INDIAN agriculture had a decent run during the ten years from 2004-05 to 2013-14, also coinciding with the tenure of the Congress-led United Progressive Alliance (UPA) regime. The farm sector (comprising agriculture, forestry and fishing) grew by an average 3.7% a year over this period, as against 2.9% during the preceding decade ending 2003-04.

Moreover, the ten UPA years also witnessed improved terms of trade for agriculture. The Index of Terms of Trade between Agriculture and Non-Agricultural sectors (base year: triennium ending 2011-12=100) rose from 81.52 in 2004-05 to 104.62 in 2013-14.¹ This is also reflected in Charts 1 and 2, comparing farm and non-farm GDP growth rates for this period at both constant and current prices. It can be seen that non-farm growth exceeded that of the farm sector in ‘real’ terms for all the years, but there was hardly any gap between the two rates at current prices. ‘Nominal’ agricultural GDP, in fact, even grew more than non-agricultural GDP in 2010-11, which was only due to the higher inflation in farm produce.

The above overall rural turnaround story was highlighted in an earlier Seminar article four years ago.² The present one focuses on the period after 2013-14. This period, which has had a new Bharatiya Janata Party-headed National Democratic Alliance (NDA) government in power at the Centre, seems to have encountered a renewed farm crisis. The evidence for it, the underlying causes, and the wider implications is what we shall seek to examine.

During 2014-15 to 2016-17, farm sector growth has averaged 1.8% a year. The Central Statistics Office’s just released GDP data for April-September 2017, too, shows a year-on-year growth of 2%. Both are clearly indicative of a deceleration in relation to the 3.7% average registered during the UPA years.

But, to be fair, 2014 and 2015 were drought years. Poor agricultural performance resulting from back-to-back monsoon failures (last recorded in 1986-87) – made worse by the unseasonal rains/hailstorms of January-March 2015 that caused damage to the standing rabi winter crop – cannot arguably be blamed on any government. Besides, in 2016-17, India’s foodgrain production hit an all time high of 275.68 million tonnes (mt), on the back of a normal monsoon and no extreme climate events.³

The story of India’s farm sector after 2014-15, however, is not about slowing growth in real terms. For farmers, increase in income, not production, is what matters. To that extent, it is nominal, more than real growth, which counts. During 2004-05 to 2013-14, the farm sector, we saw, grew by an average 3.7% a year at constant prices, which wasn’t bad at all. But it was even better in nominal terms, at 13.5%.

 

For the more recent period, Table 1 gives annual growth rates in gross value added (GVA) from the farm sector for the last 14 quarters (April-June 2014 to July-September 2017). It can be seen that nominal growth was above 10% only in the first two quarters. The average real growth rate for the entire 14 quarters worked out to just over 2%, while only 6.8% a year even in nominal terms after factoring in inflation. Equally significant is the narrowing down of the difference between nominal and real growth rates, particularly from October-December 2016 – post-demonetization – to which we shall come a little later.

If nominal GDP/GVA is taken as a proxy for farm income, the annual growth in it has been just 6.8% during the current government’s tenure. At this rate, doubling of incomes would take at least 10.5 years, as against the target date of 2022 that Prime Minister Narendra Modi mentioned first at a farmers’ rally in Bareilly, Uttar Pradesh on 28 February 2016.⁴ On the other hand, at the 13.5% rate during the UPA period, farm incomes could double in 5.33 years.

If there is one indicator of an agrarian crisis under the current regime, it would be the slowdown in nominal farm GDP. The possible causes for stagnating agricultural incomes is what we shall next look at.

 

The first major factor that has sown the seeds of the present crisis is global – more specifically, the end of a roughly decade long boom in international commodity prices. This boom began towards the fag end of the NDA government under Atal Bihari Vajpayee.⁵ Between 2003 and 2011, the United Nations Food and Agricultural Organization’s Food Price Index (base year: 2002-04=100) soared from 97.7 to 229.9. Subsequently, it fell to 213.3 in 2012, 209.8 in 2013 and 201.8 in 2014, but remained above 200 levels. The real decline – to 161.5 by 2016 – happened only thereafter.

High global prices basically helped boost India’s farm exports, which rose nearly six-folds from $ 7.5 billion in 2003-04 to $ 43.2 billion in 2013-14. As Table 2 shows, the surge wasn’t confined to coffee, tea, spices, cashew, tobacco, marine products or oil-meals that constituted the country’s traditional agri-commodity basket. Instead, there were also items not as high profile at the beginning of this century – and whose exports really shot up during the global commodity boom. From the table, we can identify five of these: buffalo meat, guar-gum, raw cotton, basmati rice and maize or corn (clubbed with ‘other cereals’).

