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Half-hearted Attention to Agriculture

Many more incentives, programmes and policy corrections than have been announced in the budget are required if yearly agricultural growth is to accelerate from 1.5 per cent to 4 per cent.

Half-hearted Attention to Agriculture

Many more incentives, programmes and policy corrections than have been announced in the budget are required if yearly agricultural growth is to accelerate from 1.5 per cent to 4 per cent.


he prime minister of India, deputychairman of the Planning Commission and the union finance minister have been emphasising that agriculture has to grow at the rate of 4 per cent per annum in order to attain 10 per cent growth in overall GDP. The performance of agriculture, however, has not been satisfactory in the last one decade.

Growth in agriculture GDP which was

4.7 per cent per annum during the Eighth Plan (1992-97) declined to 2.1 per cent a year during the Ninth Plan (1997-2002) and to 1.5 per cent per annum in the first four years of the Tenth Plan (2002-2006). While India may be “shining” in the service sector and to some extent in industry in the last two years, ‘aam admi’ agriculture is not shining.

There are many problems with the agriculture sector. In recent years, farmers’ suicides have increased in Andhra Pradesh, Kerala, Maharashtra and some other states. NSS data show that a high percentage of farmers were indebted in several states in 2003.1 As mentioned in the budget, “out of the total number of cultivator households only 27 per cent receive credit from formal sources and 22 per cent from informal sources. The remaining households, mainly small and marginal farmers, have virtually no access to credit” (p 11). NSS data and other studies have shown that farmers’ incomes have been low and stagnant.2 Other problems of farmers are increasing risk and uncertainty in cultivation, absence of a proper crop insurance scheme, spurious seeds and pesticides, serious water problems and drying up of groundwater, lack of extension services particularly for commercial crops, exploitation in marketing, lack of non-farm activities in rural areas and, higher health expenditures. The mid-term appraisal of the Tenth Plan also talked about demand side problems in terms of a slowdown in agricultural exports and stagnant per capita domestic consumption of most agricultural products despite declining relative prices [GoI 2005]. The Economic Survey 2005-06 also states that agriculture suffers from low yields per hectare, volatility in production and wide disparities in productivity over regions and crops [GoI 2006].

Against this background, one expected better initiatives for agriculture, in Budget 2006-07. Although some measures were taken in irrigation and credit, the budget does not have a concrete plan for raising the agriculture growth to 4 per cent per annum from the present average growth of 1.5 per cent per annum. The current concerns of agriculture and how the budget addresses them are discussed below.

Plan Outlay

Stagnant public investment in the 1990s and in the first five years of the new millennium has been a concern as it is necessary for improving infrastructure. As mentioned in the mid-term appraisal of the Tenth Plan, the plan outlay on agriculture and allied sectors for the centre and states during the Tenth Plan was 39 per cent higher than the Ninth Plan outlay in nominal terms, compared to the corresponding increase of 89 per cent between the Eighth and Ninth Plans. In spite of an increase in allocations to irrigation, the share of agriculture, irrigation and rural development in the total declined from 20.1 per cent in the Ninth Plan to 18.8 per cent in the Tenth Plan [GoI 2005]. Total gross capital formation in agriculture was Rs 43,473 crore in 1999-2000 and remained almost the same in 2004-05 (Rs 43,123 crore at 1999-2000 prices). However, public investment which fluctuated between Rs 7,000 crore and Rs 8,500 crore between 1999-2000 and 2002-03 increased to Rs 12,809 crore and Rs 12,591 crore in 2003-04 and 2004-05, respectively [GoI 2006]. This could be due to an increase in allocation to irrigation in recent years. In budget 2005-06 also there is an attempt to increase public investment in irrigation and other infrastructure. Private investment in agriculture declined in recent years [GoI 2006].

Irrigation and Water Management

Provision of irrigation and water management are crucial for agricultural growth. The budget should have focused more on these aspects. The Accelerated Irrigation Benefits Programme (AIBP) was launched in 1996-97 in order to complete unfinished irrigation projects. As compared to an outlay of Rs 4,500 crore in 2005-06, the outlay under AIBP has been increased to Rs 7,121 crore in 2006-07. This is a welcome step. However, this is a small amount compared to the investments needed for irrigation. The finance minister mentioned that under 6 lakh hectares of irrigation potential would be created in 2005-06. The progress on irrigation is not encouraging when compared to the target of 1 crore hectares to be brought under irrigation under the Bharat Nirman programme during 2005-09. Poorer states such as Bihar, MP, Orissa and UP account for nearly 55 per cent of the remaining irrigation potential of 2 crore hectares from the major and medium irrigation projects. The rate of investment has to be doubled even to complete them in 10 to 15 years [Rao 2006].

As many as 20,000 water bodies and a command area of 1.47 million hectares have been identified in the first phase under the programme for repair, renovation and restoration of water bodies. This is important as many small and marginal farmers benefit from the programme. Little has been done on water bodies since the promise in the last budget and one hopes something will be done next year. The focus should have been more on water management in dry land agriculture. Rain-fed areas constitute about 60 per cent of the 142 million hectares of net sown area in the country. The bulk of the rural poor live in the rain-fed regions. It is important to give high priority to sustainable development of these areas through the watershed development approach and other water management practices.

