Economic Highlights

New Delhi, 17 April 2008

Growing Inflation

GET SERIOUS ABOUT AGRICULTURE

By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

Last week the government went into a tizzy as inflations rose over seven per cent. In a knee-jerk reaction Finance Minister Chidambaram said that if necessary he would not mind sacrificing growth for the sake of controlling inflation. Well, as a politician, he may have his compulsions, but as an economist he should know that inflation occurs when there is a mismatch between demand and supply. The wider the gap between demand and supply, especially of essential commodities like grain, edible oil, fuel etc., the more severe the rate of inflation will be. 

It is also well-known that in the short term, inflation can be tackled by augmenting the supply of goods in short supply by importing or by acting against hoarders. However, if international prices are higher than the domestic prices, then imports will certainly not work. The imported goods will in fact, further push up the prices, unless of course the Government is willing to subsidise heavily.

This leaves us with only long term measures to augment the supply of essential goods on a sustainable basis to tackle inflation.  Since there is a severe mismatch in the demand and supply of agro-based products like grain, edible oil, pulses etc., we need pay serious attention to the agricultural sector.  Its neglect can impose heavy costs on the country in future both in terms of inflation as well as growth.

In a report, “Re-energizing the Agricultural Sector to Sustain Growth and Reduce Poverty” (2005), the World Bank states: “Agriculture will remain the mainstay for a large share of the rural population in the next decade, many of which also comprise the rural poor. Promoting more rapid agricultural growth, particularly achieving the government goal of  four per cent growth per year not only exclusively during the 10th Plan period but for the medium to long term, will be extremely crucial not only to achieving strong economic performance for the country as a whole, but also in lifting large numbers of agricultural households above poverty.”

Independent studies too have pointed out that the situation will not remain the same by 2020 unless we attend to the agricultural sector now. In a study prepared for the International Food Policy Research Institute it has been said that if food productivity continues to decline the demand for cereals will exceed domestic production by 23 million metric tonnes by 2020.  By then India will be a net importer of food grain to feed its people. Thus, it is time for us to start serious thinking about our agricultural sector.

It is common knowledge that till date there is no agricultural policy worth its name in this country.  Successive governments have failed to lay down any sensible agricultural policy.  It is also a fact that the rich landlord lobby in every political party has ensured that the national agricultural policy does not go beyond fixing procurement prices and paying them subsidies.

If we have to achieve a reasonable growth of the agricultural sector, then we must take reforms in the agricultural sector more seriously and ensure their implementation. As per the data from UN Food and Agricultural Organization, India is the second largest producer of wheat, rice and corn in the world, after China. However, productivity of Indian agriculture is very low, while on the other hand, China has only seven per cent of the world’s arable land but is able to feed its population. Thus, we have to pay attention to the per-hectare productivity, which is very low by world standards.

For instance, Egypt recorded the highest yield of 89 quintals per hectare for rice, while England recorded the highest yield of over 80 quintals per hectare for wheat. China recorded the average yield of 63 quintals for rice and 40 quintals for wheat. As against this, India’s average annual yield of rice is 29.3 quintals per hectare and that of wheat 25.8 quintals.

However, one disturbing feature of India’s agricultural sector is that public investments in this sector have been declining steadily in absolute terms and as a share of total investments, since the mid 80s. As pointed out by the World Bank, the decline has serious implications for the (agricultural) sector’s longer term growth prospect. One estimate shows that 10 per cent decrease in public investments (including irrigation and power) leads to 2.4 per cent reduction in agricultural GDP growth. One of the reasons in decline in public investments in the agricultural sector has been the growing subsidy requirements.

Again, according to one estimate, in the year 1999-2000 public investments amounted to only about 14 per cent of agricultural subsidies (including food grains, fertilizer, canal irrigation and power subsidies). Fertilizer alone takes a very large chunk of the total subsidy. Between 1981-82 and 1999-2000 the total subsidy increased from Rs. 15.6 billion to Rs.83.3 billion. It is estimated that subsidy share of the farmer was 67 per cent, whereas that of the industry was about 33 per cent.

One of the consequences of this subsidy on fertilizer has been that it has led to distortion of input use, leading to nutrient imbalances in the soil and ground water contamination in many areas.  Similarly, subsidies on crops are also distorting the production structure of crops. Anyhow, one thing is clear-- subsidy cannot lead to increase in productivity.

Productivity, however, can be easily increased by developing newer varieties.  We will need to put in all our efforts to develop high-yielding varieties of different kinds of agricultural products, which can go well with the weather conditions in India; and such a research will need to be extended to allied activities like animal husbandry, fishing and plantation. But the bureaucratic environment that exists in our agricultural research institutes is regrettably not conducive to research that is needed for the development of high-yielding varieties of crops or milch animals. 

The number of suicides we have had in the past at the ICAR shows how callous we are towards the agricultural research scientists. Therefore, as a first step, we must revamp the setup of our agricultural research institutes and agricultural universities and fix some goals for the development of high yielding strains of food crops, edible oil seeds, sugarcane etc.

Pending development of our own high-yielding strains, we should make best use of high-yielding seeds of various crops that are available in the international market.  If the seeds, being sold by the multi-national companies can substantially raise the agricultural productivity per hectare, why should not the country go in for them, even if they are expensive?  The use of such seeds would also increase the earnings of our farmers.  What the agricultural research institutes can do is help identify the seeds being sold by MNCs which would be more suitable to Indian climatic and soil conditions and would yield the maximum produce per hectare.

The country also needs to pay attention to the irrigation system.  Sixty years since Independence our agriculture is still dependent on rainfall and a shortfall during any year can severely upset our crop targets. Besides, whatever water we have for the agricultural sector, most of it goes waste because of mismanagement.  A large number of countries have gone in for drip irrigation system, which for the moment is said to be the best irrigation system for a number of crops.  Therefore, we need to rethink our irrigation policy--either develop our own system or scout for one available in other countries and if possible buy the technology outright and implement it.

In our country, the development of agriculture has been uneven. Some States such as Punjab and Haryana have gone through the phase of green revolution, while Orissa and Bihar are yet to experience it.  The plus point is that we have still a vast untapped potential for the development of agriculture in the country.  Instead of having an all-India agricultural strategy, it may be more meaningful to have a State specific agricultural strategy within an overall general national agricultural strategy. This would help because the specific local, cultural, social and economic factors could be taken into account for the rapid development of the agricultural sector.

In sum, we have to reduce our dependence on rain, increase area under irrigation, develop and use high-yielding varieties of seeds and other modern inputs on a largescale to achieve surplus in almost every agricultural product. In short: we need a holistic approach. --INFA

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