~ AGRARIAN CRISIS IN INDIA !!

                                                       

                                  INTRODUCTION

It was with the Structural Adjustment Programme (SAP) in 1991 that the policy of globalization was concretely introduced in India. Based on this policy and the directives of the World Bank, the Indian economy was substantially overhauled. The export levels in agriculture were drastically lowered and the government started reducing its investment on agriculture and industrial sector allowing the private sector to take over. The problems of agrarian sector have adversely affected the Indian agriculture. The most prominent manifestation of this is in the drastic decline in the growth rate of food grains. The rate of growth of agriculture was very less as compared to the increasing rate of population and India then started to import food grains at a much higher price than that in the domestic market. Again, employment in the agricultural was not profitable due to the fall in the price of farm products. One of the reasons of fall in farm prices is inherent in trade liberalization, the farm prices in India considerably declined, as the same products could be bought at lower prices in the international market. In addition, the number of people who are employed in the primary sector and the area under cultivation decreased, which in turn caused a decline in rural employment.

               The suicide of farmers is the result of stagnation in agriculture. When there is no season the farmers are left unemployed. The main reason for agrarian crisis is- liberal import of agricultural products, lack of easy and low cost loan to agriculture, decline in government investment in the agricultural sector, restructuring of the public distribution system and special economic zones.

               Finally in support for the growth of the agricultural sector, we are all aware that our farmers are in great distress. Therefore, our government should take up important measures to remove the hindrances. Better and easier banking and micro-financing should be promoted. Investment must be made especially in the farming industry. A periodic revision of the statistics of the growth and development should be made. Bold steps must be taken to implement land reforms which are not implemented in most states. An effective way of helping out the farmers could be indulgence of the youth in social entrepreneurship concentrated in the agricultural sector. According to Dr M.S. Swaminathan, “In a country where 60% of people depend on agriculture for their livelihood, it is better to become an agricultural force based on food security rather than a nuclear force.”

 INDICATORS OF AGRARIAN CRISIS DURING THE POST-REFORM PERIOD

The root cause of the crisis in agriculture is that agriculture is becoming an economically unviable activity when compared to other enterprises. It means that the profitability of agriculture is low or nil or negative, and therefore, the income derived from these activities are not sufficient enough to meet the expenditure of the cultivators. The poor farmer is squeezed between high input costs and low returns. The issue of viability depends on numerous social, economic and cultural factors which would have substantial subjective elements. It would also vary from crop to crop, time to time, region to region and group to group as well.

                 The problem of income deficit in agriculture arises from three basic causes: first, adverse terms of trade; second, low productivity of resources engaged in agriculture leading to low level of production, and third, the excessive use (dependence) of inputs such as labour, fertilisers, pesticides, etc., causing the cost of cultivation shooting up compared to that of the final sale value of the crop output. When agriculture is not yielding remunerative income the life of the farmers become very desperate. As a first step, they alter their crop pattern by cultivating profit yielding crops (commercial crops), provided if the land and climate are suitable for such shift. If the problem persists, the smart farmers give up the agriculture activity and take up alternative occupation and convert the land for alternative uses. Once the agricultural land is converted for alternative uses, it becomes totally irreversible again for agriculture. As such, decline in the agricultural land area sets the motion of crisis on, leading to the situation of permanent crisis.

              Though the root cause of agricultural crisis could be attributed to the real economics of crop cultivation, several price and non-price factors have played major role for the agricultural crisis in India. A few such factors are:

1.      Dependence on Rainfall and Climate

Despite the economic reforms initiated in 1991, Indian agriculture is still gamble with the monsoon. Unlike other sectors, agriculte depends largely on the natural climate includong rainfall. Nearly 60% of India's farmers depend on rains for irrigation and a failed monsoon means crops such as rice, wheat, soyabean, sugarcane and cotton take a severe hit. To protect the fall in prices during times of harvest, the government has hiked the minimum support price for paddy and pulses, and increase then time to time. These support prices are beneficial to farmers, only if they could harvest the crop. If the crop failed due to adverse climatic conditions and poor rainfall, the risk is more felt by the farmers.

