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Are current solutions creating more problems?

In our previous post, we explored the financial and technical investments governments need to make to develop their agricultural industries. India has made strides in increasing the budget for agricultural investments each year. The government has introduced numerous schemes for agricultural investments in its Five-year plans. However, the government’s large public spending, mostly in the form of subsidies and partly in agricultural related R&D, have not reaped results of the same magnitude as the investments.

Current Scenario

In the fiscal year 2014, INR 7.3 lakh crores was disbursed as credit to farmers. 2015 saw an increase to INR 9 lakh crores. In the new budget announced on February 2017, this number has been further hiked to INR 10 lakh crores. India also has the second highest spending on agricultural related R&D by a developing country, second only to China. But such enormous allocations to the sector have not yielded returns of the same magnitude.

High Investments Yielding Low Returns

As mentioned in previous posts, less than 50 percent of India’s agricultural land is irrigated; a majority is dependent on monsoons. Fewer than 40 percent of farms are mechanised while 95 percent of U.S. farms are mechanised. Average farm power in India lags at 1.36 KW/Ha as compared with Japan and Italy, which are at 8.75 KW/Ha and 3.01 KW/Ha, respectively. Yields of major crops such as rice, wheat, coarse cereals, maize, and pulses have stagnated as seen in the graph below.

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Failure to invest in the right areas

There are several reasons why India’s investments have failed.

Research and Development restricted to crops

Agriculture R&D in India is primarily focused on crop farming (see pie chart below). This has no impact on problems like food security especially given the complex process of regulation and acceptance of new technologies like genetically modified crops. Little importance is given to sectors such as animal husbandry, fisheries, and forests. While the U.S. has an exclusive organisation set up for R&D on forestry, India barely employs one percent of its total research staff in this sector!

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Disbursed credit not reaching its target

Almost three-fourths of the total farmer population has no access to credit through formal channels. Of the remaining one-fourth, almost half of the credit is disbursed to large farmers who make up only one percent of the total farmer population. Small and marginal farmers are excluded from their share of government credit and are, in effect, forced to rely on their savings. Consequently, 84 percent of the total farmer population makes private investment in their farms and farming practices.

Negligence of infrastructure

India has around 6500 cold storage facilities with a capacity of 30 Mn MT. Yet, a mere 4 Mn MT of the 104 Mn MT of fresh produce is transported through a cold chain. To fill the gap in India’s cold chain, a total investment of approximately USD six to ten billion is required in the next five to ten years – making the government’s role in this area of paramount importance.

A singular focus on subsidies

Input subsidies – government sponsored subsidies to farmers for fertilizers, irrigation, electricity, and food – are the most expensive aspect of India’s agricultural policies. India has witnessed an increasing subsidy budget each year. This has resulted in our agriculture sector being more dependent on input subsidies when compared with other large emerging economies as seen in the graph below.

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Developing economies such as Brazil and China have made a conscious move away from subsidies towards investment on the understanding that subsidies add little value to the sector. Rather, they are one-sided transactions that do not provide long-term benefits of real development.

However, India is yet to realise this. Of the total planned revenue expenditure, 35% of it is spent on subsidies while a mere 9% is earmarked for capital investment in agriculture.

Parting thoughts

The reality is that the government is putting enough funds in the sector. However, the resulting inefficiency is caused by the improper or low utilisation of the allocated funds. In our next post, we will examine other areas in which the government should invest such as infrastructure and R&D. The economy will only accelerate if we invest in development and not on unilateral subsidy schemes.

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