Agricultural sector reforms and its impact on growth; issues of subsidies and public investment on agriculture, reforms and agrarian crisis

Indian Agriculture is the Mainstay of Indian Economy.Since independence, undergone a change from being the sector contributing the highest share to the GDP to one contributing the lowest share.Agriculture is a state subject.

GDP contribution (Agriculture and allied sector)
- 5 pc in 1950-51
- 7 pc in 2008-09 and 14.6 pc in 2009-10. It was 19 pc in 2004-05. (2004-05 prices)
- Agricultural GDP grew by 0.4 pc in 2009-10 and -0.1 pc in 2008-09.
Employment
- 9 pc in 1961
- 9 pc in 1999-2000
- 2 pc in 2008-09
- 1999-2000: Number at 237.8 million
GCF
- Share in total GCF 2009-10: 7.7 pc (2004-05 prices)
- GCF as % of agricultural GDP: 2007-08 – 16.3, 2008-09(P) – 19.67, 2009-10(QE) – 20.3
- GCF as % of total GDP: 2007-08 – 2.69, 2008-09P – 3.09, 2009-10QE – 2.97
Contributes to agricultural growth and industrial demand
Contributed 10.59 pc of total exports in 2009-10.
Due to the large number of workforce in this sector, the growth of agriculture is a necessary condition for inclusive growth.
Food grains production
- Highest in 2008-09: 234. 47 mn t
- 2009-10: 218.11 mn t

Agriculture and Industry

Agriculture as
- Supplier of wage goods to the industrial sector
- Provider of raw materials
- Consumer of agricultural capital goods produced by industry
Stagnation in agriculture
- Get data on CAGR

Land Reforms

Great scarcity and uneven distribution of land
Focus of agricultural policies in the initial years was on institutional changes through land reforms
Two objectives of land reforms in India
- To remove the impediments to agriculture that arise due to the character of agrarian structure in rural areas
- To reduce or eliminate the exploitation of tenants/small farmers
Four main areas of land reforms in India
- Abolition of intermediaries (zamindars)
- Tenancy reforms
- Land ceilings
- Consolidation of disparate land holdings
Economic arguments for land reforms
- Equity
- Small farms tend to be more productive than large farms
- Owner cultivated plots of land tend to be more productive that those under sharecropped tenancy
Abolition of zamindari was successful while the other three areas of land reforms met with limited success
Operation Bargha. Also, LR in Kerala
Regional trends in LR
Effect of land reforms
- On tenants
  - Absentee landlordism declined
  - Tenancy declined. In some cases, tenants were evacuated from the land.
  - In some cases there was a drift of tenants into landless
  - Where tenants had not been evicted, tenancy was pushed underground
- On equity
- On productivity
- On agrarian power relations
The National Commission on Farmers has placed the unfinished agenda in land reform first in its list of five factors central overcome an agrarian crisis
Way forwards
- Land reforms that make tenancy legal and give well defined rights to tenants, including women, are now necessary

