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
Deceleration in Agricultural Growth in the 1990s

As illustrated above, barring wheat and sugarcane, there has been a perceptible slackening of growth in agriculture in the 1990s. The main factors for the deceleration in agricultural growth include, -

1. inadequate irrigation cover;

2. improper adoption of technology;

3. unbalanced use of inputs;

4. decline in public investment; and

5. weakness in credit delivery system.

Inadequate irrigation cover for most of the crops continues to be the main constraining factor for speedy adoption of improved technology. For instance, only 39.2 per cent of the gross cropped area in the country was under irrigation in 1998-99. The share of public expenditure on irrigation and flood control to total public expenditure had declined over the years. The share, which was 10 per cent during the Sixth Plan period (1980-85), came down to 7.6 per cent during the Seventh Plan period (1985-1990) and further to 6.5 per cent during the Eighth Plan (1992-97) period. During the Ninth Plan period (1997-2002), the share is estimated to remain at around 6.5 per cent.

Furthermore, irrigation coverage across various States and crops is quite skewed. Among the major agricultural States, while 92.2 per cent of gross cropped area in Punjab was irrigated in 1998-99, in Maharashtra only 15.4 per cent of cultivated area was irrigated. States like West Bengal, Karnataka, Madhya Pradesh and Orissa had less than 30 per cent of the cultivated area under irrigation in 1998-99. Distribution of irrigation facilities across crops is also equally skewed. For example, only 12.1 per cent of the area under pulses was irrigated in 1998-99 as compared with 85.8 per cent for wheat and 52.3 per cent for rice at the national level. Similarly, the coverage of irrigation under the non-foodgrains crops had also been quite lopsided. Among the non-foodgrains, irrigation cover in respect of oilseeds was as low as 23.2 per cent, while the same for sugarcane stood at 91.7 per cent in 1998-99. The low irrigation cover for various crops has led to severe rainfall dependency. It was found that the correlation between production and rainfall was particularly high for pulses and oilseeds.6 This rainfall dependence of Indian agriculture has imparted variability to production in the latter part of the 1990s when the spatio-temporal distribution of rainfall remained largely skewed.

One of the main reasons for the low levels of yields in Indian agriculture has been the unsatisfactory spread of new technological practices, including the adoption of High Yielding Varieties of seeds (HYV) and usage of fertilisers and pesticides, inadequate spread of farm management techniques and other practices such as soil conservation and crop rotation (RBI, 2002). The adoption of new technology, mainly the HYV seeds requires intensive use of fertilisers and pesticides under adequate and assured water supply. The use of HYV seeds entails a higher yield risk as compared with the traditional seed varieties, mainly due to lack of proper irrigation facilities (Ganesh Kumar, 1999; Saha, 2001). This increased risk is one of the elements obstructing the speedy adoption of HYV seed cultivation across regions and crops. The area under HYV seeds and area under irrigation have been growing in tandem, probably on account of reduction in yield risk facilitated by availability of irrigation facilities. The area under HYV seeds, which recorded a trend growth rate of 8.1 per cent per annum in the 1980s, decelerated to 4.4 per cent per annum in the 1990s. Availability of quality seeds is inadequate and usage of high yielding hybrid seeds is very low and occurs only in the case of a few crops. Similarly, there has been a decline in growth rate of consumption of fertilisers to 4.3 per cent in the 1990s from 7.8 per cent in the 1980s, with wide variations across States

