Challenges for Revival of Indian Agriculture - AgEcon Searchageconsearch.umn.edu/bitstream/57379/2/2-Mem-Lecture.pdf · 2017-04-01 · His in-depth understanding of micro-dimension

Agricultural Economics Research ReviewVol. 22 January-June 2009 pp 21-45

* Present address: Chairman, Commission for AgriculturalCosts and Prices (CACP), Ministry of Agriculture, Gov-ernment of India

Challenges for Revival of Indian Agriculture

S. Mahendra DevCentre for Economic and Social Studies, Begumpet, Hyderabad - 500 016, Andhra Pradesh*

First Prof. Dayanatha Jha Memorial Lecture

In India, economic growth has improvedsignificantly during the past two and a half decades,particularly in the post-reform period. India isconsidered as one of the fastest growing economiesin the world. However, the exclusion problems havenot been addressed seriously by the governmentprogrammes and strategies. The experience of theeconomic reforms during the past 15 years indicatesthat while there have been improvements in theeconomic growth, foreign exchange, IT revolution,export growth, etc., the income distribution has beenunequal and only some sections of the population havebeen benefited more from this higher growth andprosperity. In other words, real development in termsof growth shared by all sections of the populationhas not taken place. We have problems of poverty,unemployment, inequalities in access to credit, healthcare and education and poor performance of theagriculture sector.

Professor Dayanatha Jha........

Prof. Dayanatha Jha was a renowned agricultural economist who made seminal contributions to the area ofagricultural economics. His contributions in the area of agricultural policy research and technological change arerecognised internationally. His work on research investment and its impact on agricultural productivity and growthand resource allocation is widely acclaimed. His in-depth understanding of micro-dimension of technological changesuch as fertilizer response in dryland areas, pest and irrigation management, small farm considerations, and supplyresponse led to significant contributions to the area of agricultural economics. Advancement of the agriculturaleconomics profession and institutional development were very close to his heart. It was due to Prof. Jha’s visionand leadership that National Centre for Agricultural Economics and Policy Research (NCAP) could become a centreof excellence and institution of international repute. It is a befitting tribute to this great scientist, teacher, researcherphilosopher, and humanbeing par excellence that NCAP has started Professor Dayanatha Jha Memorial Lecturefrom the year 2008.

The first Professor Dayanatha Jha Memorial Lecture was delivered by Dr S. Mahendra Dev, Director, Centre forEconomic and Social Studies, Hyderabad on the Annual Day of NCAP in New Delhi.

Chief Editor

One of the excluded sectors during the reformperiod was agriculture which showed low growthand experienced more farmers’ suicides. There areserious concerns about the performance ofagriculture sector in the country. The post-reformperiod growth has been led by the services. Thecommodity sector growth (agriculture + industry) hasnot been higher in the post-reform period as comparedto that during the 1980s. The particular worry is theagriculture sector which has shown less than 2 percent per annum growth during the past decade. Also,there is a disconnect between employment growthand GDP growth. In other words, employment is notbeing generated in the industry and services sector,where growth is high. On the other hand, GDP growthis low in the agriculture wherein a majority of peopleare employed.

Thus, there has been a lop-sided approach toagricultural development in India during the past few

22 Agricultural Economics Research Review Vol. 22 January-June 2009

decades. Growth may be higher during the past twodecades, but the inclusive growth in terms of focuson agriculture has been missing1. It is like running atrain with engine only without connecting a majorityof the bogies and people to the engine. The role ofagriculture in economic development is well known.Agriculture not only contributes to overall growthof the economy but also provides employment andfood security to the majority population, which inturn reduces poverty in a developing country. Thus,if we want pro-poor growth and real development,high agricultural growth and rising incomes forfarmers are essential.

In recent decades, the context within whichagriculture policy has to be developed andimplemented, has undergone fundamental changes.The relationships operated for much of the 1960sand 1970s have changed. Globalization policies duringthe 1980s and particularly during 1990s and beyondhave created many challenges for agriculture indeveloping countries. Some of the consequences andimpacts of globalization in developing countries are:exposure of domestic agriculture to internationalcompetition, growth of non-agricultural sector andits impact on demand for agricultural products, urbanmiddle class life-style changes, including diets, risingfood imports, competitiveness and diversification ofdomestic production systems, vertical integration ofthe food supply chain, etc. (Prabhu, 2006).

Because of demographic pressures, there hasbeen a significant increase in small and marginalfarm holdings. These farmers have to face thechallenges of globalization. Risk and uncertaintyhave also increased as cultivation has spread tomarginal lands. The diversification of agriculture hasalso raised concerns on food security.

In recent years, there has been a concernregarding increase in the global food prices. Rise incrude oil prices has increased agricultural costs also.Increased use of food crops for biofuels has alsopushed up their demand. The USA uses 20 per centof its maize production for biofuels; Brazil uses 50per cent of sugarcane for biofuels; and the EuropeanUnion uses 68 per cent of its vegetable oil productionfor biofuels. Such large usages, by reducing the

availability of these products for food and feed, haveexerted pressure on their prices. Food prices havealso increased due to low output stocks. Internationalprices of wheat, rice and maize have increasedsignificantly in the past two years. This is anotherchallenge for India in maintaining its food security.

This lecture is divided into three sections.Section 1 deals with the performance and problemsof agriculture, while Section 2 discusses policychallenges for the revival of Indian agriculture. Thelast Section provides concluding observations.

1. Performance and Problems of IndianAgriculture

One of the paradoxes of the Indian economy isthat the decline in the share of agricultural workersin total workers has been slower than the decline inthe share of agriculture in GDP. The share ofagriculture and allied activities in GDP declined from57.7 per cent in 1950-51 to 25 per cent in 1999-00and further to 20 per cent in 2004-05. The share ofagriculturial workers in total workers has declinedslowly, from 75.9 per cent in 1961 to 59.9 per centin 1999-00 and further to 56.7 per cent in 2004-05.Between 1961 and 2004-05, there has been a declineof 34-percentage points in the share of agriculturein GDP, while the decline in share of agriculture inemployment has been of 19 percentage points only.As a result, the labour productivity in agriculturehas increased only marginally, while that of non-agricultural workers has increased rapidly. Therewere about 259 million agricultural workers in theyear 2004-05; about 42 per cent of them werefemales.

A structural transformation has happened in fourIndian states, viz. Kerala, Tamil Nadu, West Bengaland Punjab – the share of agriculture in employmentbeing less than 50 per cent in these states (Table 1)2.On the other hand, the share of agriculture inemployment in eight states was more than 60 percent in 2004-05. It may take some more years forthese states to achieve structural transformation.

In terms of growth, the performance ofagriculture has been quite impressive during the post-

2 Also see, Kannan (2007)1 For more on inclusive growth, see Dev (2008)

Mahendra Dev : Challenges for Revival of Indian Agriculture 23

Table 1. Structural transformation across different states of India: Share of agriculture in employment andGSDP: 2004-05

States Share of agriculture Rank based on Share of agriculture Ranks based onin total employment share in GSDP share in GSDP

(Rural+Urban) (%)employment (%)

Kerala 35.5 1 16.5 3Tamil Nadu 41.3 2 12.5 2West Bengal 45.7 3 23.5 7Punjab 47.6 4 38.6 16Haryana 50.3 5 29.3 12Maharashtra 53.2 6 9.6 1Gujarat 54.9 7 20.1 5Andhra Pradesh 58.5 8 24.7 8Karnataka 60.7 9 19.2 4Uttar Pradesh 60.9 10 33.3 15Rajasthan 61.7 11 27.6 9Orissa 62.4 12 28.2 10Himachal Pradesh 64.1 13 20.5 6Assam 66.0 14 32.0 13Bihar 68.8 15 32.7 14Madhya Pradesh 69.2 16 28.3 11All-India 56.7 - 21.7

Source: 61st Round of NSS Employment and Unemployment Survey and CSO data for GSDP.

independence era than pre-independence period. Theall-crop output growth of around 2.7 per cent perannum during the post-independence period (1949-50 to 1999-00) was much higher than the negligiblegrowth rate of around 0.4 per cent per annum duringthe first half of the previous century. As a result,India could achieve self-sufficiency in food grainsat the national level by the mid-1970s. The growthin GDP in agriculture was around 2.2-2.5 per centper annum during 1950-51 to 1980-81. It recordedthe highest growth rate of more than 3 per cent perannum during the 1980s. In the post-reform period,the growth rate declined to 2.76 per cent per annum.The growth in agriculture GDP, which was 4.7 per

Table 2. Growth rate of output of various sub-sectors in agriculture: 1980-81 to 2004-05

Period Crop sector Livestock Fruits and Non-horticultural Cerealsvegetables crops

1980-81 to 1989-90 2.71 4.84 2.42 2.77 3.151990-91 to 1996-97 3.22 4.12 5.92 2.59 2.231996-97 to 2004-05 0.79 3.67 3.28 0.05 0.02

Source: Chand et al. (2007); Computed from National Accounts Statistics

cent per annum during the Eighth Plan (1992-97),declined to 2.1 per cent during the Ninth Plan (1997-2002) and further to 1.8 per cent per annum duringthe Tenth Plan (2002-07). Thus, there has been asignificant deterioration in the growth rate ofagriculture since mid-1990s. However, there are signsof revival of agricultural growth to more than 3 percent per annum during the past few years.

If we look at the value of output of various sub-sectors, the crop sector which showed a growth rateof 3.2 per cent during 1990-91 to 1996-97,decelerated to 0.8 per cent during 1996-97 to 2004-05 (Table 2). In the case of livestock and fruits andvegetables, there has been a deceleration in their


growth rates since the mid-1990s, but still these areabove 3 per cent per annum.

However, our concern is more regarding foodcrops. There has been no growth in the output ofcereal crops like rice, and wheat, and coarse cereals.Similarly, there has been stagnancy in pulses andoilseed crops. The foodgrains output was 174.8 milliontonnes (Mt) in 2002-03, 213.2 Mt in 2003-04, 198.4Mt in 2004-05 and 208.6 Mt in 2005-06. It is expectedto be around 216 Mt in 2006-07. It is a matter ofconcern and it may threaten our food security. Asshown in Table 3, the per capita production of cereals,pulses and foodgrains has declined significantly sincethe early-1990s. However, foodgrains production isexpected to be 230 Mt in the year 2007-08. It is dueto the record production of paddy and wheat, touching96 Mt and 78 Mt, respectively.

