Coming on top of cost increases of a higher degree than before and lower risk-bearing capacity on the part of farmers consequent to reduced public non-price support to agriculture, the opening up of the sector to international trade has further added to the uncertainties in the field.
PROBLEMS of the Indian agricultural sector, and of farmers, are suddenly in the news again, attracting political attention. Over the past decade or so, this sector has been relatively ignored in most economic discussion, which concentrated on "reforms" i n trade, finance and industry and on the potential of the "new economy". Input subsidies to agriculture (on power, irrigation and fertilizers) were to be reduced as part of the reforms, in order to discourage environmentally unsustainable practices and t o make more resources available for increased direct public investment in agricultural infrastructure. But efforts to rationalise input prices were slow, and public investment and agricultural research have suffered over the last decade.
Nonetheless, there has so far been an air of quiet optimism regarding agriculture among those who make economic policy. This was in part because of the sequence of normal monsoons since 1988. But, in addition, there was an implicit assumption that agricu lture was benefiting indirectly from reforms elsewhere, and could take care of itself. Since many economists believed that India's comparative advantage lay in agriculture, this sector was expected to be the biggest gainer from more open international tr ade.
Increased industrial competition and reduced protection were expected to improve terms of trade of agriculture, and further benefits in this direction were expected to follow from the Agreement on Agriculture in the World Trade Organisation (WTO) which m andated subsidy cuts in developed countries.
"Get prices right" was the mantra offered against state involvement in investment, input supply and produce purchase. At the same time, greater reliance on free markets was expected to deliver higher incomes and greater efficiency to the farm sect or while enabling subsidies to be reduced. A crucial part of the reforms strategy was, therefore, to increase agricultural prices and so to end the "negative subsidies" which can result if there is a lower level of import protection to agriculture than t o industry. This was sought to be achieved both by allowing freer trade and by offering higher support prices. Indeed, an emphasis on prices, to the relative exclusion of non-price intervention, has perhaps been the defining feature of the policy approac h to agriculture in the post-reform period.
It is ironic, therefore, that now that there is again a perception of crisis in agriculture, this is being expressed mainly in terms of unremunerative agricultural prices. Prices of several agricultural commodities have declined over the last two years, often below pre-announced minimum support levels. Large stocks have built up of several commodities, for example, wheat, rice and sugar, because surpluses cannot be exported profitably at current world prices. And concern is being voiced about imports, n ot only in the case of edible oils, where the self-sufficiency ratio has fallen from over 90 per cent to less than 60 per cent over the last five years, but also of livestock and horticultural produce.
With farmers affected adversely in almost every part of the country, there is mounting apprehension about what may follow the dismantling of quota restrictions, due in April as part of India's commitment to the WTO. In particular, during the last session of Parliament, the role of WTO discipline was highlighted by many members who expressed concern over the low prices received this year by farmers who meanwhile had to pay out higher prices for diesel and fertilizer. Besides the apprehension regarding a possible import surge, concern was expressed about reduction in input subsidies and there was talk again of "negative subsidies".
It is true that some of these concerns may be exaggerated or misplaced. For example, although agricultural prices have weakened in the last two years, this is from relatively high levels. The index of the terms of trade of agriculture (which takes into a ccount not only prices received by farmers but also prices paid) was actually much more favourable during the 1990s than in the earlier decade, and in 1998-99 had reached its highest level since 1974-75. There has been a decline since, but even so the te rms of trade during the last two years have continued to be amongst the highest in the last 25 years.
Similarly, higher imports and lower exports of agricultural goods in recent years are from a high base, with net exports of these commodities having more than doubled between 1992 and 1997. Moreover, although there was a subsequent spurt in agricultural imports, this has actually abated somewhat during the current financial year following sharp increases in import duties across a range of agricultural goods last year.
There is no doubt that import protection on items such as edible oils and sugar was reduced sharply in the mid-1990s when world prices were high, and the subsequent readjustment to the changed world market situation was slow and probably at a lesser pace than what was desirable and permissible under the WTO. But contrary to current perceptions, the effective protection to agricultural products is now much higher than earlier, with most agricultural imports currently attracting duty rates significantly i n excess of the 35 per cent maximum on industrial products, in contrast to the past when industry was afforded much greater protection than agriculture. Talk of "negative protection" as an explanation for the current difficulties of Indian farmers is a h angover from the past, totally inappropriate to the present situation.
