Business Standard, August 07, 2002
Mitigating the impact of the drought will require an industrial revival
The extent of damage that the delay in rains will cause is not yet clear. But post-monsoon forecasts for GDP will undoubtedly be lower than the 6 per cent growth that had been expected. As agriculture, and rain-fed agriculture at that, still constitutes a major part of the Indian economy, it is not surprising that in the past the performance of the economy has been dependent on the behaviour of the monsoon.
But is today’s India any different? Will a drought have a smaller effect on the economy? First, drought relief is to be provided. Large sums will undoubtedly be spent, but given the politics of drought relief, it is a moot question whether food, water and money will reach the most affected. Further, inflation is to be kept in check. Agriculture minister Ajit Singh has announced that there will be no shortages because the country has sufficient reserves of foodgrains and enough foreign exchange to buy edible oil.
It is true that proper management of food supplies can prevent starvation and price rise. Effective relief programmes can reduce the pain which the drought might have otherwise inflicted on both humans and livestock. But the impact of the drought will not be limited to food prices or to those who live in the drought-prone areas. The loss in incomes of those in drought-prone areas (and the loss in real incomes due to the rise in food prices) will affect the demand for industry and the whole economy.
Indeed, that is why in the last 50 years whenever agricultural production has fallen, GDP has witnessed a downswing. There are two reasons for this. First, the share of agriculture in GDP is much higher in India than in other developing countries. For example, while this share is 9 per cent in Brazil, 18 per cent in China, and 12 per cent in developing countries as a whole, it is 25 per cent in India.
Second, the impact of a decline in this 25 per cent share of GDP is higher than simple accounting would suggest. The main reason for this lies in the high proportion of the population dependent on agriculture. Nearly 70 per cent of the country’s population lives in rural India and 60 per cent is directly dependent on agriculture for its livelihood. The other 10 per cent in rural industry and retail trade is dependent on their prosperity.
But even though about 70 per cent of the population earns less than 30 per cent of the GDP, the share of income they consume is very high. While at the economy level, only about 75 per cent of income is consumed, for the rural sector the share of income consumed is much higher. Only about 5 per cent of the GDP in agriculture is invested. Over nine-tenth of rural income goes into consumption. The saving propensity of most of the rural population is so low that a fall in income has an almost equivalent impact on consumption. It is not as if they can depend on past savings and maintain even their minimalist lifestyles.
As only 40 per cent of the arable land in India is irrigated, it implies that a large proportion of private final consumption expenditure continues to be dependent on the monsoon.
In a more long-term perspective, the impact of the drought depends on whether there have been policies in place that reduce the dependence of the economy on the rains. Contrary to the spirit of modernisation and development, the government actually takes pride in GDP growth figures when they come on the back of a good monsoon. Consequently, issues related to reducing the dependence of the Indian economy on the monsoon continue to be ignored. Not only is the state guilty of neglecting public irrigation, both in terms of maintenance and new facilities, it is also ignoring other major questions.
For instance, reducing the share of the population dependent on agriculture depends on the ability of industry to grow and employ labour. The policy changes required for this, such as dereservation of small-scale industry, change in labour laws, and infrastructure development, are well-known. The report of the task force on employment headed by Montek Singh Ahluwalia made an attempt to address these problems.
Reduction in the dependence on agriculture was to come from a faster growth in GDP, in industry and services as well as in the ability of industry to employ labour. But political bosses quickly sidelined the report to make way for a special group on employment that had all the politically safe but economically unsound recipes that maintained status quo.
Also, the issue of low incomes and low labour productivity in agriculture has not been addressed. The agricultural policy continues to be food-grain centric.
Not only do the government’s policies on subsidies, food prices, etc benefit a small group of farmers producing a surplus of foodgrains, even critics of the government focus their attention on policies related to foodgrains. Thus, debates on procurement prices, inter-state trade restrictions and food stocks still dominate policy circles even when cereals account for only 26 per cent of the value of the output of agriculture, livestock and fishing.
The focus on cereals is at the cost of other issues. For instance, the decline in productivity of both land and labour in agriculture as a whole has been ignored. It is worrying that the average growth rate of crop production fell from 3.2 per cent in the 1980s to 1.7 per cent in the 1990s. Growth of yields fell from 2.6 per cent to 1 per cent.
However, despite government apathy and lack of support, there has, in the last 20 years, been a diversification into high-value products such as milk, fruit, vegetable, livestock and fishing. Interestingly, this has been a demand-driven revolution as incomes have risen and food baskets changed with urbanisation. The government has failed to contribute significantly to this either in terms of support such as R&D or infrastructure such as roads and markets.
But recent studies reveal disturbing trends. While in the 1980s, there was a sharp increase in production, there has been a slowdown in the 1990s. This is mainly because the 1980s saw a sharp rise in yields, but now technologies have stagnated and yield levels have plateaued. If the government’s step-motherly attitude towards this sector does not change, we may well see further decline in yields and production.
Perhaps some lessons will be learnt from this drought. Unfortunately, one did not see that happen in the past but hopefully this time will be different.