The major concern during the post-reform periodis the decline in yield growth for both foodgrain and

non-foodgrain crops (Bhalla, 2006). During the period2000-01 to 2003-04, all-crops output growth declinedfurther to less than 1 per cent per annum. Thereduction was much higher for foodgrains than non-foodgrains.

The recent data given in Table 4 also indicatethe story of yield slackness in a fairly telling manner.During the past five years, the yield levels for mostcrops or crop-groups stood almost frozen as shownby the 0.5 per cent growth (lowest ever in recenttimes) per annum for foodgrains. However, the yieldgrowth for rice has shown fluctuations. It was 1.63per cent during 2001-02 to 2005-06, but declined to0.24 per cent during 2003-04 to 2005-06. Wheat hasrecoded negative growth during the past five years.Only the yield growth of oilseeds has recoveredduring 2001-02 to 2005-06.

Input Growth in Agriculture

One of the reasons for the decline in outputgrowth and farm business income was low yieldgrowth in the post-reform period. The reduction inyield growth, in turn, was largely a result of reductionin input growth in agriculture. Sen and Bhatia (2004)have shown that the growth of per hectare input-useat constant prices decelerated from 3.66 per cent perannum during the 1980s to 0.94 per cent per annumduring the 1990s. The same study has revealed thatcombination of input price increase and inadequateexpansion of public infrastructure could beresponsible for the deceleration in growth of input-use. Real input prices (deflated by CPIAL) declinedat the rate of (-) 1.94 per cent per annum during the1980s but have risen at 0.33 per cent per annum

Table 3. Average annual per capita production ofcereals, pulses and foodgrains: 1971-2007

(in kg)

Year Cereals Pulses Foodgrains

1971-75 164 19 1831976-80 172 18 1901981-85 179 17 1961986-90 182 16 1981991-95 192 15 2071996-00 191 14 2052001-05 17 12 1892004-07 174 12 186

Source: Planning Commission (2007)

Table 4. Growth rate of yields for foodgrains and oilseeds: 1980-81 to 2005-06

Years Rice Wheat Coarse Total Total Total Oilseedscereals cereals pulses foodgrains

1980-81 to 1985-86 1.67 2.10 0.27 1.69 1.49 1.63 1.081985-86 to 1990-91 1.75 1.38 3.75 2.52 0.96 2.12 3.131990-91 to 1995-96 0.73 0.92 0.90 1.11 0.29 1.08 1.571995-96 to 2000-01 0.65 0.85 0.59 0.86 0.08 0.95 -0.532001-02 to 2005-06 1.63(0.24*) -0.71 1.71** 1.03 0.22 0.52 4.53

Notes: *Growth rate for the period 2003-04 to 2005-06; **Covers the period 2001-02 to 2004-05Source: Economic Outlook for 2006-07, A Report prepared by the Economic Advisory Council to the Prime Minister

(August, 2006)


during the 1990s. The growth in the wages of hiredlabour was also responsible for the cost increases innon-cereal crops and this depressed the farm businessincomes. It was also mentioned that reduction insubsidies could be compensated by higher outputprices, but to compensate for the decline in yieldsand farm income, much higher output prices areneeded. Mid-term Appraisal of the Tenth Plan alsoattributes a part of the decline in agricultural growthto lower input-use, which in turn, was due to lowerprofitability in the post-reform period.

Terms of Trade in Agriculture

The reform strategy for agriculture relied onmaking terms of trade (TOT) favourable to the sectorby reducing protection to industry and tradeliberalization. These favourable relative prices areexpected to attract investible resources intoagriculture and lead to higher growth of agriculturalproduction.

As shown in Table 5, TOT for agriculture duringthe 1980s increased significantly, from 88.7 in 1981-82 to 99.4 in 1989-90. Inspite of this increase, theterms of trade for agriculture were not favourable.With liberalization and reduction in protection toindustry, terms of trade have become favourable toagriculture since 1990-91. In the years 1999-00 and2000-01, there was a reduction in the index beforerecovering in the subsequent two years. The indexbased on implicit prices of GDP has also shown thatduring 1998-2004, there was a four-point decline inthe agricultural TOT, although it was still favourableto agriculture as compared to non-agriculture sector

(Sen, 2007). However, the private investment inagriculture improved due to increase in terms oftrade. Although the private investment increased ata faster rate during the 1990s, it has started decliningin recent years. It may be noted that terms of tradeare one of the factors responsible for enhancingagricultural growth. There are many non-pricefactors which are important for higher growth inagricultural production.

Total Factor Productivity in Agriculture

In development literature, the assumption is thatproductivity is lower in agriculture than non-agriculture sector. Here, we look at the Indianevidence on total factor productivity (TFP) growthin agriculture and non-agriculture sectors. Theevidence shows that TFP growth has been almostidentical (1.13 per cent per annum) in both the sectorsduring the 50-year period, 1950-2000 (Krishna,2006). The sub-period data has indicated that TFPgrowth in agriculture was the highest during the1980s at 1.89 per cent per annum, but declined to1.68 per cent in the post-reform period (Table 6).On the other hand, TFP growth was higher in thenon-agriculture than agriculture sector during the1980s and it increased marginally in the post-reformperiod. One interesting finding is that inspite of lowergrowth in GDP, the TFP contributed more than 50per cent to GDP in agriculture, whereas in the non-agriculture, its contribution to GDP was less than30 per cent during the 1980s and 1990s. It showsthe importance of TFP for agriculture during the pasttwo decades.

Table 5. Index of terms of trade between agricultural and non-agricultural sectors (Base 1988-91=100)

Year Index Year Index Year Index Year Index

1981-82 88.7 1989-90 99.4 1997-98 105.6 2005-06 101.91982-83 91.4 1990-91 101.9 1998-99 105.2 2006-07* 102.01983-84 91.6 1991-92 105.6 1999-00 102.71984-85 93.9 1992-93 103.9 2000-01 100.71985-86 93.6 1993-94 103.6 2001-02 102.81986-87 95.7 1994-95 106.6 2002-03 103.61987-88 97.4 1995-96 105.3 2003-04 101.01988-89 98.3 1996-97 103.1 2004-05 100.3

*provisionalSource: Directorate of Economics and Statistics, Ministry of Agriculture, Government of India, New Delhi


Table 6. Total factor productivity (TFP) in agriculture and non-agriculture sectors

Particulars 1950-51 to 1960-61 to 1970-71 to 1980-81 to 1990-91 to1960-61 1970-71 1980-81 1990-91 1999-2000

AgricultureGrowth rate in GDP (%) 3.03 2.31 1.50 3.43 2.97Growth rate in TFP (%) 1.65 0.88 -0.35 1.89 1.68Share of TFP in GDP growth (%) 54.5 38.1 -23.3 55.1 56.6

Non-agricultureGrowth rate in GDP (%) 5.34 5.30 4.38 6.77 7.14Growth rate in TFP (%) 0.88 0.89 0.01 1.98 2.04Share of TFP in GDP growth (%) 16.5 16.8 0.22 29.3 28.6

Source: Sivasubramonian (2004)

REGIONAL DISPARITIES: There are wide regionaldisparities in output across regions in India. Certainregions such as Punjab, Haryana, western UttarPradesh, parts of Andhra Pradesh and Tamil Naduhad benefited more during the initial phase of thegreen revolution than others could. This hadaccentuated regional disparities in the immediatepost-green revolution period. An important featureof the 1980s and the early-1990s, however, was amore equitable spread of agricultural growth. Afterperforming poorly during the early years of greenrevolution, many of the states, where poverty iswidespread – Assam, Bihar, Orissa, Madhya Pradeshand West Bengal, have shown significant growthduring the 1980s. Oilseeds have also gained in thedry belts of Rajasthan, Madhya Pradesh, Karnatakaand Maharashtra.

Table 7. Growth rates of agriculture SDP in different states (ranked by percentage of rainfed area)

State Growth rate in Rainfed State Growth rate in RainfedNSDP agriculture (%) NSDP agriculture (%)

1984-85 to 1995-96 to 1984-85 to 1995-96 to1995-96 2004-05 1995-96 2004-05

Punjab 4.00 2.16 3 Gujarat 5.09 0.48 64Haryana 4.60 1.98 17 Rajasthan 5.52 0.30 70Uttar Pradesh 2.82 1.87 32 Orissa -1.18 0.11 73Tamil Nadu 4.95 -1.36 49 Madhya Pradesh 3.63 -0.23 74West Bengal 4.63 2.67 49 Karnataka 3.92 0.03 75Bihar -1.71 3.51 52 Maharashtra 6.66 0.10 83Andhra Pradesh 3.18 2.69 59 Kerala 3.60 -3.54 85All India 3.62 1.85 60 Assam 1.65 0.95 86

Source: Planning Commission (2007)

Table 7 shows that growth rate in agricultureSDP was high for many states during the period 1984-85 to 1995-96. However, growth rates deceleratedin all the states, except Bihar, during the period 1995-96 to 2004-05. The deceleration was the highest inthe states with greater proportion of rain-fed areas(Gujarat, Rajasthan, M.P., Karnataka andMaharashtra). Agricultural growth in these states wasless than one per cent per annum in the past decade.

NSS DATA ON STATUS OF FARMERS: The NationalSample Survey Organisation (NSSO) undertook acomprehensive survey to assess the status of farmersin the country in the year 2003 at the request of theUnion Ministry of Agriculture. According to theNSSO Report (497) on Income and Expenditure offarmers’ households, the average total monthly


income of a farmer household was Rs 2115 (annualincome of Rs 25,380). The average monthly incomeper farmer household constituted Rs 969 fromcultivation, Rs 819 from wages, Rs 236 from non-farm business, and Rs 91 from farming of animals.However, there were large differences in the totalincome across farm-size classes.

