Category: Agricultural sector

Budget 2008-09: Whither Indian Economists’

Almost a month has passed since the Budget was announced. The media has stopped discussing loan waivers. Economists are done with their write ups on the same as well. I guess it is no more glamorous or more pressing matters might have cropped up. This post discusses some of the concerns relating to the loan waiver which had been voiced by the media and my concern for economics in general and economists (associated with policy making) in particular.

P. Sainath says that ‘The UPA government’s waiver is no solution to even the immediate crisis let alone long-term agrarian problems. Nothing in this budget will raise farm incomes.‘

Satish Nandgaonkar writes in The Telegraph that the loan waiver was unjust because ‘the waiver helps only if the loan has been taken from a government-backed institution, but most farmers in Vidarbha borrow from moneylenders at the start of the sowing season to buy seeds.‘ Didn’t the economists behind the budget know this’

The economist from Harvard, P. Chidambaram said that ‘loan waiver will strengthen banking.’ I had thought that the loan waiver was targeted at the farmers in India! But then, the FM talks about growth quite a lot and how it is the only fast remedy to poverty. I wonder what growth he refers to!

Gurcharan Das thinks that the loan waiver is immoral as it ‘wounds that moral universe. It tells the farmer not to bother to repay his next loan, because, who knows, another party will be in power and it too will cancel his debts. What message does this send to the honest village woman who struggles every week to repay her micro-loan’‘ He has brought in the ‘moral’ angle to the loan waiver. It is interesting because, the government frames laws and establishes morality which is then modified by the civil society. The concern should be whether the loan waiver achieves its objectives or not.

Mutiny.in does not question the FM’s ‘economic sense’ and goes on to say that ‘but, burdened no doubt by political considerations, the Finance Minister has made this unabashedly populist announcement.‘ Populist-in what sense’

‘India cancels small farmers’ debt’ says the BBC. It also has a picture of a representative small farmer. I wonder whether the objective of the waiver was to help the small farmers at all. The rationale behind the waiver is debatable. It has not fooled the public therefore it won’t help in the elections. It has done nothing to resurrect the farmers in distress.

According to Business Standard, the present budget is evidence for politics winning over economics. The author(s) have not studied anything but neo classical economics. Their notion of politics and economics as distinct disciplines is quite scary. This is where Classical Political Economy aids. They do not view economics as an independent arena. For them, it is very much a part of politics, society, etc.

India Today describes the budget as ‘Bad politics bad economics‘. According to me, this is the best description of the budget.

The Indian Government consults famous economists who have been trained abroad and in India and also has talks with various eminent economists. Have they suggested ‘wrong’ policies’ Or is that the Government decided not to accept their policies’ To make such ‘loan waivers’, one does not need an academician.

Economists like Keynes, Smith, Ricardo, etc wrote ‘economics’ books not for fame or money but to help their respective economies. They studied economics to rectify the problems that existed then. Though a lot of research papers and articles are being published by Indian Economists, none of them seem to help the people of India. What are economists doing these days’

On Indian Agriculture

There is a consensus about the crisis which the Agricultural sector is facing in India. The contribution to GDP has been falling and it is under 20% of the GDP now. The sector provides employment to about 60% of the population. Most of the farmers under this sector fall under the ‘informal sector’ where there is a dearth of reliable statistics. This can be one of the causes for the low share of agriculture in the GDP. From the figures of employment and ‘contribution to GDP’, we can conclude that there is the presence of a high degree of disguised unemployment.

