Agrarian Distress in India

In October and November 2016, R. Ramakumar was a visiting scholar at the URPP Asia and Europe. He held a seminar on rural and agrarian change in India with special attention to different methodological approaches. In an additional talk, he gave an overview of India’s agricultural policy and the performance of its agricultural economy, which is also the subject of the following essay.

R. Ramakumar

When in 1947, India became free from the yoke of colonialism, it had an increasingly lopsided agricultural economy, marked by low, and at times declining, yield of crops, low share of irrigated area, large extent of cultivable land left fallow, deterioration of soil quality and the use of poor quality seeds and poorly yielding livestock. The reasons for the deteriorating state of agriculture under colonialism were many and complex. Nevertheless, the one overarching reason was the backward and oppressive relations of production in agriculture. Big landlordism was the dominant feature of agrarian relations. All the land systems of British India, though diverse in their features, were united in their outcomes: sub-division and extreme fragmentation of operated land, sub-infeudation of holdings, insecurity of tenures, rack-renting, illegal cesses and usury.

Indian agriculture after 1947

After independence, the Indian state embarked on a system of national planning for the economy. The necessary condition for a rapid increase in the growth of the agrarian economy was a radical transformation of land relations. However, notwithstanding the emphasis on the land question in the plan documents, agricultural policy after independence never really considered the reform of property rights in land as a means of eliminating structural inequalities in the economy and expanding the home market. Land reforms were a major failure; and the agrarian question remained unresolved. Agriculture was viewed as a “bargain sector” i.e., a sector where output can be increased with very little additional investment.

By the mid-sixties, the possibilities of expanding the cultivated area had been exhausted and agricultural production slowly headed towards a plateau. The food crisis of the 1960s threatened to derail the planning process itself. A significant assumption in the planning process was that of government control in the supply of wage goods. With the wage goods bottleneck building up, an increase in agricultural production was essential to sustain industrial growth rates.

The green revolution of the 1960s

In response to the fears of inadequate food production, a number of programs for “intensive agricultural development” were introduced. These programs aimed at encouraging the adoption of a “package” of high yielding inputs, combining improved technology, credit, high yielding seeds and assured irrigation. It is this New Agricultural Strategy (NAS) that is credited for what came to be known as the “green revolution.” After the mid-1960s, there was a significant rise in the public expenditure on agricultural research and extension; the technologies of the green revolution were a product of the National Agricultural Research System (NARS).

While the NAS was mainly a technology-led program, it was also supported by four forms of institutional support—price support, credit support, input-subsidy support and marketing support. First, the adoption of the new technologies required price incentives, i.e., higher product prices. The Agricultural Prices Commission (APC) and the Food Corporation of India (FCI) were established in 1965 to advise the government on the level of administered product prices and to assist in procurement. Secondly, the policy of nationalizing commercial banks in 1969 helped to significantly raise the availability of credit for peasants. Bank nationalization helped to mop up the new liquidity in the rural areas, improve the geographical spread and functional reach of public banks, and weaken the hold of usurious moneylenders in rural areas. Thirdly, the subsidy policy of the 1970s covered the pricing of important inputs like fertilizers, pesticides and electricity for irrigation. Prices of major inputs were “controlled” to promote their adoption. Fourthly, the Agricultural Produce and Marketing Committee (APMC) Act and the Essential Commodities Act were passed in States to regulate the marketing of farm produce by minimizing distortions in exchange. Under the APMC Act, a number of regulated markets were set up across the country.

The NAS made a signal contribution towards reducing India’s dependence on food imports. The NAS was instrumental in transforming the “ship-to-mouth” predicament of India in the 1960s and, as the agricultural scientist M. S. Swaminathan pointed out, “established the linkage between [national] sovereignty and food self sufficiency.” [1] Yet for all its technological advantages, the outcomes of the NAS were far below potential, especially in the 1970s.