The question is whether the income fromcultivation is sufficient to meet all the basicnecessities of a farm household. Is the net income ofRs 969 from cultivation (annual income of Rs11,628) sufficient? One household needs more thanRs 20,000/annum to cross poverty line. Here, evenan average farmer household is not able to earn fromcultivation half of the income needed to cross thepoverty line. Incomes of small and marginal farmersare much lower than of the average farmerhousehold. Many of the households depend on wagesand non-farm businesses to augment their incomes.Even these incomes may not be sufficient to meetthe basic necessities, including healthcare andeducation.

A study by Sen and Bhatia (2004) based on thecost of cultivation data has indicated a decline inthe growth of farm business income (FBI) over time.This study has shown that the all-India rate of growthin real (deflated by Consumer Price Index Numberfor Agricultural Labourers) FBI per hectare declinedsharply from 3.21 per cent per annum during the1980s to only 1.02 per cent per annum during the1990s. However, a farmer is interested in farmincome per cultivator rather than price-cost ratio orFBI per hectare. Estimates of FBI per cultivator usinggrowth of cultivators and cropped area have revealedthat the growth rate was 1.78 per cent per annumduring the 1980s, but it decelerated to 0.03 per centper annum during the 1990s, indicating almoststagnant FBI per cultivator in the later period.

FARMERS’ SUICIDES: In recent years, the farmers’suicides have increased in some states. There were167,000 farmers’ suicides in the previous decade. Itis one of the darker sides of Indian agriculture.Indebtedness of farmers and increasing risks inagriculture are the main factors responsible for thesesuicides3. The sharper decline in absolute

productivity, price uncertainties due to tradeliberalization and rise in costs due to domesticliberalization, decline in credit and non-farm workhave intensified this crisis. Most of these studieshave, rightly, identified household indebtedness tobe the main reason for the suicides. However,indebtedness is due to increase in input intensity ofagriculture. Long-term factors like decline in farmsize, groundwater depletion, deterioration in soilquality, etc. have also been responsible for theagrarian crisis and farmers’ suicides.

Many farmers are shifting to commercial crops,where input intensity is higher than subsistencecrops. There is no breakthrough in drylandtechnology. Cultivation is also being done inmarginal lands. Risk is high in commercial cropsand marginal lands. The government has identified32 districts in the four states of Andhra Pradesh,Karnataka, Maharashtra and Kerala and announceda package in September, 2006. Half (16) of thesedistricts are from Andhra Pradesh. Due to thispackage, these four states would benefit in terms ofirrigation projects, bank debt reschedule, writing offloan interest, moratorium on loans, support to co-operative banks, increase in new agricultural credit,support to dairy, poultry, fisheries, horticulture,insurance for crops and sheep, etc. The governmentpackage on farmer’s suicides and agrarian crisis is awelcome step. However, the government has to takeboth short- and long-term measures to reduce thecrisis. The Prime Minister’s package for Vidarbhais comprehensive in coverage. However, it has to beimproved from some deficiencies, as pointed by theCommittee chaired by Radhakrishna (GoI, 2007).First, the design of some of the schemes is not basedon the felt-needs of households. Second, there is alack of region- and household-specific flexibilitybuilt into these measures. Third, there are problemsof implementation and monitoring due to lack ofproper institutional arrangements.

Problems and Reasons for Deceleration inAgriculture

To recapitulate, the agriculture sector has manyproblems. Its growth rate has been around 2 per centsince the mid-1990s, although there are signs ofimprovement in recent years. The yield growth has3 More on agrarian crisis, see Vyas (2004) and Reddy (2006)


also declined. Farmers’ suicides have continued/increased in some states. Farming is becoming a non-viable activity. Further scope for increase in net sownarea is limited. Land degradation in the form ofdepletion of soil fertility, erosion and, waterlogginghas increased. There has been a decline in the surfaceirrigation expansion rate and reduction ingroundwater table. Risk and vulnerability haveincreased. Disparities in productivity across regionsand crops still persist. Long-term factors like steeperdecline in per capita land availability and shrinkingof farm-sizes are also responsible for the agrariancrisis.

The Steering Committee Report on agriculturefor the 11th Plan (GoI, 2007a) has identified thepossible reasons for deceleration in agriculture sincemid-1990s. According to the report, the major sourcesof agricultural growth are: public and privateinvestments in agriculture and rural infrastructure,including irrigation, technological change,diversification of agriculture and fertilizers. It lookslike that the progress in all these sources slowed downduring the 1990s, particularly since mid-1990s(Table 8).

According to the report, the causes of slow downare: increase in subsidies crowding out investment

in infrastructure, degradation of natural resources,failure in conservation, and improvement of rain-fed land, knowledge gap with existing technology,low market infrastructure and too much regulation,institutions not geared to help women farmers,imperfections in land market and plight of smallfarmers.

3. Policies Needed for Revival of Indian Ag-riculture

The agricultural growth declined during the post-reform period, particularly since the mid-1990s asnoted in the previous section. Appropriate policiesare needed for achieving growth rate of 4 per cent inagriculture and increase in income of farmers. Toframe these policies, it is important to identify thepolicy issues and the needed reforms in agriculture.In this section, we discuss the policies needed forrevival of Indian agriculture.

The supply and demand side constraints have tobe removed to raise the overall growth in agriculture.It may be noted that more than 80 per cent of India’sfarmers belong to the categories of small andmarginal farmers with an area share of more than 40per cent. The support systems and policy changes

Table 8. Trend growth rate in area, input-use, credit and capital stock in agriculture during 1980-81 to 2003-04(per cent/year)

Particulars 1980-81 to 1990-91 1990-91 to 1996-97 1996-97 to 2005-06

Technology-a 3.3 2.8 0.0Public sector net fixed capital stock 3.9 1.9 1.4b

Gross irrigated area 2.3 2.6 0.5b

Electricity consumption in agriculture 14.1 9.4 -0.5c

Area under fruits and vegetables 5.6 5.6 2.7c

Private sector net fixed capital stock 0.6 2.2 1.2b

Terms of trade 0.2 1.0 -1.7b

Total net fixed capital stock 2.0 2.1 1.3b

NPK use 8.2 2.5 2.3Credit supply 3.7 7.5 14.4b

Total cropped area 0.4 0.4 -0.1Net sown area -0.1 0.0 -0.2Cropping intensity 0.5 0.4 0.1

Notes: a – Yield potential of new varieties of paddy, rapeseed/mustard, groundnut, wheat and maize;b – up to 2003-04; c – up to 2004-05.

Source: GoI (2008)


have to be tuned in such a way that they improve theproductivity and income of the small and marginalfarmers. However, the Approach Paper for the 11th

Five-Year Plan indicates that the entire agriculturesector is in crisis and is not limited to small andmarginal farmers. Also, second ‘green revolution’should focus more on dryland areas. Simultaneously,the domestic reforms have to be undertaken in certainareas to improve growth and compete in globalizedworld.

The policies needed for revival of Indianagriculture are discussed below.

Price Policy

The major underlying objective of the Indiangovernment’s price policy is to protect the interestsof both producers and consumers. Currently, food-security system and price policy basically consist ofthree instruments: procurement prices/minimumsupport prices, buffer stocks, and public distributionsystem (PDS). The Government of India (GoI)follows a Minimum Support Price (MSP) Policy for24 major crops, including paddy, wheat, jowar, bajra,maize, ragi, pulses, oilseeds, copra, cotton, jute,sugarcane and tobacco. The Commission forAgricultural Costs and Prices (CACP) recommendslevels at which MSP should be fixed based on severalconsiderations, such as : (i) Cost of production; (ii)Changes in input prices; (iii) Input-output price parity;(iv) Trends in market prices; (v) Demand and supply;(vi) Inter-crop price parity; (vii) Effect on industrialcost structure; (viii) Effect on cost of living; (ix) Effecton general price level, etc. Among these factors, thecost of production is the important factor indetermining minimum support price.

There is a need to provide remunerative pricesto farmers to maintain food security and increaseincome of farmers. There has been a debate on pricevs non-price factors in the literature. In our view,both price and non-price factors are important inraising agricultural production. It is true that studieshave shown that aggregate supply response is higherfor non-price factors as compared to price factors.However, prices play an important role in thecropping-pattern shifts and increase in privateinvestments in agriculture. There are some concernsthat inflation would increase if minimum support

prices are raised. It may be noted that consumerinterests can be protected with open marketoperations and public distribution system.

In the post-reform period, terms of tradeincreased initially, declined during the late-1990s andincreased again recently (growth also fluctuatedsimilarly). Another problem is volatility in theinternational agricultural prices.

In the context of globalization, the tariff policybecomes important for agricultural commodities. Inother words, it is important to monitor exports,imports, global supply and demand and fix tariffsaccordingly. There is a need to strike a balancebetween producer prices and consumer prices by acareful calibration of minimum support prices andtariff policy (import duties).

Macro Policies and Agriculture

There is a need to have pro-agriculture macropolicies. The experience in several countries duringthe reform period shows that public expenditure aspercentage of GDP is low and declining. As a result,public investment in the rural development hasdeclined sharply in most of the Asian countries.Consequently, agricultural growth slowed down inmost countries during the 1990s. The average annualrate of growth of gross capital formation also sloweddown in many countries. Trade liberalization hasbeen associated with increased ratio of trade to GDP,improved export performance, and diversificationtowards manufactured exports. However, linkagesto employment are not so well established. Financialsector has historically had an urban bias. On balance,the macro policies have not been pro-employmentand pro-poor in the post-reform period in manydeveloping countries, including India. Therefore,there is a need to have pro-poor macro policies.

In terms of fiscal policy, pro-poor approachinvolves increasing tax/GDP ratio, improvingexpenditures on agriculture and rural development,infrastructure and other capital expenditures. Pro-poor monetary and financial liberalization policiesshould improve access to agricultural credit of smalland marginal farmers and also to the informal sector.Monetary policy should contain inflation,particularly food prices and also reduce spread


between lending and deposit interest rates. Pro-poortrade liberalization and exchange rate policies areneeded to promote employment through labour-intensive exports and also measures to reducevolatility in prices due to globalization.