2.      Liberal Import of Agricultural Products

The fall and fluctuations in the prices of agricultural products is directly related to the liberalisation policy of the government. The policy of removal of quantitative restrictions and lowering of import duties adopted in India were according to the agreements of the World Trade Organisations (WTO). The main reason for the crash of prices of agricultural products, especially of cash crops, in India was removal of these restrictions to import these products. For example, when the Government of India reduced the import duty on tea and coffee from Sri Lanka and Malaysia, their prices in the domestic market got reduced drastically. Comparatively, as the prices of some of the farm products are less in the international market, import of these products has driven down the prices in the domestic market. Thus, cultivation of such products became unprofitable and so their production was fully or partly stopped. 

3.      Rise in Input subsidies and fall in public Investment in Agriculture

Subsidies at both a global and local level have played a part in the current crisis. Well known are wealthy-country subsidies to commodities such as cotton, which have driven down world market prices. Federal and state level subsidies in India are also responsible for this. Farm subsidies in India has been rising from 1980s onwards, without raising the productive capacity, this is also distortionary in nature. In addition to this, rising input subsidies have adverse impact on environment and land fertility. On the other hand, public investment in agriculture has been continuously decelerating particularly after the post reform era. Where India can afford to invest in its agrarian economy, it would be better placed in developing rural infrastructure and education, rather than input subsidies. "Marginal returns on subsidies have gone down over time," says Dr. Gulati. "If government has money to spend, [the] return is much better if it goes into research and development, followed by roads." During the period between 1976–80 and 2001–03 public investments in agriculture declined from over 4% of agriculture GDP to 2%. The expenditure of the government in rural development, including agriculture, irrigation, flood control, village industry, energy and transport, declined from an average of 14.5 percent in 1986-1990 to six per cent in 1995-2000. When the economic reforms started, the annual rate of growth of irrigated land was 2.62 per cent; later it got reduced to 0.5 percent in the post-reform period. Thus, from Macro-economy framework, we can understand that the fall in public investment has negative impact on agricultural growth, leading to distress and crisis in Indian agrarian scenario. 

4.      Lack of Easy Credit to Agriculture and Dependence on Money Lenders 

 

In general, the lending pattern of commercial banks, including nationalised banks, to agriculture is not simple. It is part of the policy of privatisation that banks, even nationalised banks, look for profit over their social responsibilities to the people. This has forced the farmers to rely on moneylenders and thus pushed up the expenditure on agriculture. The National Commission for Agriculture, headed by Dr M.S. Swaminathan, also pointed out that removal of the lending facilities and concessions of banks during the post-reform period have accelerated the crisis in agriculture.

5.      Conversion of Agricultural Land for Alternative Uses

As part of the economic reforms, the system of taking over land by the government for commercial and industrial purposes was introduced in the country. As per the Special Economic Zones (SEZ) Act of 2005, the government has notified more than 400 such zones in the country. Since the SEZ deprives the farmers of their land and livelihood, it is harmful to agriculture.

6.      Farmer’s Suicide

The year 1997 witnessed the first emergence of farm suicides on a mass scale in India. More than 25,000 farmers have taken their lives since 1997, according to experts who have analyzed government statistics. Most suicides occurred in states of Andhra Pradesh, Maharashtra, Karnataka, Kerala and Punjab. Study shows that the majority of suicide victims were small and marginal farmers and the majority had high levels of indebtedness. Yet debt is not identified as a factor leading to suicide. However, more than 90% of suicide victims were in debt.  Two factors have transformed the positive economy of agriculture into a negative economy for peasants - the rising costs of production and the falling prices of farm commodities. Both these factors are rooted in the policies of trade liberalization and corporate globalisation. A Vaidyanathan (2006) views that People are driven to the extreme step of suicide not only because of imprudently large borrowing from high cost sources and for non-productive uses but also because the increase in net incomes from loans used for productive purposes falls far below expectations. Suicide-afflicted households have also borrowed heavily for digging/deepening wells and for cultivating input-intensive high-value crops (like Bt cotton and spices) in the expectation of high yields and good prices. Failure of these expectations is a major reason for their inability to repay these debts. 