The limitations of NAS have to be understood in terms of the “failure of planners…to see agriculture as a strategic, system transforming sector” that would have required a “focus away from the supply side to the centrality of property relations and mass demand as a propellant for the whole economy.” [2] The implementation of land reform was a crucial factor in determining the extent of technological diffusion; the limits of NAS lay in its circumvention of this strategic choice. Consequently, the benefits of green revolution were distributed unevenly with a “region-wise, crop-wise and class-wise concentration of production.” [3] The NAS focussed on regions well-endowed with irrigation, on just two crops (rice and wheat) and on sections of the peasantry that could mobilize the investment necessary for adopting the new technology.

The liberalization of the 1990s

As distinct from the earlier periods, agricultural policy in the 1990s took a different turn. The agricultural sector was significantly liberalized and globalized after 1991. India’s economic “reform” was based on an explicit rejection of the need to transform the traditional institutional framework of agriculture. The basic premise of the reform program was that with increased openness of the economy, the barriers to raising agricultural surplus could be overcome by using external trade as an instrument. The need for land reform did not just take a backseat; the effort was to reverse the implementation of land reform altogether.

The critique of the agricultural policy that had been followed up to the 1980s was first put forward by international financial institutions, such as the World Bank, and willingly embraced by the ruling governments. In the new discourse, the concept of terms of trade began to dominate discussions on agricultural policy. It was argued that the earlier policy deliberately skewed the terms of trade against agriculture through protectionist industrial and trade polices and an overvalued exchange rate. As the argument went, once we “get the prices right,” the incentive structure in agriculture would improve, and farmers would respond to higher prices by producing more.

Liberalization of domestic agriculture and agricultural trade was put forward as important steps towards imparting “efficiency” to Indian agriculture. A free trade policy was envisaged not just to “promote farmers’ own investments,” but also “investments by industries producing inputs for agriculture and agro-based industries.” In 1994, India signed the WTO agreement.

According to the new view, terms of trade were biased against agriculture also because the policies of input subsidies and output support prices suppressed domestic prices. Subsidies in agriculture were “fiscally unsustainable…inefficient and costly to farmers.” [4] It was argued that the government should gradually retreat from the functions of procuring food, as “government cannot manage commodity trade in an efficient way.” [5] The large buffer stocks of food should be gradually brought down; as a corollary, food subsidies should not be universally accessible, and need targeting. Instead of public procurement and distribution of food, people could rely on private trade.

The agenda for the liberalization of the agricultural sector also included a number of additional components. First, as part of the larger program of financial liberalization, the policy on agricultural credit underwent significant changes towards deregulation. Banks should function on a commercial basis, and profitability should be their prime concern. Thus, banks were permitted to rationalize their branch network in rural areas. Norms related to the compulsory provision of agricultural credit by banks were considerably diluted. Secondly, it was argued that the existing laws on agricultural marketing discriminated against farmers by not allowing them to interact directly with the big buyers. Contract farming was seen to be beneficial to farmers in their efforts at crop diversification. It was argued that land ceilings have to be raised so that rich peasants and agri-business firms could freely lease in land. The underlying belief was that, if permitted, land leasing could provide economies of scale by attracting potential investors, including corporate players, into agriculture. Thirdly, though the official policy often reaffirmed its commitment to encourage public agricultural research, private sector research was to be promoted in a large number of sectors. To encourage the private sector and meet the commitments of the WTO agreement, an Intellectual Property Rights (IPR) regime was endorsed in agricultural research.

Impacts of liberalization

The longer period of implementing agricultural liberalization policies in India was also a period of slowdown in agricultural growth rates. Agricultural growth rates in India between 1991–92 and 2014–15 were lower than the growth rates recorded for the 1980s. Rate of growth of food grain production, especially rice and wheat, slowed down significantly. The per head food grain availability (the sum of domestic output, net imports and change in stock) fell from about 175 kg in the triennium ending 1992 to 156 kg in the triennium ending 2014. The availability per head of pulses and coarse cereals also fell in the period after 1991–92. In spite of these obvious adverse outcomes, it is required that each argument raised in favour of liberalization and their outcomes be examined more closely.

Reversal of land reform laws

New economic policies in Indian agriculture were premised on rejecting the need for a basic institutional transformation in rural areas. It is no surprise, then, that one of the most important features of this policy was the rejection, and reversal, of state-led land reform.