Thus, priority should be given to the policies thatimprove quality and quantity of employment growth.Priority to public investment in physical (irrigation,roads, communications, transport, electricity, etc.) andhuman infrastructure (healthcare, education, etc.) isconsidered as one of the important factors responsiblefor inclusive growth. Also, priority to rapid growth inagriculture and rural non-farm sector is importantfor poverty reduction.

Land Issues

In India, land relations are extremely complicatedand this complexity has contributed significantly tothe problems being faced by the actual cultivators.Unregistered cultivators, tenants, and tribal cultivators— all face difficulties in accessing institutional creditand other facilities available to farmers with land titles.One priority should be to record and register actualcultivators, including tenants and women cultivators,and provide passbooks to them, to ensure that theygain access to institutional credit and other inputs.As part of the reforms, lease market should be freedand some sort of security for tenants should beguaranteed. This will ensure availability of land forcultivation on marginal and small farms. The landrights of tribals in the agency areas must beprotected. There is a considerable scope for furtherland redistribution, particularly when wastelands andcultivable lands are taken into account.Complementary inputs for cultivation (initial landdevelopment, input minikits, credit, etc.) should beprovided to all assignees, and the future assignmentsof land should be in the name of women.

On land market, the Report of the SteeringCommittee has recommended as follows: “Smallfarmers should be assisted to buy land through theprovision of institutional credit, on a long-term basis,at a low rate of interest and by reducing stamp duty.At the same time, they should be enabled to enlarge

their operational holdings by liberalizing the land leasemarket. The two major elements of such a reformare: security of tenure for tenants during the periodof contract; and the right of the landowner to resumeland after the period of contract is over” (PlanningCommission, 2007a). Basically, we have to ensureland leasing, create conditions including credit,whereby the poor can access land from those whowish to leave agriculture.

Small and uneconomic holdings are at the rootof many difficulties in the way of agriculturaldevelopment and farmers’ incomes. In order toimprove the incomes of marginal and small farmers,there is a talk that we should promote cooperativefarming. Andhra Pradesh has some experiences incooperative farming, particularly in the case ofwomen. One of the most interesting examples of thisis the ‘Deccan Devlopment Society’ (DDS), an NGOworking with poor women’s collectives in some 75villages in Medak district – a drought-prone tract ofA.P. The DDS has helped the women from landlessfamilies to establish claims on land, through purchaseand lease, using various government schemes. Onesuch scheme of the Scheduled Caste DevelopmentCorporation in A.P. provides subsidized loans tolandless scheduled caste women for buyingagricultural land. Catalyzed by DDS, women form agroup, apply for the loan after identifying the landthey want to buy, and divide the purchased landamong themselves, each women being registered asthe owner of about an acre. Cultivation, however, isdone jointly by each group.

The cooperative farming may not be possibleon a large scale. The cooperative faming in terms ofpooling of individual lands and cultivating as oneunit may not be practicable now. To start with, therecan be cooperation in input purchases and marketingthe commodities. Similar to the DDS experiment,poor women’s cooperative farming can beencouraged in some parts of the state. Because ofthe increased pressure from small and marginalfarmers on the limited land for their livelihood, thereis no justification, at this stage, for encouragingcorporate farming by relaxing the existing ceilingon land ownership. Basically, marginal and smallfarmers need assistance in input purchases,technology adoption, crop insurance, credit, output


marketing and improvement in rural infrastructure ina big way.

The share of women is increasing in agriculture.However, the public services do not support womenin agriculture. We have to ensure women’s rights toland (Agarwal, 1994), infrastructural support towomen farmers, and their access to technicalknowledge, credit, inputs and marketing.

Special Economic Zones (SEZs)

In the year 2000, the Government of India hadreplaced the old Export Processing Zones (EPZ)policy by a new a scheme called, ‘Special EconomicZones’ (SEZs) with some more incentives. In 2005,a Bill was passed by the Parliament in the form ofSEZ Act and SEZ rules were notified in February,2006. The SEZ policy is expected to give a big pushto rural employment, exports and investment. Sincethe notification of SEZ Act, 133 SEZs have beennotified (Table 9). Out of these, 75 Zones are inoperation. These have generated 35,000 jobs. ByMarch 2008, SEZs are expected to increaseinvestment to Rs 1,00,000 crore and create 1 lakhjobs.

However, there are several apprehensionsagainst the SEZs. Some of these are : (a) generationof little new activity as there may be relocation ofindustries to take advantage of tax concessions, (b)revenue loss, (c) large-scale land acquisition by thedevelopers which may lead to displacement offarmers with meager compensation, (d) acquisitionof prime agricultural land having seriousimplications for food security, (e) misuse of land bythe developers for real state, and (f) uneven growth

aggravating regional inequities (GoI, 2007a). Theseare valid apprehensions. The social costs of creatinglarge zones and the revenue loss (Rs 1,75,000 croreaccording to one estimate ) have to be weighedagainst alternatives of employment generation. Thegovernment has made some changes in the SEZpolicy recently. According to the new policy, thegovernment cannot compel any landowner to sell landfor SEZs. On the other hand, the central governmentcannot take away the right of the state governmentsto acquire land. If the state government acquires aland by force, the central government will not notifyit under SEZ. But, in practice, it is difficult to saywhether a state government has acquired the landvoluntarily or by force. In the original policy, corporateresponsibility will be confined to utilizing only 30 percent of the land allotted, leaving the rest fordevelopment and real estate business. The new policymandates that at least 50 per cent of the land shouldbe for processing (of goods and services).

Often, the Chinese experience is quotedregarding SEZs. It may be noted that China has onlysix SEZs. And, there are many problems in thesezones of China also. One criticism relating to SEZsin India is that it would create distortions. For example,the IT units in SEZs would have tax advantagebeyond 2009, while these outside SEZs will not havethis tax advantage beyond 2009. Another question iswhether SEZ policy is for the long-term industrialdevelopment in the country. SEZs can only be atransitory phenomenon. Factors like technology,institutional and infrastructural improvements arenecessary than cost minimization approach of SEZs.

Table 9. Status report of SEZs: Progress since notification of SEZ Act

Granted formal approval 362Notified 133Yet to be notified 229Operational SEZs 75Investment in these SEZs Rs 43,125 croreEmployment generation 35,053Estimated investment by March 2008 Rs 1,00,000 croreEstimated direct employment by March 2008 1,00,000

Source: Businessline, 24 July, 2007


Subsidies and Investments

The question of subsidies in agriculture hasemerged as an important issue in recent policydebates. Undoubtedly, subsidies are effective inpushing agricultural growth to a certain extent, butit is important to make sure that they do not becomea permanent feature of the Indian economy.

Input subsidies in agriculture are having adverseeffect on environment. These policies are leading todegradation of land and water. The subsidies arecausing severe deterioration of the systems due toneglect of their maintenance, in addition to becomingfiscally unsustainable. Further, they have led to thehighly wasteful use of canal water, ecologicaldegradation from waterlogging, salinity, pollution,excessive consumption of electricity, and over-drawlof groundwater, resulting in the shortage of drinkingwater in several parts of the country. Similarly, theprevailing heavy subsidy on nitrogenous fertilizersperpetuates inefficiencies in the domestic fertilizerindustry. Irrigation and use of power seems to bemuch higher under small than large farms. Moreover,the subsidies are cornered by the farmers in irrigatedareas and those in unirrigated areas do not get thesesubsidies. Most of the fertilizer subsidy also goes tothe farmers under irrigated areas. The benefit flowingto the farmers and consumers of food is illusory, as itis leading to the degradation of soil due to excessivechemicalization and adverse NPK ratio. A fixedquantity of fertilizers sufficient for one or two hectaresmay be subsidized for all the farmers, if necessarythrough a system of input coupons, requiring them topurchase the remaining quantities in the market atthe on-going rates.

Who gets these subsidies? During the initialstages of adoption of new technology in agriculturesome of these subsidies may be justified as ‘front-up costs’. Over time it has been found, that the richerstates and well-irrigated areas, certain crops, andsometimes rich farmers capture a disproportionatelyhigh share of the major input subsidy programmesof fertilizer, power, irrigation and credit.

Another issue regarding subsidies is that whetherthese should be withdrawn without improving theefficiency in supplying of inputs. While withdrawingsubsidies, care should be taken to remove

inefficiencies in production and distribution of inputsand services. For example, a farmer may not paythe full cost of power if reliable and continuouselectricity is not supplied. The distribution systemis characterized by inefficient transmission andwidespread pilferage. Irrigation system ischaracetrized by inflated costs due to bad designing,inferior quality of services, inefficiencies inmanagement, and delays and leakages inconstruction. Due to these inefficiencies, the actualsubsidy going to the farmers using these inputs isfar less than what is projected. A case for reductionin subsidies will be strengthened if the input-useefficiency is improved.

There has been a secular decline in publicinvestment in agriculture and it has been a matter ofconcern as it is important for improvinginfrastructure. As compared to the target of 3.4 Mhaper annum, the irrigation potential harnessed duringthe Ninth Plan was only 1.8 Mha per annum. It istrue that private investment has increased during the1990s, but the public and private investments cannotbe treated as substitutes, as their compositions aredifferent. Public investment is mainly in the mediumand major irrigation works while private investmentis mainly in minor irrigation, mechanization and landlevelling (Sawant et al., 2002). More publicinvestment is needed in the rain-fed and backwardareas. Many of the ills of the agriculture sector,namely, low productivity, low employmentopportunities and inadequate infrastructure areattributed to inadequate and progressive decline inthe public investment in agriculture.

The public investment in real terms in theagriculture sector has declined during the past twodecades. It may be noted that inadequacy ofinvestments has slowed the pace of technologicalchanges in agriculture with adverse effects onproductivity. Investment in agriculture has declinedfrom 2.2 per cent of GDP in 1999-00 to 1.7 per centin 2004-05 (Table 10). This decline in share wasmainly due to stagnation or fall in the publicinvestment in irrigation, particularly since the mid-1990s. However, there is an indication of a reversalof the declining trend with public sector investmentreaching its highest level of Rs 12,591 crore sincethe early-1990s (Table 10). As a result, the share of


public sector in the total investment has increasedfrom 18 per cent in the early years of this decade to29 per cent in 2004-05. Private investment inagriculture, on the other hand, has continued todecline. It is a matter of concern that the overallinvestment, which was Rs 38,215 crore in 2001-02,declined to Rs 30,532 crore in 2004-05. It is truethat the overall investment in agriculture hasincreased from 10 per cent to 12 per cent ofagricultural GDP during the past few years. Giventhe low base, a dramatic improvement is needed toenhance income-generating capacities. According tosome estimates, 16 per cent of investment is neededto attain 4 per cent growth in agriculture.

