Aspects of India's Economy Nos. 36 & 37: The Real State of India's Economy

Within the productive sector, as we have seen above, the industrial sector has failed to bring about sustained growth. Employment in industry has not risen to levels at which the industrial workforce itself becomes a major source of demand (ie, accounting for a major part of the market). Artificial stimulants, such as dismantling industrial licensing to spur the growth of luxury production, soon wear off. For only three years in the mid-1990s was there a spurt of growth; after the pent-up demand for luxury goods ran its course, recession set in again. The Government thereafter repeatedly reduced interest rates, but industry merely substituted its old debt with fresh lower-interest debt and pocketed the saving, rather than expand production. Finally it was the partial recovery of agriculture in 2003-04 that gave some sort of stimulus to industrial demand.

Indeed, for all the official talk that India is an increasingly modern, even post-industrial, economy, agriculture remains its base. This is so not only in the depressed prices of inputs it supplies to industry. Manufacturing growth is still linked to the demand generated by agricultural performance, as a glance at the last four decades will reveal. When this is so even in agriculture's present stunted state, one can imagine the boost that could be given to industrial demand if agriculture were freed of its present shackles. However, the rural classes which today control land, credit, inputs and the levers of governmental power extract surplus from the peasantry in various forms, but do not reinvest much of it in expanding productive forces in agriculture. In effect they act as a drain on surplus from agriculture.

Agriculture even now remains the largest employer, providing the majority of the workforce some sort of subsistence in the form of under-employment. This has its negative aspect: The existence of an army of under-employed in agriculture helps industrialists keep industrial wages depressed. (First, industrial workers can be paid less because their families can be kept in the villages; even otherwise they can get some help from the farm to make ends meet, and find refuge there after retirement. Secondly, those employed in industry find it difficult to unionise and raise their wages, given that their place can easily be taken by the large pool of under-employed in agriculture.) It is important to note that here the army of unemployed/ under-employed is much larger than the industrial workforce.

Agriculture also acts as a social shock-absorber, helping to prevent sharp class struggle by workers, who can fall back on their village subsistence when they lose their jobs. And the feudal forces and backwardness that reign in agriculture sustain all sorts of reactionary cultural influences and structures such as caste and communalism that help keep working people subjugated and keep them from uniting on class lines. Thus agriculture serves as an economic base for the type of economic growth taking place, and as a social base for the ruling classes to sustain their rule. It casts the shadow of its own backwardness and stagnation over the entire economy.

The condition of this base of the Indian economy and society is deteriorating even further.

Steep fall in investment
Investment in agriculture, already very low, has been declining to appallingly low levels. In particular, public investment in agriculture, which in present circumstances has been the key to improving land productivity, has been declining for the last two decades. As a proportion of GDP, it has fallen from 3.4 per cent in 1980-81 to 1.3 per cent in 2000-01 — this for a sector that constitutes one-fourth of GDP. Even as a proportion of GDP in agriculture itself, investment has fallen from 8.5 per cent to 6.1 per cent in the same period.²⁴ In other words, from the value added in agriculture, a smaller and smaller share is re-invested in agriculture.

It is worth noting that as public sector investment in agriculture has fallen, private sector investment has constituted a larger share of total investment. However, it has not compensated for the fall in public investment; on the contrary, it too has fallen as a share of GDP. This is natural, as it is public sector investment that encourages private investment. About 90 per cent of public sector investment in agriculture is in major and medium irrigation facilities, and the spread of irrigation makes it attractive for farmers to make other investments, since they are assured of returns.

	Public	Private	Total
1980-81	1.3	2.1	3.4
1990-91	0.6	1.6	2.2
1993-94	0.5	1.1	1.6
1996-97	0.4	1.1	1.5
1999-00	0.3	1.1	1.4
2000-01	0.3	1	1.3
2001-02	0.3	1	1.3
Economic Survey, different years. 1980-81 figures on the basis of the old series (base year 1980-81); remaining on the basis of 1993-94 series.

