Golden yields - Focusing on agriculture alone will not improve farm incomes
The recent budget talked about the government's plan to double farm incomes in the next five years. This will be done through investments in rural infrastructure, especially irrigation. About 50 per cent of land under foodgrain production in India is irrigated. This means that half of the foodgrain producing land in India faces weather uncertainties and, hence, those working on them face annual (seasonal) variations in income. These variations could be huge - from bumper harvests to complete wipe-outs if there is a flood or drought. Irrigation will at least mitigate the effects of a drought. Floods, however, can wreak havoc on both irrigated and unirrigated lands. The best interpretation of the government's promise, therefore, is one of doubling, in five years' time, the income earned by the farmer in a normal year.
The Indian landmass has been historically described as highly fertile. However, if we are to compare India's land productivity with that of other countries, the picture is quite dismal. India ranks 27 in rice yield, behind Brazil and China and 19 in wheat yield, behind China and South Africa. There is, thus, a lot of scope in improving Indian yields; indeed, if India could reach Chinese yield rates, we need only half of the current land devoted to rice to produce what we are producing now. Irrigation will certainly go a long way in getting us there.
However, public irrigation alone will not work. It also needs other inputs like fertilizers, seeds, labour and farm equipment. Farmers would also need better storage and marketing systems to move the produce off the farm and get the farmers sufficient value for their crops. All of these are costly and the farmers will need to have access to, and be able to afford the costs of, these complementary inputs. The recent budget does mention these though it is not clear how these would be addressed. The budget does talk of a uniform and modified Agricultural Produce Marketing Committee Act that states will be encouraged to pass. Such an act has been in the offing for quite some time now but, like the goods and services tax, all the states are not yet on board.
If the problem was simply a technological and marketing issue, and the government over the next few years delivered on its commitment, the budget promise could materialize. Unfortunately, focusing on agriculture alone may actually reduce, rather than increase, farmer incomes. Increasing agricultural output will lead to a fall in prices. This fall in prices is often more than the increase in yield, leading to a fall in the revenue (price times quantity) and hence, income, to the farmer. This is especially true for foodgrains which suffer from what economists refer to as inelastic demand.
This can be arrested somewhat by introducing minimum support prices for each type of crop. For the MSP to be effective, it has to be above the market price. The government will then procure at the MSP but release the produce to the market at a lower price. This will mean an increased subsidy bill. The MSP also has the added problem of distorting crop choice on land. This is evident in the falling water table experiences of Punjab which has become a major paddy producing area though it is, traditionally, not a paddy-producing region.
Earlier, we stated that if India reaches China's yield rates, we will need only half the land that we now devote to rice in India. If the farmers on the other half of the land did not produce any rice, then the income of those continuing to produce rice, on land with China's yield rates, will indeed double. Herein lies the crux of the solution the government needs to work out to double farm incomes. We need to reduce the number of farmers, the amount of land cultivated and the number of landless labourers working in agriculture. The latest census tells us that more than 55 per cent of workers are either cultivators or agricultural labourers (sometimes both). Coupled with the observation that agriculture and allied activities (which is more than farming) contribute 17 per cent to the gross domestic product, it is not very difficult to understand why agriculturalists as a class are at the bottom of the heap in India.
For those whose full-time economic activity is in agriculture, the most important asset is land. Ambedkar, writing as far back as 1918, had warned us of dire consequences if people were not taken out of agriculture. At that time, the British were held responsible for India's deindustrialization and forcing people back on to the land. Since land was the only valuable asset for a large proportion of the population, it was also the most important inheritance. Ambedkar was worried that, unless succeeding generations had other economic activities to turn to, land would continue to get sub-divided and fragmented and the farmers' lot would go from bad to worse with the passage of time. During Ambedkar's time, 71 per cent of the Indian population was in agriculture but many European countries also had more than 50 per cent of the population similarly occupied.
If we are to assume that all households had the same size (number of members) and the same number of workers, then 71 per cent of the population will mean that 71 per cent of the workers were involved in agriculture around 1918. After about 100 years since Ambedkar's warning, close to 70 of which has been without the British in charge, we have reduced the dependence on agriculture to one where 57 per cent of the workers are either cultivators or agricultural labourers.
So, we still have a huge pressure on land and it is getting worse by the day. This is because of two facts: (a) we have a growing population and (b) we are not adding new land to our land mass. The average holding in India in 1970-71 was 2.29 hectares; in 2010-11 it fell to 1.15 hectares. In 40 years, or in roughly two plus generations, the average farmer has half the land to cultivate. India describes its farmers as marginal (owning less than one hectare), small (between one and two hectares), semi-medium (between two and four hectares), medium (between four and 10 hectares) and large (above 10 hectares). In these 40 years, the number of marginal farmers have increased by 156 per cent, small by 84 per cent and semi-medium by 30 per cent. The numbers of medium and large farmers have fallen by 26 per cent and 65 per cent. And, the average holding in each of these categories has fallen, respectively, by 4, 1, 3, 5 and 4 per cent. In short, agriculture may not be the place where the rich are getting richer and the poor poorer.
Focusing on agriculture alone to better the plight of farmers could become a lost cause. Since the amount of the productive asset owned by an individual is falling over time, the income earned by each owner is also decreasing. To arrest this decline, these owners must be given other productive assets, like education and skill and, of course, good health. This will enable them to sell off their land and move into other economic activities. Only then will those remaining in agriculture be able to earn higher incomes through higher yields. Otherwise, we will spend public money, increase yield and see our farm incomes continue to diminish.
The author is Research Director, India Development Foundation