Tuesday, March 14, 2017

What it takes to Double Farmer’s Incomes in India?

Shantanu De Roy

The Union Budget presented on February 1 by Finance Minister, Mr Arun Jaitley has announced certain measures for agriculture sector in India. The question is, whether these are enough to realise the dream of Prime Minister Mr. Narendra Modi to double farmer’s incomes by 2022?  apparently, doubling of farmer’s income which implies making agriculture a profit earning economic activity is always welcome. This is because agriculture is the main source of employment in India and the nation has been experiencing agrarian distress over the last quarter century. Thus, livelihood security of substantial number of people, associated with agriculture, has been jeopardised with prolonged agrarian distress from which no region has been spared. 

While the nation at large has been experiencing agrarian distress, reflected in a spate of farmer’s suicides, yet Indian agriculture over the last 25 years has not been characterised by undifferentiated misery in which all sections of the agrarian community have been adversely affected. Indeed, a small stratum at the top has been continuing with the process of accumulation from cultivation of agricultural crops; they have been beneficiaries of policy measures announced by the state even when the policy regime, overall, has changed with initiation of reforms since early 1990s. However, the process of accumulation of a minuscule section has been insufficient to take agriculture sector as a whole out from low growth trajectory or to mitigate the sufferings of a substantial number of rural populations. Thus, policies to further increase/doubling incomes of these sections will only make agricultural growth more iniquitous. The question then becomes is whose incomes it is that the national leadership and policy makers are thinking about? is it about those very few who are already making substantial gains from production of agricultural crops or an overwhelming many, who are finding it extremely tough to eke out a living? this is important because the agrarian community that includes peasants/farmers are not homogenous entities and there are wide variations in the degree and nature of participation of different sections of the agrarian population in input and output markets across the nation. Any policy initiative to meet the objective of doubling/increasing farmer’s incomes must take this aspect into consideration. In fact, without it, the objective per se is meaningless. This essay is an attempt to analyse factors that can potentially raise agricultural incomes of poorer sections of the farming community and can lead to broader based agricultural and overall economic growth. 

Implementation of land reform
Land is the fundamental means of production in an agrarian society. Also, land is the source of power apart from being an important source of livelihood security in an agrarian society. Thus, concentration of ownership rights over land among the economically and socially powerful sections in rural areas results in concentration of power among a small minority in rural areas. Almost all the major political formations in India, except may be for the Left and BSP, are controlled by leaders who have ownership over disproportionate shares of land. Land reform leads to destruction of landlordism and changes in power relations in the countryside in favour of the working poor.Thus, land reform entails redistribution of an important asset and incomes from the dominant to hitherto dominated sections with wide ranging implications. It is not only an economic but also a social and political programme.

The promise of land reform was an integral part of the freedom struggle in India that was not implemented by the dominant political parties that repeatedly came to power in the Union and most of the state governments. Till date, only four states in India, West Bengal, Kerala, Tripura and Jammu and Kashmir, had successfully implemented land reform. Land reform can lead to release of productive forces in the countryside. This is because with the possession of ownership rights of land and elimination of burdens of rent for tenants to superior rights holders, poor and small peasants, have more incentive to put in labour and non-labour inputs on their land thereby leading to increases in growth in productivity and output. Increase in incomes in agriculture can remove demand constraints, widen up domestic market for the industry and services sector and fasten their growth rates. The existence of surplus labour in agriculture on account of low absorption of labour into the industrial sector has largely been due to the existence of excess capacity in the latter which is a fall out of narrowness of industrial base in the nation. In other words, that mobility of labour from traditional (agriculture) to modern (industry) sector could have been successful had there been expansion of domestic market due to agrarian reforms. It may be noted that even a limited institutional reforms by way of zamindari abolition in the 1950s, aided by state support in a protected economy that did not radically alter production relations in the countryside, resulted in growth rates in agriculture which is much higher than what was achieved in the pre-Independence periods.  Thus, land reform can reduce poverty substantially and play an instrumental role in expanding the size of market so crucial for a broad based capitalist development. In fact, development of a strong industrial base and widening of markets of early and late industrialising nations owes much to the successful implementation of land reform in these nations. There is a strong relationship between a successful implementation of land reform and certain other policies that have been discussed below. Land reform by giving land to the poor can not only lead to destruction of landlordism but also results in social, economic and political empowerment of the poor people in rural areas. Empowerment can lead to effective political mobilization of poor people and enable them to demand for other essential aspects of human freedom like better quality health-care, education and food from the state.

