August 31, 1998

Presenting a reformist blueprint for the second Green Revolution.

Jairam Ramesh

One of the hardy perennials in our economic policy is the terms of trade: the relative prosperity of agriculture vis-à-vis industry. Conventional wisdom is the terms of trade is weighted against agriculture.

The Commission on Agricultural Costs and Prices (CACP) calculates the terms of trade annually. The terms of trade is defined as the ratio of the index of agricultural wholesale prices to that of industrial wholesale prices. Setting the value of the ratio for the triennium ending 1971-72 at 100, the CACP estimated the ratio in 1990-91 at 90 and in 1996-97 at 88.9.

Our pre-1991 macroeconomic and trade policies definitely worked against the interests of farmers. Overvalued exchange rates, absurdly high import duties on industrial goods, and export bans and quotas for farm products caused the discrimination. But the idea that the terms of trade is still moving against agriculture is wrong.

Three years ago, a committee headed by the noted agro-economist A.S. Kahlon submitted its report on a revised methodology for calculating the terms of trade between agriculture and industry. His committee made two significant recommendations.

Given the changes in production and consumption patterns, the base year should be the triennium ending 1990-91 and not 1971-72.

Indices normally used do not fully capture the nature of farm activity or its economy-wide linkages. So a more comprehensive index to measure the terms of trade should be used. Kahlon's committee calculated the terms of trade as the ratio of the index of prices received for farm products to the index of prices the farmer pays for farm inputs, his own food and capital investment.

If Kahlon's ideas are incorporated, then it turns out that the terms of trade has been moving in favour of agriculture through the 1980s -- and sharply since 1991. For example, the index was 93.9 in 1984-85 and 101.9 in 1990-91. By 1994-95, it had risen to 106.6. True, favourable terms of trade does not automatically mean high profitability. But what is clear is the discrimination against agriculture is being whittled away. Private investment in agriculture has grown in real terms, despite a decline in public investment.

All this would not have happened had the terms of trade gone against agriculture. Unfortunately, the Kahlon methodology is contrary to the prevailing mindset. That is why his report lies ignored.

Continuous hikes in procurement prices have, no doubt, boosted the terms of trade in favour of agriculture. But this benefits only those who have a market surplus to offer -- barely 15 per cent of all farmers.

Since all governments find it hard to raise issue prices for consumers after increasing procurement prices for producers, food subsidies keep burgeoning. Investment, productivity and technology have to drive and sustain the terms of trade in favour of farmers. A five-point "refarms" agenda suggests itself.

First, over the past decade, farm subsidies have grown at three times the rate that farm investment and infrastructure expenditure has gone up. This is crazy. Investment in rural areas for roads, power, irrigation, research, education, technology transfer, storage and marketing is the only way to accelerate agricultural growth. It may also be the solution to poverty, particularly in eastern and central India. But investment in agricultural science and technology is now one-third that of defence and nuclear energy. This is a clear case of misplaced priorities.

Second, the vitality and viability of the rural financial system, destroyed by years of competitive populism, have to be restored. It is not the cost of credit but its timely, adequate and convenient availability that matters. A majority of our small and marginal farmers do not have access to institutional credit. Annual flow of farm credit has to almost treble in order to meet demand.

Third, a special programme for irrigation has to be launched. Just about 37 per cent of the total cultivated area is irrigated. Currently only the wheat and sugarcane crops are assured of near-complete irrigation. Irrigation departments must be converted into farmer-owned corporations and put on a sound financial footing.

Fourth, agricultural decontrol must be pushed forward. The 1997-98 budget made a beginning by abolishing antiquated laws like the Ginning and Pressing Factories Act, 1925, the Rice Milling Industries (Regulation) Act, 1958 and the Cold Storage Control Order, 1964.

It also deserved some items from exclusive production in the small-scale sector. Next it allowed futures trading. Freeing both domestic and international trade in agriculture will enrich farmers.

Fifth, even today only one crop is grown in over two-thirds of the net sown area. Diversification is imperative for farm prosperity. Also, given the pressure on land, non-farm employment in rural India must be given a new thrust. Forestry, animal husbandry, afforestation, construction, agro-processing, sericulture, leather: these are only some of the areas which hold potential.

The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own.

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