Technology and Green Revolution

In the early 60s India faced several crises
- It had to fight two wars: Pakistan and China
- Severe drought in 1965 and 1966
- US was using PL-480 food supply as a means to twist India’s arms to meet US interests
This called for an overhaul of the agricultural strategy and the need to be self-sufficient in food production
Three phases of green revolution
- 1966-1972
- 1973-1980
- 1981-1990
1966-1972
- C Subramaniam and MSS
- 1965: Agricultural Prices Commission and Food Corporation of India set up
- Introduction of HYV seed of wheat from Mexico created by CIMMYT
- Under the new agricultural policy, the spread of HYVs was supported by public investments in fertilisers, power, irrigation and credit
- Food grain production shot up
  - 1966-67: 74 mt
  - 1971-72: 105 mt
- India became nearly self-sufficient in food grains
- What led to the increased production?
  - Favourable pricing policy led to adequate incentives
  - National research system proceeded to indigenise the new seeds to tackle their shortcomings
  - Availability of inputs including canal water, fertilisers, power and credit
  - Subsidies
  - Role of credit began to be important after 1969
- 1973-1980
  - This phase saw many challenges
  - Consecutive droughts in 1972-73
  - Oil shock
  - Production fell. Imports began again.
  - Thereafter, government increased fertiliser subsidies
  - Groundwater irrigation increased in importance
  - HYV technology extended from wheat to rice
- 1981-1990
  - 1986
    - Rice prod: 63.8 mt (1964: 37)
    - Wheat prod: 47 mt (1964: 12 mt)
  - Even when the ‘worst drought of the century’ struck in 1987, food needs could be adequately met due to buffer stocks
  - HYV technology spread eastward to states like West Bengal and Bihar
  - The impact of HYV technology had started to plateau however
  - Input subsidies kept on increasing
  - 1991: Input subsidy was 7.2 pc of agricultural GDP
- What was the impact of highly regulated policies on agriculture?
  - There were barriers on pricing, movement and private trading of agricultural produce
  - The external sector was burdened with various tariff and non-tariff barriers to agricultural trade flows
  - The overvalued rupee produced an anti-export environment for agriculture
  - High protection to industry produced high industrial prices and adverse terms of trade for agriculture, reducing the relative profitability of the primary sector
- What was the aim of agricultural pricing in pre-reform era?
  - Ensure inexpensive food for consumers
  - Protect farmers’ incomes from price fluctuations
  - Keep the balance of payments in check
- Agriculture in post-reform era
  - Impact: 1. Growth in PCI led to an increase in food demand and also diversification. Terms of trade between agricultural and industrial prices improved in favour of agriculture
  - Increased profitability has led to increase in private investments which are now double the public investment in agriculture.
  - Growth rates
    - 1980s: 3 pc
    - 1990s:
    - 2000s:
    - Tenth Plan: 2.47 pc (as against 7.77 pc of overall economic growth)
  - This has however not translated into reduction of poverty
  - There has been an increase in both urban and rural inequality
- Deceleration in agricultural growth
  - Declined during 90s
  - Deceleration in the growth of area, production and yield
  - Food production of Rabi crops has off late equalled the Kharif crops. This has to an extent reduced the over dependence on monsoon and imparted some stability to agricultural production
  - Area-wise, the deceleration was more in case of the Indo-Gangetic region
- The instability in agricultural growth is more in states with high percentage of rain-fed areas
- Acreage: declining trend in most crops during the period 1995-96 to 2004-05
- Productivity: sharp decline (1995-2005). Healthy performance of cotton and maize though

Major factors affecting growth potential

Lack of long term policy perspective
- No long term strategy for agricultural development
- National Agricultural Policy was announced only in the year 2000
- Sectoral priority to industry from the second FYP
- Weaknesses of policies followed for agricultural development
  - Policies provided little incentives for the farmers as the prices were depressed and the sector was disprotected vis a vis other sectors of the economy
  - Inward-looking policies
  - Excessive price based focus than non-price factors like water, infrastructure, R&D, extension services etc
- Investment in Agriculture and Subsidies
  - There have been cutbacks in agricultural investment and extension, but not in subsidies
  - Agricultural subsidy as pc of GDP:
  - Public investment in agriculture declined from 4 pc of agriculture GDP in 1976-1980 to
  - Subsidies on fertiliser, power and irrigation have contributed to soil degradation
  - It is important to reduce subsidies and increase public investment in crucial areas such as soil amelioration, watershed development, groundwater recharge, surface irrigation and other infrastructure
  - Public Sector GCF in agriculture stood at less than Rs 50 bn at 1993-94 prices
  - It is imperative to reduce these subsidies for stepping up public investment in agriculture
  - After 2003, the investments have started to increase. In 2006-07 public sector GCF was 3.7 pc of agricultural GDP and total GCF was 12.5 pc of agricultural GDP
  - Three areas should get priority in public investments
    - Rural roads
    - Electricity
    - Irrigation projects
    - <all three of them are under Bharat Nirman project>
  - Complimentarity between public and private sector capital formation in agricultural sector. Public sector can create infrastructure while the private investment is essential for short term asset building mainly in the areas of mechanisation, ground levelling, private irrigation etc
- Lagging research and development efforts
  - After the green revolution, there has been no major breakthrough in agricultural research. GM is a promising area but its safety has not yet been conclusively established.
  - Poor productivity in India compared to other countries and even compared to world average
  - India, however, has the largest public agricultural research establishment in the world. ICAR and agricultural universities
  - India spends only 0.3 pc of agricultural GDP for research as compared to 0.7 pc in other developing countries and 2-3 pc in case of developed countries.
  - There is hardly any scope for expansion of area. Hence, productivity must increase to keep up with the increasing demand. R&D has a lot of role to play here
  - New varieties of seeds need to be developed suited to different regions of the country
  - The research system should be responsive to the changing needs and circumstances
- Technology generation and dissemination
  - Fixed land. Hence technology
  - Focus on yield as well as sustainable use of land
  - Focus should be on specific requirements of each agro-climatic region
  - Ned to develop much stronger linkages between extension and farmers
- Rising soil degradation and over-exploitation of groundwater
  - Around 40 pc of Indian’s total geographical area are officially estimated as degraded
  - Soil health is deteriorating in Punjab and Haryana
- Degradation of natural resources
- Subsidies vis-a-vis investments and farm support systems
- Agriculture’s terms of trade and farm price volatility
  - Ensure rapid development of backward farm linkages
- Summary: Need to correct the policy bias against agriculture, make higher investments, develop new varieties of seeds, conserve natural resources like land and water and provide incentives to the farmers to adopt modernisation

