"Agriculture and the reforms: Growth", 'The Hindu', December 20, 1999

Some have argued that the economic reforms since 1991 have not targeted the agricultural sector directly, and hence not much may be expected of it under the new policy regime. One might say "not much" because even the purveyors of such a view would recognise that trade liberalisation, when it does materialise in full, could affect agricultural prices even if it might not immediately affect production immediately. However, while I find myself in agreement with the view that not a great deal may be expected to emerge in the agricultural sector post reforms, it would be wrong to ignore that the managers of the reforms had based their actions upon a model of how these would affect, nay encourage, agricultural production. Evidence of such a conviction is to be found in the address to the Indian Society for Agricultural Economics on the occasion of its annual conference in 1994 by Manmohan Singh, then Finance Minister. The argument is not original to him, having first seen the light in an OECD publication of the late sixties, but it is exposited with great clarity by Dr. Singh. It is that in economies where policymakers follow import-substituting industrialisation, and India is seen along with Brazil and Mexico as the prime example of this type of strategy, agriculture is discriminated against. I quote, albeit selectively, from Dr. Singh’s address: "The policy of excessive protection for industry hurt Indian agriculture in several ways. It raised the price of industrial products relative to agricultural products which hurt the rural sector of our economy as consumers of industrial production. It also greatly increased the profitability of industrial production compared to agricultural production which led to a progressive shift in investible resources away from agriculture. This shift takes place in various ways. Low returns in agricultural activity reduce the ability of agriculture to pay economic prices for many inputs such as power, water and credit ……. Instead of relying on expansion of subsidised supplies of the very inputs, it would be much better to progressively reduce the protectionist bias against agriculture by lowering protectionist barriers favouring industry and altering relative prices in favour of agriculture. This would create a potentially more profitable agriculture, which would be able to bear the economic costs of technological modernisation and expansion." While there could only have been very few Finance Ministers in the international history of the portfolio who are able to expound economic theory with such effortless ease, the central suggestion here is one at which we may cavil. For while the returns in agriculture relative to that in industry might well have been lowered by protection to the latter their relation to the cost of the inputs mentioned is immune to the effects of protection. Power, water and credit, though chosen rightly for their importance, remain generically untraded.

            At the theoretical level the argument that `disprotection’ invariably hurts agriculture is much less general than it is made out to be. For a start, it assumes much greater inter-sectoral flow of resources than it is perhaps wise to do. In particular, it is an argument regarding resource allocation, a one-shot activity, and of dubious worth when it comes to analysing growth, a dynamic process. Its explanatory power meets its match in the Green Revolution that was. That an expansion of agricultural production occurred during the sixties even as import substitution was in its full flood indicates that the incentive structure need not remain static even as trade might remain intensely regulated, leaving industry protected. But, apart from this, there are problems to be encountered in any welfare analysis based on the market price. First, it ought not to be overlooked that agriculture itself receives protection, albeit often as a lower rate than industry (which might appear to breathe some life into the argument that agriculture has been discriminated against during industrialiasation). Moreover, in a mixed economy with heavy government intervention the observed market price must be corrected for taxes and subsidies. Viewed from this angle Indian agriculture appears twice blessed. Not only do agricultural producers receive subsidies – visible in the case of fertilisers, invisible in the case of water and electricity – but also they do not pay direct taxes as do industrial firms. To top it all, grain producers in the Indian economy have till date been favoured by a scheme of support operations that must be the envy of industrial producers the world over, not just the Indian. Except in the case of rice in certain states, the procurement policy does not entail any compulsion, offering instead unlimited offtake at an avowedly remunerative price. Under the reforms since 1991 the relative profitability of agriculture could only have increased, for industrial tariffs have been lowered very substantially while all the other interventions favourable to agriculture remain intact.

Table: Agricultural growth before and after 1991

 

Period

Foodgrains

Non-food crops

1

1949-50 to 1964-65

2.93

3.54

2

1967-68 to 1989-90

2.74

2.72

1’

1970-71 to 1979-80

2.08

1.66

2’

1980-81 to 1989-90

3.54

4.84

3

1990-91 to 1997-98

1.66

2.36

Source: Rows 1-2 from `Area and production of principal crops

in India 1989-90’, Directorate of Economics and Statistics, GoI;

the rest from `Economic Survey 1998-90’ and author’s estimates.

Naturally then, there is some interest in how agriculture has responded to the changes in the economic policy regime. In the Table are presented annual average compound growth rates in Indian agriculture for almost half a century. As is always the case when viewing data partitioned into sub-periods the trends that would emerge are related to the division adopted. Interestingly now, were we to start with the seventies, we would find that in the nineties there is a reversal of a rising trend of foodgrain production in the eighties (notice estimates 1’, 2’ & 3 in the Table). I am of course aware that this so called rising trend is partly a function of starting the analysis from the seventies. If we are to extend the analysis further back into the fifties, and also adopt a different partitioning of the time period since, the performance of the eighties tends to get obscured (notice estimates 1, 2 & 3), as it happens to our loss in much writing on the subject. One feature remains unchanged though, which is that either way, during the period associated with the economic reforms the picture of agricultural growth that emerges is as lacklustre as it is insufficiently widely acknowledged to be so. Nevertheless a slight nuance might be provided. This is that viewed from a longer term perspective, starting with the fifties, the economic reforms appear to have had no success in reversing the trend in Indian agricultural production which have been downward; on the other hand, viewed from a shorter perspective, starting the seventies, for the period of the reforms we witness a reversal of the buoyancy of the eighties. The at least temporary upturn of the eighties has got less attention than is necessary for an appreciation of what drives the growth process in agriculture.

            The decline in the rate of growth in the nineties must be viewed against the background of a significant development in the agricultural sector vis-à-vis the rest of the economy which draws our attention from two directions. On the one hand, being aware of this development alerts us to the likely success of the reforms in a certain sphere. On the other hand, viewed as part of a larger picture, it helps us evaluate Dr. Singh’s explanation of slow agricultural growth in India. The development I refer to is the quite dramatic shift in the relative price in favour of agriculture in recent years. If its slow growth is due to the disincentive to agriculture endemic to import-substituting industrialisation then the reforms since 1991 appear to have succeeded in rectifying the so-called `price distortion’. The data on movements in the relative price and in the average import tariff (available on request from the author) point to a likely improvement in the profitability of agricultural relative to industrial production co-terminus with the decline in the level of protection. It must, however, be borne in mind that this observation regarding an improved relative profitability of agriculture is based on the behaviour of the relative price and not on that of the terms-of-trade which are clearly the more accurate indicators of relative profitability. There is no getting away from the fact though that the movement in the relative price is in consonance with the implicitly predicted consequence of dismantling protection to industry. It remains to be established though that this has come about as envisaged, that is due to the lowering of protectionist barriers to trade in industrial goods; especially when procurement prices have been raised more in the nineties than in the preceding decade. For the present, however, we need to note that the relative price shift has not had the predicted effect on the rate of growth of agricultural production. Clearly agricultural growth is a function of more than farm prices.