Thursday, November 8, 2012

Agriculture – from Poverty to Prosperity

by Dr Jayaprakash Narayan

I feel privileged to participate in this function to pay homage to Sri N G Ranga on his 112th birth anniversary. Acharya N G Ranga fought for many causes, built many institutions, and touched millions of lives. Farmers, tenants, agricultural labourers, weavers, dalits – every segment of our long-suffering rural population was on his rador.

Achrya Ranga’s public life spanned over 60 years, from his first election to central legislative Assembly in 1930 to his demitting office as Member of Parliament in 1991. While he played a crucial role in freedom struggle, including his participation in the first Round Table conference, his greater contribution was to nation building and rural economic emancipation.

In many ways, the history of farmers’ movement in India is inseparable from Ranga’s life. He was in the forefront of the struggle for Zamindari abolition. His leadership saved farmers and the nation from the potentially fatal folly of collective farming proposed by Nehru in 1959. In an era of uncritical admiration for socialism and collectivism, Ranga understood the importance of individual initiative, property rights and economic incentives. Starting his life as a socialist, he acquired deep insights into human nature and became an ardent advocate of liberty and humanism.

Nehru was enamoured by the Soviet model and aggressively pursued collective farming. Little realizing that absence of ownership and economic incentive would undermine agricultural production and food security, he pursued the ambitious plans of collective farming, erasing farmers’ property rights in pursuit of a socialist God. Ranga valiantly fought against Nehru at great personal cost, at a time when opposition to Nehru was political suicide. It was this one great success of Ranga that saved our farmers, and indeed the nation. Three decades later, the failure of the USSR on food front was one of the chief reasons for the collapse of the Soviet Union. In our own country, Nehru, having failed in his grand mission, still pursued state-controlled farming through large central State farms. The productivity of these farms with enormous infrastructure and state support was typically a fraction of the productivity of the neighbouring farmers’ lands! Even now some 14 of these Central State Farms exist as white elephants and as monuments to our past follies.

Similarly, when Nehru later proposed the Seventeenth Amendment to the Constitution to curtail property rights, again it was the intrepid Ranga whose compelling logic and persuasive argument swayed Parliament against Nehru’s wishes, and defeated the amendment. Later, after Nehru’s death, as a mark of honour to him, the Amendment was carried in Parliament. Mercifully, the Golaknath (1967) and Keshavanand Bharati (1973) judgments of Supreme Court protected liberty, constitutionalism and due process, and negated the effect of the illiberal Constitutional assaults on human dignity and individual initiative.

Rajaji, Minoo Masani, Ranga, Gouthu Lachhanna and their far-sighted colleagues were far ahead of their times. Among them, Ranga’s name stands out foremost in the history of the struggle to protect peasants’ rights. That is why, even Nehru was compelled to admit in Lok Sabha, “As long as Rangaji is in Parliament, Indian peasants can sleep without any worry.”

Any contemporary struggle for a fair deal to the farmers has to start where Ranga and his colleagues left it. In his celebrated Economist essay on India in May, 1991, Clive Crook argued that if Indian politicians, policy makers and planners sat together and conspired to destroy Indian agriculture, they could not have done a better job! Collective farming and the 17th Amendment are obviously two of the more egregious policies pursued or attempted in the early days, and thwarted by Ranga and the Courts. But many more illiberal, anti-farmer, anti-poor policies and actions continued unchecked, and played havoc with rural economy and agriculture, and undermined India’s growth and prosperity. As Kilaru Purnachandra Rao cited, as early as in 1955-56, Ranga’s computations showed that the per capita income of those dependent on agriculture, at Rs 195 was only 40% of those in other sectors (Rs 485). Today, thanks largely to successive governments’ follies and failures, this income disparity has grown to six times. About 55% Indians even today depend on agriculture for their livelihood, and yet their share of GDP is only 15% now. This share is still declining by 0.5% every year, without appreciable decrease in population dependent on agriculture.