Some Issues in Indian Agriculture

Low public investment
Halt in the modernization of agriculture
Agricultural indebtedness
Farmer suicides
Agricultural imports and future markets

Subsidies

Talk about bringing urea under the Nutrient Based Subsidy (NBS) system and decontrolling its prices
Downsides
- Fertilizer subsidy touched almost 1 lakh crore in 2008-09
- Promotes overuse of fertiliser and thereby catalysing soil degradation
- As a result, agricultural production in the bread baskets of the country has stagnated, posing a threat to the food security of the country
- Drylands do not receive the benefit of crores of subsidy given in fertilizers

Government Intitiatives

Green Revolution
National Policy on Agriculture, 2002
National Policy for Farmers, 2007
- Major policy provisions include provisions for asset reforms, water use efficiency, use of technology, inputs and services like soil health, good quality seeds, credit, support for women etc
- Focus on millets as well

Agriculture during the 11^th plan

Flagship schemes
- Rashtriya Krishi Vikas Yojana
- National Food Security Mission
- National Horticulture Mission (2005-06)
- Integrated Scheme of Pulses, Oilseeds and Maize
- Technology Mission for Integrated Development of Horticulture in North-east and Himalayan States (2001-02)
- National Mission for Sustainable Agriculture
- National Mission on Micro Irrigation was launched in 2010 in addition to the earlier Micro Irrigation Scheme launched in 2006
- National Bamboo Mission
Avg growth of 2.03 pc against the Plan target of 4 pc per annum.
For sustainable and inclusive growth
- Must focus on the small and marginal farmers as well as female farmers
- Group approach should be adopted so that they can reap economies of scale
- Bring technology to farmers
- Improving efficiency of investments
- Diversifying while also protecting food security concerns
- Fostering inclusiveness through a group approach
Irrigation
- Envisages creation of an additional potential of 16 mn ha
- Bharat Nirman aims to bring an additional 1 crore ha of land under irrigation by 2012
- Accelerated Irrigation Benefits Programme still on

Irrigation

45 pc of nearly 175 mn ha of cropped area is irrigated
Trends
- Nearly trebled from 24 mn ha in 1953-64 to 75 mn ha in 1998-99
- It accounts for the largest part of total investments in the agricultural sector
- Importance of ground water as an irrigation source has also increased considerably
Uneven access
- Inter-regional variance
- Inequality in access within the farming population
Areas of concern
- Depletion of ground water
- Environmental concerns
- Costs
Steps to take
- Improving water use efficiency
- Water governance
- Economic incentives for efficient use
Govt Schemes
- Accelerated Irrigation Benefits Programme was started during 1996-97. It extends assistance for the completion of incomplete irrigation schemes
In 11^th FYP – refer previous section

