What Modi needs to do to spur agri-trade

Today, India spends roughly 0.7% of agri-GDP on agri-R&D and extension together. This needs to double in the next 5 years. The returns are enormous

What Modi needs to do to spur agri-trade
Today, Indian industry is complaining that rural demand is collapsing.

As per the latest report of the National Statistical Office (NSO), released on May 31, the Gross Value Added (GVA) at basic prices (2011-12 prices) for fourth quarter (Q4) of FY19 has slumped to 5.7% for the overall economy, 3.1% for manufacturing, and -0.1% for agriculture, forestry and fisheries. However, for the full financial year, FY19, GVA growth is more respectable: 6.6% for the economy, 6.9% for manufacturing and 2.9% for agriculture.

Incidentally, for the five years of Modi government (2014-15 to 2018-19), agri-GDP has also grown at 2.9% per annum. Many experts believe that agriculture cannot grow at more than 3% per annum on a sustainable basis. Swaminathan A. Aiyar, whom I admire for his brilliant writings, has recently written in the Times of India that ‘no country has managed more than 3% agricultural growth over a long period’.

This is simply not true. China, for instance, registered an agri-GDP growth of 4.5% per annum during 1978-2016, a very long period indeed. In fact the first thing Chinese government did in 1978, when it started off economic reforms, was to reform agriculture. Agri-GDP in China grew at 7.1% per annum during 1978-84, and because they also liberated price controls on agri-commodities, farmers’ real incomes increased at 15% per annum. That set the stage for a manufacturing revolution, which revved up through Town and Village Enterprises (TVEs) to satisfy domestic demand coming from rural areas. The rest is now history.

Today, Indian industry is complaining that rural demand is collapsing. Tractor sales are down by 13%, two-wheeler sales are down by 16%, car sales are down by a similar percentage, and even FMCG sales are down in April 2019 over April 2018. One of the reasons behind this is that India never had any major agri-reforms, and farmers’ incomes have remained very low. But still there have been periods, reasonably long enough, when agri-GDP has grown well above 3%. In fact during the 10 years of UPA from 2004-05 to 2013-14, agri-GDP grew at 3.7% per annum. This dropped to 2.9% during the Modi period. When masses do not gain, demand for manufactured goods remains limited, slowing down the wheels of industry. So, if industry wants to prosper, we must aim at an agri-GDP growth of more than 4%. My assessment is that it can grow even at 5% per annum, at least for a decade, provided we are focused on reforming this sector.

What is needed is to raise its productivity in a manner that can cut down unit costs and make Indian agriculture more competitive, enabling higher exports. Unfortunately, agri-exports had negative growth during the Modi period (see accompanied graphic).

During UPA-2, agri-exports more than doubled, from $18.4 billion in 2009-10 to $ 43.6 billion in 2013-14. But during the Modi period, they declined, touching as low as $33.3 billion in 2015-16 and then recovering to $39.4 billion by 2018-19, but still below the peak of 2013-14.

Officials managing agri-trade need to pay heed to this massive failure as it has implications not only for overall agri-GDP growth but also for slowing down of manufacturing growth due to sluggish demand for industrial products emanating from rural areas. There is ample evidence that much of Indian agriculture is globally competitive. But, it is our restrictive policies that restrain private sector from building direct supply chains from farms to ports, bypassing the mandi system. This leads to weak infrastructure for agri-exports. The net result of all this is that Indian farmers do not get full advantage of global markets. Further, an obsessive focus on inflation targeting by suppressing food prices through myriad controls is basically an anti-farmer policy. If these policies continue, prime minister Modi’s dream of doubling farmers’ real incomes by 2022-23 will remain only a pipe-dream.

It has to be noted that any attempt to artificially prop up farmers’ prices through higher minimum support prices (MSPs), especially in relation to global prices, can be counter-productive. Normally, MSPs remain ineffective for most commodities in large parts of India. But even if they are operational through massive procurement operations, it can backfire when MSPs go beyond global prices.

Take the case of rice. India is the largest exporter of rice in the world, exporting about 12-13 MMT of rice every year. If government raises the MSP of rice, say, by 20%, exports of rice will drop and stocks with government will rise to levels way beyond the buffer stock norms. It would be dead loss of scarce resources. Besides, it would create unnecessary distortions, adversely impacting the diversification process in agriculture towards high value crops. This needs to be avoided.

What can augment our global competitiveness in agriculture is investment in agri-R&D and its extension from lab to land, investment in managing water efficiently and investment in infrastructure for agri-exports value chains. Today, India spends roughly 0.7% of agri-GDP on agri-R&D and extension together. This needs to double in the next 5 years. The returns are enormous. Look at what meagre investments in Pusa Basmati 1121 and 1509 have given to the nation in terms of basmati exports that hover between $4-5 billion annually. Similar are the returns from sugarcane variety (Co-0238) in Uttar Pradesh that has increased the recovery ratio from about 9.2% in 2012-13 to more than 11% today. Massive investments are also needed in managing our water resources more efficiently, to produce more with less. But augmenting productivity alone, without pushing for export markets, can lead to glut at home and depress farm prices, shrinking their profitability. So, first, think of markets and then give a push to raise productivity and exports simultaneously. Can it be done under Modi 2.0? Only time will tell.

The author is Infosys chair professor for agriculture at ICRIER

Views are personal

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