Various subsidies on inputs have resulted in skewed and unsustainable usage of inputs. To illustrate, subsidies on urea have resulted in unbalanced use of Nitrogen (urea), Phosphorus (phosphate), Potassium (potash) fertilisers (which was in the ratio of 8.5: 3.1: 1 in 1998-99 as against the desirable ratio of 4:2:1) and aggravated deficiency in use of micro-nutrients (Government of India, 2000). Subsidies on other inputs such as provision of electricity at nominal rates for irrigation pumps continue in various States. Subsidised electricity for irrigation purposes has resulted in proliferation of ground water drawing machinery such as pump sets and tubewells, which have implications for groundwater sustainability (Vaidyanathan, 1996). This also has adverse implications for equity since such machinery is capital intensive, and hence, the actual benefits derived by small farmers are debatable. Furthermore, subsidies on electricity and diesel have led to the cultivation of water intensive crops such as rice and wheat, with skewed consumption of nitrogenous fertilisers leading to an unsustainable cropping pattern. Moreover, private sector capital formation in irrigation typically favours digging of wells, as this practice has the advantage of excludability, as opposed to the non-excludable nature of canal irrigation. However, it needs to be recognised that such implements draw water from ground water table, which covers larger area beyond a farm size. This means that farmers with larger capacity pumps can actually draw water away from the water table adjoining their farms, and at a faster rate than those with smaller pumps (Dhawan, 1996). This tendency clearly has adverse impact on the level of water table and the ability of small and marginal farmers to irrigate their farms. Ground water being a common public resource, there is a necessity to rationalise the access and utilisation of the same. Appropriate user charges on electricity and diesel, could have a favourable impact on rational utilisation of water resource. Alternative arrangements of common property resource management, such as user cooperatives may result in better management and conservation of this public good

The subdued performance of Indian agriculture in the 1990s is often attributed to a secular decline in the rate of public investment in agriculture. It is argued that decelerating public sector capital formation in agriculture, which goes primarily towards major irrigation, has serious implications for the private sector investment in minor irrigation.7 The ratio of public sector capital formation in agriculture to Gross Public Sector Capital Formation has declined from 17.7 per cent in 1980-81 to 7.1 per cent in 1990-91 and further to 4.9 per cent in 2000-01. Capital formation in agriculture as a ratio of GDP originating from agriculture also decreased from 8.5 per cent in 1980-81 to 6.1 per cent in 2000-01. However, private sector capital formation in agriculture has been on the rise during the same period. In this connection, it needs to be noted that about 90 per cent of public sector capital formation in agriculture is invested in major and medium irrigation facilities, while most of the private sector capital formation goes towards minor irrigation facilities like pump sets.

Although the private sector capital formation in agriculture has been on the rise, fixed capital formation by the household sector has been on the decline (Sawant et al, 2002). Furthermore, private sector capital formation was found to be responsive to availability of water (canal intensity) and inputs (electricity) in any given year (Dhawan, 1996). It is worth mentioning in this regard that major and medium irrigation facilities have a long gestation period (10-12 years) and hence, private sector capital formation would respond to a greater degree to the cumulative capital formation in agriculture rather than that in any given year. Thus, the declining capital formation in agriculture seems to be a result of reduced investment in irrigation over a long period covering both the 1980s as well as the 1990s (Gulati and Bathla, 2001)

It is clear that the inadequacy of new capital formation has slowed the pace and pattern of technological change in agriculture with adverse effects on productivity. In this context, there are apprehensions that the boost in output from subsidy-stimulated use of fertilisers, pesticides and water may partly be at the expense of deterioration in aquifers and soil, and hence is environmentally unsustainable (Government of India, 2000). This, to some extent, explains the rising costs and slackening growth and productivity in agriculture.

Lack of adequate credit for investment is an important impediment to expansion of acreage under HYV seeds and the use of optimum dose of inputs (Sarap and Vashist, 1994). Furthermore, adequate credit plays a crucial role in augmenting private sector capital formation. The annual compound growth rate of direct institutional credit (disbursements) to agriculture and allied activities improved marginally from 12.0 per cent during the 1980s to 12.7 per cent during the 1990s. However, the credit delivery scenario at the disaggregated level in the 1990s is somewhat unsettling as there is a deceleration in the scheduled commercial banks’ disbursements of direct finance to small farmers from 15.1 per cent in the 1980s to 11.0 per cent in the 1990s. Similarly, the annual compound growth rate of direct finance (disbursements) to marginal farmers, decelerated to 13.0 per cent from 18.1 per cent during the same period. The annual compound growth rates of medium/long term loans disbursed to agriculture and allied activities (direct advances), which are important for private sector capital formation in agriculture, have shown deceleration to 9.7 per cent in the 1990s from 11.5 per cent in the preceding decade. However, the disbursements of short-term loans have accelerated from 12.2 per cent to 14.5 per cent during the same period. The shift in the composition of the agricultural loans in favour of short-term advances is a matter of some concern, as it is likely to further accentuate the declining private sector capital formation in agriculture.