Challenges Facing Indian Agriculture

India’s massive agricultural sector employs about 60% of the population, yet accounts for only about 17% of total GDP. Growth in agriculture has stagnated relative to other sectors: last year the agricultural sector grew at a rate of 2.7%, relative to 11% growth in both the service and industry sector. Agricultural incomes are lower and growing slower than incomes in other sectors. The government has a clear imperative to seriously examine whether existing policies are optimal.
There is a staggering amount of literature analyzing agricultural policy in India. From my admittedly cursory review I noticed several recurring themes, which I discuss in no particular order:

1. Increase farmer’s access to markets.

The World Bank cites an “almost universal lack of good extension services” to farmers as a major factor inhibiting growth. In addition to the miserable infrastructure in many rural areas, the inability of farmers to directly access markets has sustained the presence of a chain of middlemen through whom most agricultural commodities must circulate before finally reaching consumers. Many SHGs have, with great success, arranged cooperatives that bypass such middlemen and sell directly to wholesalers. The government should learn from the success of such initiatives and try to help streamline the agricultural commodity supply chain.

2. Improve agricultural productivity.

In spite of the gains of the Green Revolution, Indian agriculture lags behind in terms of technology take-up and production efficiency. Lack of access to credit, which we discussed earlier, may be one of the factors inhibiting farmers from investing in technology. However, the ground reality also suggests that poor education and lack of awareness of the benefits of new technology is also a factor. In addition, the epic and recurring issue of poor irrigation and infrastructure is widely recognized as a drain on productivity in many regions (Its estimated that about 10% of all agricultural production in India is wasted due to lack of storage, transport, etc). The government already proved itself capable of stimulating advances in agricultural productivity with the Green Revolution. Future policies should focus on providing incentives to farmers to adopt better production technology, bridging the information gap that currently exists in the agricultural sector, and remedying severe underdevelopment of irrigation and infrastructure facilities.

3. Reconsider distortionary subsidies and other policies.

Currently, the Indian government sets a minimum support price for almost all agricultural commodities. Farmers who produce various goods are guaranteed the option of selling directly to the government at a price fixed in the beginning of the season. The stated goal of this policy is to “ensuring remunerative prices to the growers for their produce with a view to (sic) encouraging higher investment and production.” The inherent endogeneity of MSP policy makes a rigorous impact assessment difficult, but the persistently low productivity growth in agriculture suggests that the MSP policies have failed to stimulate sufficient capital investments by farmers. Its conceivable the virtual subsidy provided by MSPs might actually dampen incentives for technology take-up by guaranteeing a basic level of income security. Furthermore, the existence of MSPs may encourage agricultural production for which there is actually limited demand in private markets, leading to unbalanced and suboptimal production choices by individual farmers. The process by which which MSPs are set is also somewhat dubious, and many have suggested that the current price-setting system is vulnerable to political manipulation and lack of parity across goods. Although scrapping MSPs would obviously expose a large number of farmers to the risk of price shocks, it seems to me that improving farmers access to insurance products and commodity futures markets is more sustainable and optimal way to manage such risks.

4. Improve public education.

Even if agricultural productivity does increase, it is still likely to lag behind the explosive IT and service sectors. However, the public education system is clearly failing to provide rural children with the skills necessary to enter these labor markets. This is perhaps the single biggest factor inhibiting the transition from agriculture to service sector employment. The demand for skilled workers in India has exploded, particularly in the service sector, demand which many firms are finding difficult to meet domestically due to extremely skewed distribution of human capital (something Doug discussed in the previous post).

5. Promote non-farm entrepreneurship among farmers.

Although India’s rural poor are by and large uneducated, many of them are capable of operating small businesses that have higher returns than traditional agriculture. However, their ability to start such business is often hampered by lack of access to credit and capital. In spite of the microfinance “revolution” and government policies designed to stimulate capital flow to the rural population (such as priority sector lending), there is still a massive failure of credit markets to meet the demands of the rural population. Empirical research has demonstrated that returns to capital are extremely high in microenterprises (roughly 80% in Sri Lanka), which of course suggests that there is tremendous potential for farmers who start operating small businesses to supplement or replace their primary line of work.

I’d be interested in hearing peoples opinions on any of these issues, and think this discussion would particularly benefit from the observations of people working in rural ares.