In addition to the rural to urban transition, a farm to non-farm transition is necessary.

Agriculture may be ancient, having originated 10,000 years ago. However, since the Industrial Revolution, the importance of agriculture has become less and less in developed countries. One-third of the world’s work force may be employed in agriculture. But most of this agriculture is inherently subsistence in nature and of low productivity. That’s the reason why despite one third of the world’s work force being employed in agriculture, agriculture accounts for only 4% of the value of global output. In India, 19% of national income is estimated to originate from agriculture and allied activities.

In which countries in the world is agriculture’s share of national income more than this 19%? In the list of 193 countries of the world, all—like Bolivia, Sudan and Uganda—are from poor parts of the world.

In contrast, in relatively richer parts of the world, people have been pulled out of agriculture and into more productive activities. For instance, in the US, only 0.9% of national income comes from agriculture. This doesn’t mean the Malthusian spectre of people having to starve. Other than the possibility of imports, agriculture becomes more productive, requiring less people to be engaged for producing the same amount of food. Indeed, there are several different types of movements that happen.

People who remain in agriculture move away from producing food-grains to other forms of crop output, such as horticulture. There is commercialisation and diversification. Others move away to allied activities like aquaculture, dairy farming, floriculture and poultry.

Still others move away from farm activities entirely to non-farm activities, such as rural industry and services. This is precisely the kind of transition that has happened in China.

In India, out of the rural labour force of roughly 300 million, 72.7% still earns a living from agriculture. This may have declined from 81.4% in 1983, but is still inordinately high. The decline hasn’t been fast enough. But some comments are in order about such figures. First, these refer to usual principal and subsidiary status, implying that there may be a secondary occupation outside agriculture.

Indeed, with the seasonal nature of the bulk of India’s agriculture, that is invariably the case. Second, there are variations across States. The figure is less than 50% in Kerala, Tripura, Tamil Nadu, West Bengal and Punjab and is more than 65% in Assam, Madhya Pradesh, Mizoram, Bihar, Meghalaya, Arunachal Pradesh and Chhattisgarh. Third, the pace of decline, as opposite to the base figures, has been sharpest in Kerala, Himachal Pradesh, Haryana, Rajasthan, Punjab and West Bengal. And has been the slowest in Orissa, Bihar, Madhya Pradesh, Andhra Pradesh and Karnataka. Fourth, there are gender differences. The farm to non-farm transition happens first for males and a feminisation of the agricultural work force occurs. Fifth, out of those who are in agriculture, roughly two-thirds (64%) describe themselves as self-employed, that is, they are farmers. The remaining roughly one-third (36%) are wageworkers, almost invariably on casual basis. Sixth, 13.1% of rural households are landless and only 11.2% have medium or large holdings, defined as those that are more than 2 hectares. 44.8% of land-holdings are sub-marginal (0.01-0.40 hectares), 18.7% are marginal (0.41 to 1 hectare) and 12.2% are small (between 1 and 2 hectares). This kind of smallholder agriculture cannot exploit economies of scale and scope and is subsistence-level, inefficient and relatively unproductive. For development to happen, there must be a graduating out and a movement up the value chain of productivity.

Since people always want to better their lives, there must be a reason why this farm to non-farm transition doesn’t happen. There are again policy-induced distortions. If these policy-induced distortions are removed, the right kind of farm to non-farm transition will occur and that is the way to a more prosperous future. The following is a list of policies that need to change for this to become possible.

* Public expenditure must move away from input subsidies (fertilisers, seeds, power, water) that only benefit large farmers to provision of rural infrastructure. Public sector gross capital formation in agriculture used to be 5% of the gross value of agricultural output in the early 1980s, but declined to 2% in the second half of the 1990s. This occurred because of fiscal constraints, both at the Central and State levels and has inched up to 3.7% in 2006-07. Private sector gross capital formation in agriculture has also increased from 5.5% in the early 1980s to 8.9% in 2006-07. But often, private investments require public investments to perform a catalytic function. While on rural infrastructure, one must flag that rural infrastructure is not only about the creation of new infrastructure, but also maintaining them. Hence, there is a decentralisation issue too in the management of rural infrastructure.

* Linked to declines in public expenditure has been the phenomenon of a collapse of the extension service system. Sometimes, people also mention research and development in connection with extension services. It is not immediately obvious that there is market failure in either. To the extent that there is a market failure, it is likely to be more in extension services than in research and development.

* Agricultural policy is invariably equated with a food-grain policy, more specifically, a rice and wheat policy. This leads to perverse price signals through the minimum support price and procurement systems and creates disincentives against agricultural diversification. This must change.

* Government imposed restrictions on production, marketing and distribution must be removed. Typically, these are through the Agricultural Produce Marketing and Control (APMC) Acts and orders under the Essential Commodities Act (ECA). On the APMC Acts, reforms vary greatly from State to State. The relaxation of such restrictions will permit dis-intermediation of distribution chains and investments in cold storage and processing. Dis-intermediation permits higher prices for farmers and lower prices for consumers, since there will be an estimated 25% of savings for fruits and vegetables and 15% for food-grains.

* There is no reason why corporate sector involvement in agriculture should not be permitted. Even if corporate farming is not permitted, there should be nothing against contract farming, with an efficient dispute resolution mechanism in instances where there is non-compliance with contracts.

* The credit and insurance markets need to be freed up, with private sector participation and choice. Neither is particularly satisfactory now. There is also no reason why forward markets should not be allowed.

* Land markets should also be freed up. Ownership legislation, like land ceilings, may be controversial. However, it is possible to un-bundle reforms, such as relaxations in tenancy legislation, while keeping the ownership legislation intact.

These reforms will make Indian agriculture modern and productive. We will no longer have 100 million holdings, 90% of which are smaller than 2 hectares. Nor will we have more than 100 million agricultural labourers working on unproductive land.

Not only is per capita income higher in urban areas than in rural areas, within rural areas, per capita income is higher outside conventional crop agriculture, for cultivators as well as for agricultural labour. Outside of rice and wheat, Indian agriculture has been suffering, because the commercialisation and diversification that had occurred earlier died down from the second half of the 1980s.

Therefore, dryland agriculture has suffered, since only 40% of India’s land area continues to be irrigated.

The proposed reforms will at least double the productivity of India’s crop output. This will mean that less people have to work on farms and those who do will have higher productivity and income. Released farm workers will be able to work in rural industries and services, the kind of model that worked in China. The rural to urban transition is partly linked to the farm to non-farm transition. But in addition, within rural areas, there is a farm to non-farm transition too and that needs to be encouraged by scrapping policies that force and incentivise people to work on farms. There has to be an Industrial Revolution within the rural sector. Today, with the organised and unorganised sectors taken together, 38 million work in manufacturing. The number can easily be 100 million and of these, many will be rural, but will work in non-farm pursuits.

—Bibek Debroy is a noted economist and Laveesh Bhandari is head of the economics research firm Indicus Analytics

Source: The Financial Express