The story of India emerging from nowhere to become the world’s largest bovine meat exporter – these ironically peaking at $ 4.8 billion in 2014-15, the first year of the Modi government – is well documented.⁶ Rising global prices (especially during 2009-14), and Indian exporters managing to supply a relatively cheaper product (buffalo meat sells at a discount to regular cattle beef) to low/middle-income developing countries in Southeast Asia, West Asia and North Africa, is what powered the so-called Pink Revolution.⁷

No less spectacular was guar-gum, whose shipments skyrocketed from a mere $ 110.5 million in 2003-04 to $ 3.9 billion in 2012-13. The stimulus here was the US shale boom. The said gum, extracted from the seeds of guar, a hardy legume crop mostly grown in Rajasthan, is used as a thickening agent in the fracking fluid that gets injected at high pressure into shale rocks to create cracks and allow oil/gas to flow through them. As hydrocarbon drilling services firms such as Halliburton, Schlumberger and Baker Hughes began stockpiling guar-gum, its exports from India spiralled.

 

The last decade similarly saw the country become the No. 1 exporter of rice and No. 2 in cotton. Equally significant was maize. In 2000-01, India could hardly ship out 32,500 tonnes of this feed grain worth $ 5.97 million. By 2012-13, these had touched 4.79 mt and $ 1.31 billion, respectively, with Cargill, Louis Dreyfus and other global traders sourcing the grain mainly from Bihar’s Kosi-Seemanchal belt and Nabarangpur district of Odisha for despatching to Indonesia, Malaysia and Vietnam via Kakinada and Visakhapatnam ports.

 

In the above mentioned commodities, exports were also enabled by production boosting technologies – modern integrated slaughterhouses, Bt cotton transgenics, high yielding single-cross maize hybrids and the extra long-grain Pusa-1121 basmati rice variety – that came just at the right time. As global demand for Indian agri-produce rose, it resulted in higher price realizations for farmers as well. This happened partly due to minimum support prices (MSP) of crops having to be adjusted upwards to reflect their new international parity levels, and also because of imports turning more expensive.

All this, however, is history. The end of the worldwide commodity boom has engendered a collapse of India’s exports which, at $ 33.7 billion in 2016-17, were $ 9.5 billion lower than in 2013-14. Moreover, with global prices crashing, imports too have risen by $ 10.1 billion to $ 25.6 billion (see Table 3), thereby putting further pressure on domestic prices and reducing the country’s overall agri-trade surplus. During their peaks, futures prices of corn, wheat and soyabean at the Chicago Board of Trade ruled at $ 8.49 (August 2012), $ 13.34 (February 2008) and $ 17.94 (September 2012) per bushel, respectively, while scaling 244 cents a pound (March 2011) for Cotlook ‘A’ Index cotton and $ 5,142 per tonne (April 2013) for skim milk powder at the New Zealand dairy giant Fonterra’s online auction platform. The respective rates for the same commodities at the end of November 2017 were $ 3.56, $ 4.33, $ 9.86, 83.7 cents, and $ 1,701!

If farm distress owes primary to low produce realizations, it is obvious that globalization – its pernicious effects playing out in the reverse, unlike during the 2004-13 period – is significantly to blame.

 

But the impact of the global trading environment turning unfavourable – on which the government admittedly has little control – has been aggravated no less by domestic policy. One of the Modi government’s first steps – on 2 July 2014 – was to bring potato and onion within the purview of the Essential Commodities Act (ECA). Coming after almost a decade, the move empowered states to fix stock-holding limits and act against supposed hoarders and black marketers of the two staples. It was combined with the imposition of minimum export prices (MEP), below which no overseas shipments could take place and forcing farmers to sell only for the domestic market. During the last three-and-a-half years, ECA and MEP restrictions have been clamped at the slightest hint of domestic prices going up.⁸

But it isn’t onions and potatoes alone. Stock and turnover limits on sugar traders – not being allowed to hold more than 500 tonnes and having to sell within 30 days after receipt of any consignment – have been in place since April 2016. In pulses, when prices surged during 2015-16, the controls did not stop at banning exports, permitting duty free imports, and extending ECA stock limits to dal millers and importers; even enforcement agencies, including the Directorate of Revenue Intelligence and the Intelligence Bureau, were made part of the Centre’s efforts to check ‘cartelization’ and ensure that there was no ‘artificial’ price rise.⁹

 

Such actions, far from being isolated, are actually in line with the policy of ‘inflation-targeting’ adopted by the Modi government, through an Agreement on Monetary Policy Framework signed between the Finance Ministry and the Reserve Bank of India on 20 February 2015. It commits the latter to keep annual inflation based on the consumer price index (CPI) within 6% from 2016-17.¹⁰ True, India may not be the first country to have gone in for inflation-targeting. There were at least 28 countries before India, whose governments set explicit inflation targets for their central banks to achieve.¹¹