                The above mentioned points to a great extent show that crisis in Indian agriculture has been much more severe after the economic reforms initiated in 1991. Utsa Patnaiyak mentions that from the mid-1990s in particular, both the material productive sectors – industry and agriculture – have been in decline with agriculture being more severely affected than industry. The only sector, which has expanded fast, is the services sector. As India's services sector grows in economic might, productivity in its agrarian economy has lagged behind. "While China started its reforms with agriculture, India is starting at the top of the pyramid with services, and poverty reduction has been much slower as a result," said Ashok Gulati.

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      Consider the Following Table Showing Trends in Share of Agriculture and Allied Sectors in India’s GDP:

                                               

                                  TABLE-1

Period	Percentage share
1950-51	56.70
1960-61	52.48
1970-71	46.00
1980-81	39.93
1990-91	34.04
2000-01	26.18
2006-07	21.65
2007-08	17.80

Source-Economic Survey, 2008-09

It is interesting to note that the growth rates of agriculture in India’s GDP had been growing during early periods, but in the last few years, it is constantly declining. This is evident from the table 2, which presents the long-term growth rates of agriculture in comparison with the whole economy.

                                       TABLE 2

  Average GDP Growth Rates—Overall and in Agriculture in India

     (% per Year at 1999–2000 Price)

Period	Total economy	Agriculture and Allied   Sectors
Pre-Green Revolution 1951-52 to 1967-68	3.69	2.54
Green Revolution Period 1968-69 to 1980-81	3.52	2.44
Wider Technology Dissemination Period, 1981-82 to 1990-91	5.40	3.52
Early Reforms Period 1991-92 to 1996-97	5.69	3.66
Ninth Plan Period	5.52	2.50
Tenth plan Period	7.77	2.47

        

Source- National Account Statistics, 2008

         Thus, the above trends and discussion clearly indicate the crisis in Indian agriculture, which could largely be attributed to Economics Reforms initiated from 1980s onwards and more predominantly since 1991.  On this backdrop, we shall discuss specific reform measures of agriculture crisis in India in the next section.

           

KEY REFORM MEASURES TO REMOVE AGRARIAN CRISIS IN INDIAN AGRICULTURE

While larger investment outlays are necessary, the emphasis and focus must be not on the magnitude of investment expenditure, but on the composition of improvements that increase the product capacity in agriculture.

This requires:

Ø  government to actually implement the various money-lending Acts that already exist to prevent the alienation of the farmers land-holding

Ø   to make the crop Insurance Scheme more farmer friendly, with lower premia and less red-tape

Ø   renewal of the land’s biodiversity to ensure the health of land and enable the farmer to cope with market ups and downs

Ø  better health facilities in the locality since expenditure on health has been one of the most important financial drain in the village

Ø  better education facilities at school level in the villages to enable better coping with a more technologically oriented agriculture

Ø   quality checks on agricultural inputs like seeds, fertilizers and pesticides to prevent cheating of the farmer by unscrupulous suppliers of industrial inputs for agriculture

Ø   reliable agricultural advisories for farmers on farm related practices
 better access to markets for agricultural produce to get higher rates for farm produce

Ø  Strengthening panchayats and better coordination with government agencies to provide technical advice and supports

Ø  Rationalise all soil and water conservation programmes into a single unified watershed programme under a single agency at the ground level

Ø  Increase the price of canal water, electricity and fertilisers to cover costs of providing them at reasonable levels of efficiency, ensure proper assessment, and prompt collection of dues from users.

Ø  Better and easier banking and micro-financing should be promoted

Ø  Finally, need to enhance purchasing power of rural population

CONCLUSION

Agriculture in India is undergoing a structural change leading to a crisis. The rate of growth of agricultural output is gradually declining in the recent years. The relative contribution of agriculture to the GDP has been declining over time steadily. The performance of agriculture by crop categories also clearly indicates the slowing down process of agriculture in India. The onset of deceleration in agriculture began from early nineties and it became sharp from the late nineties. The trends in the area, input use, capital stock and technology also reflect the agricultural downfall and the farmer’s response accordingly. It is alarming that India is moving towards a point of no return, from being a self-reliant nation of food surplus to a net importer of food. All these trends indicate that the agricultural sector in India is facing a crisis today.