There seems to be some trade-offs between inputsubsidies and public investment in agriculture. Theproblem of mounting subsidies and its effect in termsof crowding out public agricultural investment hasbeen highlighted in the 10th Plan document4.

The estimates of CSO’s public sector investmentcomprise mainly investment in irrigation projects.Some researchers feel that it is an underestimate and

there is a need to widen the definition of publicinvestment by including investment in theinfrastructure, like rural roads and electrification.The government allocates large funds to anti-povertyprogrammes. Some of these programmes also maybe contributing to capital formation in agriculture.

Rural Infrastructure and Bharat NirmanProgramme

Investment in rural infrastructure is moreimportant for agricultural growth than tradeliberalization per se. The role of public and privateinvestments in infrastructure becomes crucial in thiscontext. The rural infrastructure plays an importantrole in both input and output sides. It helps to ensuretimely and adequate delivery of inputs to the farmersand on the output front integrates local markets withnational and international markets. In this context,the announcement of Bharat Nirman programme in2005 by the Government of India in order to improveagricultural and rural infrastructure is in the rightdirection. It covers six components of infrastructuraldevelopment: (i) accelerated irrigation benefitprogramme, (ii) accelerated rural water supplyproject, (iii) construction of rural roads, (iv) rural

4 For more on subsidies vs investments, see Gulati and Narain(2003)

Table 10. Gross capital formation in agriculture

Year Investment in agriculture Share in agricultural gross Investment in(Rs crore) investment (%) agriculture as

Total Public Private Public Private percentage of GDP

In 1993-94 prices1990-91 14836 4395 10441 29.60 70.40 1.921995-96 15690 4849 10841 30.90 69.10 1.571996-97 16176 4668 11508 28.90 71.10 1.511997-98 15942 3979 11963 25.00 75.00 1.431998-99 14895 3870 11025 26.00 74.00 1.261999-00 17304 421 13083 24.40 75.60 1.37

In 1999-00 prices1999-00 43473 7716 35757 17.7 82.3 2.22000-01 38735 7155 31580 18.5 81.5 1.92001-02 47043 8746 38297 18.6 81.4 2.22002-03 46823 7962 38861 17.0 83.0 2.12003-04 45132 9376 35756 20.8 79.2 1.92004-05 48576 10267 38309 21.1 78.9 1.92005-06 54539 13219 41320 24.2 75.8 1.9

Source: GoI (2007)


housing, (v) providing rural electrification, and (vi)telephone connectivity in the villages (see Box 1).The Union Budget 2007-08 had provided anenhanced outlay of Rs 24,603 crore as against Rs18,696 crore for Bharat Nirman. The programmefor repair, renovation and restoration of water bodiesis being implemented through pilot projects in 23districts of 13 states. The design of the programmehas been finalized in consultation with the states.Restoration of water bodies is expected to give anelement of stability to agricultural production andthereby may give a boost to yields.

Irrigation and Water Management

Water is the leading input in agriculture.Development of irrigation and water managementare crucial for raising the levels of living in ruralareas. Around 40 per cent of country’s cultivated areais irrigated. The ultimate irrigation potential of thecountry has been assessed at around 140 Mha —58.46 Mha from major and medium irrigations and81.42 Mha from minor irrigation, of which 64.09Mha is from groundwater sources. Nearly 37 per centof the available irrigation potential from the major

and medium irrigation projects in the country stillremains to be exploited. Over 400 such projects werein the pipeline at various stages during the NinthPlan period. When these on-going projects arecompleted, bulk of the remaining irrigation potentialwould be exploited. Decline in public investmentand the thin spread of resources over a large numberof projects are responsible for the delay incompletion of these projects.

Around 70 per cent of the available potentialfrom minor irrigation sources (81.4 Mha), consistingpredominantly of groundwater sources has beenutilized. Further progress towards the exploitationof the remaining potential depends on the availabilityof electric power for pumping water in the easternand north-eastern states where as much as 75 percent of the groundwater potential still remains to beexploited. Apart from electricity, there is also a needto devise affordable schemes for financinggroundwater tapping in these states, since most ofthe farmers in the region are resource-poor. Tappinggroundwater in the Gangetic Plains and Assam isimportant for raising agricultural productivity inthese regions.

Box 1Bharat Nirman Programme

Bharat Nirman is a time-bound business plan for action in rural infrastructure over the four-year period (2005-2009). Under Bharat Nirman Programme, action is proposed in the areas of irrigation, rural roads, rural housing,rural water supply, rural electrification and rural telecommunication connectivity. Specific targets have been setunder each of these goals as under:

Irrigation - To create 10 million hectares of additional irrigation capacityRural roads - To connect all habitations (66802) with population above 1000 (500 in hilly/tribal areas)

with all-weather roadsRural housing - To construct 60 lakh houses for rural poorRural water supply - To provide potable water to all uncovered habitations (55067) and also address slipped

back and water quality affected habitationsRural electrification - To provide electricity to all un-electrified villages (1,25,000) and to connect 23 million

households below the poverty lineRural telephony - To connect all remaining villages (66822) with a public telephone

While the agenda is not new, the effort is to impart a sense of urgency to these goals, and make the programme timebound, transparent and accountable. The funding for the programme will be met through an appropriate mix ofbudgetary support by the Centre and states, external aid, market borrowing and a separate window under RIDF forrural roads.To ensure accountability, the names of villages electrified, villages connected by all-weather roads, villages provideddrinking water and villages provided telephone connectivity will be put on the internet.


The Bharat Nirman Programme inter aliaindicates creation of 10 Mha additional assuredirrigation during the four-year period (2005-09). Toachieve this, the pace of potential creation will haveto be increased. Investment under AcceleratedIrrigation Benefits Programme (AIBP) has to beraised significantly.

Conservation of surface and groundwater hasbecome imperative. This is best achieved when waterand power are priced according to the volume oftheir consumption. Some state governments areproviding free power to farmers. This is notsustainable. Involvement of rural communities isessential in setting the user charges as well as forassessing the individual consumption.

The rain-fed areas constitute about 60 per centof the 142 Mha net sown area in the country. Therain-fed agriculture is characterized by low levels ofproductivity and low input-usage. The bulk of ruralpoor lives in the rain-fed regions. Therefore, it isimportant to accord high priority to sustainabledevelopment of these areas through watersheddevelopment approach. In fact, watersheddevelopment has been given high priority, at least onpaper, for several years, but it does not appear to bemaking much headway, except in isolated cases,primarily under the initiatives and close supervisionof a few NGOs. Watershed development can besustained in the long-run only through socialmobilization and capacity building. Land use shouldbe made more remunerative through the new drylandtechnologies and the development of infrastructure.Watershed programme addresses two differentconcerns in the matter of land management. One isto conserve water in drought-prone areas. However,the programme is equally effective in areas with asurplus of water where drainage and waterloggingmight be the major problems. Another area of concernis fodder, fuel and secondary timber availability.Because wastelands are treated under thisprogramme, the availability of such forest producehas shown a significant increase. The proposedNational Rainfed Area Authority is supposed toprovide a vehicle for developing concerted actionplans for the rainfed areas in close consultation withstate governments.

Traditional water harvesting structures like tankshave become virtually defunct. The Finance Ministerin his 2004-05 budget speech had announced ascheme to repair, renovate and restore all the waterbodies that are directly linked to agriculture. Theirrestoration involves not only the physical aspects ofthe task but a clear demarcation of water rights. Asmany as 20,000 water bodies and a command areaof 1.47 Mha have been identified in the first phaseof this programme for repair, renovation andrestoration of water bodies. It is important as manysmall and marginal farmers may benefit from theprogramme. It is also equally important to assignwater rights to the community at large as a part ofwatershed approach that may be adopted for theafore-mentioned special programme for drylandfarming in the arid and semi-arid regions in thecountry.

Agricultural Credit

The nationalization of banks in 1969 andsubsequent developments led to the expansion of thegeographical and functional reach of commercialbanks, regional rural banks (RRBs) and cooperativecredit institutions. Public policy is aimed at ‘social’and ‘development banking’ in the form of meetingrural credit needs and reducing the role of informalsector credit. A large number of small and marginalfarmers and other vulnerable groups remain excludedfrom the opportunities and services provided by thefinancial sector.

Supply and Demand Side Issues

It is being increasingly recognized that addressalof credit expansion requires a holistic approach,addressing both supply and demand side aspects.Although there has been a significant expansion inthe banking sector during the past few decades, thereare many supply-side problems for commercialbanks, RRBs and co-operative banks. Some of thecriticisms on the trends in rural credit in the 1990swere: (a) narrowing of the branch network in ruralareas, (b) fall in credit-deposit ratios in rural areas,(c) disproportionate decline in agricultural credit tosmall and marginal farmers, (d) worsening ofregional inequalities in rural banking – steepestdecline in credit-deposit ratio in the eastern and


north-eastern states, and (e) crippling RRBs5. Politicalinterference including loan waivers and write-offsalso resulted in unviability and sickness in some ofthe formal rural credit institutions.

The credit-deposit ratios increased from 55.1 percent in 1980 to 97.1 per cent in 1990, but declinedsignificantly to 49.3 per cent by 2000. Theincremental CD-deposit ratios also declined from106.1 per cent during the 1980s to 36 per cent during1990s. Against the target of 18 per cent for ‘prioritysector’, the direct agricultural advances by thecommercial banks are only around 11 per cent. Theposition is much worse in the eastern and northernstates. The Rural Infrastructure Development Fund(RIDF), started a decade ago as a measure to provideinfrastructural support to agriculture in lieu of itsfalling share in commercial bank credit, has remainedgrossly underutilized, basically for want of matchingcontributions from the state governments. In theprocess, individual needs of the farmers forinvestment and production credit are not beingadequately met.

