Understanding the Indian Economy from the Post-Reforms of 1991

Indian Agriculture

Shrawan Kumar Singh

• Publisher: Business Expert Press
• Year: 2021
• ISBN:
  9781953349477
• Topic: Volkswirtschaftslehre
• Subtopic: Währungspolitik

The agricultural sector is impacted by and impacts the society, economy, and environment. No study of the Indian economy can afford to neglect the agricultural sector. Although its share in the national product has declined, it harbors not merely half of the labor force; it has also vital supply and demand links with the manufacturing sector.

This is the third volume in the series of eight such volumes. Each volume seeks to present an analysis of a specific area or sector of the Indian economy. This volume examines various aspects of India's agricultural sector.

Three of the basic foundations needed for building a sound agricultural economy are a productive technology package, efficient delivery services, and remunerative and stable market prices for produce. The federal structure of government and policies belong primarily to the realm of political economy. Policy interventions need to focus on ensuring remunerative prices for farmers, credit, supply chain, and marketing and make the farmer market ready.

Though policymaking is difficult, the toolkit of good governance of agriculture becomes more important and regulations need improvement. For better policy planning, there is a need to improve upon the database on agriculture, considering that the existing data is unreliable.

CHAPTER 1

Agriculture and Its Importance in the Indian Economy

This chapter tries to know more about agriculture in India and explores the details about the important role of agriculture in the Indian economy. Indians have been practicing agriculture since the time of the Indus Valley Civilization. To practice agriculture means to use natural resources to produce commodities that maintain life, including food, fiber, Medical herbs, plants, honey, timber and other non-wood products, horticultural crops, and food processing industries. Green Revolution is the biggest revolution in agriculture. Green revolution means increase in production, particularly wheat and rice by adopting new technology of high yielding variety (HYV) seeds during 1969

Agriculture and Its Importance

The importance of agriculture cannot be overemphasized. The agricultural sector plays a very important role in India’s prosperity, as follows:

I. Contribution to National Income Of India’s independence in 1947, agriculture has been contributing a major portion to India’s national income. Gross value added by agriculture, forestry, and fishing was estimated at Rs. 18.53 trillion (US$ 271.00 billion) in FY18. However, as the Indian economy has diversified and grown, agriculture's contribution to the gross domestic product (GDP) has been declining continuously since 1951. Agriculture and related sectors such as forestry and fisheries account for 17 percent of the GDP since 1991. In developed countries like the United Kingdom and the United States, agriculture contributes only about 3 percent to the national income.

II. Source of Livelihood: Agriculture, with its allied sectors, is the largest source of livelihood in India. Around 50 percent of its rural households still depend primarily on agriculture for their livelihood, with 86 percent of farmers being small and marginal. Agriculture-related occupations, including those of the textile sector, account for roughly half of India’s labor market. Indeed, the agricultural sector is a critical segment of India’s economy in terms of employment and income generation. Consequently, it plays an important role in Indian economy, politics, and society. In comparison, only 2 to 3 percent of rural households in the United Kingdom and the United States, 6 percent in France, and 7 percent in Australia depend for their livelihood on agriculture.

III. Source of Food Supply: About 60 percent of household consumption is met by agricultural products in the country.

IV. Linked to Industrial Development: Agriculture supplies raw materials to various industries. Cotton and jute textiles, sugar, vanaspati (A type of thick vegetable oil used in India.), edible oil, plantation industries (i.e., tea, coffee, rubber), and agro-based cottage industries are regularly collecting their raw materials directly from agriculture. About 50 percent of income generated in the manufacturing sector comes from all these agro-based industries in India. Moreover, agriculture provides a market for industrial products as increase in the level of agricultural income may lead to expansion of the market for industrial products.

V. Commercial Importance: Agriculture plays an important role both in the internal and external trade of the country. Agricultural products constitute an important basket of India’s total exports. Besides manufactured jute, cotton textiles and sugar also contribute to the total exports of the country. Agriculture helps the country in earning precious foreign exchange.