Agriculture every where in the world is a difficult and risky occupation. Farmers always depend on nature’s mercy, and incomes tend to be lower than in other sectors. And yet, agriculture is the very basis of civilization, and provides food security and raw materials for industry, and increasingly in the energy-starved world, fuels. Recognizing this, governments world over have promoted agriculture in three ways: boosting production by irrigation, drainage, credit support, research and extension; protecting incomes by free trade, protection from external competition, and assured price support when needed; and preventing volatility and waste by insurance, ware housing and storage, promoting market access, post-harvest technology, and value addition. Higher productivity is critical to meet the needs of an ever-growing population and rising economy. Reasonable and assured incomes are vital for the survival of the farmer and sustainability of agriculture. By nature, agriculture is risky and prices are volatile. Commodity price should therefore cover the risk, and reward the effort. Volatility of prices should be minimized by better and direct access to market, greater market information, and development of logistics chain to prevent supply shocks and agro-processing to eliminate wastage and add value.

Indian agriculture has largely suffered because of government’s failure to do the right things, or insistence on doing the wrong things. Even now, about two-thirds of the area under crops is dry land with paltry rainfall and no assured irrigation. The state failed in water-harvesting and soil conservation, and left the farmers completely to nature’s mercy. Agricultural research and extension were of a high order in select areas during the era of green revolution. As a result, our food grain production rose significantly, and India is more than self-sufficient. While the total food production in the 50’s was about 50 million tonnes, the food stored during peak time in government granaries alone stands at 83 million tonnes now. But the green revolution has not extended to pulses and oil seeds, and dry land agriculture. There is a shortage of pulses, and we import about 9 million tonnes of edible oil annually.

But the state’s follies are not really in the area of production; they are largely in the perversion of markets, deliberate price distortion, and fleecing of farmers in a corruption-ridden license-permit-quota raj. At one stage, in 1973, even wholesale trade of food grains was nationalized for a short while, until it failed spectacularly. But retail trade has always been rigorously controlled by state, and storage, transport, and sale continue to be at the mercy of politicians and bureaucrats. A vast, inefficient and corrupt public distribution system (PDS) has been created. Nearly 40% of the food grains in PDS are ‘recycled’ because of price distortion, and go back for sale to FCI. More than a third of the food grains with FCI are stored open to sky or in poor conditions, leading to wastage and corruption. There is organized corruption in food procurement and distribution in PDS. There is a well-developed market for public office in all these sectors. And yet, the government is getting ready to enact a so-called food security legislation to supply subsidized grains to 72% of the population! The resultant market distortions and corruption end up perpetuating poverty and hurting farmers.

The so-called minimum-support price offered by governments in these conditions is neither fair, nor remunerative. It encourages production and sale of sub-standard stocks, and food is largely wasted or ‘recycled’ at enormous cost to the exchequer without benefiting the farmer. The state is seen to be spending a lot on food subsidies, but the poor get little benefit. In order to partially compensate for the market distortion resulting from state policies, fertilizer subsidies are given. Again while the exchequer is depleted, there is a huge imbalance in application of plant nutrients. Poor storage is leading to high volatility of prices of even non-perishable commodities like cotton, chili and turmeric. Absence of cold-storage and processing leads to wastage of 30-35% of fruits and vegetables being wasted. Prices in the market fluctuate dramatically hurting both farmer and consumer. There is a long market chain between producer and consumer, and farmers often get only 35% of the consumer price. In perishable products, farmer’s share can be as low as 12-20%.

Arbitrary, unreasonable trade controls and inconsistent and adhoc government policies have played havoc with farmers’ lives. Food grain exports have been banned for years even as our grain stock is rotting and prices were falling and production was increasing. Only in late 2011, rice exports were allowed, but with quotas and caveats. Even when exports are allowed, the corruption, procedural bottlenecks and inefficiency at ports is ensuring that Indian grain does not reach international markets. Because of uncertainty and adhocism, Indian rice is selling at less price than comparable Thai rice. Every other week there is threat of arbitrary export quotas and reversal of decisions. Given the uncertainty, exporters cannot take risks or develop long-term market linkages. In states like Andhra Pradesh, even food grain sales across state borders are banned illegally, artificially depressing prices and causing distress to farmers.

