Reforms in Agriculture

A common criticism of India's economic reforms is that they have been excessively focused on industrial and trade policy, neglecting agriculture that provides the livelihood of 60 percent of the population. Critics point to the deceleration in agricultural growth in the second half of the 1990s as proof of this neglect. However, the notion that trade policy changes have not helped agriculture is clearly a misconception. The reduction of protection to industry, and the accompanying depreciation in the exchange rate, has tilted relative prices in favor of agriculture and helped agricultural exports. The index of agricultural prices relative to manufactured products has increased by almost 30 percent in the past ten years. The share of India's agricultural exports in world exports of the same commodities increased from 1.1 percent in 1990 to 1.9 percent in 1999, whereas it had declined in the ten years before the reforms. But while agriculture has benefited from trade policy changes, it has suffered in other respects, most notably from the decline in public investment in areas critical for agricultural growth, such as irrigation and drainage, soil conservation and water management systems and rural roads. As pointed out by Gulati and Bathla (2001), this decline began much before the reforms and was actually sharper in the 1980s than in the 1990s. They also point out that while public investment declined, this was more than offset by a rise in private investment in agriculture, which accelerated after the reforms. However, there is no doubt that investment in agriculture-related infrastructure is critical for achieving higher productivity, and this investment is only likely to come from the public sector. Indeed, the rising trend in private investment in agriculture could easily be dampened if public investment in these critical areas is not increased.

The main reason why public investment in rural infrastructure has declined is the deterioration in the fiscal position of the state governments and the tendency for politically popular but inefficient and even inequitable subsidies to crowd out more productive investment. For example, the direct benefit of subsidizing fertilizer and under pricing water and power goes mainly to fertilizer producers and high-income farmers while having negative effects on the environment and production, and even on income of small farmers. A phased increase in fertilizer prices and imposition of economically rational user charges for irrigation and electricity could raise resources to finance investment in rural infrastructure, benefiting both growth and equity. Competitive populism makes it politically difficult to restructure subsidies in this way, but there is also no alternative solution in sight.

Some of the policies that were crucial in promoting food grain production in earlier years, when this was the prime objective, are now hindering agricultural diversification. Government price support levels for food grains, such as wheat, are supposed to be set on the basis of the recommendations of the Commission on Agricultural Costs and Prices, a technical body that is expected to calibrate price support to reasonable levels. In recent years, support prices have been fixed at much higher levels, encouraging overproduction. Indeed, public food grain stocks reached 58 million tons on January 1, 2002, against a norm of around 17 million tons! The support price system clearly needs to be better aligned to market demand if farmers are to be encouraged to shift from food grain production toward other products. Agricultural diversification also calls for radical changes in some outdated laws. The Essential Commodities Act, which empowers state governments to impose restrictions on movement of agricultural products across state and sometimes even district boundaries and to limit the maximum stocks wholesalers and retailers can carry for certain commodities, was designed to prevent exploitative traders from diverting local supplies to other areas of scarcity or from hoarding supplies to raise prices. Its consequence is that farmers and consumers are denied the benefit of an integrated national market. It also prevents the development of modern trading companies, which have a key role to play in the next stage of agricultural diversification. The government has recognized the need for change and recently re- moved certain products-including wheat, rice, coarse grains, edible oil, oilseeds and sugar-from the purview of the act. However, this step may not suffice, since state governments may be able to take similar action. What is needed is a repeal of the existing act and central legislation that would make it illegal for government authorities at any level to restrict movement or stocking of agricultural products.

The report of the Task Force on Employment has made comprehensive proposals for review of several other outdated agricultural laws (Planning Commis- sion, 2001b). For example, laws designed to protect land tenants, undoubtedly an important objective, end up discouraging marginal farmers from leasing out non- viable holdings to larger farmers for fear of being unable to reclaim the land from the tenant. The Agricultural Produce Marketing Acts in various states compel traders to buy agricultural produce only in regulated markets, making it difficult for commercial traders to enter into contractual relationships with farmers. Develop- ment of a modern food processing sector, which is essential to the next stage of agricultural development, is also hampered by outdated and often contradictory laws and regulations. These and other outdated laws need to be changed if the logic of liberalization is to be extended to agriculture.