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Resource centre on India's rural distress
 
 

Switch from farm subsidy to farm investment-Ashok Gulati
-The Economic Times

With a weak monsoon, farmers and farm labour, agri-investors and policy makers, everyone is looking up in the sky and praying for more water to pour. Farm analysts are debating whether this will lead to a drop of 16 million tonnes of foodgrain, as it happened in 2009, or 38 million tonnes, as it did in 2002. NCAER is projecting 20 million tonnes drop in grain production in its preliminary estimates while my own back-of-the-envelope calculation is at least 10-15 million tonnes drop. Food inflation, which is already hovering around double digits, is likely to go up further unless urgent action is taken by the government to import edible oils and pulses and released in the open market (as also in public distribution system). Also, this distribution strategy needs to be synchronised with release of larger quantities of cereals from overflowing public stocks.

It is against this backdrop, everyone is clamouring for more public resources to be funneled in agriculture to stabilise agri-production and tame food prices, else there is danger that this will become a drag on the overall growth story of India, which is already heading downhill.

The central question therefore is: how much public expenditure is really going to agriculture and how much more needs to be pumped in to achieve stability in production and our desired rate of growth in agriculture and fall in food inflation? The brief answer is that the government is already spending quite a bit on agriculture, almost 20-25% of agri-GDP, which is one of the highest in south and southeast Asian economies.

Yet, it does not get the desired results because of the nature and manner in which public expenditure is poured in agriculture. Almost 80% of the public expenditure going to agriculture is in the form of input subsidies (fertilisers, power, irrigation) and only 20% as investments in agriculture (Chart I).

Agriculture
And that is where the bane of Indian agriculture lies. If we could gather courage to bite the bullet, and turn it around to have 80% public expenditure going to agriculture as investments and only 20% as targeted subsidies to farmers directly, Indian agriculture will be easily growing at much higher rate of growth than the targeted 4%. And there will ample food with stable prices, at home as well as for exports.

It may be worth noting that during the last three Five Year Plans, we have failed to achieve our modest targeted rate of growth of 4% in agriculture. During the Ninth Plan (1997-2002), agri-GDP growth was 2.5%, which dropped marginally to 2.4% in the Tenth Plan (2002-07), but increased to 3.4% in the Eleventh Plan (2007-12), though still remaining below the targeted 4% growth.

We all know that one of the most critical variables to propel growth is investments (assuming a normal rainfall year). While public sector investments are meager (but subsidies large), it is the private sector investments by farmers themselves that dominate the agri-landscape. From irrigation pump-sets to farm machinery, they are all going up and that growth is accelerating. Total gross capital formation (public plus private) has gone up from about 12% in 2000-01 to about 20% plus in 2010-11. This is the most commendable part of the story of Indian agriculture. And almost 80% of this investment in agriculture comes from the private sector (Chart II), and it is strongly influenced by the incentive structures in agriculture.

It is, therefore, crucial to get the agri-prices right as well as the agri-markets right. This requires reforming the markets and freeing them from the clutches of controls. Reforming APMC Act, ECA, abolishing levies, freeing up landlease markets, aggregating the produce at farmers' level through farmer producer organisations (FPOs) and linking them to largescale processors, modern retailers, and building effective and efficient value chains by investing in logistics ( a la AMUL model in milk) and mainstreaming even vendors in organised retail, is the way forward. This will require resources and social engineering, besides cleaning up laws which are archaic and leading to large scale rent seeking.

The larger chunk of resources for investments in value chains can come from the private sector, if we get our incentive structures right and declare food processing and organised retailing in food, ensuring food safety, as priority sectors. Public funds can come from rationalising and containing input subsidies on fertilisers, power, irrigation and credit. These funds can then be spent for social innovations in aggregating farmers in clusters, building some basic infrastructure at the farm level to clean, grade and package food, especially perishables like fruits and vegetables.

Research clearly shows that marginal returns on agri-investments are 5 to 10 times higher than from agri-input subsidies. Economics is quite clear on this. But why then our policy making leans heavily towards subsidies and not towards investments? Is it the short-term political returns that are higher in doling out subsidies than in investments is a matter for political scientists to probe? Investments take time to fructify, but they are more sustainable to give benefits.

If only in our dynamic democracy we had a little longer vision and concentrated on investments, today we would not be looking up in the sky with prayers for better monsoon but would have largely drought-proofed our agriculture. As they say, God helps those, who help themselves!

(Ashok Gulati is chairman of Commission for Agricultural Costs and Prices. Views are personal)