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  • FEBRUARY 27, 2006

The other side of the 'India story'

"In regard to the importance of agriculture in a broader socio-economic sense, all the three basic objectives of economic development of the country, namely, output growth, price stability and poverty alleviation are best served by the growth of the agricultural sector. It may sound ironic that agriculture is one sector where there is convergence of all the three main objectives of economic policy in India but we seem to have relegated the sector to the background in the process of economic reforms... - Dr. Y. V. Reddy, Governor, The Reserve Bank of India"

While the economic survey on the agriculture sector has touched upon many aspects, we have highlighted the key drivers:

  1. Monsoons

  2. Output performance

  3. Agricultural credit

  4. Capital formation and

  5. Outlook

First the rain gods...
Considering the fact that the country as a whole, barring two northern states, are highly reliant on monsoons to sustain output, blessings of rain gods are a critical factor for the country's GDP growth. Though this sector contributed only to 24% of GDP, the livelihood of an estimated 68% of the population is dependent on monsoon, both in terms of timeliness as well as in terms of distribution of rainfall. This year, the southwest monsoon (June-September 2005), though arrived late, had plenty to offer. Barring few north-eastern states, the country has had a normal monsoon season, if not excess in southern and central India.

Output has been an issue...
The economic survey clearly highlights the volatility in the performance of the agricultural sector over the last decade. Also, it emphasizes a great deal on the need to improve productivity in the sector. Just to put things in perspective, the survey highlights the fact that India accounts for 22% of paddy production in the world but as far as the yield per hectare is concerned, we lag Bangladesh! The graph here reflects what Dr. Reddy has highlighted. While the overall economic performance has been impressive in the last five years, the agriculture sector has lagged, resulting in income inequalities widening among rural and urban areas.

Money is not the problem...
If the total agricultural credit disbursals in the last five years are any indication, the problem is not that there is a dearth of funds. As has been the case in the past, the issues are lack of knowledge among farmers, heavy reliance on local lenders and inadequate reach. While specific break-ups are not available with us, loans to farmers with respect to tractors are also considered as agricultural credit. Based on the number of tractors sold in FY05 and assuming that 90% of tractors sold are financed, financing of tractors alone accounted for 55% of total agricultural disbursals! There is a pressing need to improve loan availability, beyond tractor financing. This is clearly reflected in the capital formation numbers below.

Starved for capital...
We would like to start off by quoting from the economic survey "the decline in the share of the agricultural sector's capital formation in GDP from 2.2% in the late 1990s to 1.7% in FY05 is a matter of concern". The government has attributed the same to the decline in public investment in agriculture since the mid-1990s. The economic survey has highlighted the need for diversification in outputs, improving agricultural marketing infrastructure and so on. But this has been highlighted by the previous economic surveys as well and yet, it remains a pipedream.

Outlook - The same old story...
As always, the economic survey concludes by saying "prospects of agricultural production in 2005-06 is considered to be reasonably bright due to near normal monsoon". But it is perplexing to note as to why the policy makers cannot look beyond monsoons! All things remaining the same, if there is a decline in agricultural output, the blame is on the rain gods. The outlook is as vague as it can be and there is a mention about the need to reduce the dependence of the farmers on the public distribution system, as if there is willingness on the part of the government to do so.

Given this backdrop, we would again like to quote Dr. Y. V. Reddy's last sentence and we hope that the policy makers, including the Finance Minister, make a note of it. "It may sound ironic that agriculture is one sector where there is convergence of all the three main objectives of economic policy in India but we seem to have relegated the sector to the background in the process of economic reforms... - Dr. Y. V. Reddy, Governor, The Reserve Bank of India (RBI)"

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