Institutional Credit

Timely and adequate credit is important to meet the increase in fixed and working capital for farmers. Agricultural credit is expected to cross the target of Rs 1,41,500 crore set for the current year. The government wants to increase this to

Economic and Political Weekly April 8, 2006 Rs 1,75,000 crore in 2006-07 and also add another 50 lakh farmers to their portfolios. It is true that there have been some improvements in agricultural credit. The budget provides Rs 1,700 crore as relief to farmers on their interest liability up to 2 percentage points on their borrowings up to Rs 1 lakh. This will be credited to her/ his bank account before March 31, 2006. The government also decided to ensure that farmers receive short-term credit at 7 per cent with an upper limit of Rs 3 lakh on the principal amount. These measures are in the right direction. But, there are many more problems in this sector. First, the ground level realities are different as compared to the macro figures. There are reports that many farmers are getting credit mainly from moneylenders. It is also not clear whether the entire credit increase that has taken place is real or banks are making book adjustments. Second, it is also not clear whether small and marginal farmers are getting the credit. The dependency of small and marginal farmers on moneylenders for credit is much higher. According to some estimates, the small and marginal farmers’ share in credit is 32 per cent as against their share of 36 per cent of operated area [Rao 2006]. Moreover, the scale of finance is very low in many parts of the country. Third, the reduction in the interest rate on credit is not the solution as farmers are interested in availability of credit from formal sources without much transaction costs. Fourth, mechanisms should be developed to provide credit to tenants. Fifth, as the last budget admits, “the cooperative banks, with few exceptions, are in shambles”. There is a need to revive these banks as many farmers are dependent on credit from these institutions. Sixth, with rising income, there will be diversification of crops. Investment needs for the production of high income-elastic agricultural products such as dairying, livestock, horticulture and agro-forestry would rise much faster now. Due to these factors, rural credit has to expand at a rate faster than in the recent past. The finance minister’s answer to these problems is to appoint another committee to solve the credit problems of farmers!

A corpus of Rs 10,000 crore will be provided to the Rural Infrastructure Development Fund (RIDF) in 2006-07. It has a cumulative corpus of Rs 50,000 crore at present, under tranches I to XI. But the disbursements so far have been only Rs 28,338 crore [GoI 2005]. The shortfall in disbursements and sanctions continues to remain a matter of concern in the implementation of the RIDF. The RIDF has remained grossly underutilised, basically for want of matching contributions from the state governments. In the process, the individual needs of the farmers for investment and production credit are not being adequately met.

The 2005-06 budget mentioned a farmer friendly crop insurance scheme. This year’s budget merely says that the National Agricultural Insurance Scheme will be continued in the present form. But we know that many farmers are not benefiting from insurance in the present form.

Agricultural Research and Extension

Allocation to agricultural research in the budget is low. Central government expenditure on agricultural research and education has increased from Rs 1,900 crore in 2005-06 (revised) to Rs 2,160 crore in 2006-07 (BE). The expenditure on agriculture research is only around 0.3 per cent of GDP. This is much lower than the level of 1 per cent GDP for developing countries. There is a need to focus research and extension on dry land, hilly and marginal areas, diversification of crop patterns and allied activities, and post-harvest and biotechnologies. The private sector’s role is increasing, particularly with the advent of biotechnology. However, public sector research has to address the problems facing the resource poor farmers in the less endowed regions.

The mid-term appraisal of the Tenth Plan highlighted several weaknesses in the ICAR system. These are: “proliferation of programmes resulting in resources being spread thinly, and lack of focus in areas of relevance and opportunity; crop bias with major focus on rice and wheat; and inadequate priority to emerging challenges, particularly post-harvest, marketing and environmental conservation” [GoI 2005: 214]. There is also inadequate emphasis on rain-fed areas, which constitute 60 per cent of cultivated area and the role of women in agriculture. The returns to investment on research and extension will be much higher on agricultural growth as compared to other investments.

One of the problems of Indian agriculture is low and declining growth in productivity of many crops and regional disparities in agricultural performance. The development of technology is important for equitable development. For example, the spread of green revolution to the poorer states in India shows its potential for reducing regional disparities in development. Also, small farmers benefited from this technology. Therefore, stepping up agricultural growth through the use of biotechnology has considerable potential for reducing regional and inter-personal disparities. Similarly, the experience with information technology has been equally encouraging and can raise productivity in agriculture. There is a need to exploit the potential from these emerging technologies for overall growth and equity across households and regions.

