July, this year, marks the silver jubilee of economic reforms. It is time to take stock of our major successes and failures. There is a saying that bad times are often good for policies and good times are bad for policies. It is well-known that the foreign exchange crisis, with reserves falling to as low as $1.5 billion, triggered fundamental changes in economic policies in India. Three major policy changes were: Depreciation of the rupee by more than 40 per cent, liberal trade policies with substantial cuts in import tariffs of industrial products, and de-licensing of a host of industries.
There have been major successes on all three counts. But in this article, I want to focus on the impact of the economic reforms on agriculture. The first big policy change that was attempted in agriculture pertained to fertiliser: Raising urea price by 40 per cent in order to cut fertiliser subsidy. That created an uproar, even in the Congress party, forcing a rollback to 30 per cent. Subsequently, a joint parliamentary committee was set up on pricing of fertilisers. The committee recommended freeing up of potassium and phosphorous fertilisers from subsidies, but also suggested a 10 per cent reduction in urea prices. This set the stage for unbalanced fertiliser use as well as swelling the fertiliser subsidy.
Thereafter, several committees looked into this issue, but none could recommend decontrolling urea prices. As a result, this sector suffers from large inefficiency, urea is diverted to non-agricultural uses and to neighbouring countries, while the subsidy burden continues to rise.
The fertiliser subsidy in the Union budget for the fiscal year 2017 is about Rs 70,000 crore. But there are also pending bills of more than Rs 45,000 crore against the fertiliser industry. The government is trying to increase fertiliser production by pumping in more resources in sick units. That is an inefficient strategy.
Data from Bihar gives us some idea of fertilisers getting diverted to neighbouring countries. In FY 2013, fertiliser consumption in Bihar was about 200 kg/ha, way above the all-India average of 131 kg/ha. But figures of wheat and rice production are not commensurate with such levels of fertiliser consumption. Directorate of Economics and Statistics data shows that wheat cultivation in the state required 125 kg of fertiliser per hectare (ha) while paddy consumed 97 kg per ha. What accounts for such a large difference is anybody’s guess. Very likely, much of the fertiliser is going to Nepal.
Can the Narendra Modi government take fertiliser sector reforms to their logical conclusion? The road map is reasonably clear. It is time to transfer fertiliser subsidy to farmers’ bank accounts on per hectare basis, and decontrol the fertiliser sector completely. This will make the subsidy crop-neutral, help those who want to grow crops other than wheat and rice, and promote organic farming. China has done that already.
Unfortunately, there was no reform package for agriculture as a sector — unlike industry and trade policy. There was only minor tinkering with agriculture policies, as in the case of fertiliser pricing or opening up exports of rice in1994. Two years after opening up of rice exports, India became the second largest exporter of grain in the world. This encouraged the government to open exports of wheat in 1995. But this caused domestic prices of wheat and rice to rise and led the government to ban wheat and rice export in 1997. The ban continued for almost five years.
These hiccups notwithstanding, India has emerged as the largest exporter of rice in the world. Between FY 2013 and FY 2015, Indian rice exports amounted to more than 10 million metric tonnes on an average. This led to major transformation in the rice milling industry. The industry today uses better technology, including sortex machines.
However the biggest gain to agriculture came from the improvement in the terms of trade. The correction of the over-valued exchange rate of the rupee in 1991 and the slashing of industrial tariffs ended the “implicit taxation” of agriculture from these indirect policies. Terms of trade for agriculture improved. This resulted in higher private investments in agriculture and agri-GDP grew by 4.8 per cent per annum from FY1993 to FY1997. But once export controls were back and East Asia was hit by a crisis in 1997, agricultural growth suffered. It has not come back to the 4.8 per cent level.
Agriculture witnessed severe crisis in the first two years of the Modi government. Agriculture growth collapsed to 0.5 per cent. This is partly because of back-to-back droughts and falling global agri-prices, but the crisis has also to do with the fact that there is no champion for agriculture in the cabinet. It is time for the PM to pay attention to this and complete the unfinished agenda of agri-reforms. The government surely needs to go beyond fertilisers and extend reforms to agricultural markets, boost investments and create institutions that research and promote agriculture. If the PM can increase agri-growth beyond 4 per cent per annum, he is likely to reap rich dividends.