The new policy aimed at a shift in India’s cropping pattern from less-remunerative food grains to high-value and export-oriented crops. Such a change in cropping pattern was to be achieved by promoting economies of scale in agriculture, allowing free leasing in and leasing out of land, boosting agro-processing and facilitating the development of private post-harvest and marketing infrastructure in rural areas. The new organization of production demanded possession of large tracts of land with private firms, which was constrained by the ceilings on land possession in the land reform laws. Post-1991 policies aimed at removing the ceiling limits by amending these laws, to allow private firms to cultivate unlimited areas of land.

In a country with a terrible track record on land reforms, lifting of land ceilings have encouraged absentee farming by large farmers and corporations. It has also reduced the extent of ceiling-surplus land, while a substantial proportion of rural households is still landless.

The stagnation of public capital formation in agriculture

Public expenditure on agriculture has a significant impact on agricultural growth. According to scholars, government spending on productivity-enhancing investments, such as rural infrastructure, irrigation and agricultural research, have significantly contributed to growths in agricultural productivity as well as rural poverty reduction. However, public investment in agriculture, as a share of agricultural GDP, began to decline from the early-1980s and continued to decline after the 1990s. Almost all of the increase in total fixed capital investment in the 2000s came from private sources.

The promise of free trade in agriculture

The argument put forward in support of trade liberalization was that it would improve the prospects of export-led growth in agriculture. This promise has remained unfulfilled. Between 1990–91 and 2014–15, while agricultural exports grew at an annual rate of about 13 per cent, agricultural imports grew at a faster rate of about 21 per cent. Driven by a surge in agricultural imports, the difference between the rupee value of farm exports and imports significantly narrowed after the mid-1990s, when the WTO agreement was signed. Exports and imports in agriculture also displayed significant instability in the period after the mid-1990s.

Consequently, there was a sharp fall in domestic prices of many commodities after the mid-1990s. In the background of greater integration between domestic and international markets, domestic prices of cotton, tea, coffee, spices and many fruits and vegetables fell after 1997–98 following a fall in the corresponding international prices.

The increased alignment of domestic and world prices after trade liberalization also effectively imported the volatility of international prices—formed in highly imperfect and monopolized market environments—into Indian agriculture. On the one hand, price volatility increased the uncertainties in cultivation. On the other hand, price volatility also sent misleading price signals to domestic producers. Misleading price signals encouraged cropping pattern shifts that were largely ecologically unsound and economically unviable in the medium term.

The rise in input costs

The rationale for the provision of input subsidies has historically been to provide farmers with remunerative as well as stable prices so as to enable them to adopt new technologies and raise yields. Also, subsidies help to compensate for imperfections in the capital market and the risks associated with the adoption of new and high-cost technologies. There is by now wide agreement that input subsidies have significantly aided the process of adoption of new technologies in the post-green revolution period.

The argument in favour of reducing subsidies was based on three reasons: first, subsidies constitute a substantial burden on the finances of the government; secondly, subsidies crowd out public investment by diverting resources; and thirdly, the prices of inputs do not reflect their scarcity value and hence these inputs are prone to overuse resulting in environmental degradation and fall in soil quality.

The Indian government’s policy in the 1990s and 2000s was to cut input subsidies. As a result, input prices and costs of production increased sharply. It was the prices of fertilizers and pesticides that rose most sharply. Particularly after 2009, the prices of phosphoric and potassic fertilizers tripled or quadrupled. The rise of input costs, coupled with the fall of output prices, shrank profitability of agriculture in a range of crops.

Public expenditure on agricultural research

Historically, the government has been the leading investor in agricultural research, as it was considered a “public good.” In the developed world, public spending on agricultural research as a share of agricultural GDP ranges between 2 and 3 per cent. For all developing countries put together, public spending on agricultural research as a share of agricultural GDP was 0.6 per cent in the 2000s. In India, the corresponding share stood at 0.56 per cent. In the 1990s and 2000s, private firms have expanded their hold over agricultural research. However, private sector research has never been considered a substitute for public sector research.