Way Forward

Second green revolution (?)
Relook at all the issues offering forward and backward linkages in the agricultural production cycle
Focus on oilseeds, pulses and coarse cereals
Coarse cereals: high nutrition, can be grown in dry areas, enhance fertility of soil in rotation
PDS should be reformed: coarse cereals should also be provided through PDS
Timely availability of credit at affordable costs
Wider extension of insurance facilities to the farm sector
Water and irrigation infrastructure
Drip irrigation
Organic manures should be popularized and their commercial production encouraged
Educate farmers about technology and agricultural techniques

Food Security

Food security should also incorporate nutritional security. This requires emphasising the increase in production of pulses, fruits, vegetables, poultry and meat.
Interpreted broadly
Includes nutritional security which particularly incorporates maternal health and infant health due to the involvement of the nutritional aspect
Also covers employment security (?)
Affordability, accessibility and availability
Food security seeks to address all the three dimensions of hunger: chronic, hidden and transient
It also is the first step towards inclusive development

Public Distribution System

High procurement prices

Irrigation

The total irrigation potential in the country has increased from 81.1 mn hectares in 1991-92 to 108.2 mn hectares in March 2010.
1996-97: Accelerated Irrigation Benefit Programme initiated
Reservoir Storage Capacity: 151.77 billion cubic metres

Agricultural Pricing

To ensure
- Remunerative prices to growers
- Encouraging higher investment and production
- Safeguard the interest of consumers by making sure that adequate supplies are available
It also seeks to evolve a balanced and integrated price structure in the perspective of the overall needs of the economy

Investment in Agriculture

FAO estimates that global agricultural production needs to grow 70 pc by 2050 in order to meet projected food demand
Hence investment should grow by a whopping 50 pc
In India, public investment in agriculture has witnessed a steady decline from the 6^th FYP onwards
Share of investment in agriculture has been between 8-10 pc
Most of this has gone into current expenditure in the form of increased output and input subsidies
Though private sector investment has been increasing, it has not proved to be enough
Decreased public spending in creation of supporting infrastructure in rural areas has discouraged private investment in this sector
Some of the measures could be
- Investment in general service like R&D, education, marketing and rural infrastructure
- Increased investment in rainfed areas
- Private sector participation
- Increased investment for sustainable development

WTO and Agriculture

Uruguay Round multilateral trade negotiations were concluded after 7 years of negotiation in December 1993
The WTO Agreement on Agriculture was one of the main agreements which was negotiated
Agreement on Agriculture contains provisions in three broad areas of agriculture
- Market Access
- Domestic Support
- Export Subsidies
Market Access
- This is the most important aspect of the negotiation because all countries restrict market access while only few have export subsidies and domestic support
- This includes tariffication, tariff reduction and access opportunities
- Tariffication means that all NTTBs should be withdrawn (such as quotas, minimum export prices etc)
- Adopts a single approach using a tiered formula
- Single approach: everyone except LDCs have to contribute by improving market access for all products
- Sensitive products: All countries can list some sensitive products and are allowed flexibility in the way these products are treated, although even sensitive products have to see ‘substantial improvements’ in market access.
- Special and differential treatment
  - Purpose: for rural development, food security and livelihood security
  - Specifically, special treatment is to be given to developing countries in ‘all elements of the negotiation’, including ‘lesser’ commitments in the formula and long implementation period
  - Special products: developing countries will be given additional flexibility for products that are specially important for their food security, livelihood security and rural development.
  - Special Safeguard Mechanisms: is intended to provide contingent protection to poor farmers in developing countries from negative shocks to import prices or from surges in imports. [Safeguards are contingency restrictions on imports taken temporarily to deal with special circumstances such as a sudden surge in imports. AoA has special provisions on safeguards. In agriculture safeguards, (unlike normal safeguards) can be triggered automatically when import volumes rise above a certain level or if prices fall below a certain level; and it is not necessary to demonstrate that serious injury is being caused to the domestic industry]
- AoA requires (from 1995)
  - 36% average reduction by developed countries, with a minimum per tariff line reduction of 15% over six years
  - 24% average reduction by developing countries with a minimum per tariff line reduction of 10% over ten years
- Domestic Support (subsidies)
  - AoA structures domestic support into three categories
    - Green Box
    - Amber Box
    - Blue Box
  - Green Box
    - Non (or minimal) trade distorting subsidies
    - They have to be government funded and must not involve price support
    - They tend to be programmes that are not targeted at particular products and include direct income supports for farmers that are not related to current production levels or prices. They also include environmental protection and regional developmental programmes. These subsidies are therefore allowed without limits
  - Amber Box
    - All domestic support measures considered production and trade fall into the amber box
    - These include measures to support prices, or subsidies directly related to production quantities
    - These supports are subject to limits which are allowed: 5% of total production for developed countries, 10% for developing countries
    - Reduction commitments are expressed in terms of a “Total Aggregate Measurement of Support” (Total AMS)
  - Blue Box
    - This is the “amber box with conditions” – conditions designed to reduce distortion
    - Any support that would normally be in the amber box, is placed in the blue box if the support also required farmers to limit production
    - At present there are no limits on spending on blue box subsidies.
  - Export subsidies
    - Developed countries are required to reduce their export subsidy by 36% (by value) or 21% (by volume) over the six years
    - For developing countries the % cuts are 24% (by value) or 14% (by volume) over 10 years
  - India’s commitment
    - As India was maintaining QRs due to balance of payments reasons (which is a GATT consistent measure), it did not have to undertake any commitments in regard to market access
  - In India, exporters of agricultural commodities do not get any direct subsidy. Indirect subsidies are given

