India should learn
from China and start with liberalisation of rural land, labour and
capital markets before attempting bigger things.
Independence
Day has come and gone with its usual mix of celebrations, pride and
ruminations on how things could be better. Interestingly, several media
commentaries tagged the event with the 25th anniversary of economic
reforms, launched in 1991 around the same time of the year. They largely
dwelt on the theme of expanding economic freedom to buttress and
sustain political freedom, though none – barring a piece by Ashok Gulati
and Shweta Saini for this newspaper on August 15 (http://goo.gl/L922wj)
– focused on agricultural reform.
It is a well-known fact that
unlike in the industrial, financial or other services sectors, reforms
have mostly bypassed agriculture. The rigid and illiberal policies that
continue to exist in agriculture severely restrict its potential to
contribute to employment generation and poverty reduction. It, then,
raises the question: why does reform elude agriculture?
The
answer may lie in the political economy of agriculture, which, in turn,
is a product of the interplay of three major forces: a) the situation in
the factor markets (land, labour and capital); b) the role of rural
commercial capital; and c) globalisation. Let me briefly explain each of
these elements — how they mutually clash and generate the friction,
slowing down reform in agriculture.
The factor markets in
agriculture represent some of the most frozen parts of our economy,
where time seems to have stood still since roughly the first decade
after Independence. In the case of land, tenancies were abolished along
with dismantling of the zamindari system in practically all states by
the 1950s. But the result is that informal tenancies flourish and with
no legal protection to tenants. There is data showing that the majority
of farmers leasing in land now are small and marginal cultivators, who
together constitute some 85 per cent of all holdings. The absence of a
legal land lease market has hurt these cultivators the most. Lack of
tenancy documentation deprives them of access to subsidised formal crop
credit, insurance, power and other inputs, while restricting their
ability to absorb new productivity-enhancing technologies.
Coming
to labour, while this is an area generally seen to be fraught with high
risks for reform, the situation of rural labour markets is all the more
primitive. While governments have promoted the use of modern technology
in seeds and other inputs, they have shied away from unleashing the
full power of farm mechanisation. While the underlying motive may be the
fear of displacing labour – not borne out on the ground, where the
reality is one of growing scarcity and non-availability during the peak
agricultural season – the ultimate cost has been farm productivity: Our
yields in most crops are around half of China’s. Small and marginal
cultivators have again been the worst sufferers. They cannot hope to own
modern farm equipment and are also unable to access these in the
absence of custom hiring centres.
With regard to capital,the
Situational Survey of Agriculture for 2013 revealed that only 60 per
cent farmers could avail of credit from formal financial institutions,
whether banks or cooperative credit societies. In the case of small and
marginal farmers, about 85 per cent are still dependent on the village
moneylender and informal credit markets, where interest rates start at
24 per cent per annum. No wonder, the survey also showed 52 per cent of
all agricultural households in India to be indebted, with Andhra Pradesh
(92.9 per cent), Telangana (89.1 per cent) and Tamil Nadu (82.5 per
cent) topping the charts.
Linked to these is the role of the
other two elements. The stark reality is that rural commercial capital —
personified by the large landowner, the moneylender and the mandi
commission agent/trader — still dominates the farm credit sector. This
form of capital is inherently risk-averse, only seeking to reproduce
itself. It courts political patronage to resist any reform or entry of
competitors. The entrenched power of rural commercial capital probably
explains how even the most tentative and limited of marketing reforms,
initiated now and then, have got thwarted in most states.
The
impact of globalisation, too, needs to be looked at against this
backdrop of rigid factor markets and primitive rural commercial capital.
Integration of a few commodities such as cotton, soyabean, rice and
high-value fruits and vegetables into global value chains has exposed
large number of farm households to price volatility and risks, which
they can neither understand nor control. More importantly, the
safeguards and instruments available to producers in more developed
markets — futures, hedging or even risk insurance — aren’t accessible to
farmers here. The result can be widespread distress (as in the case of
cotton when it went through a global downturn after 2013), fuelling the
notion that all reform in agriculture is risky and dangerous.
China’s
example shows that reforms in the primary sector have to begin with the
basic factor markets. The farming community must taste the benefits of
reforms first in its immediate neighbourhood — through easier land
leasing laws, affordable and timely credit and other financial services,
and also access to inputs, mechanisation and transparent markets. That
would help build a constituency to support a larger and longer term
agenda for reform in agriculture, including rationalisation of
subsidies. Policy makers seeking quick solutions through ad hoc,
surface-level interventions will only come to grief.
(The
writer, a former IAS officer, is the CEO of an agriculture marketing
start-up and is also visiting senior fellow at the Indian Council for
Research on International Economic Relations, New Delhi)