VI. Source of Government Revenue: Agriculture is one of the major sources of revenue for both the central and state governments of the country. Some other sectors like railways, roadways also derive a good part of their income from the movement of agricultural goods.

VII. Source of resource mobilization: The rural areas are the biggest markets for low-priced and middle-priced consumer goods, including consumer durables, and rural domestic savings are an important source of resource mobilization.

Agriculture is important in India for the obvious reason of its centrality, given that it accounts for a large share of the GDP (16 percent), and an even larger share of employment (49 percent). Perhaps, it is even more important because, as the experience of the last few years illustrates, it has the potential to hold back Indian development. Poor agricultural performance can lead to high inflation, rural distress, and political restiveness (Hari et al. 2018).

Any change in this sector, positive or negative, has a multiplier effect on the entire economy. A nation of 1.3 billion people cannot be dependent on imports for a basic item like food grains. The agriculture sector, therefore, acts as a bulwark in maintaining food security and, in the process, national security as well. Allied sectors like horticulture, animal husbandry, and dairy and fisheries have been able to improve the overall economic conditions and health and nutrition of the rural masses. To maintain the ecological balance, there is need for sustainable and balanced development of agriculture and allied sectors. Recognizing the crucial role played by the agricultural sector in enabling the widest dispersal of economic benefits, agricultural development is central to the economic development of the country.

Over the past seven decades, agriculture has witnessed different phases of growth (Sharma 2018a):

I. The first phase, which is referred to as Farming 1.0, extended from 1947 to 1966 and was characterized by radical land reforms.

II. The second phase was the Green Revolution, which increased farm productivity and rid the county’s dependence on foreign food aid. Farming 2.0 (1967–80) was a golden age in India’s agriculture.

III. As of 2020, agriculture is at a critical juncture. The need has arisen for another revolution—a new phase that will be defined by innovation and technology; an age where focus would be on balancing productivity and economics with social and environmental considerations.

India’s agricultural sector has an impressive long-term record of taking the country out of serious food shortages despite rapid population increase. This was achieved through a favorable interplay of infrastructure, technology, extension, and policy support. The main source of long-run growth was technological augmentation of yields per unit of cropped area. Rapid growth of agriculture is critical for inclusiveness. The climate challenge facing agriculture needs to be taken seriously. The variation in performance across states suggests that state-level responses and implementation play a very significant role in determining agricultural performance. However, to the extent that available technology limits potential growth, it will be difficult to maintain high growth rates where productivity has increased close to potential levels (12th Five-Year Plan 2015).

Problems of Indian Agriculture

“Farming never pays” is a familiar slogan among agriculturists across the world, and especially so in India. Nevertheless, many continue to cultivate their fields year after year, barely eking out an existence, toiling in the hope that the tide may turn in their favor one of these days. A good deal of year-on-year variation in output is seen. There are a large number of small producers, traders, and trade intermediaries. The supply chain for agri-produce is rather long and inefficient. Too many intermediaries add to the cost but little to the value. Despite the importance of agriculture in the Indian economy, it suffers from many ailments:

I. Scarcity of capital

II. Instability of monsoon affecting crop output

III. Poor quality of seeds

IV. Inadequate fertilizer and manure use

V. Improper irrigation

VI. Small and fragmented landholdings

VII. Less use of modern technology

VIII. Soil erosion

IX. Inefficient Cropping pattern

X. Ownership of land

XI. Inadequacy of agricultural marketing, storage facilities, and transport

XII. Poor Condition of laborers

XIII. Excessive risk

An important reason for the farmer’s plight is the excessive risk he has to bear in order to engage in agriculture. Government policy, through the Essential Commodities Act (1955), restricts farmers and traders from transporting and storing their produce, in order to prevent alleged hoarding and profiteering in times of shortages. The stock-holding (Certain agricultural commodities in short supply and their price is spiking, then government can notify stock-holding limits for a specified period.) limits preclude investments in supply chain, as the food processing and retail companies need stocks in order to shield themselves from price shocks. Moreover, stock holding allows a smooth supply of produce, reducing price volatility. This requires trust in the farmer to make his choices, so that he can sell his produce anywhere, but that requires institutional changes that can allow price discovery and free avenues for trade.