Food Processing

Food processing is a large sector that covers activities such as agriculture, horticulture, plantation, animal husbandry and fisheries
Ministry of Food Processing indicated the following segments within the Food Processing industry:
- Dairy, fruits and vegetable processing
- Grain processing
- Meat and poultry processing
- Fisheries
- Consumer foods including packaged foods, beverages and packaged drinking water
Industry is large and has grown after 1991. However, of the country’s total agriculture and food produce, only 2 per cent is processed.
FP has 9% share in manufacturing
Structure
- 42 pc: Unorganised
- 33 pc: SSI
- 25 pc: Organised

Constraints & Drivers of Growth
Changing lifestyles, food habits, organized food retail and urbanization are the key factors for processed foods in India, these are post-liberalization trends and they give boost to the sector.
There has been a notable change in consumption pattern in India. Unlike earlier, now the share and growth rates for fruits, vegetables, meats and dairy have gone higher compared to cereals and pulses. Such a shift implies a need to diversify the food production base to match the changing consumption preferences.
Also in developed countries it has been observed that there has been a shift from carbohydrate staple to animal sources and sugar. Going by this pattern, in future, there will be demand for prepared meals, snack foods and convenience foods and further on the demand would shift towards functional, organic and diet foods.
Some of the key constraints identified by the food processing industry include:

Poor infrastructure in terms of cold storage, warehousing, etc
Inadequate quality control and testing infrastructure
Inefficient supply chain and involvement of middlemen
High transportation and inventory carrying cost
Affordability, cultural and regional preference of fresh food
High taxation
High packaging cost

In terms of policy support, the ministry of food processing has taken the following initiatives:

Formulation of the National Food Processing Policy
Complete de-licensing, excluding for alcoholic beverages
Declared as priority sector for lending in 1999
100% FDI on automatic route
Excise duty waived on fruits and vegetables processing from 2000 – 01
Income tax holiday for fruits and vegetables processing from 2004 – 05
Customs duty reduced on freezer van from 20% to 10% from 2005 – 06
Implementation of Fruit Products Order
Implementation of Meat Food Products Order
Enactment of FSS Bill 2005
Food Safety and Standards Bill, 2005
Mega Food Parks

Apart from these initiatives, the Centre has requested state Governments to undertake the following reforms:

Amendment to the APMC Act
Lowering of VAT rates
Declaring the industry as seasonal
Integrate the promotional structure

Plan Schemes

During the 10th Plan, the Ministry implemented Plan schemes for Technology Upgradation/Modernization/Establishment of Food Processing Industries, Infrastructure Development, Human Resource Development, Quality Assurance, R&D and other promotional activities.