More protection from external competition
Successful implementation of land reform in terms of deriving sufficient material benefits depends crucially on the degree of protection provided to poor, marginal and small cultivators from cheaper imports of agricultural commodities. Also, demand and political mobilizations for a more protectionist regime in favour of agrarian poor can be successfully realised through empowering these sections as a direct fall out of changes in balance of power due to agrarian reforms, which is particularly relevant for a developing economy like India. Developed countries, despite WTO diktats, have been fairly successful in providing huge subsidies to their agriculture sector that has enabled these nations to supply cheap imports and get market access in developing countries. Moreover, these nations had imposed various non-tariff barriers to restrict entry of agricultural commodities from developing countries. Elimination of subsidies, as part of WTO rules, meant that there has been a rise in the cost of production of agricultural crops in India. On the other hand, openness ensured participation in international markets of primary commodities characterised by extreme volatility in prices. Moreover, entry of a country as large as India in international markets of primary commodities means that on the supply side there will be huge increases, and given the level of demand, prices of agricultural commodities will decline. This is mainly relevant for primary commodities in which India is a major supplier in international markets. In all, agricultural trade liberalization has ensured the loss of viability of agriculture in India, specifically for small and marginal cultivators. In other words, if the government is serious in ‘doubling’ incomes of poor, small and marginal farmers in India, it should provide more protection to these sections from external competition and take necessary steps to increase incomes from agriculture.

Provision of cheap credit and price support
Viability of small scale farming in India could have been increased significantly through disbursal of rural credit to the poor cultivators in India. While a substantial number of poor people in India that includes small, poor and marginal farmers do not have bank accounts which severely limits their access to rural credit, even those who have bank accounts do not receive cheap loans because banks and other formal institutions occasionally find them to be ‘credit un-worthy’. As a result, they are being forced to take loans for production from the informal sector at a very high rate of interest that leads to additional increases in cost of production. Since the first half of new millennium, there were have been an upward trend in credit disbursals of commercial banks in rural areas. Credit deposit ratio in rural areas had increased from 49.6 per cent in 2001 to 91.6 per cent in 2010; there has been a decline since 2010, though, it was well above the figures attained in late 1990s. Also, there has been a rise in agriculture and priority sector credit in rural areas during this period. However, increase in rural credit mainly benefited the large agro-business corporations and big cultivators. Also, there have been definitional changes whereby credit disbursals to infrastructure funds, non-banking finance companies and food processing industries were incorporated under priority sector. These factors did lead to increase in the supply of finance, however, agriculture sector in general and poor, small and marginal farmers in particular did not benefit from this development. As a result, although, the demand for finance remained high as was reflected in thriving of an informal credit market with high interest rates, supply was not forthcoming. Moreover, in an era characterised by increase in cost of cultivation and volatility of output prices, increased supply of credit from financial institutions could have provided cheap finance for working capital and long term investment needs of these farmers. The corresponding growth in productivity achieved due to investments on land would have been useful in raising output and incomes of farmers.

In a nation characterised by interlinked factor and output markets, dependence of rural poor on moneylenders for credit meant exploitations of the former in land, labour and output markets. In other words, poor sections of the peasantry, who often are net hirers out of labour, either will have to supply labour either for free or at a wage rate that is lower than the market wage, to repay loans of moneylenders. In the output market, occasionally poor peasants are forced to sell their produce to the commission agents or other market intermediaries at a price lower than market prices. In the land market, exploitation occurs through loss of land for the cultivators to the money lenders at throwaway prices that are typically used as collaterals in credit contracts. Thus, financial exclusion in India impacts on the lives of poor cultivators through myriad ways. Typically, in India, moneylenders, commission agents and landlords or rich peasants are the same person or same group of persons in rural areas. Control over capital enables these sections to wield monopsonistic/oligopsonistic power in rural input and output markets.    

While implementation of land reform could have led to redistribution of an important asset and income from rich to the poor, and consequent loss of power for these sections that could have been instrumental in breaking down interlinkages and monopsonistic/oligopsonistic power across markets; providing more protection from external protection would have ensured economic benefits to the poorer sections in terms of making agriculture sector in India profitable.

As a policy response to volatility of prices of primary commodities in international markets to which cultivators in India have been subjected to following India’s entry into the WTO and also on account of rising costs of cultivation due to elimination of subsidies, price support from the state should have been extended to all crops produced by Indian farmers. However, it is not enough to raise MSPs uniformly across the nation. It is equally important to take into account variations in costs of inputs used in cultivation across the nation, costs incurred through payments of rent by poor cultivators often at very unfavourable terms with no registered contracts, particularly when they are tenants of land owned by big landowners, and then providing adequate rates of returns over costs of production. In other words, there need not be a single MSP for each crop across the entire nation. An additional factor that is extremely crucial for proper implementation of MSP so that the poorer cultivators can get benefits include extending the reach of procurement agencies by way of which farmers can sell directly to them and not through intermediaries who are either mill owners or other agents so that they do not receive a fraction of MSPs.

