleration in India's agricultur e.

Capital formation in agriculture has declined, points out Dr Reddy, as a percentage of total gross domestic capital from 6.8 per cent in 1993-94 to 5.5 per cent in 1998-99. In particular, public investment has declined. The share of agriculture and allie d activities in the total Plan outlay has declined from 6.1 per cent in the Sixth Plan to 4.4 per cent in the Ninth Plan. Irrigation and flood control have received just 6.5 per cent over the recent Plan periods compared to 10 per cent in earlier Plans.

While investment in agriculture is falling, the subsidy attributable to agriculture is going up. Budgetary subsidies for the farm sector have been increasing. Fertiliser subsidies, in particular, have gone up in absolute terms from Rs 4,390 crore in 1990 -91 to Rs 13,463 crore in 1999-2000. States' power sector subsidies have also recorded steady growth.

Dr Reddy estimates that hidden subsidies provided by the States for agriculture increased from less than Rs 6,000 crore in 1991-92 to Rs 25,500 crore in 1999-2000. Dr Reddy emphasises the need to make a conscious choice between spending money on subsidie s and devoting it to investment. This has also been made in the approach paper to the Tenth Plan.

Dr Reddy takes on, frontally, the issue relating to inadequate credit to agriculture. The flow of credit to rural areas by the Banks in the recent years has not been up to the mark. Dr Reddy appears to question the wisdom of the present prescription, whi ch requires commercial banks which are not able to reach the prescribed target of lending to agriculture to place the extent of the shortfall with Nabard.

Nabard, in turn, places these funds with the State Governments for investment in infrastructure and related activities. It amounts to indirect borrowing from the banks by the State Governments. Even after taking into account these extra sources of public sector funds, public sector allocations for investment in agriculture have declined during the reform era.

Dr Reddy argues that the RIDF should refocus, if possible, by diverting such funds directly for credit for agricultural operations. There is a dichotomy here. While banks are not able to reach their targets for lending to agriculture, the informal sector of lenders is quite active. A closer linkage between the banks and the informal sector will perhaps better serve the purpose of both banks and the informal sector.

This requires a change of mindset on the part of the RBI, which should look sympathetically at the non-bank financial sector lending to agriculture. Non-bank lenders have considerable advantages in terms of freedom from procedures, quickness of response and facilities for recovery. There is also the potential for using micro-finance. While a number of initiatives have been taken in this regard, it is important to ensure that micro-financial institutions do not get bureaucratised in response to excessive regulation.

Dr Reddy refers to the serious problems of huge foodstocks of nearly 45 million tonnes held by the Government. The storage facilities are inadequate to handle any further inflows of foodgrains. The monetary and fiscal problems of high buffer stocks are t oo grave to be ignored. The credit flow to foodgrain stocks and the consequent interest charges are unbearable burdens on the Indian monetary and financial system.

If public investment and market infrastructure for agriculture continue to be inadequate, agriculture will face a serious problem of competitiveness and inadequate supply response to price variations. Global standards of quality have come to stay. It is not sufficient to have large stocks of grains, but we must also ensure sufficient quality and capability to deliver in time to international markets. Agricultural marketing requires aggressive thinking rather than defensive play. All this requires adequa te institutional arrangements within the country. The US had set up the Commodity Futures Trading Corporation to handle the problems of uncertainty in commodity prices.

This example is worth studying and replicating. At the same time, a thorough review of adequacy of institutional arrangement for quality control certification and trade in agriculture should be a national priority to take advantage of global opportunitie s, says Dr Reddy. The second phase of the Green Revolution awaits these reforms. Additional production of foodgrains and other agricultural products requires a competent and reorganised marketing arrangement. Futures and options will have an important ro le to play in this.

The Government should be ready to effect such changes. This requires a lot of groundwork, both legal and structural. It is also necessary to educate the State Governments on the advantages of establishing a network, such as the Commodities Future Trading Corporation of US. I understand that the report of the Committee on the issues of financing the settlement mechanism of futures and options is still under the consideration of Government. This requires speedy action.

Agriculture, above all, suffers from uncertainty, especially because of the change of weather. The extent to which crop insurance can help agriculturists overcome the effects of uncertainties is clouded in uncertainty itself. Crop insurance, in the form in which it has been tried in India, has not been a success. The Government has to exercise care to institute a proper form of crop insurance based on appropriate tariffs to be levied based on different climatic conditions to cropping areas.

Improving the performance of agriculture calls for a variety of actions, not only on the credit front, but also in investment, both public and private, as also structural changes in the marketing system. Above all, the trend of inadequate investment in a griculture has to be reversed. The legal and institutional framework for flow of credit to agriculture has to be strengthened. The indications by the Finance Minister, Mr Yashwant Sinha, of a possible decentralisation of the country's foodstocks have to be pursued to its logical conclusions.

Dr Reddy's address on the problems of agriculture does not, however, cover the important area of research and extension. China's success in this area, especially in respect of adoption of hybrid varieties of rice, is worth pursuing. It is important that the Governments at the States and Centre encourage and organise a new stream of research work in high-yielding varieties, especially hybrid, if we are to reach higher yields from our depleting natural resources. All in all, Dr Reddy's address on the need for continuing reforms in the financial and institutional framework deserves to be heeded at the highest levels at the Centre and the States.

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