In the 11^th Plan, it has been proposed to continue assistance to the above schemes with higher levels of assistance. In the 11^th Plan, the Ministry proposes to launch a revamped Infrastructure Scheme under which it will promote setting up of Mega Food Parks, cold chain infrastructure, value added centres and packaging centres. The Mega Food Park Scheme will provide backward and forward linkages as well as reliable and sustainable supply chain. The emphasis will be on building strong linkages with agriculture and horticulture, enhancing project implementation capabilities, increased involvement of private sector investments and support for creation of rural infrastructure to ensure a steady supply of good quality agri/horticulture produce. It will provide a mechanism to bring farmers, processors and retailers together and link agricultural production to the market so as to ensure maximization of value addition, minimize wastages and improve farmers’ income. The Mega Food Park would be a well-defined agri/horticultural-processing zone containing state of the art processing facilities with support infrastructure and well established supply chain. The primary objective of the proposed scheme is to facilitate establishment of integrated value chain, with processing at the core and supported by requisite forward and backward linkages. It is envisaged that the implementation of the projects would be assisted by professional Project Management Agencies (PMA) from concept to commissioning. In 11^th Plan it is planned to support establishment of thirty (30) Mega Food Parks in various parts of the country.

Vision 2015 on Food Processing Industries

A vision, strategy and action plan has also been finalized for giving boost to growth of food processing sector. The objective is to increase level of processing of perishable food from 6% to 20%, value addition from 20% to 35% and share in global food trade from 1.6% to 3%. The level of processing for fruits and vegetables is envisaged to increase from the present 2.2% to 10% and 15% in 2010 and 2015 respectively. The Cabinet has approved the integrated strategy for promotion of agri-business and vision, strategy and action plan for the Food Processing Sector, based on the recommendations made by the Group of Ministers (GOM).

Integrated Food Law

An Integrated Food Law, i.e. Food Safety and Standards Act, 2006 was notified on 24.8.2006. The Act enables in removing multiplicity of food laws and regulatory agencies and provide single window to food processing sector. Ministry of Health & Family Welfare has been designated as the nodal Ministry for administration and implementation of the Act.

National Institute of Food Technology Entrepreneurship & Management (NIFTEM)

The Ministry has set up a National Institute of Food technology Entrepreneurship & Management (NIFTEM) at Kundli (Haryana). The Institute will function as a knowledge centre in food processing. Certificate of Incorporation of NIFTEM as a section 25 Company under the Companies act 1956 has been obtained.

SWOT Analysis of Food–Processing Industry
Strengths

Abundant availability of raw material
Priority sector status for agro-processing given by the central Government
Vast network of manufacturing facilities all over the country
Vast domestic market

Weaknesses

Low availability of adequate infrastructural facilities
Lack of adequate quality control and testing methods as per international standards
Inefficient supply chain due to a large number of intermediaries
High requirement of working capital.
Inadequately developed linkages between R&D labs and industry.
Seasonality of raw material

Opportunities

Large crop and material base offering a vast potential for agro processing activities
Setting of SEZ/AEZ and food parks for providing added incentive to develop greenfield projects
Rising income levels and changing consumption patterns
Favourable demographic profile and changing lifestyles
Integration of development in contemporary technologies such as electronics, material science, bio-technology etc. offer vast scope for rapid improvement and progress
Opening of global markets

Threats

Affordability and cultural preferences of fresh food
High inventory carrying cost
High taxation
High packaging cost

Subsidies

Fertilizer Policy: Urea is the only fertilizer under statutory price control. Government of India has introduced nutrient based subsidy with effect from 1st April, 2010 in respect of phosphatic and potassic fertilizers. Under the policy, subsidy is based on the nutrient (N,P,K and S) content of the decontrolled P and K fertilizers. Price of Urea has been increased by 10% while price of other subsidized fertilizers are being maintained around current levels. Additional subsidy on micronutrients has been introduced on Boron and Zinc, to begin with. In order to promote the concept of balanced use of fertilizers and to encourage use of micronutrients, several fertilizers fortifed with Boron and Zinc have been incorporated in the Fertilizer (Control) Order, 1985.

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