      The only remedy to the crisis is to do all that is possible to make agriculture a profitable enterprise and attract the farmers to continue the crop production activities. As an effort towards this direction, the government should augment its investment and expenditure in the farm sector. Investment in agriculture and its allied sectors, including irrigation, transport, communication, rural market, rural infrastructure and farm research, should be drastically increased, and the government should aim at integrated development of the rural areas. Therefore, without a serious effort to confront and address these remedial measures, realising the target of 4 per cent sustained growth in agriculture will remain a dream. Hence, there is urgent need for redressal.

~FISCAL POLICY IN A GROWTH FRAMEWORK....!!

INTRODUCTION

Is government involvement vital for economic growth? This question has surprisingly dominated both theoretical and empirical debate among economists for a long time. The traditional answer from economic theory to the more general question of whether fiscal policy can affect growth is that it can affect the short run growth of per-capital income. However, since mid 1980s, new endogenous growth models have proposed a number of channels through which fiscal policy could have permanent growth effects. The empirical evidence suggests that fiscal policy affects economic growth differently across the countries .So its effects need to be analysed carefully.

                   

Ø  GROWTH EFFECTS OF TAXES EXPENDITURE

Theoretically, most economists have agreed that public expenditures that are productive have positive impact on economic growth. Whereas unproductive public spending crowds-out productive private or public investment and hence negative impact on long run growth. On the other hand, the taxes which are distortionary (e.g. income Tax) affects decision to invest and have negative impact on growth. While, non-distortionary taxes (e.g. lump-sum taxes) may affect economic growth positively. Also even, where all government expenditure is productive the use of distortionary taxes to finance this generates negative growth effects.

Ø  BUDGET DEFICIT AND GROWTH

Whether budget deficits affect growth, depend on whether Ricardian equivalence (RE) holds. If RE holds, deficits are analogous to lump-sum taxes and there are no long-run growth effects. However, where RE does not hold budget deficits are generally expected to be growth retarding ceteries paribus. However, in most cases, there is negative correlation between budget deficit and growth.

                                                However, theoretically, these seem to sound well but empirically taxes and expenditure have proved inconsistency and incompatibility with the theoretical findings.

 RELEVANCE OF FISCAL-GROWTH MODELS AND EMPIRICAL EVIDENCE      TO LDCS, OECD COUNTRIES IN GENERAL AND INDIA IN PARTICULAR

Ø  THE CASE FOR OECD COUNTRIES AND LDCS 

 The empirical fiscal-growth literature is of highly variable quality and has generally yielded non-robust result. However, to some extent, evidence that is comparatively more consistent is found to OECD countries and the theory has some relevance here. Nevertheless, prior to 1997 when gross budgetary constraint (GBC) was not used the result proved to be methodologically weak rendering results unreliable and non-robust.

                                                                There is very little reliable evidence available for LDCs. Evidence from LDCS/LICS suggest that fiscal growth effects has been observed to be much different from OECDS. However, one of the reasons of inconsistent results with LDCs is poor quality of data and hence unreliability of their data source. Besides regression specification of many studies are inadequate because of their failure to deal adequately with GBC.

            Comparatively almost all of the methodologically more reliable evidence comes from OECD countries. Spending on health, education and defence has been found to raise growth across OECD countries. However, it is associated with lower growth in LDCs. Equally controversially income taxes appear but raise it in LDCs.

     Whether OECD or LDCS empirical evidence on the impact of budget deficits have often revealed significantly negative growth effects (positive effects of surpluses)

                                                                                Despite the methodological weakness, one of the more robust pieces of evidence from fiscal-growth regression is the negative association between growth and budget deficits, which is also supported by the third generation studies which incorporates GBCS.

