The Grim Reaper: Declining Profitability of Agriculture and the Agrarian Crisis in India

By Madhumitha Madhavan
Contributor

At a recent interview, the Chairman of Central Bank of India, a government-owned commercial bank, asserted that agriculture in India is a profitable business and that misuse of loans by farmers was the primary reason for non-performing bank assets. Furthermore, the media was blamed for the hype over farmer suicides in India, currently estimated at over 200,000 between 1997 and 2011.

It is true that the miracle economy of India has seen high growth in almost every sector in the last couple of decades. The current GDP is almost 1.73 trillion. Yet, despite the fact that India’s economy is primarily agrarian, the agricultural sector has actually seen negative growth. Anybody who thinks that agriculture in India is profitable only needs to look at its contribution to the overall economy. In 2010, agriculture contributed to 19% of the total GDP, while employing over 51% of the population.

The dramatic increase in food prices in recent times might also lead one to believe that farming is a profitable business. However, in India, while large farmers are net sellers of food grains, small farmers who constitute a major percentage of the farming population are net buyers. This means that as food prices increase, large farmers make bigger profits while smaller farmers are forced to shell out more money for their food.

Numerous reasons have been cited for this decline, one of the most interesting being the after-effects of the Green Revolution in India. In the 1960s, High Yielding Varieties (HYV) of crops, most importantly rice and wheat, were developed by international agricultural research centres and introduced in Latin America and Asia. In India, these crops were rapidly adopted and led to increased productivity. Although these crops required higher input of fertilizers and irrigation, they had much higher output than traditional varieties. Furthermore, the Indian Government promoted these crops by subsidizing inputs such as fertilizers and electricity for irrigation. However, the investment in irrigation has been gradually declining with the result that only 35% of the total agricultural area is currently irrigated. Moreover, the input subsidies have placed a heavy fiscal burden on the government.

For example, the state of Punjab in India was at the forefront of the Green Revolution and underwent substantial modernization of the agricultural sector. There was consolidation in the land holdings and the subsidization of electricity for irrigation by the government. Per hectare consumption of fertilizers increased, and water intensive crops like cotton, rice and wheat were adopted. Singh has shown that the total operational cost of rice and wheat increased by around 50% between 2000-01 and 2005-06, while rice yields increased by only 12%, and wheat yields actually declined by 8%. (Singh, Karam. 2010. “Agrarian Crisis in Punjab: High Indebtedness, Low Returns and Farmer Suicides”. Agrarian Crisis in India. Edited by Narasimha Reddy and Srijit Mishra. Oxford University Press. 261 – 280.) This means that while farmers spend more money on growing their crops, their total output, and therefore their profit, has continued to decline. Moreover, excessive dependence on these crops has made farmers extremely vulnerable to a number of factors ranging from volatility of commodity prices to increasing changes in weather patterns due to climate change. Had they maintained their crop diversity and not solely depended on these HYVs, they might have been better shielded from these factors.

Another factor that has an important impact on agriculture in India is the Agreement on Agriculture (AOA) under the World Trade organization (WTO). This was formed in order to enforce the policies of economic liberalization and promote free trade. Under this system, it was believed that developing countries would have the comparative advantage over developed countries. However, the opposite has often been the case, mainly because of its distorting effects on market access and relationships.

For example, the first tenet of the AOA required enabling market access. Developing countries could no longer have import bans and prevent other countries from importing commodities into their markets. Instead, they had to replace them with tariffs. However, Gulati found that while India’s peak tariff rate in the dairy sector was zero percent in 1998, those of the EU, South Korea, Canada and Japan were 99%, 211%, 213% and 336% respectively, thus preventing or at the least making it extremely difficult to gain access to their markets. (Gulati, Ashok. 2001. “Agriculture and the New Trade Agenda in the WTO 2000 Negotiations: Interests and Options for India.” Prepared for The World Bank’s Integrated Program of Research and Capacity Building to Enhance Participation of Developing Countries in the WTO 2000 Negotiations)

The combined result of the AOA is that markets in developing countries are flooded with cheaper commodities from developed countries. Although AOA essentially allows developing countries to put in place their own mechanisms to reduce the price of their commodities, they simply cannot afford to do so.

In today’s world, a farmer in rural India is inevitably linked to a banker on Wall Street. Professor Jayati Ghosh, an eminent economist from India, has shown how speculation and futures trading in commodities by large banks adversely affected the price of crops and directly contributed to the global food crisis. In an interestingly titled paper “The Unnatural Coupling: Food and Global Finance”, she argues that deregulation of commodities trading in the United States and elsewhere resulted in extreme volatility of food markets.

The problem with agriculture in India, as in many developing counties today, does not lie with demand-supply imbalances, a decline in net food production, or excessive demand caused by population growth. The problem does not even lie completely with the actual farming itself, but rather the political economy of the society in which it takes place.

Agriculture in India intersects with almost every development agenda—be it poverty elimination, rural development, environmental protection or human development—because of the huge number of people it employs. It is therefore very important that agricultural development successfully keep pace with the progress other sectors have made. Teaching farmers how to better invest their money and grow crops using advanced scientific techniques is no doubt important, but there are a number of extremely complex factors at play that determine the profitability of agriculture. If India were to achieve the status it wishes on the world stage, it would do well to understand this and protect the sector that is a big source of livelihood for a huge percentage of its population.

Photo courtesy of soubhagya via Flickr.

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