Investments, institutions, incentives

Written by Sunil Jain | Updated: Mar 17 2011, 05:38am hrs
One of Indias top agriculture economists, Ashok Gulati has been critical of government policies that lead to subsidies crowding out investments, on-off policies on exports and futures, and of the lack of incentives to get farmers to invest in better technology. It is precisely for this reason that the government has appointed him as the chairman of the Commission for Agriculture Costs and Prices (CACP), to put his ideas at work. Its been just a few weeks, but Gulati already has some definite ideas. He shares some of them with Sunil Jain:

How do we deal with the agriculture crisis

Given that GDP growth originating in agriculture is at least twice as effective in reducing poverty, its important to grow agriculture faster. There are genuine concerns, but lets not believe Indias agriculture is in a crisisfrom 1980 till now, agriculture has grown at around 3% per annum; this is under-performance, not a crisis.

The foodgrain sector has, of course, performed slower than other crops (1.4% in 2002-07 versus 3.6% for other crops), so future growth wont come from foodgrain, and there is a lot of intra-state difference in growth (agri-GDP in Gujarat, driven by Bt cotton, grew 9.6% per annum between 2002-03 and 2007-08 as compared to just 1.6% in UP and 2.7% in West Bengal).

What is the CACPs role

Its role is to recommend price and non-price policies to make the farmers adopt new technology in an efficient and sustainable manner, to use better seeds and better farming practice.

So you just need to raise procurement prices

Not at all! In the green revolution, we got seeds from abroad and the CACP raised food procurement prices, but the FCI made this effective by procuring the grainunless FCI procures, raising prices doesnt help. In many places, FCI doesnt procure. In UP, paddy prices fall below the MSP when output risesit was R 865 per quintal in October in Shahjahanpur and this rose to R975 in January, though the MSP was R1,000. In Sambalpur in Orissa, prices were around R900.

Plus, keep in mind the practices need to be sustainable. Over the last 40 years, weve brought the water table down dramatically by producing crops that require excess water in areas that dont have enough natural water.

How do you make it sustainable

To begin with, move at least one million hectares of paddy from Punjab, and another million from Haryana and western UP, to eastern UP, Bihar, Jharkhand and Orissa. The north-west states get 60 cm of rain while rice needs 225 cm. But for that to happen, FCI needs to procure in Orissa and Bihar. Once FCI procures, farmers will adopt new seeds. China produces 200 mn tonnes of paddy from 29 mn hectares. We produce 150 mn from 45 mn hectares; 63% of Chinese rice is hybrid, just 3% of Indian rice is hybrid. China has a full institute working on just hybrid rice; we barely have a small programme. East Indias productivity is half that of north-west India, so just achieving this level means a big jump in production.

We spend 0.6% of agri GDP on R&D, China is around 0.9% of agri GDPthat is much higher than ours.

So youre really dependent upon what FCI does. You should have been made FCI chief, not CACP!

I am happy as a CACP chair! But for our MSP policy to work, we need an effective procurement mechanism so that market prices do not go below the MSP. However, if FCI does not find it a viable option to open procurement centres in some eastern states, we have to think about involving the private sector to procure on the governments behalf.

Besides grains, where else do you want to focus

Edible oils (oilseeds) and pulses. Our imports of edible oils and pulses together have crossed $8 billion (approximately R36,000 crore) in 2009-10. About half of our consumption of edible oils is being imported. Most of our oilseeds and pulses are on rain-fed lands with very little assured irrigation. Oilseeds have about 25% irrigation cover and pulses only 15%. They bear high risk.

How important is R&D

I just gave you numbers on rice. The two biggest revolutions India has seen in recent years have been in cotton (driven by Bt) and maize (driven by hybrids). Thanks to Bt, India has become the second-largest producer of cotton in the world and also the second-largest exporter, and around 85% to 90% of all cotton in India is under Bt. The Bt revolution is fully driven by the private sector and around 80% of the maize revolution has been driven by private firms. The trick is to see if we can harness private initiative.

How do you do that

The government can tie up with the private sector under the PPP mode for a buy-back arrangement of their seeds at a negotiated price. If those prices are high for farmers, the government can sell these seeds to farmers at a subsidised price. This will not cost a huge amount; perhaps R400-500 crore can be a catalytic factor to transform the technological side of the issue. Bigger investments are needed to tackle weak infrastructure, like power, roads and water management (especially flood control).

Why did private initiative work in the case of Bt and maize only After all, if technology can make yields rise, farmers will adopt it in every area since the cost of seeds is a fraction of overall yields. Isnt it that technology gets adopted only if the government supports it with better infrastructure, better irrigation, better roads

Of course, its better if we have all of this. But better technology is adopted even without better irrigation, though the results will not be as good. Gujarat has 60% cotton area under Bt, but 50% is under irrigated conditions; Maharashtra has almost 90% of its cotton area under Bt, but only 5% has irrigation cover. This leads to a huge risk in Maharashtra compared to Gujarat. The pace at which the technology has spread is an eye-opener since weve all been saying that the agriculture extension system has collapsed in India!

Pure private initiatives worked better in maize because the buying is driven by the poultry industrys needs; in the case of cotton, you have export demand as well as that from textile mills. So, in both cases, the demand source is more organised than in the case of foodgrain. Since that doesnt exist in the case of foodgrain, Im suggesting the government step in with buying rice seeds from the private sector and distribute them. Its pretty easy to identify districts where this should be tried: districts with better irrigation and better roads, roll things out there first.

Today, private players are not allowed to import seeds, only the ICAR is. Why not allow private players to import seeds and then work on them to adapt them to the Indian environment

Should the government distribute or get the private sector to do it, perhaps using the kisan credit cards

Let the private sector do it; give a 50% rebate for seeds and administer it through the credit cards, which appear to be working well, or through the new smart cards under UID... all these possibilities can be explored.

Is the CACP giving enough margins to farmers One suggestion is that pricing should be done in such a way as to give farmers a 50% margin.

Pricing over cost is important. But cost is only one factor, though a critical one. However, if we rely exclusively on that, it can lead to the kind of distortions weve seen in over-production in the north-western states and a dramatic fall in the water table, the ills of free power and even increased salinity of the soil through flooding of fields.

Three-fourth of all investments in agriculture are in the form of subsidies. How does that distort things

Weve done work to show that if poverty alleviation is the goal, building roads gives you the best returns.

If the objective is agriculture growth, expenditure on R&D is the best and roads is second. But understand that little will be gained by only focussing on R&D if the pricing isnt right and if procurement doesnt take place the incentives policy has to work hand-in-hand with technology to unleash major changes in agriculture.

The bottom line is that you need to reform the three Isinvestments, institutions and incentivesif you want agriculture growth to rise, especially in the foodgrain sector. This means not just CACP pricing or FCI procurement, but the entire gamut of the on-off export policies, the on-off bans on futures, getting in larger retail players and so on.