Ø  THE CASE FOR INDIA  

                India is a lower middle-income country, whose per capita income is $1024 per annum registering one of the highest growth rates in the world for the last seven consecutive years on an average. Over the years there have been many factors contributing to high or low economic growth scenario in India. In this context, fiscal variables are considered to be of prime significance. However, empirical evidence partially confirms it and contradicts the argument. India’s high growth has been associated with private sector led growth and government role has been of facilitator where it lacked growth rate decelerated. As it is evident, that domestic saving, particularly private saving has been the prime growth determinant.

                            Right from the beginning , during 1950-80, public spending was moderate, tax rates were very high, fiscal deficit was low, also efficiency and productivity were low, besides saving rate was only 10% in 1950’s, overall govt budgets were always in crisis finally, causing moderate or low growth rate of 3.5% over the period of time. When Indira Gandhi adopted ‘Garibi Hatao’ it did not work well and after the emergency was over, she focused much on growth, for this purpose adopted pro-business strategy, which was a grand success, and paved the path for growth momentum in India.

                    1980s saw the huge surge of public spending hence investment to GDP ratio improved, taxes were cut particularly in the second half of 1980s, comparatively productivity and public sector saving also improved and infrastructure was given special attention which witnessed crowding-in of private investment, causing the growth rate of GDP to surge to 5.5%.  

                            On the other hand, close to 1980s fiscal deficit was mounting around 10% (One of the highest in the world) as monetisation of fiscal deficit had resulted in huge interest payment and ultimately public debt. In addition, there was high fiscal imbalance in such cases growth would have been unsustainable if 1991 reform had not been carried out.

                From 1991-98 public spending fell, taxes were further cut, fiscal deficit witnessed some improvement, and there was hike in growth rate to 6.7% during this period. During 1998-2003 public spending further fell, taxes were cut, infrastructure investment also fell. In addition, rising fiscal deficit in the second half of the 1990s was not financing higher level of investment resulting the fall of overall growth rate to 5.7%. During 2003-08, public expenditure grew continuously, tax rates declined moderately and there were some indirect taxes reforms. Public sector savings improved to 3.2% of GDP. Overall growth rate improved and was all time highest 9.5% in 2005-06. This also shows domestic saving led growth. Financial years 2008-10 saw further rise in public spending in forms of stimulus packages, this caused growth to sustain despite the crisis.

                                                                In addition, from the data used during 1980-2000, empirical evidence in most cases is statically insignificant. Few cases suggest positive, whereas few cases suggesting negative correlation between fiscal policy and economic growth. Though there is consistency between revenue deficit and growth and confirms negative relation between the two.

 CONCLUDING OBSERVATIONS

              The effects of fiscal policy on economic growth are a controversial and long- standing topic in economic theory, empirical research, and economic policy making as it is evident from above discussion. The third generation empirical study conducted for OECD countries, which incorporates GBC, shows to some extent theoretical relevance and empirical consistency but the result is ambiguous to LDCs. In the Indian context, the dynamics between government spending and private sector behaviour show that raising public sector consumption to boost aggregate demand in the economy crowds out private consumption. The alternative of raising public sector capital expenditure in manufacturing also crowds out private investment. This is only the public sector capital expenditure in infrastructure that crowds-in private investment, a result consistent with endogenous growth theory. However, in most cases (the result is ambiguous in some cases) fiscal deficit particularly revenue deficit has been associated with negative growth and crowding-out effect on private investment. On the tax front, Laffer’s curve hypothesis has not worked well in India. After 1991, tax to GDP ratio has been falling. The authorities have claimed that reduction in tax rates have resulted in better compliance and improved tax buoyancy – a claim that is not proven factually. Better buoyancy has come about because there has occurred a sharp rise in the number of persons earning high income.

                   The results, therefore, suggest the need for a restructuring of the composition of government expenditure while containing fiscal deficit for the beneficial effect of government's infrastructure investment to be realised and the urgent need for correcting fiscal imbalance, fiscal consolidation and improving tax to GDP ratio in view of sustaining long-term growth strategy through fiscal policy.  

                       Therefore, at this stage it would be dangerous to conclude from any observed relationship that fiscal policy would necessarily enhance or hinder growth.