Prime Minister Narendra Modi’s exhortation ‘Make in India’ would appear to make perfect sense till we realise that when he speaks of the making he has manufactures in mind. But could it be that his somewhat exclusive focus on manufacturing may come a cropper if we do not ensure that our agriculture is placed permanently on a sound footing? The history of the great manufacturing nations that the PM has been visiting suggests that. So does recent experience here.
It would of course be politically correct to speak of the importance of agriculture at this point when farmer suicides have been in the news. Actually, though, the economy has been signaling for some time that all is not well with the sector. Note that I say ‘economy’ and am therefore not referring to agriculture alone. This is because the performance of agriculture has an implication for a population wider than that contained by it. At least for five years food-price increases have driven economy-wide inflation, conveying a bottleneck of some kind. That the food-price inflation has persisted suggests that a structural factor is likely at work. The market mechanism can in principle eliminate inflationary pressure emanating from any particular shortage by encouraging the expansion of the sector now made attractive by the increased profitability. That this is not happening with respect to India’s food sector points to structural impediments in place, ones that the market cannot eliminate.
Food-price inflation has consequences for more than just the economy-wide inflation rate. It can even impact the part of the economy close to our PM’s heart, namely manufacturing. This is evident from the news report that while the inflation rate is at a four-month low the index of industrial production is at a five-month one (The Hindu, May 13). There is a plausible explanation for this. Food price inflation can crowd-out household expenditure on manufactures, leading to declining investment and thus demand for capital goods. Higher inflation also leads to real exchange-rate appreciation, rendering exports uncompetitive. So in many ways, a vibrant manufacturing sector requires a sound agricultural base, one that is not generating continuous inflationary pressure.
The agrarian crisis in the country partly reflects the structural element in the problem of expanding agricultural production. It has two implications for economic policy as it has been practiced so far. The first may appear somewhat negative but it is no less valuable for that. This is the message that if the production conditions are the constraint, then, trying to tackle the agrarian crisis by raising the procurement price – as has been proposed – is tantamount to no more than feeding inflation. This fact the UPA 2 had discovered through bitter experience. Apart from the fact that support prices are mostly confined to cereals, and the price rise is happening elsewhere, producers in India’s non-agricultural sector are not going to be mere spectators in the reduction in their real income. They constitute 80 percent of the economy, and are likely to raise the price of their outputs to compensate for its reduction. Now not only is the original rise in the procurement price now generalised across the economy, but also it will connect the inflation rate over time. For, the price would have to be raised again in the next round to restore parity with non-agricultural prices. Thus trying to shift the advantage towards the farmers by raising support prices cannot normally succeed. To both improve the lot of farmers, and for the rest of the economy to reap the benefits of such a move, the yield of land must be raised continuously. This would require non-price interventions. Mr. Modi cannot be ignorant of these as they constitute what must count as governance, and during the election he had promised to maximize it. So, what are the areas within agriculture that require better governance? First and foremost there is irrigation. Secondly there is the issue of land policy.
Expanding irrigation has been the bugbear of governments in India. While estimates vary, we know for sure that the share of irrigated land in total cropped area is low. Increasing this share is vital as we know that assured availability of water can overcome some of the disadvantages of small farm size. Some years ago the Economic Advisory Council to the PM made the observation that though the average holding size in much of East Asia was smaller than that in India the share of irrigated land was much higher in the former. This accounts for the fact that these economies enjoy far greater food security that India does, and must have some bearing on their being world-class manufacturing nations. However, while the slow growth of irrigated area may be a cause of the tardy expansion of food production in India it has less to do with funding than with governance. In a study published by the RBI in 2008, Ramesh Golait, Pankaj Kumar and I have shown that public expenditure on irrigation and flood control has gone up by over 100 percent in real terms since 1991, with precious little to show for it on the ground. Low spending cannot account for the glacial spread of irrigation capacity in the country. Equally, it is disingenuous to be suggesting that land acquisition is vital for irrigation projects. Actually in the early decades after 1947 much of the acquisition of farm land was ostensibly for irrigation and flood control. To see public expenditure on irrigation fructify we would need governance encompassing conception, construction, supply and maintenance. It is not clear that farmers are part of the process right now, even as it would be wise to include them, for as potential users they have a stake in the success of the project. Politicians tend to showcase high expenditure on irrigation, and have succeeded in turning such expenditure into a sacred cow so that querying outcomes is to be “anti-farmer”.
The second governance issue in agriculture has to do with land-use policy. The pressure of population has led to fragmentation of many farms to a level below economic size. Sizeable investment is now made difficult. Furthermore, at low output levels any adverse fluctuation drives the farmer into poverty and debt, from which recovery is impossible without assistance. There is a strong case for the prevention of further fragmentation of land by appropriate legislation. At the same time legislation must also allow for tenancy which is illegal in many parts of India. In fact the state should facilitate tenancy on reasonable terms so that the necessary yield increase is not held back due to the uneconomic size of land holdings. Another issue that a land use policy has to urgently address is the alienation of agricultural land. There is a strong case for disallowing the conversion of agricultural land except in the rarest of rare cases. In fact, the proposed Social Impact Assessment is perhaps too narrowly conceived. It tends to privilege the rights of those deriving a livelihood from the land in question. Actually, there is the question of the greater common good, from which point of view food security for the nation as a whole emerges as salient. Given the imponderables, especially, due to climate change, and the fact that grain production per capita is far lower here than in the developed world, an embargo on conversion, whether undertaken by government or owners makes much sense.
While there is no need for Mr. Modi to put his enthusiasm for manufacturing on hold, he should seriously and urgently address the long-term prospects for our agriculture. His governance skills are finally on show.