Farming in India: The past keeps its grip

Many of India's agricultural practices have barely changed in decades. Reform is long overdue.

Nearly a quarter of a century after India launched its first big liberalising reforms in 1991, setting off a new spurt of growth, one area of the country’s economy remains hardly touched: farming.

Prime Minister Narendra Modi launched a 24-hour, state-run television channel for farmers in May, but has fostered no public debate about how to improve India’s dreadfully backward agriculture. This matters.

About 600 million Indians, or roughly half the population, depend upon growing crops or rearing animals to survive. Many farming practices, along with India’s agricultural markets, infrastructure, insurance and rules on leasing land, have barely changed in decades. Reform is long overdue.

On the surface, things do not look too bad in the countryside. Rural poverty has fallen sharply in the past 15 years. However, this is because services such as selling mobile telephones or motorbikes have boomed across India. It also has helped that previous governments greatly increased welfare spending in the countryside.

The productivity of farming itself has been woeful. Contributing only 13.7 per cent to the country’s GDP, agriculture has grown by around 3 per cent a year in recent years, far slower than the rest of the economy.

Farmers’ woes recently have made headlines again. In the spring, unexpected rain damaged northern wheat. A summer heat wave has killed more than 2,000 people, mostly those toiling in fields in the south, as well as hundreds more in Pakistan. A run of farmer suicides has drawn national attention. Official concerns about the monsoon linger: Rains may fall short, for the second year in a row. Since three-fifths of the farmland lacks irrigation, patchy or weak rainfall can spell disaster.

Rural incomes already are under strain. One reason is volatile prices: Farmers near Delhi are getting as little as two or three cents per pound of potatoes, a quarter of last year’s price. Cotton farmers who had prospered from strong exports to China recently have been hit by weaker demand. The government has bought millions of bales to shore up prices.

Another reason for lower rural incomes is the decision Modi made a year ago, soon after coming to office, to cut the minimum government-support price for staples, notably wheat and rice. It was the right move, and has helped bring down inflation, but it should have come with more transitional support for farmers hurt by the adjustment. On June 17 a new, only slightly higher minimum price for rice was set for the coming year.

Low productivity is a bigger long-term problem. One cause of this is the shrinking size of cultivated plots. As India’s population has expanded, the average plot size has fallen from nearly 5.7 acres in 1970 to less than three acres today. Two grain harvests a year are common, but India’s yields are low by global standards.

Productivity also is held down by state laws limiting the amount of farmland a single person may own. Liberalisation would make it easier for abler farmers to consolidate land into bigger, more productive holdings. Even leasing land is famously hard, because strong tenancy rights discourage owners from renting out fields.

A newly completed, not-yet-published report for the government on reforming agriculture, led by Ashok Gulati of the Indian Council for Research on International Economic Relations in Delhi, is likely to blame politics. Food inflation upsets voters, so politicians respond to sudden spikes in food prices by imposing national export bans.

Regional politicians do something similar. When potato prices soared in West Bengal last year, the state banned traders from shipping potatoes to other states. Amid such uncertainty farmers are disinclined to invest or specialise.

Price swings are exacerbated by a 1955 law that bans the storage of large quantities of any of 90 commodities, including onions and wheat. The aim was to deter “hoarding,” but the effect is to discourage traders or farmers from investing in cold storage and warehouses. As a result, plenty of crops rot before they reach a plate and prices swing erratically. If a bumper crop can neither be exported nor stored, the only way to sell it is to slash prices.

Agricultural markets are fractured and distorted. Across much of India, state marketing boards known as Agricultural Produce Marketing Committees restrict trade in fruit and vegetables. A trader in Delhi, for instance, is not allowed to bid for coconuts in Karnataka. It is often easier to import from abroad: The capital’s markets are as likely to stock apples from California or New Zealand as from Himachal Pradesh or Kashmir.

Markets are even fragmented within states. Arvind Subramanian, the government’s chief economic adviser, grumbled that India has between 3,000 and 4,000 separate agriculture markets.

Clout of commissioning agents
Gangs of local commissioning agents squeeze farmers like ripe mangoes. The mandi, or marketplace, in Azadpur on the edge of Delhi is said to be Asia’s largest for fruit and vegetables. Enormous trading houses are piled high with garlic and potatoes. Presiding over all are plump agents sporting gold chains.

Many are the fourth generation of their family to hold the licence to do the job. They add little value, but admit to taking a hefty 6 per cent commission on sales. In other markets fees are reportedly as high as 14 per cent. Gulati suggested that the international norm for commissions is more like 0.5 per cent. The Delhi government is trying to scrap the local APMC’s monopoly, but there is a lack of available land to open a rival marketplace.

Many farmers struggle to obtain financing. Agricultural banks are notoriously corrupt. State aid for small farmers is skewed toward providing cheap inputs, by subsidising the provision of fertiliser, water and electricity, rather than, for example, helping to insure farmers’ crops against bad weather or natural disaster. If it cut the input subsidies, the government could help with insurance or help poor rural folk by simply giving them cash.

Too much farming remains under the control of states, and little suggests that the central government wants to shake things up. State leaders, mindful of the conservative rural vote, are not keen either. Farmers would welcome some reforms, such as cutting the power of middlemen, but would resist others, such as lifting ceilings on land holdings.

They worry that this would allow them to be pushed off their land by the rich and powerful.
In October, a big election is expected in the mostly-rural Bihar. Modi has great ambitions for his Bharatiya Janata Party to win there, and will do nothing to fuel the opposition’s claim that his government is against farmers. After that come Assembly in other rural states.

Crucial though it is for India to reform its ailing agriculture, such reform will be poss-ible only if politicians find a way to explain how change will actually benefit farmers, not harm them.