Increased public investment in agriculture
Increased public investment has the potential to enlarge the productive base of Indian agriculture. It enhances stock of capital employed in agriculture and also plays a vital role in stimulating investments of farmers resulting in further enlargement of capital stock in agriculture. Thus, unlike textbook macroeconomic models that argues in terms of ‘crowding-out’ of private investment due to increased public investments, in the context of developing economies in general and Indian economy in particular, characterised by high unemployment and un-utilisation of resources, public investment in agriculture actually ‘crowds-in’ private investments. However, since the 1980s, the importance of public investment in total investment in agriculture had been declining steadily. While the share of public in total investment was 52.4 per cent in 1981-82, it had declined to 34.2 per cent in 1989-90 and by 2013-14 the share had declined further to 24.2 per cent. Although, there had been increases in private investments over these years, the nature of public and private investments are such that one cannot be substituted by the other. For instance, public investments mainly focus on public goods like irrigation projects and rural road and electrification networks that are not provided by private capital. Thus, any increase in private investment will not be able to compensate the decline in public investment in an economy like India where basic infrastructure crucial for agricultural growth has not been lacking even after 70 years of Independence. In India, irrigation accounts for a major share of capital formation in agriculture. Access to reliable irrigation water enables farmers to adopt new technologies and intensify cultivation, leading to increased productivity and production and greater income from farming. However, the response of the government in terms of allocation of resources for irrigation was inadequate and even this inadequate amount has been declining. The share of outlays on irrigation and flood control had declined from a low of 1.4 per cent of GDP in 1981-82 to 0.6 per cent in 2013-14. While GDP had undoubtedly increased over these years, yet these figures show that a lesser proportion of income generated in the economy was ploughed back into the agriculture sector. The decline in ratio shows that in terms of allocation, irrigation has not been given any priority by the government.

Although, increase in public investment is necessary, yet, by means, it is sufficient if one is concerned of doubling/increasing incomes of poor farmers in India. It is equally important that public investment is spread evenly with more focus on backward regions and groups that had been hitherto excluded from its benefits. Starting from the green revolution period, the second phase of agricultural growth (1967-81), policy makers in India have mainly focussed on the already well-off and agriculturally prosperous regions. It had resulted in the accumulation processes of large cultivators at the cost of increased incremental capital-output ratio (ICOR) in agriculture which implies decline in efficiency. The strategy had paid off in terms of increasing of incomes of richer sections of agrarian population. While, there had been a reversal of this tendency in the third phase (1981-91), with the meteoric rise of West Bengal as one of the best performing states in agriculture in India, things have started to move in the wrong direction, again, with the initiation of economic reforms since 1991. The West Bengal experience, manifested in terms of high agricultural growth rate in the 1980s, showed that land reforms and democratization of rural local bodies can not only lead to political empowerment but  can potentially bring in corresponding material and social benefits for poorer sections of agrarian population. However, decline in agricultural growth rate in West Bengal as elsewhere in India, with the initiation of economic reforms, meant that petty production in agriculture became increasingly unprofitable. It had led to the loss of land in which Scheduled Castes, Scheduled Tribes and Muslims, hitherto the major beneficiaries of land reform, were adversely affected. NSSO data showed that almost two third of Scheduled Caste and Scheduled Tribe households and about three-fourth of Muslim households in West Bengal did not cultivate land in 2011-12. In the absence of alternative employment opportunities, shifting of workforce has taken place from agriculture to the informal sector in non-agricultural activities that hardly provides a decent standard of living. As a result, livelihood security of substantial sections of rural population, mostly poor, has been threatened with the initiation of economic reforms. Despite successful implementation of land reforms and a very strong history of peasant movement, there has been depeasantisation and dis-empowerment of poor people in West Bengal. Incidentally, these developments have taken place under a regime that had a significant role to play in terms of changing the correlation of class forces in the countryside in favour of poor people.

High growth of agriculture in West Bengal in the 1980s and its subsequent decline since the 1990s showed that a) peasant agriculture can be viable if enabling conditions are provided under the guidance of state and b) increasing public investment, per se, may not be enough; it has to be accompanied with other conditions, most important being political and social empowerment of rural poor.

To conclude, while the idea of doubling of farmer’s incomes is crucial for the entire economy, the questions are a) whose incomes will it be and b) how can it be achieved? this essay has tried to address these questions. It has argued for certain policies, which, if implemented properly can lead to not only high growth in agriculture but also bring in benefits to substantial number of people engaged with this sector. However, successful implementation of these policies will need political will of the policy makers. Without, political willingness, this will remain as a mere dream.

The Author is Assistant Professor at TERI University

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