NONETHELESS, there are undoubtedly some real signs of crisis in the agricultural situation today which require to be understood and addressed. Some of these stem from too optimistic an earlier assessment of the benefits of international trade and of the WTO. But others have much more to do with the domestic policy environment regarding investment, technology and the stability of incentives. As mentioned earlier, the post-reform perspective on agricultural policy emphasised price incentives over non-pric e intervention. This did lead to improved terms of trade and, as expected, private investment in agriculture also increased in response.
However, public investment in infrastructure and in agricultural research and extension was relatively neglected, and these came under increasing pressure from the deteriorating fiscal health of State governments. So, during the 1990s, there was higher p rivate investment but in a context of lower public sector non-price intervention and investment, not only in agriculture but also in related rural infrastructure.
The net, longer-term result of this has been a marked slowdown, post-1990, in the rate of growth of the yields per hectare of most crops, despite the higher private investment. This has happened partly because of a slowing down in the rate of release of new yield raising varieties from research institutes and partly because the spread of existing high-yield varieties to low-yield regions has also slowed down because of inadequate development of infrastructure. Since the cost of production per unit of cr op output shows a strong inverse relationship with changes in the yield per hectare, this outcome has caused production costs to increase more rapidly than earlier, requiring higher output price increases to maintain the net returns from farming.
MOREOVER, certain other developments have added to the risks of farming. An otherwise welcome feature during the 1990s was a marked diversification of Indian agriculture, particularly in southern and western India, towards new crops in response to changi ng patterns of demand. But although this offered the promise of higher returns and encouraged new investment, it led farmers to bear more risk because of lack of experience and inadequate market facilities.
Thus, the early 1990s saw spurts of new horticultural plantings and also a spread of cash crops (such as cotton and oilseeds) to new areas in response to improved price incentives. But in many cases such diversification efforts could not be sustained sin ce there was no corresponding increase in institutional support for marketing and finance to help farmers bear the increased risk.
In fact, for many farmers the ability to take risks may actually have declined over the last decade. The traditional way in which farm families have coped with unexpected adversities is through recourse to borrowing and/or by diversifying at least tempor arily to non-agricultural activity. But on both these fronts, the situation worsened during the post-reform period.
The institutional rural credit system which had expanded rapidly during the 1970s and 1980s suffered a setback because of debt write-offs in the late 1080s and it has since entered a phase of contraction because financial sector reforms have effectively discouraged the banking sector from rural lending.
Also, perhaps the most depressing feature of rural well-being in recent years has been a reversal in the growth of non-farm opportunities in rural India. According to the National Sample Survey, rural non-agricultural employment, which had almost doubled between 1977 and 1989, has declined since then. Both these outcomes were, at least in part, the result of public policy reversals which were inherent in the reform agenda: in areas of social banking and public employment creation.
IN this background of higher cost increases and lower risk-bearing capacity consequent to reduced public non-price support to agriculture, the opening up of the sector to international trade further increased the sources of uncertainty. Prior to the refo rms, there was much expectation from research which had shown that India had definite comparative advantage in a number of staple crops, such as paddy and cotton, in the case of which domestic prices were then much lower than international prices. Howeve r, while trade in these crops was opened up and support prices were suitably revised upwards, less attention was given to the implications of other research which had shown that international prices were also much more volatile. Instead, much hope was re posed in the outcome of the WTO agreement, which was expected to increase world prices further and also lead to greater price stability.
In the event, developments since the signing of this agreement have belied all earlier expectations, mainly because the developed countries managed to preserve almost all the distortions in international agricultural trade that suited them. World agricul tural prices did increase for two years after the agreement was signed in 1994, but have spiralled downwards after 1996. In large part, it is these wild swings in international prices which are the source of the present distress of Indian farmers. Unaccu stomed to the vagaries of world commodity markets, and with reduced ability to cope with such risks, many farmers have been unable to meet obligations which were optimistically built up during years when prices were high.