Moreover, in the absence of public sector investment the type of private investment being carried out now has dangerous consequences: "most of the private sector capital formation goes towards minor irrigation facilities like pump sets.... 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 the 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. This tendency clearly has adverse impact on the level of the water table and the ability of small and marginal farmers to irrigate their farms."²⁵ This would have several consequences: inequality would worsen; commercial crops would get priority over consumption crops; and overall productivity would fall, even as productivity on farms of better-off farmers may increase.

Slowdown in spread of new technology
The Green Revolution dramatically increased yields in the regions where it was introduced (mainly Punjab, Haryana, and western U.P.); meanwhile yields stagnated or fell throughout the rest of the country. The contrast was particularly striking in the case of eastern India, which was endowed with the appropriate natural conditions, including large water wealth, needed for rapid growth. Yet the backward social relations prevailing, as well as the paucity of State expenditure on irrigation, agricultural extension, agricultural research, and rural infrastructure (electricity, storage, rural roads, etc) prevented such an advance. Per capita foodgrains production in Bihar fell from 155 kg in 1970-73 to 121 kg in 1990-93. Similar declines occurred in a number of other states.

In the 1990s, cereal yields in the Green Revolution areas in northwest India reached a plateau, and there are major environmental problems emerging from the present pattern of agriculture and irrigation there. These may cause a fall in output, unless the State makes large outlays for a combination of measures. In eastern India, however, two important developments took place in this decade to stifle hopes of rapid yield growth. First, there were huge shortfalls in public investment in irrigation: barely half the target for creation of additional irrigation was achieved in 1997-2002. Agricultural extension services were wound up by the states and the Centre, and bank credit to agriculture was reduced. Secondly, though input costs rose, prices paid to farmers for their crops fell below the cost of production, acting as a disincentive. Now the rulers have openly taken the stand that there is too much grain production, and it needs to be decreased. Among the measures being adopted is to lower procurement by freezing procurement prices and by rejecting much of the grain offered for procurement on grounds of quality. When this is the policy adopted in areas of normally high procurement, the effect on areas of low procurement will be to depress prices further.

As a result of these trends, the the trend growth rate of area under high-yielding variety seeds slowed down from 8.1 per cent per annum to 4.4 per cent, and growth rate of consumption of fertilisers slowed down from 7.8 per cent in the 1980s to 4.3 per cent in the 1990s, and fell further in the last few years. Moreover, the hikes in prices of potash and phosphatic fertilisers have led to an imbalance between nitrogen, phosphorus, and potassium; the three were in the ratio of 8.5:3:1 by 1998-99, as opposed to the desirable ratio of 4:2:1. The soil is thus being massively depleted of nutrients, damaging its productivity. This, combined with the draining of underground aquifers by wealthier farmers' pumpsets, portends an even graver situation in the near future.

Dramatic slowdown in production
The effects on agricultural production have already been seen quite dramatically. Yield growth rates have plummeted. Since area under foodgrains is falling, the fact that yield growth is below population growth (1.9 per cent per year) means that foodgrains production per capita is falling. Importantly, this is not a fluctuation caused by the weather; on the contrary, there has been a long string of good monsoons during the last decade, whereas there has been a steady downward trend in yield growth. The situation is even worse with non-foodgrains, which are cash crops such as edible oilseeds, cotton, jute, and sugarcane. Yield growth has turned negative for them, and production is propped up by turning over more and more area to these crops (the index of area under non-foodgrains grew 1.2 per cent per year during the 1990s). The growth of area under these crops appears to be driven by the desperate need for cash to pay off debts.