Last year’s budget talked about a road map for agricultural diversification and allocated Rs 630 crore for the National Horticulture Mission. This year’s budget does not talk about any such road map except indicating that a sum of Rs 150 crore have been earmarked under the National Horticulture Mission. This fund will be utilised for a public private partnership (PPP) model to set up model terminal markets in different parts of the country. Diversification, however, is risky and the conditions have to be improved for the farmers to feel confident about shifting the cropping pattern. The bottlenecks in the realisation of the benefits of diversification, by responding to growing demand, lie on the supply side. The agricultural policy in respect of price, technology, infrastructure and institutions has so far been foodgrain centred and has been slow to respond to the new imperatives on the supply side. Major policy initiatives are called for to bring the relative prices of foodgrains in conformity with demand. Public as well as private investment has to be stepped up in agricultural research, especially biotechnology, focusing on the new activities and the unfavourable areas. Many of the new products being highly perishable, there is a need for the development and upgradation of the infrastructure for roads, markets, storage and processing. Every year the government speaks about a road map on diversification without implementing it. However, a provision of Rs 1,000 crore in this year’s budget for food processing industry, which has enormous benefits in growth and job creation is in the right direction.

The biggest difficulty for farmers in agriculture is marketing. Volatility in prices due to globalisation is also a problem. Tariffs should be used depending on the movements in prices. At present, the

Economic and Political Weekly April 8, 2006

government marketing infrastructure is not sufficient for many crops. In fact, farmers have the problem of facing a “produce and perish trap”. Some experts say that the bumper crop in Andhra Pradesh in 2006 may lead to more suicides if prices fall due to excess supply. Therefore, there is a need to realise the importance of a “produce and flourish” equation if we develop food and agro processing industries and marketing.

According to the Economic Survey 2005-06, the emerging areas which have a high potential of growth in agriculture are horticulture, floriculture, organic farming, genetic engineering, food processing, branding and packaging, and futures trading. “Development of rural infrastructure, rural extension services and agro-based and food processing industries are essential for harnessing this potential” [GoI 2006:173]. For this, however, substantial investment is required which has not been forthcoming until now.

Foodgrains Production and Stocks

The budget says that “the output of foodgrains is expected to be 209.3 million tonnes, which is about 5 million tonnes more than in the previous year” (p 2). It may be noted that foodgrains production was 212.9 mt and 213.5 mt, respectively, in 2001-02 and 2003-04 respectively. Therefore, foodgrains production in the year 2005-06 is lower than in some of the previous years in the new millennium. It is known that the growth rate of yields in foodgrains in the 1990s and beyond is much lower than that in the 1980s. The average per capita net availability of foodgrains during the last five years is much lower than in the earlier five-year averages. In July 2005, for the first time since 2001-02, the actual stocks of foodgrains (24.5 mt) fell short of the buffer norms (26.9 mt) by 2.4 mt. This shortfall in stocks, however, was reduced to 1.1 mt in October 2005 (15.1 mt of actual stocks against 16.2 mt of norms). The present shortfall in stocks may not be alarming but one should not be complacent about grain production and stocks. Although diversification from cereals to other crops is necessary both in view of changing demand patterns and sustainability of natural resources, the per capita production of cereals has actually been declining in the last decade. There is a need to increase yields of cereals in order to divert the land to non-foodgrain crops.

As mentioned above, Indian agriculture is facing demand problems in the form of stagnant per capita consumption of many commodities and a slowdown in agricultural exports. There is a need for some demand side initiatives by increasing rural incomes and diversifying cropping patterns. Adequate insurance is also needed for those carrying out diversification within agriculture or from agriculture to nonagriculture. Diversification itself may increase employment and wages. Also, flagship programmes like the National Rural Employment Guarantee Scheme and programmes on health and education may increase employment and incomes of rural people. It may, however, be noted that supply side measures like public investment in irrigation and Bharat Nirman and credit improvements can remove some of the demand problems by generating employment and wages.

To conclude, the finance minister acknowledged last year that he would address the problems of agriculture with a sense of urgency. This urgency was not reflected in the fund allocation and programmes given in this budget. More concrete plans are required to raise the annual agricultural growth rate from the present 1.5 per cent to 4 per cent. Every year there are expectations of agriculture, but there are disappointments in both announcements, allocations and implementation.




1 See Deshpande and Prabhu (2005) on indebtedness of farmers. 2 See Sen and Bhatia (2004) and Narayanamoorthy (2006) on farmers’ incomes.


Deshpande, R S and Nagesh Prabhu (2005): ‘Farmers’ Distress: Proof Beyond Question’, Economic and Political Weekly, October 29.

GoI (2005): ‘Mid-Term Appraisal of Tenth Five-Year Plan 2002-07’, Planning Commission, Government of India.

– (2006): Economic Survey 2005-06, Ministry of Finance, Government of India.

Narayanamoorthy, A (2006): ‘State of India’s Farmers’, Economic and Political Weekly, February 11.

Rao, C H H (2006): ‘Agriculture and the Union Budget 2006-07’, Mainstream (forthcoming).

Sen, Abhijit and M S Bhatia (2004): State of the Indian Farmer: A Millennium Study – Cost of Cultivation and Farm Income, Vol 14, Academic Foundation, New Delhi.

Economic and Political Weekly April 8, 2006

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