Landholdings are getting fragmented. Among the agricultural households, 69.44 percent are classified as marginal farmers and 17.14 percent are small farmers. The proportion of marginal and small farmers works out to be 86.58 percent. (NSSO 2014). The average size of marginal holdings is only 0.41 ha (one acre) and that of small holdings is 1.4 ha. Over the decade, the average size of land holdings has fallen. The riskiness of agricultural production continues to be high, and market-based insurance coverage remains low. There has been an observable decline in groundwater levels, and not much has improved in storage and postharvest risk management. Farmers have adapted to yield and price volatility through adjustments in crop and acreage choices. Unfortunately, neither agricultural credit nor agricultural insurance markets have evolved to cater to their liquidity and investment requirements. While there has not been a noteworthy productivity gain, the cost of cultivation has increased in real terms. The real incomes from cultivation are not only low but also variable, not enough to sustain the livelihoods of farm households.

Given the monsoon-dependent nature of farming, farmers are at a constant risk of falling into poverty, but a number of measures can distribute this risk between peasants and traders. Contract farming and land lease laws will similarly allow farmers to share the risks associated with farming, and allow them access to cheaper credit and farm inputs. Farming has now become a risky business, far riskier than industry. Twice every year, farmers first face a production risk and then a price risk. The well-being of the peasantry depends on how they get the value of their produce. Minimum support price (MSP) is a form of market intervention by the government to insure farmers against any sharp fall in prices. The MSP was announced by the government for the first time in 1966–67; it covered wheat in the wake of the Green Revolution, to save farmers from depleting profits. Since then, it has been an integral part of India’s agricultural price policy. Currently, the MSP has been announced by the central government for as many as 25 crops (14 kharif, seven rabi, and four other crops) at the beginning of each season, that is, rabi and kharif. (“The crops that are sown in the rainy season are called kharif crops. (Also known as the summer or monsoon crop) in India. Kharif crops are usually sown with the beginning of the first rains in July, during the south-west monsoon season. The crops that are sown in the winter season are called Rabi crops.”)

As regards employment in agriculture, economic reasons to flush farmers out of agriculture are enumerated by many economists and policy makers. But they ignore the fact that there are not enough employment opportunities in the nonagricultural sector. In the last three decades, not many employment opportunities have been created in the manufacturing sector. The service sector also has very limited employment opportunities available for unskilled and uneducated labor. It is possible to create this employment by promoting dairy and animal husbandry, mushroom farming, poultry, forestry, horticulture, fishing, food processing, and so on.

Need for Rational Policy Measures

Agricultural systems, including crops, livestock, forestry, and fisheries, need to be transformed without degrading the natural resource base to ensure adequate quantity of quality food for the growing population and to promote economic growth and alleviate poverty. Even with state policies that offer ever-increasing support prices; subsidies on power, diesel, fertilizer, seeds, insurance, and credit; and loan waivers to top it all, conditions in agriculture have not improved. The policy makers and an extractive state have debilitated the farmer as an entrepreneur. The state apparatus is still sitting on the farmer’s chest and pretending to offer him resuscitation instead of allowing his entrepreneurship to flower in a market economy.

India’s average farm sizes are simply too small to support viable farming, with 86 percent of them below 2 hectares. These farms have little or no surplus to invest in productivity. It is important to flag the reality that beyond connectivity and storage, agriculture needs freer markets, and these markets are with urban consumers. Rural and agricultural nirvanas depend on an urban nirvana (Jagannathan 2018). In view of the problems, it is essential that authorities should come out with reasonable policies so that the conditions of agriculture can be improved. Farmers have called for the following:

I. The removal of restrictions of rural land markets

II. Farmers need freedom to sale anywhere to fetch better prices for their produce.

III. Free trade in farm products

IV. The end of government intervention in the farm economy

V. The liberalization of agriculture

VI. Direct benefit transfers to the poor

Agricultural marketing needs an overhaul. The main problem is the subservience of the farmer to the licensed trader in the mandi (Markets) system. These traders collude to determine the purchasing...