Table 19: Rates of growth of yields per unit area
(Moving five-year growth rates calculated upon
three-year moving averages of indices of yields)

Foodgrains
1992-93	1993-94	1994-95	1995-96	1996-97	1997-98	1998-99	1999-00	2000-01	2001-02
3.39%	3.04%	2.57%	1.55%	1.80%	1.40%	1.47%	1.05%	1.29%	1.39%
Non-foodgrains
1992-93	1993-94	1994-95	1995-96	1996-97	1997-98	1998-99	1999-00	2000-01	2001-02
3.19%	2.44%	2.13%	1.44%	2.05%	1.54%	1.55%	0.44%	0.19%	-0.57%
Report of the Committee on Long Term Grain Policy

(See also Charts). Ever since the new economic policy was imposed in 1991, and more particularly since the mid-90s, agriculture has taken a severe beating. From an average annual growth rate of 5.2 per cent in the 1980s (1980-81 to 1989-90), the growth rate of agricultural production during the period of so-called reforms (1993-94 to 2002-03) has fallen to 0.4 per cent.²⁶ Again, this amounts to a sharp fall in production in per capita terms.

If agricultural output had continued to grow during 1993-94 to 2002-03 at the rate at which it grew during the 1980s, output now would have been one-third higher than actually achieved.

Land alienation
Given the fall in the growth of agricultural production, one would have expected employment growth to slow down. Continuing mechanisation in parts of the country and for particular crops would further reduce demand for labour. Even so, it is startling that between 1993-94 and 1999-2000 agricultural employment growth fell to virtually zero.

The reason for this appears to be massive land alienation. Input costs are rising, bank credit is disappearing, and the price peasants get for their crops is falling, making it difficult for peasants to hold on to their land. The percentage of landless households among rural households has risen from 35 per cent in 1987-88 to 41 per cent in 1999-2000, and the percentage of households with marginal holdings too has risen from 19 per cent to 22 per cent. Thus landless and marginal account for 63 per cent of rural households, up from 55 per cent in 1987-88.²⁷

A crucial role is played by usurers in this process — one that has been dramatically highlighted by the thousands of suicides of peasants taking place in states as varied as Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Uttar Pradesh, Bihar, and Punjab. The extractions start even before the planting of the crop, in the form of overpriced inputs often sold by the moneylender himself; they continue to the stage of sale of the crop at a depressed price, often to the same person. The effective rates of interest charged (including the extractions by inflating input prices and depressing output prices) are such as to stifle production. Since the overwhelming bulk of agricultural credit is given by usurers, and what little bank credit was earlier extended is vanishing rapidly, the scale of these extractions in agriculture is huge. The final alienation of land is thus the end of a long process in which the peasant slowly loses effective control of the land -- his sole means of sustenance in a degenerating economy.

It is important to note that the increasing concentration of land is taking place at a time when yields are stagnating, and per capita production is falling. This is not the process of land being concentrated in the hands of more efficient producers in a dynamic agrarian sector, but of a crippled sector in which producers are finally alienated of land by parasitic forces.

The entire process is parasitic in that the extractions made by the rural exploiting classes from the peasantry are neither going toward investment in agriculture nor toward rapid expansion of industry, but are being spent on conspicuous consumption, invested in unproductive activities such as trade and transport, used as bribes to Government officials to capture more resources, re-cycled in more usury and purchase of land of bankrupt peasants, and the like.

Indeed it is not only agriculture, but the entire economy, which is crippled. The peasants who lose employment in agriculture are unable to find employment in industry, and must find some sort of refuge 'employment' in the services sector.

The current abysmal condition of the Indian economy — the condition of its people and their productive future — calls attention to the enormous potential for growth if the present political economy of the country is changed. The enormous squandering of the surplus, and therefore of the productive potential of the country, is difficult to capture in statistics. A democratic re-ordering of the Indian economy and society, beginning with its base, would be a painful process, no doubt, as those who stand to gain from the current order would do their best to prevent such change. But it would be far less painful than what is routinely suffered by those on whose labour this economy runs.

27. Jayati Ghosh, "Why is agricultural employment falling?", 22/4/03, www.macroscan.org. (back)


Nos. 36 & 37, March 2004