A Decade of Economic Reforms - Review by RBI
[Source: RBI Report on Currency and Finance 2001-2002 dated March 31, 2003]

Module: 1 - Growth, Saving and Investment
(an analysis of the impact of reforms on economic growth and its variability at the aggregate level
besides analysing issues relating to saving and investment)

Real Economy - Performance of Agriculture
Assessment of Progress

The development of agriculture is a critical prerequisite for sustaining a high growth process, apart from raising living standards and eradicating poverty of a large proportion of the populace that is directly dependent on agriculture. Reforms in agriculture so far have been largely confined to pricing aspects. Though the terms of trade have moved in favour of agriculture, the existing institutional structure still constrains the growth in this sector.

Agricultural growth decelerated during the 1990s. Per capita foodgrain availability has remained below the historic peak attained in 1991. Agricultural performance witnessed a dip in the 1990s partly on account of subdued public investment in agriculture and inadequate diversification. The decline in public investment was only partially compensated by the rise in private investment. Real private investment in agriculture did rise significantly, but in the face of declining real public investment in agriculture, overall real capital formation in this sector has been low in recent years. This underscores the need to recognise complementarity between public and private investment.

Near plateauing of yields in the 1990s indicates that any further improvements in yields are difficult to accrue unless accompanied by new technological breakthroughs and establishment of a proper mechanism for extension. There is a need to promote a more broad-based and participatory system of extension services. The recent scheme of agri-clinics is a welcome step in this direction and will pave the way for greater private sector participation in agricultural extension

The issue of mounting agricultural subsidies is a contentious one. It impacts not only the agricultural sector but is also important in the context of fiscal consolidation. Explicit and implicit subsidies for this sector remain large and ill-targeted. The food and fertiliser subsidies are explicit subsidies. In addition, there are three main types of implicit subsidies in the form of subsidies to power, water through public irrigation projects and credit under priority sector lending norms. The excessive and unbalanced use of subsidised inputs can have adverse impact on the performance of agriculture. Appropriate pricing and user charges of such inputs would release resources for improved public investment in new infrastructure projects and for the maintenance of the existing facilities. It is, therefore, important to reduce most of the agricultural subsidies and ensure better targeting of those that are essential for social welfare. However, the subsidy issue is made more complex in the light of falling international agricultural prices. If these prices return to the mid-1990s levels, the need for subsidies will be correspondingly lower.

A contributing factor to below-potential performance of agriculture is the failure to sufficiently diversify the cropping pattern. The minimum support price (MSP) policy has distorted the relative prices between rice and wheat, on the one hand, and other food and non-food crops, on the other, giving rise to a distorted cropping pattern. It has contributed to a steep rise in the ratio of procurement to production over the years. The higher increase in MSPs of rice and wheat relative to prices of other agricultural commodities has contributed to an incentive structure that favours production of rice and wheat at the cost of other crops. The policy has contributed to a burgeoning stock - far in excess of food security requirements, adding to carrying costs and locked-in bank credit, which could have been otherwise deployed for funding productive activities. In view of the associated costs, there is a need for re-examining the price support mechanism to eliminate the distortion of agricultural product composition. In line with diversification of the consumption basket of a representative Indian household, there has been some acceleration in the growth of high value-added agricultural products such as milk, fruits and vegetables, poultry, meat and fisheries during the 1990s. It is essential that this trend be reinforced in the coming years from the viewpoint of enhancing producer incomes and nutrition of consumers. Higher agricultural growth will come from crop diversification to non-traditional activities that are in line with the changing agricultural demand pattern.

Though withdrawal of restrictions on the movement of commodities has been a major component of the reforms in agriculture, some legislative and regulatory constraints have prevented the agricultural sector from exploiting its true potential. Reforms have, however, been substantial in the case of selective credit controls, with only sugar currently being subjected to such controls. Limited de-reservation of items produced in the small-scale sector related to agriculture has been initiated. Some progress has been achieved in setting up of the commodity exchanges for trading in futures and options in agricultural commodities. Further efforts are necessary that would remove distortions (price and non-price interventions) in the output and input markets and facilitate, inter alia, price discovery and risk management

Several changes have been effected in external trade and exchange rate policies that have significantly improved the incentive structure for the farm sector. Such reforms include progressive liberalisation of quantitative export ceilings and price floors along with decanalisation. As regards imports, policies were directed, inter alia, at lowering of tariffs on agricultural inputs and products and broadening of the open general licence (OGL) list. The pace of liberalisation has been relatively faster for dairy products and fruits and vegetables.

Several measures have been initiated in the 1990s to augment the flow of institutional credit to the rural sector and enhance the efficacy of the credit distribution channel. The growth of direct institutional credit flow towards agriculture and allied activities, however, declined during the 1990s as compared with the 1980s. Coupled with a shift in the composition of credit away from medium/long-term loans, this could have affected capital formation in the private sector. These developments indicate that banks may have targeted relatively risk-free irrigated areas and individuals with high net worth for providing priority sector agricultural loans. In comparison, rain-fed and drought prone areas and relatively poorer households have had greater dependence on informal sources of finance. The deadweight of non-performing assets (NPAs) of agricultural advances has also affected the recycling of credit. The adherence to prudential norms of income recognition, asset classification and provisioning has made banks more conscious of risk. This could have also contributed, at the margin, to deceleration in flow of credit to agriculture.

There have been two significant innovations in the rural credit delivery mechanism in the 1990s namely, micro finance and the Kisan Credit Cards (KCCs). Micro finance has emerged as an alternative system for rural credit delivery to complement the formal credit institutions. The scheme of micro finance has made significant progress, by linking self-help groups (SHGs) with banks and the number of beneficiaries covered. The loan amount per beneficiary at Rs.1,360 is, however, not adequate to enable the poor to cross the threshold of poverty. Similarly, development of SHGs has been highly uneven across States. There is urgent need to upscale the programme evenly across the States along with an increase in the loan amount per beneficiary. The outreach of the KCC to cover all eligible farmers under the scheme has been hampered by the lack of updated land records, small landholdings and illiteracy of borrowers. Sensitisation of bank staff to these issues through training would be helpful.

The performance of Indian agriculture in the 1990s has often been attributed to the lack of reforms in the agricultural sector. Whereas this is not exactly true, more needs to be done for the agriculture sector, both in terms of sequencing and overall priority. For example, futures trading, particularly in foodgrains, should be promoted first so that dependence on MSP mechanism for price stabilisation could be avoided. Similarly, strengthening of public distribution needs to accompany the relaxation of the Essential Commodities Act, 1955 to ensure uninterrupted supplies of foodgrains to the poor at reasonable prices. As most of the vital reform measures in the agricultural sector, viz., removal of inter-State restrictions on movement, storage of and trading in foodgrains, were initiated only recently, their impact is yet to be felt, particularly because of the fact that States have a major role to play in their implementation. The policy of linking allocation of resources from Centre to States with their performance in implementing agricultural reform measures is a step in the right direction.