Kisan Credit Card Scheme, aimed at providingadequate and timely support to the farmers from thebanking system in a flexible and cost-effectivemanner, does not seem to be working well becauseof various stipulations and restrictions. A morefarmer-friendly credit card system needs to beoperated so as to realize the objectives of the scheme.

There has been some improvement ininstitutional credit to agriculture during the past fewyears. With rising income, there will bediversification of crops. Investment needs for theproduction of high income-elastic agriculturalproducts, such as dairying and livestock, horticulture,agro-forests, etc. would rise much faster. But, themain problem is that the focus is on meeting thequantitative targets. The government has to be moresensitive to the distributional aspects of farm credit.It has been silent on these distributional issues suchas regional disparities and access to credit by smalland marginal farmers. There is a suggestion thatgovernment should have sub-targeting to improvethe credit flow to small and marginal farmers6.

One issue is whether we need separateinstitutions for promoting credit expansion. Are theexisting formal institutions sufficient for thispurpose? It is true that commercial banks have theirown problems, like manpower shortage, unfavorableattitude towards rural services, infrastructural andtechnological problems in the rural areas, etc. Ruralbanking has to be friendly to small and marginalfarmers and other vulnerable groups. It requires aspecific type of organizational ethos, culture andattitude (Rangarajan, 2005). There is a need toremove the supply-side problems of commercialbanks, RRBs and co-operative banks. As the UnionBudget 2005-06 admits, ‘the cooperative banks, withfew exceptions, are in shambles’. This institutionhas to be revived as many farmers are dependent onthe credit from these banks. VaidyanathanCommittee’s recommendations may be helpful torevive the cooperative sector.

On the demand side, some of the constrainingfactors for credit in rural and urban areas are: lowproductivity and high risk and vulnerability of smalland marginal farmers, low skill and poor marketlinkages for rural non-farm and urban workers,vulnerability to risk for rural landless and urban poor,inadequate awareness and low financial literacy.

NABARD has also taken several initiatives thathave significantly contributed to credit expansion.Self-help group (SHG)-bank linkage programme ofNABARD is an innovative programme. It was startedas a pilot program in 1992. Today, there are 22 lakhSHGs under this programme comprising more than3 crore poor households who are accessing creditthrough commercial and cooperative banks. Everyyear 6 lakh SHGs are added. The programme is nolonger confined to the southern states. The non-southern states have 46 per cent of the groups. Thus,the SHG movement is now a national movement.MFIs have been playing an important role insubstituting moneylenders and reducing the burdenon the formal financial institutions7.

One can also learn lessons from the successfulexperiences in and outside India. Within India, we

7 On the approach of RBI on micro finance, see Reddy(2005); on the initiatives of RBI on financial inclusion,see Thorat (2006).

5 For more on this, see Shetty (2003) and articles inRamachandran and Swaminathan (2005).

6 See Reddy (2007)


have good and successful practices for credit likeKudumbasree programme in Kerala, Velugu (IndiraKranti Padhakam) SHG program in Andhra Pradesh.We have good practices in SEWA (health), BASIX(livelihoods) for insurance, while Pondicherry pilotproject offers lessons for bank accounts. We can alsolearn from the successful practices in countries likeBangladesh, Thailand, Indonesia, Mexico and Brazil.

Ultimately, the credit expansion programme willbe successful only if the productivity of the smalland marginal farmers improves. We have torecognize that credit expansion for farmers cannotbe sustained by the banking system alone, as thereis a need for other measures like public investmentin irrigation, research and extension, infrastructure,proper seeds and fertilizers, good marketing systemfor better price, etc. Small and marginal farmers facemany risks in cultivation. Credit expansion shouldtake into account the risk element of farmers whileframing policies. The agricultural officers mustprovide ‘farm advisory’ services that will help inmaking agriculture an integrated activity withappropriate backward and forward linkages(Rangarajan, 2005).

Risks in Agriculture

One of the differences between ‘greenrevolution’ benefits during the 1960s and 1970s andthe present ‘second green revolution’ plan is that therisk is higher in the latter approach as it has toconcentrate more on dryland areas apart from theproblems in irrigated areas. Crop failures and distresssales are also increasing.

Agriculture has two types of risks: Yield risk andPrice risk. Crop insurance is important for taking careof yield risk. Since a major cultivated area isdependent on rainfall, crop insurance is importantfor farmers. In place of the Comprehensive CropInsurance Scheme (CCIS), the governmentintroduced a new scheme entitled, ‘NationalAgricultural Insurance Scheme’ (NAIS) from rabi1999-2000 season. The premium paid during 1999to 2006 was around Rs 2,566 crore, while total claimsduring that period were of Rs 7,506 crore. In theimplementation of NAIS, certain limitations/shortcomings relating to unit area of insurance,

calculation of generated income, low indemnity level,and delay in settlement of insurance claims wereobserved. The government plans to introduce analternative mechanism for crop insurance.

Field surveys have also shown that the insuranceschemes are largely ineffective although somefarmers did get the benefits (Vyas and Singh, 2005).Many farmers have criticized the compulsoryinsurance for taking loans from the banks and theynever got compensation inspite of low yields.Another problem is that we do not have data on yieldsat the village level.

There are some proposals that insurance basedon rainfall should be evolved instead of yields. Area-based rainfall index insurance has some attractivefeatures such as lower adverse selection, lessadministrative costs, potential for a secondarymarket, can be sold to non-farmers, can be linked tomicrofinance and can clear the way for innovationin mutual insurance (Hazell and Skees, 2006). Somedevelopments have emerged in India in recent yearsto offer rainfall insurance contracts. ICICI LombardGeneral Insurance Company began a pilot insuranceprogramme that will pay farmers when there are rainshortfalls in one area, and pay others in the case ofexcess rains. BASIX used ICICI Lombard andtechnical assistance from the Commodity RiskManagement Group of the World Bank to developand launch the new rainfall insurance product.BASIX began operations in March 2001, in thedistricts of Mahbubnagar in Andhra Pradesh andRaichur and Gulbarga in Karnataka. In 2003, the newrainfall insurance was targeted at individual farmersof groundnut and castor. Given the apparentattractiveness of area-based index insurance, privatesector should have entered into this field quickly.But, this has not happened on any widespread scalebecause of several set-up problems. Government mayhave to help in setting up basic infrastructure. In the2007-08 Budget, the Finance Minister hadannounced that he would ask Agricultural InsuranceCorporation (AIC) to start a weather-based cropinsurance scheme on a pilot basis in two or threestates as an alternative to NIAS.

It may be noted that crop insurance is not thelong-term solution for yield variability. Risk


prevention or de-risking of agriculture is important.In order to de-risk agriculture, we have to focus moreon management land and water, including irrigationdevelopment, soil conservation, watersheddevelopment, water conservation and improvementin public delivery systems.

For taking care of price risks, futures marketsare advocated. It is, however, not clear whetherfarmers are benefiting from futures markets. It lookslike that there is a disconnect between futuresmarkets and farmers. The argument in favour offutures markets is that farmers in all other countriesare benefiting from these markets. Indian farmersshould not be denied this facility of futures markets.

Research and Extension

The yield growth for many crops had declinedduring the 1990s. The National Commission onFarmers has also indicated that there is a large yieldgap between the yields in research stations andfarmers’ fields. There seems to be a technologyfatigue in the Indian agriculture. The yield gaps givenby the Planning Commission (2007) are thefollowing.

The 2003-05 data show very large yield gaps:

• Wheat: 6 per cent (Punjab) to 84 per cent (MP)

• Rice: Over 100 per cent in Assam, Bihar,Chattisgarh and UP

• Maize: 7 per cent (Gujarat) to 300 per cent(Assam)

• Jowar: 13 per cent (MP) to 200 per cent(Karnataka)

• Mustard: 5 per cent (Haryana) to 150 per cent(Chattisgarh)

• Soybean: 7 per cent (Rajasthan) to 185 per cent(Karnataka)

• Sugarcane:16 per cent (AP) to 167 per cent (MP)

A fresh look at the priorities of Indianagricultural research system is necessary in the lightof emerging prospects. There is only marginalincrease in the funds for research in the recentbudgets. Of course, states have to take a lead inagricultural research and extension. It is known that

India spends only 0.5 per cent of GDP on agriculturalresearch as compared to more than 1 per cent byother developing countries. There is a considerablepotential for raising the effectiveness of thesefinancial outlays by reordering the priorities inagricultural research and redefining the relative rolesof public and private sectors in research andextension.

A review of the research and developmentactivities of the Indian Council of AgriculturalResarch (ICAR) system during the first two years ofthe 10th Plan has revealed several weaknesses. Someof these are: (a) inadequate emphasis on the needsof rainfed areas, which account for over 60 per centof cultivated area, (b) crop bias with major focus onrice and wheat, (c) proliferation of programmes,resulting in resources being spread thinly and lackof focus in areas of relevance and opportunity, (d)inadequate priority to the emerging challenges,particularly post-harvest, marketing andenvironmental conservation, (e) multiplicity ofinstitutes with overlapping mandates leading toduplication of research work, and (f) lack ofaccountability, less emphasis on multidisciplinaryresearch, weak interaction among researchers,extension workers and farmers and the private sectorand, excessive centralization of planning andmonitoring. A thorough reform of ICAR system isneeded to address these weaknesses.

There is a need to shift away from the individualcrop-oriented research focused essentially onirrigated areas, towards research on crops andcropping systems in the drylands, hills, tribal andother marginal areas8. Dryland technology has to beimproved. In view of high variability in agro-climaticconditions in such unfavourable areas, research hasto become increasingly location-specific with greaterparticipation or interaction with farmers.Horticultural crops that are land-saving and water-saving should be encouraged in the dryland areas.Research has to be improved on horticultural crops.