Adhoc farm export policies are completely ignoring the fundamental laws of economics governing demand, supply and price. Policies on cotton export are a classic example. The largest number of farm suicides are by distressed cotton farmers. And yet the government unabashedly pursues a policy calculated to depress prices, and imposes quotas and stops exports at will on the ground that Indian textile industry needs raw material. Farmers will be glad to sell to anybody – Indian or foreign – if the price is good. If there is shortage in India, there should be a price signal to that effect, boosting production and stabilizing price. Instead, export controls are imposed, and crisis-ridden farm sector is forced to sell at low prices to enhance the profits of a few in industry. If farmers switch over to other crops on account of low prices of cotton, there will be long-term shortage and price increase adversely affecting the economy.

India is the biggest importer of edible oil. There is need to boost oil seed production, even as we import to overcome shortages. The world over, moderate to high import duties are levied on farm imports, and incentives are given to boost indigenous production. Surprisingly, India does not subject edible oil to any import duty. On occasion, sensing India’s dependence on imports, the exporting countries are levying export duty! If a moderate duty of, say 10%, is imposed on edible oil imports, and if that revenue is ploughed back to oil seed farmers as incentive to boost production, within a few years we will have no shortages. Time and again, when technology and price incentives are available, the poor, illiterate Indian small farmers have achieved great results.

I have outlined the impact of adhocism and short-sighted antediluvian policies on three commodities – food grains, cotton and edible oils – to highlight the failure of government policies in protecting the farmer through proper price signals. This failure is leading to long-term dangers to the economy. Depressed prices will force more and more farmers to leave farming. The recent crop holiday declared by farmers of Godavari delta is illustrative of the brewing crisis. Farmers without reliable market information will move rapidly from crop to crop in the quest for better incomes, leading to volatility in prices. Long-term shortages because of failure of price signal, and agrarian distress are real and mounting dangers to the economy. The government and political parties need to act swiftly and wisely before the crisis leads to massive rural unrest.

India is home to 11% of the world’s agricultural land, with plenty of sun shine, good rainfall and strong agrarian tradition. A comprehensive policy needs to be evolved to leverage our strengths, and make agriculture an engine of growth and an earner of export revenue, not a drag on the economy. This strategic shift should involve a recognition that farmers’ interests, industrial growth, and national prosperity are all inseparable. We need to get out of the narrow, compartmentalized silos of thinking in terms of different ministries of agriculture, food, commerce and environment. Prosperity of the farmer and consumer is an inseparable, harmonious goal.

What then needs to be done to ensure fair and remunerative prices to farmers, and promote rural rejuvenation and overall economic prosperity of the nation? We need to act on several fronts – trade policies, warehousing, market access, value addition, new technologies, price support and restructuring agricultural support.

Let us start with trade policies and pricing of commodities. The global history of the past century taught us that free trade is the best guarantor of smooth supply of commodities in both the short term and the long term. In the short term supply will go wherever demand and price are higher, and thus stabilize prices; in the long term price signal will boost production of a commodity in short supply. The failure of the Soviet Union in agriculture, and success of Chinese agriculture after liberalization are standing testimonies to the virtues of economic freedom. Certainly the state should have a strategic reserve to tide over crisis, and there should be state support for warehousing and marketing infrastructure. In conditions of dire scarcity, as in Second World War, there is need for effective public distribution system, backed by road, storage and retail infrastructure. But rationing and price controls in the long-term are always ineffective, and lead to arbitrage and corruption.

The only time rationing was perfectly implemented was when Marshal Zhukov, the Russian general, enforced it through brutal means in time of war during the seize of Stalingrad. He shot down a whole family because they suppressed information of the death of an elderly family member so that they could get extra rations to stave of starvation! Such draconian measures were necessary in extreme scarcity and national crisis; but are both unacceptable and counterproductive in normal times, particularly when there is no real shortage in the economy as a whole.

In times of adequate supply, the state should ensure fair trade and marketing infrastructure to ensure that fair competition prevails. The poor who need state support would benefit more through cash support or food stamps which enable them to buy food in the open market. Instead, we chose to depend heavily on controls and the corruption-ridden civil supplies machinery through Essential Commodities Act. The results are evident; phenomenal corruption, arbitrary state power, waste of public money, whole sale fraud through ‘recycling’ and arbitrage, a transfer industry fuelling corruption, depression of market prices, cronyism, and a culture of government patronage in business and trade.