What makes the Indian case unique though is the high weightage that food and non-alcoholic beverages have in its CPI. As Table 4 shows, this share, at 45.86%, is more than for the CPI of any other inflation-targeting economy. What it also means is that the success of inflation targeting in India rests disproportionately on reining in agricultural produce prices. And since these are not amenable to control through traditional monetary policy instruments – hiking the RBI’s short-term ‘repo’ lending rate cannot help bring down onion prices – it creates an inherent anti-farmer policy bias. If CPI inflation has to be below 6% a year, food prices cannot be allowed to rise beyond 8-10% at the retail level. That would, then, translate into 6-8% at the wholesale and 4-6% at the farm-gate levels.

An inflation-targeting regime also implies that the alacrity in imposing controls – violating every rule of free trade – is invariably matched by a lack of urgency in withdrawing them. The best example of this is pulses. In 2016-17, the country produced a record 22.95 mt of pulses, over and above imports of 6.61 mt. The fact that farmers were set to harvest a bumper crop was known since late-2016, when ruling market rates had already plunged below MSPs. Yet, stockholding limits were removed only in May 2017, while import restrictions on arhar, urad and moong, along with a 50% customs duty on white peas, came during August-November. The Modi government also freed exports of milled pulses in mid-September. But all this was well after the damage had been done.

The final blow was, of course, delivered by demonetization. The effects of the 8 November 2016 decision to scrap all existing Rs 500 and Rs 1,000 denomination notes were not felt during the rabi planting season – farmers simply replaced cash with deferred payments for labour, seed, fertilizer and other inputs. But when the time came for marketing this crop, prices crashed and this in peak summer; CPI inflation in food was negative during both May and June. June also recorded widespread farmer unrest, especially in Maharashtra, Madhya Pradesh and Rajasthan. The source of anger, it seems, was that they had harvested a bumper crop after two drought years only to see prices nosedive.

 

A major reason for low crop realizations in the last rabi marketing season was an absence of liquidity in the mandis. What remains to be seen is how much of this is purely transitory. Agricultural produce-trading in India has traditionally been cash based and financed through a chain of mandi intermediaries, processors, input dealers and retailers. It is not clear whether this class of intermediaries has really recovered from the shock of demonetization, even with cash returning to the system. The evidence so far does not suggest it has. The old confidence to freely buy and stock up produce, if anything, has been replaced by a general fear of being ‘watched’ by the income tax and enforcement authorities. The ultimate sufferer is the farmer, whose produce prices are today more prone to falling than rising.¹²

Postscript: The massive farmer agitations in June came barely three months after the BJP had swept the assembly polls in Uttar Pradesh. Agrarian distress, whether demonetization induced or otherwise, did not prove to be much of a factor then. But in the December Gujarat elections, it was the main contributor to the ruling party’s reverses in rural areas.

 

Footnotes:

1. The Index of Prices Received by farmers and agricultural labourers went up from 61.56 to 132.85, while the Combined Index for Prices Paid by them increased from 75.51 to only 126.98. Hence, the overall terms of trade index – the ratio of the former to the latter – improved from 81.52 to 104.62 (Agricultural Statistics at a Glance 2016, Directorate of Economics and Statistics, Ministry of Agriculture and Farmers Welfare, Government of India, p. 250).

2. Harish Damodaran, ‘The Untold Farm Rebound Story’, Seminar 241, January 2013, pp. 39-43.

3. Among individual foodgrains, the output of rice, wheat, maize and pulses – including arhar/tur (pigeon pea), urad (black gram) and moong (green gram) – reached record levels. For details, see http://bit.ly/2nNaW9A

4. See http://bit.ly/2BOI2YD

5. Its tenure came to an end in May 2004 and was followed by the UPA that ruled for the next 10 years.

6. See, for example, http://bit.ly/2AaIcJD

7. The term was used derisively by Modi in his 2014 Lok Sabha poll campaign. See http://bit.ly/1G4qrdw

8. Harish Damodaran, ‘Back to Controls: Going Against the Grain of Liberalisation’, Indian Express, 21 September 2017. The latest imposition of an MEP of $ 850 per tonne was on 23 November 2017.

9. http://bit.ly/2BPQmaI

10. http://bit.ly/2ArknkF

11. http://bit.ly/1uD716m

12. See Harish Damodaran, ‘The Crops of Wrath’, Indian Express, 12 June 2017 and ‘Rural Incomes: Why Farm Prices are Now More Prone to Falling than to Rising’, Indian Express, 8 November 2017.