Progress in post-harvest technology is essentialto promote value addition through the growth ofagro-processing industry. Private sector participationin agricultural research, extension and marketing is8 See Swaminathan (2007) on research and technology


becoming increasingly important, especially with theadvent of biotechnology and protection being givento intellectual property. However, private sectorparticipation tends to be limited to profitable cropsand enterprises undertaken by the resource-richfarmers in well-endowed regions. Moreover, privatesector is not interested in research for bettertechniques of soil and water management, rainfedagriculture, cropping systems, environmental impactand long-term sustainability. Therefore, the publicsector research has to increasingly address theproblems being faced by the resource-poor farmersin the less-endowed regions. The new agriculturaltechnologies in the horizon are largelybiotechnologies. Effective research is needed todevelop biotechnologies suitable to differentlocations in India.

Regarding extension, the existing Training andVisit (T and V) system of extension is top-down inits approach and there is little participation by thefarmers. There is a need to take corrective steps todeal with the near collapse of the extension systemin most states. In the absence of public provision ofsuch services, the resource-poor and gullible farmersare becoming the victims of exploitation by theunscrupulous traders and moneylenders interestedin selling inputs such as seeds, fertilizers andpesticides. Therefore, there is an immediate need forreforming and revitalizing the existing agriculturalextension system in the country. The mainingredients of reforms should be: (a) activeinvolvement of farmers through user groups/associations, (b) participation by the private sectorand NGOs, (c) increasing use of media andinformation technology, including cyber kiosks todisseminate knowledge on new agricultural practicesand information on output and input prices, and (d)building gender concerns into the system, forexample, by manning the extension servicespredominantly by women9. The returns to investmenton research and extension will be much higher onagricultural growth as compared to otherinvestments.

Diversification by Maintaining Food Security

There has been diversification of Indian diets,away from foodgrains to high-value commodities

like milk and meat products and vegetables and fruits.The increasing middle-class due to rapidurbanization, increasing per-capita income, increasedparticipation of women in urban jobs and impact ofglobalization has been largely responsible for the dietdiversification in India. There is a growing demandfor non-foodgrain items in India. The expenditureelasticity for non-cereal food items is still quite highin India. It is thrice as high when compared to cerealsin the rural areas and over ten-times as high in theurban areas. The growth in per capita consumptionhas been shown highest by fruits and vegetables,followed by edible oils. Diversification to high-valuecrops and allied activities is one of the importantsources for raising agricultural growth. Since risk ishigh in diversification, necessary support toinfrastructure and marketing is needed. Price policyshould also encourage diversification of agriculture.However, diversification should not be at the costof food grains and other food crops. Efforts shouldbe continued to improve the yields of food crops.

The government plans to have the second ‘greenrevolution’ by diversifying agriculture in the cropsector and allied activities. Diversification is unlikelyto be a feasible strategy all over the country if it isrestricted only to agriculture-related activities likeshift from cereals to horticultural crops. The truebenefit of diversification will come if more emphasisis given on allied activities like animal husbandryand fisheries. The livestock sector contributes 5.4per cent to GDP and 22.7 per cent to the total outputfrom agriculture sector. The value of milk groupcommodities (Rs 103804 crore) is more than ofpaddy (Rs 73965 crore) or wheat (Rs 43816 crore).The rural women play a significant role in animalhusbandry and are directly involved in majoroperations like feeding, breeding, management andhealthcare. As the ownership of livestock is moreevenly distributed with landless labourers, andmarginal farmers, the progress in this sector willresult in a more balanced development of the ruraleconomy, particularly in the reduction of povertyratio.

Marketing

For small and marginal farmers, marketing oftheir products is the main problem, apart from credit9 See Rao (2005)


and extension. The contract farming arrangementsare particularly useful in the developing countrieswhere small-scale agriculture is widespread. Thesmall and marginal farmers have problems in gettinginputs, credit, extension services and marketing. Theservices provided by the contract farming companieswould be useful for small-scale agriculture. In recentyears, there has been some form of contractarrangements in several agricultural crops such astomatoes, potatoes, chillies, gherkin, baby corn, rose,onions, cotton, wheat, basmati rice, groundnut,flowers, and medicinal plants. Such contract farmingarrangements have to be strengthened to help thesmall farmers. There is a silent revolution ininstitutions regarding non-cereal foods. Newproduction –market linkages in the food supply chainare: spot or open market transactions, agriculturalco-operatives, and contract farming (Joshi andGulati, 2003).

The contract farming is spreading for severalcrops in states like Andhra Pradesh (Dev and Rao,2005), Tamil Nadu, Karnataka, Punjab andMaharashtra. From the farmers’ perspective, thereare risks of market failure and production problemswhile growing new crops. The sponsoring companiesmay be unreliable, may exploit the monopoly position,and/or have inefficient management and marketingproblems that could result in manipulation of quotaand non-fulfillment of commitments. Contract farmingin India is neither backed up by law nor by an efficientlegal system. This is the single most constraint to thewidespread use of contract farming in India. Thelegal system can be improved with legislativemeasures like development of model contract andcode of practice, registration of contracts withmarketing committees and tribunals for disputeresolutions.

Both the 11th Plan and NDC Working Groupson Marketing have supported the on-going marketingreforms. They want to take the APMC amendmentsto their logical conclusions. However, many statesare yet to frame the necessary rules. Both WorkingGroups have endorsed ‘Contract Farming’. Sinceseveral models are coming up, there is a need formechanisms for dispute resolution and contractregistration (Planning Commission, 2007).

The most important problem for the farmers isoutput price fluctuations. There is a big gap betweenthe prices of producer and consumer. For example,farmers sometimes get 50 paise per kg of tomatoeswhile the consumers pay Rs 15/kg in the urban areas.In order to protect farmers from national andinternational price volatilities, price stabilizationfund is needed. There are different models formarketing collectively by the small and marginalfarmers. These are: self-help group model, co-operative model, small producer co-operatives, andcontract farming. Apni Mandi in Punjab, Rytu Bazarsin Andhra Pradesh, and dairy co-operatives are someof the successful cases in marketing. The realchallenge lies in organising the small and marginalfarmers for marketing and linking them to high-valueagriculture.

Globalization and Agriculture

There has been adverse impact of tradeliberalization on the agricultural economy of theregions growing crops such as plantation, cotton andoilseeds, in which foreign trade is important. Withliberalization, the issue of efficiency has become highlyrelevant as domestic production has to compete withproducts of other countries. In recent years, domesticprices of several agricultural commodities haveturned higher than their international prices. India isnot able to check import of a large number ofcommodities even at high tariffs. It is true not only inthe case of import from developed countries whereagriculture is highly subsidized but also in the case ofproducts from developing countries. India is facingsevere import competition in the case of items likepalm oil from Malaysia and Indonesia, spices fromVietnam, China and Indonesia, tea from Sri Lankaand rice from Thailand and Vietnam (PlanningCommission, 2007). Cost reduction is, therefore,important for increasing producers’ profit margins.The policies have to induce larger investments inyield-augmenting technological improvements andcontain the adverse environmental impact of misuseof water and agro-chemicals for sustainability ofgrowth. To compete in the global market, the countryneeds to reduce various post-harvest costs andundertake suitable reforms to improve efficiency of


domestic markets and delivery systems. To be ableto successfully compete in a liberalized trade regime,therefore, there is need for a paradigm shift frommerely maximizing growth to achieving efficientgrowth. The effect of volatility in international priceson domestic agriculture should be checked byaligning tariffs with the changing price situation.

Implementation of the WTO Agreement onAgriculture (AoA) since 1995 has brought out theinadequacies inherent in the agreement. The ongoingnegotiations in the WTO on the AoA provide anopportunity for India to rectify these inadequaciesand inequalities. India should stress on theimplementation of Uruguay round agreements toreduce subsidies and other distortions caused bypolicies pursued by developed countries.

Impact of Hongkong Ministerial Conference on India

India is likely to benefit if developed countriesreduce agricultural subsidies. The phasing out ofexport subsidies is clearly a long overdue small stepin removing distortions in the area of agriculture.But, since the total magnitude of export subsidies isonly of the order of US $5 billion, it would not makemuch difference to markets for agricultural productsuntil domestic support (more than US $300 billion)is reduced substantially. Unless domestic subsidiesare cut, export subsidization will continue even afterthe ‘elimination of export subsidies’ in 2013 or theirphasing out before that. The Hong Kong Conferencewould have been more meaningful if there had beena decision leading to substantial cuts in total-tradedistorting domestic subsidies to levels below thecurrent or planned applied levels, and seriousdisciplines on the Green Box subsidies and theirreductions, so that overall domestic support is reallydecreased.

Institutional Reforms and SustainableAgriculture

Institutional reforms are important, particularlyin the domain of public systems, for a sustainedtechnical progress and output growth in agriculture.“There is a limited scope for privatizing irrigation,research and extension and other infrastructuralfacilities. All of these will continue to be mainly theresponsibility of public sector. Unless the public

sector’s efficiency in mobilizing resources andmanaging these facilities is vastly improved, tradeand price policy reforms will not make a significantdifference to the pace of agricultural growth”(Vaidyanathan, 1996, emphasis added).

Institutions for Sustainable Land and WaterManagement

Environmental concerns are among the policypriorities in India, particularly degradation of landand water is alarming. Watershed development underthe new guidelines, in general, has an overall positiveimpact on environment. However, groundwatertables are depleting at an alarming rate. The de factoprivatization of groundwater and subsidized powersupply are the main culprits. There has been a neglectof minor irrigation sources like tanks. Shortage ofdrinking water has accentuated and quality of waterhas declined over time.

An integrated approach is needed for waterresources management in the country. An appropriatestrategy should integrate institutional approacheswith market principles. Since institutional innovation(Water User Associations) is already in place forcanal irrigation, it is time now to implementvolumetric pricing. There is a need to de-link waterrights from land rights in order to ensure equity andsustainability.

Institutions like the water user associations(WUAs) and watershed committees are importantfor water management. The experience of AndhraPradesh has shown that the impact of WUAs hasbeen encouraging in these areas, especially in termsof providing irrigation to tail-end farmers. This hasbeen made possible by cleaning of canals and watercourses and monitoring of water losses by theWUAs. Area under paddy is reported to haveincreased significantly following these reforms.However, much of the reported increase could bestatistical because of underreporting of irrigated areasbefore reform , as this meant lesser payment of watertax to revenue department. Paddy yields are reportedto have increased by about 40 per cent. Long-termsolution for effective functioning of WUAs isawareness building and promoting participatorymonitoring and evaluation. Unlike in the case ofcanal irrigation, WUAs are not found to be effective


in respect of tank irrigation due to insufficientallocations.