I have already outlined the market distortions on account of adhoc and capricious government policy. Indian agriculture could be an export engine if we allowed our traders to develop and nurture global markets in areas where we are competitive. License-control-permit raj within the country is even more hurtful to the farmers and consumers. Edible oil, sugar and pulses – all suffer control raj. Instead of allowing price signal to boost production and eliminate shortages, we are perpetuating a scarcity economy that fuels corruption.

The paddy and rice trade restrictions imposed illegally by AP government are a case in point. The union government removed all barriers to trade between the states, and the states have no power to go against the Union’s directions on a central law. And yet, AP government continues to ban sale of fine varieties of paddy and rice across state borders. In Feb, 2012, while BPT paddy sold at Rs 1200 / 75kg bag in Karnataka and Maharashtra, across the border in AP it was selling at Rs 750 / 75kg bag, thanks to these illegal restrictions. Corruption was rampant in border trade. Then Lok Satta and Federation of Independent Farmers’ Associations led a Rytu Satyagraha. We under took a padayatra from Kurnool to Karnataka, and Nizamabad to Nanded. Hundreds of volunteers carried paddy and rice on our shoulders, defied the government ban, dared them to arrest and prosecute us, crossed the border, and sold these commodities in neigbouring states. The state, realizing that their ban was illegal and immoral, did not dare to arrest us. Within days, farmers and traders understood that the state had no power, and the price of 75kg bag of paddy rose to Rs 1200, an increase of Rs 450/-, or 60% increase in a few weeks. About 4 million tonnes of BPT rice (or its equivalent in paddy) was available for sale at that time. By enforcing free trade, this Rytu Satyagraha increased farmers’ incomes by about Rs 3600 crore in just one season in one variety (BPT) of one crop in one state!.

This episode demonstrates the massive losses suffered by farmers every year because of state controls, not to speak of corruption. The argument that trade should be restricted to control inflation is a disingenious defense of a shameful anti-farmer policy. Consumer price will be fair if market chain is compressed, not by imposing controls and hurting the already impoverished, suffering farmer. In the long term, in fact scarcity will increase, prices will shoot up and food security will be jeopardized by depressing prices and forcing farmers to shift to other occupations or more remunerative, uncontrolled crops.

Clearly we should abolish all restrictions and controls on food grains trade within the country, and across the national borders. With vast quantities of food grains rotting in government godowns, and enormous sums spent on storage and holding costs, it is a monumental folly to prevent or control international trade. A strategic reserve to tide over crisis is more than adequate in this day and age. Once producers’ interests are protected, consumers will gain by price stability. The savings on procurement, storage and inefficient distribution, and the reduction of corruption, leakages and arbitrage will benefit both producers and consumers. Farmers as well as the poor can be benefited much more by deploying these savings wisely.

In respect of non-food commodities like cotton, a similar, durable, predictable policy will yield rich dividends. Let all trading restrictions go, and prices in India will be comparable to global prices. Farmers can make long term plans and leverage our competitive strengths once there is price stability. The nation will earn precious foreign exchange. Once agriculture becomes remunerative, government can also reduce some of the fertilizer subsidy burden, and also promote more rational application of plant nutrients.

In respect of imports of palm oil, or on occasion pulses, we need to adopt a rational policy meeting the twin objectives of overcoming short term shortages, and stimulating medium-term production to make us self-sufficient. The WTO regime gives us all the flexibility we need to protect our farmers from global imports. Even high tariffs are permissible. But the prudent course would be to impose 10-20% import duty, and utilize the revenues to give incentives to farmers to boost production. This policy will ensure moderate prices and rapid increase in production and full sufficiency. Such a sensible policy will give a strong signal to the farm sector, and save precious foreign exchange.

There are many non-perishable commodities which are not subject to domestic controls, and yet are suffering tremendous volatility of prices hurting both producers and consumers. Cotton, chilli and turmeric are three examples. Despite the AP government raising Rs. 1500 cr per year as tax revenues on paddy / rice procurement by FCI, and in addition collecting about Rs. 400 – 500 cr / year as market cess, the markets controlled by government are in deplorable condition. A massive investment in storage infrastructure, and ensuring pledge loans to farmers who stored their produce would give great relief to farmers. These commodities see cyclic price fluctuations, and once the farmer can store the produce and raise money to meet his consumption and production needs, there would be no distress sale. The farmer can choose to sell at a price attractive to him as the price line improves. Equally, consumers do not have to pay exorbitant prices when there are shortages. If prices rise, producers will bring their stored commodities into the market for sale; prices will stabilize as demand and supply are allowed to operate in a free market. Once long-term price becomes stable, more investment will flow into agriculture, boosting production and productivity. As productivity increases, prices will be under control, and the whole economy gains in the long term. The failure of government in post-harvest management of even non-perishable commodities is striking, and this failure has resulted in extra-ordinary hardship and distress in farm sector. As I said before, most farm suicides in India are in this segment of non-perishable commodities.