Agriculture in the Budget

The proposals to revive the agricultural sector are:

  • Farm credit raised to Rs 1,75,000 crore, providing relief to additional 50 lakh farmers.
  • At 7 percent interest rate farmers receive short-term credit from NABARD, with Rs 3,00,000 upper limit on principal amount.
  • The outlay for Accelerated Irrigation Benefit Programme (AIBP) has been raised by 58.22 per cent to Rs 7,120 crore for 2006-07 from Rs 4,500 crore during 2005-06.
  • Banking sector to credit-link an additional 3,85,000 Self-Help Groups (SHGs) in 2006-07.
  • NABARD to open a separate line of credit for financing farm production and investment activities.
  • The corpus of Rural Infrastructure Development Fund (RIDF) in 12 tranches to be increased to Rs 10,000 crore.
  • The programme for repair, renovation and restoration of water bodies to be implemented through pilot projects in 23 districts in 13 states. The estimated cost of the programme stands at Rs 4,481 crore.

[Via Surfindia]

The current budget has addressed the farm credit, pulses, plantation sector, irrigation, rainfed area development, restoring water bodies, ground water recharge, training of farmers, fertilizer subsidies, agricultural insurance, social security etc. [Budget 2007-08]

Are these enough to significantly affect the agricultural sector’ Moreover since India claims to growing at over 8% in GDP, are these allocations sufficient’

An important constituent of the strategy to revive agricultural performance in the country must be to increase the level of public investment in agriculture research and development and rural infrastructure. Increase in public investment in agriculture in turn requires significant rationalisation and restructuring of government subsidies on food and agricultural inputs, including power, canal irrigation and fertilisers. Greater public investment in agriculture research and extension and rural infrastructure would stimulate private investment in agriculture and agro-processing. A policy of higher investments without commensurate reforms in the institutions endowed with the charge of managing the resources created is, however, unlikely to succeed. Participatory management and selective privatisation can contribute greatly to improving the delivery of major inputs to agriculture. [Sharma and Gulati 2005]

Reasons for the crisis

Only 2 reasons are being highlighted as all the other reasons are associated to there too or spring form these two. So broadly speaking, the crisis is due to

<!–[if !supportLists]–>1) <!–[endif]–>Pressure on land: Population has outstripped land supply. Faster growth of population goes with slower rise in per capita output. [Vaidyanathan 1988] The rate of growth of population is more in the rural areas than in the urban areas. Population growth can be said to be indirectly proportional to education. Where there are more family planning programmes and adequate education, which lays emphasis on both the male and female child, the tendency to have more children is less. Moreover, with the rapid expansion of SEZ‘s, the pressure on agricultural land is further aggravated.

<!–[if !supportLists]–>2) <!–[endif]–>Structural deficiencies: Indian agriculture is characterized by inefficient distribution, marketing and financial institutions. As more of the agriculture falls under the ambit of the informal sector, there is a dearth of efficient institutions. The loans are hard to come by as they lack the necessary assets to keep as collateral. Moreover, with the current rates of inflation, the prices of inputs will rise, further adding to the farmers’ distress. The distribution systems fail as the agricultural produce most often does not reach the targeted population.

US and Indian Agriculture

Rich nations preach free trade but practice protectionism against poor nations, especially in agriculture. For example, the United States severely limits sugar imports from Latin America to benefit American sugar beet growers, even inhibiting imports of Brazilian cane-based ethanol, which is far cheaper and more energy efficient than domestic ethanol. [Noll 2006]

The subsidies that the developed nations offer their farmers’ vis-‘-vis to what the developing countries can offer is very large. The developing nations find it difficult to withstand this competition in the world markets. If the subsidies are not reduced by the US and the EU, it will be the developing nations who will have to bear the brunt. [Thomas 2006]

Globalization and Indian Agriculture

Once again, there are some individual cases where globalization has led to deprivation and suicide. About 800 km away from Mumbai is the cotton-growing region of Vidarbha, perched on the Deccan Plateau. Hundreds of cotton farmers here have killed themselves in recent years. The reasons are complex and varied. Among the reasons is this one: farmers here cannot compete with cheap cotton imported from the United States, whose farmers are lavished with huge subsidies by a government that preaches the virtues of competitive markets to the rest of the world. Their deaths can be linked to imperfect globalization. More generally, though, reform and globalization have led to faster growth and sharp drops in poverty levels. [Knowledge Wharton 2007]

The article talks about individual cases which resulted from imperfect competition. I wonder if anything in this world can work in a perfect way! And in Vidarbha, it is not individuals who are dying but ‘groups of individuals‘. Yes, globalization has led to faster growth but ‘sharp drops’ in poverty levels is hard to agree, though the statistics does say so.

