Dry spell should bring change to India

By Christopher Swann
August 20, 2009

India is high on the list of candidates to help lead the world out of the current recession. The country weathered the global downturn remarkably well and looked poised to race ahead in coming years. Against this backdrop, the modest slowdown in growth caused by this year’s weak rainfall is little more than an annoying speed bump.

But the dry spell should sound an alarm to India’s politicians. Years of misguided agricultural policy have indisputably made the situation worse. Greater investment in irrigation and hardier crops could have halved the economic damage from a lackluster monsoon. More crucially, an overhaul of India’s farming policy could help close the gap with China — which has grown more than twice as fast since 1980.

Nobody could accuse India of neglecting its farmers. The country lavishes huge subsidies on the sector, sets minimum prices to shield farmers from price fluctuations and offers free electricity and water. Yet the spending has contributed to the parlous state of Indian public finances while doing little to increase agricultural productivity and farm incomes. State intervention is a stifling embrace — focusing on welfare and security rather than on efforts to make the sector more dynamic.

As a result, farm productivity growth has lagged badly behind China — where agricultural reform was the starting point of liberalization in 1978. Since the 1970s, the productivity growth of wheat farmers in India has been barely half that of the Chinese, where yields have trebled, according to the statistics by the Food and Agriculture Organization. India’s rice growers are also roughly half as efficient as their Chinese counterparts.

Given the size of India’s agricultural population — about 70 percent of the total — this is a terrible missed opportunity. Rural Indians still account for about 64 percent of spending, according to research by emerging markets research group Trusted Sources.

Because farming policy is the prerogative of India’s states, a nationwide reform would require plenty of arm-twisting. Those states that have invested more heavily and liberalized — Gujarat, Punjab and Haryana — have been rewarded with rising farm incomes. Higher cell phone and car sales have followed in short order.

First, India needs to sort out its costly and wasteful subsidies. “Little of this money ever really finds its way to the farmers anyway,” says Devesh Roy, an analyst with International Food Policy Research Institute. “Corruption and inefficiency creates a lot of leakage.” Fertilizer subsidies mostly benefit the agribusinesses that produce them, while electricity, though free, is highly unreliable.

Longer-term investments would give a much bigger bang for the rupee but have been neglected. “The agricultural universities have collapsed,” says Devesh Kapur, head of the India Center at the University of Pennsylvania. “This has meant no new drought-resistant crop varieties or significant technological innovations for irrigation.” As the irrigation system has fallen into disrepair, the amount of land covered has fallen by almost 20 percent since the early 1990s. Even India’s Planning Commission believes only around a third of irrigation water reaches crops.

Price supports on a narrow range of crops have led to an overproduction of cereals — even in dry regions, where such water-greedy plants make little sense.

Finally, India needs to take a leaf out of China’s reform manual and liberalize. When China allowed in foreign retailers and let them link up with farmers, there was a surge in farm productivity. All farmers should also be free to sell directly to retailers rather than through government boards as at present. Many states have already moved in this direction.

If the drought nudges Indian politicians towards reform it will not just be the nation that benefits. A feeble farm sector has made India highly protective of its farmers in global trade negotiations — creating a major road block for the Doha round. Another fillip to rural demand would make India a more effective driver of global growth. India finally needs to harness the full potential of its farmers.


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