Getting the incentive structure right is vital
As India’s growth moves back to the new Hindu rate of growth, not surprisingly agriculture growth is once again a critical variable. If GDP in the first half of FY14 grew at 4.6%, it was primarily due to agriculture growing at 3.6%—manufacturing, the engine of growth over the past decade, is down to levels last seen in 1991. Unlike what happened in the days of the Hindu—or the new Hindu—rate of growth, though, agriculture in India is a lot more vibrant today. There is, no doubt, a large proportion of disguised unemployment in agriculture and very few states have even reasonable levels of productivity, but the ones that are doing well have ensured India is very competitive in terms of wheat exports and is the world’s largest exporter of rice and beef. Imagine the potential for export if less productive states get more efficient. A recent report by CII-McKinsey, for instance, projects India as becoming one of the world’s top 5 agriculture exports—that could nearly double agriculture growth—by 2030.
Not surprisingly, CII-McKinsey talk of the need for a technology mission, the need for more processing of food, and so on. While improving the spread of technology is important, as is the need to complete incomplete irrigation facilities, what is perhaps more important is to get agriculture incentives right—in the case of cotton, when it became apparent that there was a big market to be captured through the use of higher-yielding Bt varieties, farmers across the country were quick to switch to them. Indeed, the so-called lack of extension services run by the government, to help farmers adopt new technologies, did not prove to be a deterrent in this case. Though the BJP’s latest vision document suggests farmers are getting a raw deal with their profit margins falling over the past few years, this ignores the rise in productivity. Commission for Agricultral Costs and Prices (CACP) data show, in the case of cereals, once you take all costs into account—including the imputed value of the land and all inputs—profits rose from 5% to 19% over the two sub-periods, 2000-01 to 2003-04 and 2008-09 to 2011-12. For pulses, these rose from 19% to 26%, from 11% to 23% for oilseeds and from 14% to 43% for commercial crops. None of this is to say India doesn’t need to do more R&D or spend R4 lakh crore on completing the irrigation potential—ironically, the government spends a fourth of this each year on unproductive fertiliser and power subsidies—but once you get the commercial incentives right, a lot of the rest will follow.