Conclusion

On the whole, the condition of Indian Agriculture is bleak. If the current allocations of the budget will help the agricultural sector will be seen in the next few years. The sector is pressurised by the domestic as well as the international economy. Agriculture finds it hard to compete in international markets with other products which are highly subsidised. More of funds need to be devoted to research in agriculture which should aim at improving agricultural production and productivity. The size of agricultural markets needs to be increased. This can be facilitated by the extension and improvement of transport. [Vaidyanathan 1988]

Agriculture is a sector which cannot be neglected as majority of the Indians depend on it for their livelihood. Targeted policies which bring about favourable outcomes are necessary. Of late, the rhetoric is about the booming GDP and bulling bourses; that significant issues like ‘agriculture’ are not getting adequate attention.

References

<!–[if !supportLists]–>1) <!–[endif]–>Pooja Sharma and Ashok Gulati, Can the Budget Boost Agricultural Performance’, EPW, May 21, 2005.

<!–[if !supportLists]–>2) <!–[endif]–>Alex M Thomas, Why fear subsidies’, Undergraduate Economist, August 16, 2006.

<!–[if !supportLists]–>3) <!–[endif]–>Roger G. Noll, The Foreign aid Paradox, SIEPR Policy Brief, October 2006.

<!–[if !supportLists]–>4) <!–[endif]–>A Vaidyanathan, India’s Agricultural Development in a Regional Perspective, 1988.

Further Readings

<!–[if !supportLists]–>1) <!–[endif]–>On Private Participation in Agriculture- M Rajivlochan (Via the commenter, Chetana)

India and it’s ‘Segregated Growth’

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.’ One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions ‘ education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides ‘ poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]

Conclusion

Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.

References

1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check, www.forumblog.org, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism’, EPW, February 17, 2007.

Indian Economic History: Part 2

The previous post on Indian Economy during the British period revealed one of the reasons for widespread penury in the country at the time of independence. This post is second in the series on Indian Economic History. A major reason for the presence of very wide inequalities of income and wealth concomitant to abject poverty was due to the Land Tax levied by the British Government.

On Land Tax

After the deterioration of the Indian manufacturing sector owing to policies framed by Britain, Agriculture was the sole source of national wealth.

The Land Tax levied was not only excessive by outrageous. In England the Land Tax rates were between 5% and 20% whereas in India, they levied exorbitant rates which were over 90% of the produce. This crippled the Indian Agriculture. This ensured that the cultivators got zilch from cultivation.

The main characteristics were

1) It was heavy as in the rates were too high.

”” 2) The rates were uncertain. The tax rates were changed very now and then. There was absolutely no transparency in the proceedings.

Moreover, this Land Tax differed from the principle of taxation which prevailed in all well administered countries.

In addition to all this, the revenue from Land Tax was never used for the betterment of the Indian populace. This left the cultivators permanently poor.

Lagaan

The movie portrays the large chunks of monies which were taken as tax from the Indian peasants. Life during the colonial rule was certainly hard for them. This was not caused by mismanagement but in fact it was maneuvered cleverly by the British.

Conclusion

The effects of the Land Tax were wide spread. They not only robbed the cultivators of their harvest but also discouraged them to cultivate. This had serious negative impact on production and productivity. Thus we know that, Colonial rule played a very important role in destroying agriculture and industry in India. This resulted in India being shunned from international trade as the products were no longer ‘price’ competitive.

References

1) The Economic History of India By R.C. Dutt