In the case of land and forestry, watershedapproach and Joint Forest Management are crucialfor protecting the environment. The critical issue issustainability of these programmes. Althoughwatersheds have shown positive economic impact,the social issues are missing. More participatoryapproach and involvement of women would lead tosustainability of watershed development approach.In the case of JFM, the focus is more on high-incomeareas like timber. The low-value products constitutingsources of livelihoods for the poor have low priority.Customary rights of the tribals on podu (shiftingcultivation) have to be recognised. Awareness andinvolvement of the civil society is a precondition forchecking the environmental degradation.Environmental movements would have a discerningimpact in this regard.

Another concern is the land degradation due toexcessive use of fertilizers and pesticides. Thegovernment has launched programmes such asIntegrated Pest Management (IPM) and IntegratedNutrient Management (INM). Keeping in view theill effects of pesticides and also National Policy onAgriculture, Integrated Pest Management (IPM)approach has been adopted as a cardinal principleand main plank of plant protection in the country inthe overall crop production programme. Besides theongoing activities, the thrust area will be pertainingto Pest Risk Analysis (PRA) and post entryquarantine surveillance. This has become essentialin the light of WTO agreement, which will facilitatemore and speedier movement of plants, and plantingmaterials globally.

The Integrated Nutrient Management (INM)advocates the integrated use of all sources of plantnutrients like chemical fertilizer, bio-fertilizer andlocally organic manures like farmyard manure,compost, vermi-compost, green manures, edible andnon-edible oilcakes to maintain soil health and itsproductivity. Focusing on improving the soil qualityshould be one of the priority areas in raisingagricultural growth. Organic farming is also beingencouraged in the country due to demand for theseproducts all over the world.

District Planning

Agriculture is a state subject and most of thestrategies are planned at the state level. Theagricultural planning at state level has becomeweaker as often the State Plan is consisted of onlyCentrally-sponsored Schemes. The NDC resolutionand the 11th Plan strategy of the Planning Commissionadvocate state-specific planning for improvement inagricultural performance. In fact, ‘District Planning’is advocated for fully utilizing the resources availablefrom all the existing schemes. The district agriculturalplan will include crop, livestock and fishing sectorsand be integrated with minor irrigation projects, ruraldevelopment and with other schemes for waterharvesting and conservation. The state governmentsare supposed to set up appropriate units at the districtlevel for this purpose. Each state has to prepare aState Agricultural Plan based on district plans, subjectto reasonable resources from its own Plan and addingthose available from the Centre. The plans shouldaim at achieving the state’s agricultural growthobjective, keeping in view the sustainablemanagement of natural resources and technologicalpossibilities in each agro-climatic region (PlanningCommission, 2007). They also should include seedproduction, extension, credit, and natural resourcemanagement. They should fix the annual targets andfunds at the start of the fiscal year and review theimplementation every quarter at both district and statelevels.

Rural Non-farm Sector

The ultimate solution for reduction of land is toimprove rural non-farm sector and plannedurbanization. Rural diversification is important forseveral reasons. At the economy level, thedemographic pressures on land have been increasingsignificantly in India. Urban areas have their ownproblems of demographic pressures. As a result, ruralnon-farm sector becomes an escape route foragricultural workers. In order to increase wages inagriculture and to shift the workers to moreproductive areas, rural diversification is required.

Chinese experience on rural transformationoffers several lessons for India. Chinese governmenthas recognised that agricultural growth is a necessarybut not a sufficient condition for alleviating poverty.


It has followed several approaches including migrationfrom urban to rural areas, and employment generationin the rural areas to deal with surplus agriculturallabour. Chinese rural industrialization strategy is themost successful example for other countries toemulate. The rural township and village enterprises(TVEs) grew rapidly following the rural reforms of1979 and now play a significant role in Chinese ruralincome growth.

Chinese experience shows that globalization withbetter initial conditions has increased employment andincomes for workers which in turn was due to ruraldiversification. Developing countries should learnfrom China on agricultural growth, rural non-farmemployment, public investment and human resourcedevelopment. The impact of growth on povertyreduction is quite significant. Elements of Chineseexperience such as high and labour-releasingagricultural growth, favourable income distributionthrough broad-based agricultural growth, availabilityof infrastructure, higher levels of literacy and skills,inducements for the location of enterprises in ruralareas, and easy access to credit and inputs areextremely relevant for the developing countries.Those who support liberalization say that China’s higheconomic growth and impact on poverty is due toeconomic reforms since 1978. However, initialconditions before introduction of reforms areimportant. China’s success is due to these better initialconditions. China introduced land reforms andinvested in infrastructure, healthcare and educationbefore reforms. This led to high agricultural growth,and better human development. In other words,reforms work better in a more egalitarian (equality)society. Infrastructural investment was 19 per centof GDP in China as compared to 2 per cent in Indiain the 1990s. The foreign direct investment also playsan important role in improving investment in China.One important debate in India relates to the impactof FDIs, particularly on retail chains on employment.

Although there has been a reduction in thegrowth of TVEs, they are likely to remain importantin Chinese rural economy. The effective functioningof a well-knit decentralized mechanism of resourcesand control system along with massive investmentin local infrastructure and newer ventures helped theChinese TVEs enormously.

Turning to India, it is recognized that rural non-farm sector is important in both generatingproductive employment and alleviating poverty inthe rural areas, as agriculture and urban areas cannotabsorb the increasing workforce. Within agricultureand allied activities, there seems to be somediversification towards non-cereal crops. However,risks and uncertainty are associated withdiversification. Technology, infrastructure andmarket have to be improved in order to shift thefarmers to non-foodgrain crops. By any standards,the unutilized potential of food processing in Indiais enormous. An expansion of this sector is an idealway of bringing industry to rural areas, expandingthe value chain of agricultural production, providingassured markets for farmers, enabling them todiversify into higher-value horticultural crops andexpanding employment by creating high-quality non-agricultural work opportunities in the rural areas.There can not be one policy package for the entirerural non-farm sector. Sub-sectoral policies indifferent regions are needed.

In general, development of the manufacturingsector is important for absorbing labour forceproductively. Right now many workers are absorbedin low productive services sector. Encouragementto women and training and improvement in skillswould enhance employment opportunities. Leadingfactor for diversification is improvement in educationand skills of workers. Migration is consideredanother form of diversification. But, it has to be basedon pull factors rather than distress migration.

A two-pronged strategy is needed forenhancement in the livelihoods of the poor. On theone hand, government should have policies toimprove education and skills of the workers, and onthe other hand, there should be several policies toincrease employment for the unskilled workers. Forthese two strategies, pro-poor growth engines haveto be identified. Simultaneously backward areas andsocial groups have to be helped for development.Livestock and forest sectors are more pro-poor inthe rural areas as compared to other areas. The poorsuffer from inadequate access to important capitals.These are physical (roads, buildings, plant andmachinery, infrastructure), natural (land, water,forests, livestock, weather), human (nutrition,


healthcare, education, skills, competencies), socialand financial. There is a need to improve thesecapitals for the poor in order to reduce demand-sideproblems.

4. Concluding ObservationsThere are many policy challenges for the Indian

agriculture. Both price and non-price factors areimportant for higher agricultural growth. Thechallenges for the ‘second green revolution’ ascompared to green revolution of 1960s and 1970sare : (a) globalization challenges, high volitility inprices, (b) more shrinking farm-size, (c) drylandfarming challenges, and (d) environmental stress.Small farmers are certainly going to remain in Indiain the next decade or even after. The main challengesare improving productivity and moving towardshigh-value agriculture and promoting rural non-farmsector by maintaining food security for reducingpoverty and hunger.

There are six deficits in Indian agriculture. Theseare: (a) investment, credit and infrastructure deficit;(b) research and extension (technology) deficit; (c)market deficit, (d) diversification deficit, (e)institutions deficit, and (f) education/skill deficit.

De-risking or risk prevention in agriculturethrough land and water management is better thaninsurance, etc. There are many domestic and externaltrade liberalization challenges and small farmers canrespond to and benefit from these challenges. Apartfrom high growth, efficiency (cost reduction) is alsoneeded in the globalized world.

Ultimately, it depends on the political will at bothcentral and state levels. Deficiency in agriculturaland rural infrastructure is the biggest problem foragricultural development. There is a need for massiveincrease in outlays for agricultural and ruralinfrastructure by simultaneously improving thedelivery systems. Trilemma of keeping input priceslow, farm level prices high and consumer prices lowhas always been a challenge for policymakers.‘Business as usual approach’ may not help revivalof agriculture. Declining profitability in Indianagriculture has to be reversed. The government isthinking of big push to education in the 11th Five-Year Plan. Such a big push is needed for agriculture

also. Given the short-run and structural long-termproblems in agriculture, the government should givelarge push to core issues like public investment ininfrastructure, land and water management includingrainwater conservation and watershed development,research and extension, price stabilization, etc. tomake cultivation viable and profitable. There is aneed to concentrate on delivery systems also. India’slarge numbers of farmers and poor can benefit if thereare right policies and effective implementation.

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About the Author........

Professor S. Mahendra Dev is the Chairman,Commission for Agricultural Costs and Prices (CACP),Ministry of Agriculture, Government of India. Earlier,he was Director of Centre for Economic and SocialStudies at Hyderabad. He got his Ph.D. in Economicsfrom Delhi School of Economics and did post-doctoral research at the Economic Growth Centre,Yale University, USA. He served the Indira GandhiInstitute of Development Research, Mumbai, for morethan a decade. He was a senior fellow at Rajiv GandhiFoundation during 1996-97 and Visiting Professor atUniversity of Bonn, Germany in 1999. He has writtenextensively on agricultural development, poverty andpublic policy, food security, social security systemsand allied areas. He was instrumental in formulationof the policy for Inclusive Agricultural Growth inIndia for the XI Five-Year Plan. He has been a memberof several committees including Prime Minister’s TaskForce on Employment, and the Committee on‘Financial Inclusion’, etc.

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