Government’s failure in marketing is not limited to appalling lack of warehousing despite collecting vast amounts in taxes and cesses from farmers. Market committees are totally in government hands, and managements are nominated at the behest of local legislators for partisan considerations. Farmers who pay taxes and market cess, who produce crops and need to market them, have no say in managing the markets. Most market committees are moribund, and do not provide market access to farmers or protect from unscrupulous private traders. Even in cases where markets do operate to some extent, as in case of Telangana region – the conditions are appalling. There are no shelters for farmers; no protection from rain to the paddy or cotton brought to the market, no compound walls (resulting in bandicoots and stray dogs becoming a menace), no sanitary facilities, no electronic weighing machines, and no driers to reduce the moisture of food grains to meet the procurement standards. The proud and honest producer is treated as a mendicant, and is robbed of all dignity and income.

There is a long chain of intermediaries between the producer and consumer. As a result, the farmer gets only a fraction of the consumer price, and the consumer is forced to pay high price. Low farmer income and high food inflation – both coexist in this bizarre situation. Where Rytu Bazaars are implemented effectively, the small farmers are able to access the market directly, and they get the price market is willing to pay. These pilot projects of Rytu Bazaars have not fully succeeded because of infrastructure deficiencies and failure of bureaucrats to ensure that farmers, not traders, can utilize markets. But even the limited success in unsatisfactory conditions shows that direct market access and compression of market chain yield significant benefits in the form of better price realization for farmers, and supply of quality produce at affordable price to consumers.

Markets therefore need to be democratized and brought under direct farmer control. Managerial and expert professional assistance can be provided to farmers on request to protect their interests. But there should be no external control of markets other than the democratic control and management of the stake-holders, the producers. All taxes and cesses related to farm produce should be directly deployed only to improve infrastructure in markets, warehousing and other facilities to facilitate better access and higher price realization; and these resources should be directly transferred to elected committees, under fair and firm supervision to enforce accountability and transparency.

One of the great challenges of agricultural marketing is the volatility of prices of perishable commodities on account of vagaries of nature and demand-supply imbalances. About 35% of our fruits and vegetables are wasted because of poor storage or excess supply which cannot be sold in the market. Poor market access or absence of storage means that while price of tomato in Madanapalle is half a rupee (50 paise) per kg, consumers in Hyderabad pay Rs 15/kg. Prices fluctuate wildly, hurting both the farmer and the consumer. In the developed world as well as in most emerging economies, they built up impressive transport and cold-storage infrastructure to address these problems. In addition, a massive food-processing industry came into existence to eliminate wastage, add value to farm produce, promote industrialization, create employment, enhance farm-gate price, and stabilize consumer price. Once there is adequate storage and processing, the farmer need not resort to distress sale, nor is food wasted. If the market demand is low or supply is too high depressing the price, the processing units can buy at minimum guaranteed prices. This can be further promoted by legal framework to promote contract-farming and protect farmers’ interests. The farmers’ income is thus protected, and fruits and vegetables that would otherwise have gone to waste are put to use. Whenever the supply of these fruits and vegetables falls below the demand and the market price rises, the processed foods will go into the market to meet the demand. This will eliminate shortages and stabilize prices.

India is the second largest producer of fruits and vegetables, at about 200 million tonnes per annum. We have only over 5000 cold-storage facilities with a total capacity of 23.6 million MT. 80% of this cold storage is used only for potatoes. 35-40% of horticultural products and 10% of food grains are wasted for want of storage. Post-harvest losses of perishable commodities exceeds Rs 100,000 cr or Rs one trillion per annum. Massive investment in transport, cold storage, processing and retail chains is necessary to reduce this criminal waste, improve farmers’ incomes, stabilize consumer prices, and ensure quality food supply.