Shrinking credit to agriculture

The period of financial liberalization between the early-1990s and early-2000s was clearly a period of reversing the achievements of bank nationalization in 1969. In the 1990s, there was (a) large-scale closure of commercial bank branches in rural areas; (b) a widening of inter-State inequalities in credit provision, and a fall in the proportion of bank credit directed towards regions where banking was historically underdeveloped; (c) a sharp fall in the growth of credit flow to agriculture; (d) increased sidelining of small and marginal farmers in the supply of agricultural credit; (e) increased exclusion of the disadvantaged and dispossessed sections of the population from the formal financial system and (f) strengthening of the hold of moneylenders on rural debt portfolios.

In sum, a consequence of the squeeze of formal credit in the 1990s was the resurgence, in different degrees across India, of the informal sector of credit, particularly moneylenders. Studies have shown that the expansion of the informal sector of credit sharply raised the costs of credit in agriculture in the 1990s. Beginning from the early-2000s, the supply of agricultural credit assumed a totally different role—of financing new forms of commercial, export-oriented and capital-intensive agriculture, including by corporate houses.

Concluding comments

Agricultural development in post-independence India is marked by the state’s failure to resolve the agrarian question. This issue involves ending the extreme concentration of land ownership and use, as well as weakening the factors that fostered disincentives in investment and technology adoption and that tied workers to a social system with considerable pre-modern features and compressed purchasing power. While this failure shaped the pattern and nature of agricultural growth in India after 1947, the implementation of economic “reforms” after 1991 introduced new dimensions to the contradictions of the earlier regime.

The green revolution of the 1960s and 1970s helped Indian agriculture overcome a “ship-to-mouth” existence and achieve self-sufficiency in production. This achievement was built on a platform of state support. There was price support, subsidy support, credit support, and marketing support. The interventionist role of the state in the 1970s and 1980s led to the creation of a network of institutional support structures in rural areas. Indeed, given the unreformed agrarian economy with dwindling public investment, the benefits of these support structures were distributed unequally—across crops, classes and regions.

But economic “reform” after 1991 was based on an explicit rejection of the need for an institutional transformation of Indian agriculture. Instead, it was argued that with increased openness, the barriers to raising agricultural surplus could be overcome through free trade. Diversification away from food grains, and towards export-oriented crops, was promoted. Land reform laws were amended in many States to raise land ceilings and encourage private corporate investment.

Over the longer period of reform between 1992–93 and 2010–11, agricultural growth rates slowed down. In the 1990s and 2000s, there was a weakening of public institutional support to agriculture. The protection offered to agriculture from predatory imports was removed, resulting in falling prices for many commodities. As part of fiscal reforms, the input subsidy system was restructured, due to which input prices and costs of production increased sharply. The growth of public capital formation in agriculture stagnated, as did the growth of public expenditure on research and extension. The expansion of rural credit slowed down in the 1990s, reopening the doors for the informal sector; in the 2000s, public banks increasingly catered to the needs of large farmers and corporate agri-business groups.

In sum, continuity and change mark the period of liberalization in Indian agriculture. On the one hand, many features of the long-run path of agrarian change continue into the contemporary agrarian regime. On the other hand, Washington consensus-inspired policies after 1991 have led to acute adverse impacts on the conditions of life and work in rural India.

[1] “For an ‘Evergreen Revolution’”, Interview to Parvathi Menon, Frontline, 16 (27), 1999.

[2] Rao, J. Mohan (1994), “Agricultural Development under State Planning”, in T.J. Byres (ed.), The State, Planning and Liberalisation in India, Oxford University Press, New Delhi, p. 133).

[3] Prabhat Patnaik (1975), “Current Inflation in India”, Social Scientist, 3(6/7), Special Number on Inflationary Crisis, January-February, pp. 22–42 (p. 28).

[4] Kirit Parikh (1997), “Overview: Prospects and Retrospect”, in Parikh, Kirit (ed.), India Development Report 1997, Indira Gandhi Institute of Development Research, Oxford University Press, Mumbai, p. 11.

[5] Parikh, ibd., p. 12.