Most damagingly, policy-makers too were unable to cope effectively with the consequences of international price volatility. Import duties which had been reduced when world prices were high were increased only after considerable lag after these fell, and, in some cases, for example in the case of edible oils, the increased duties have been unable to neutralise the fall in world prices. On the other hand, minimum support price (MSP) for commodities such as wheat and rice was increased sharply when world p rices increased and continued to ratchet up from these levels even when world prices came down. These policy rigidities were, moreover, influenced by the political strength of different farm lobbies, so that inter-crop price parities altered sharply with out any necessary reference to either relative domestic costs of production or to relative world prices.
In particular, the generous MSP policy for wheat and rice resulted not only in much more procurement than necessary but also in a much sharper increase in their market prices than for most other agricultural commodities. Since cereals make up a considera ble part of the consumption bundle of agricultural labourers, this not only disadvantaged such workers but also resulted in upward wage pressure. This further increased the cost of production of farmers growing non-cereals crops, such as oilseeds. Such f armers have thus faced a double disadvantage of lower prices and higher costs in the last couple of years, leading to the further anomaly that area has shifted from oilseeds to cereals even as the country is simultaneously importing large quantities of e dible oils even as cereal stocks have reached unmanageable levels.
These inconsistencies in price policy in the face of a continued depression in world prices have been compounded because budgetary orthodoxy has prevented both a reduction in issue prices of cereals through fair price shops and a substantial increase in the allocation for food-for-work programmes. Consequently, the country is saddled with huge stocks of grain at a time when there is visible distress in the countryside and when the real need of the agricultural sector is for a massive programme of rural infrastructure development which could be financed substantially by the productive release of these stocks. Instead, the high stocks now threaten the orderly conduct of further price support operations even in those regions which have so far managed to a void undue price uncertainty because of the effective presence of support agencies.
THE immediate problem to be addressed therefore is how to provide more effective measures to stabilise incomes and prices and strengthen farmers' ability to bear greater risks. In a closed economy, prices and output tend to move in opposite directions, w ith higher prices mitigating incomes at times of output decline. But such automatic mitigation is much less in an open economy since world price movements can depress domestic prices even at times of low production. In the 25 years before 1995-96, there were only three years when the terms of trade had declined simultaneously with a drop in the index of agricultural production. But since 1995-96, the indices of terms of trade and of agricultural production have moved in the same direction every year, an d the current year is likely to be the fourth (out of the six years since) when there has been a coincidence of lower output and lower prices.
This heightened income uncertainty, rather than low prices per se, appears to be the main cause of today's distress among farmers since, as already mentioned, the terms of trade have throughout these recent years been amongst the highest in the la st quarter century. In addition, of course, there is the problem of skewed inter-crop parities and the uneven presence of support agencies, which has meant that certain crops and certain regions bear a disproportionate burden of the resulting distress.
Clearly, the time has passed when it was fashionable to think that most problems of Indian agriculture could be solved simply by concentrating on "getting prices right" by linking more closely to international markets. Instead, it is necessary now to thi nk seriously about how to use countercyclical tariff changes to mitigate imported price uncertainty and how to coordinate domestic price policy to policies in international trade so that the two reinforce each other rather than work at cross-purposes. It is also necessary to revitalise rural finance so that farmers can better cope with the risk. Moreover, it is time to consider the possibilities of new instruments of risk management that can be accessed by farmers and by agricultural trade. In some of t hese tasks there is the potential to use in favour of agriculture the growing strength of India's financial and information technology sectors. But ultimately the initiatives must be taken by the government.
Most important, it should be realised that the present situation of high stocks and perception of low prices is not a result of too much production. Agricultural growth has slowed down since 1990, and foodgrain production has barely kept pace with popula tion growth. The underlying malaise is a fall in the growth of rural incomes. In this situation, relying on markets alone will neither deliver the requisite demand for agricultural commodities today nor the incentives for further growth.
The real potential market for Indian farmers is not abroad, nor even among the urban rich, but among the masses in the countryside. The task is to imbue them with purchasing power, while using their energies to strengthen the productive base. In this, no thing substantial will happen unless resources flow towards regions with potential and in need, rather than to those who are already better off and can mount the most effective political pressure. In sum, the state must once again take the lead in all ne cessary areas of non-price intervention, especially infrastructure creation and the dissemination of knowledge.
Abhijit Sen is Professor of Economics, Jawaharlal Nehru University, New Delhi. Until recently he was chairman of the Commission on Agricultural Costs and Prices (CACP), which was previously known as the Agricultural Prices Commission.