Government should deploy every available resource to improve this infrastructure. But the state has neither the resources nor the managerial ability to undertake such a massive operation. Realistically, the governments can improve the existing regulated markets and provide basic amenities and warehousing. Retail business in India is estimated to be about $ 590 billion annually, and it is growing at 13% per annum. Organized retail industry is needed to improve quality of farm output by grading, contract-farming, packaging, input supply and other interventions. With improved logistics and supply chain, waste is eliminated and farmers will have direct access to markets. Apart from improving farm incomes, the resultant quality improvement will open up global markets to our farmers. With vast arable land, good sun shine, tropical climate and adequate rain fall, once support is given to farmers to improve quality, India can be a major global player earning precious foreign exchange.

Massive investments in organized retail chains are necessary to stimulate our agriculture, stabilize prices, create jobs and promote exports. The source of investments is of little consequence as long as steps are taken to protect farmers’ interests. For instance, mandatory procurement from within the country, and regulatory mechanisms to prevent monopolies of purchase are necessary. Much of the recent debate on FDI is misplaced. As Deng Hsiao Ping famously said, it does not matter whether the cat is black or white, as long as it catches mice! Given our mounting fiscal deficit and massive current-account deficit, foreign direct investment in any form is preferable to flow of FII hot money into our stock markets which will flee the country at the first sign of trouble, deepening crisis. Investment which creates jobs is always better than borrowing which shifts the burden to our children.

Any serious discussion on farm incomes would be incomplete if we do not pay at least passing attention to productivity problems and serious shortfalls in oil seeds, pulses and other products. ICAR did a remarkable job along with agricultural universities during the green revolution era. But in recent years, most universities are moribund, and governments have neglected research funding as well as encouragement of quality scientists. Significant investment in agricultural technologies, plant breeding, pest control, soil management, drought resistance, post-harvest technology, and in frontier areas of biotechnology is critical if we are to ensure food security and protect farm incomes. In a highly competitive, globalized world, India has to keep pace with technology and our farmers and entrepreneurs need the best technology. Otherwise we will be ruthlessly exploited by monopolies and multi-nationals.

There is a lot of concern about genetically modified crops. We need to separate technology from issues relating to commerce and monopolies. Any serious biologist knows that genetic research and transgenic crops are vital for our future. BT Cotton, by developing varieties resistant to heliothis has dramatically increased yields and reduced pesticide consumption. ICRISAT is developing transgenic groundnut which could revolutionize our oil seed production and improve incomes of dry land farmers. Soyabean, maize and other GM crops are already transforming global agriculture. About a billion hectares of GM crops have been raised globally in the past decade. Current GM crop area is about 160 million hectares. Human insulin, which eliminates insulin-resistance in diabetic patients administered bovine insulin, is a life-saving transgenic medical product used world over. The US, Brazil, China, South Africa, Australia, Canada and all major agricultural producers are applying GM technologies to improve farm productivity, food quality, incomes and nutrition.

Certainly all regulatory steps should be taken to prevent monopolies of a few MNCs. Apart from promoting GM research in our Universities and ICAR research laboratories, we need to take several steps to protect farmers. Only competent scientists with global exposure should be positioned in regulatory agencies; there should be a fixed tenure without reappointment to prevent vested interests getting entrenched; and independent regulatory mechanism should be created to determine a fair price of GM seeds to ensure reasonable returns to the entrepreneur and prevent monopolistic price extortion; the patent laws should be amended to ensure limited period of technology monopoly.

All these steps to protect our farmers and national interest should be taken. But denying ourselves technology because of our anger against monopolies would be tantamount to cutting the nose to spite the face. In order to fully tap our agricultural potential, a major economy of India’s size must have access to the best technologies. Denying ourselves technologies would be throwing the baby with the bathwater.

India has the potential to convert our farming into a dynamic, globally competitive, fast-growing, job-creating sector. What is seen as a drag on our economy can be a stimulant to growth. We need to choose prosperity over poverty; opportunities over alms; and liberty over state controls. Our farmers have delivered great results against heavy odds and fetters. Once the fetters are removed and the right incentives are provided, Indian farmer can be globally competitive, and rural economy can be transformed.

The author is the founder and President of Lok Satta Party – new politics for the new generation; Email:; Url:

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