Easing of Agriculture Growth Wheels Essential for Economic Recovery Aspirations
Agriculture Today June 2009
V. Shunmugam[1]
The fact that the economic performance of Indian agriculture still affects more than half of our population, whose economic fortunes are directly/indirectly linked to it, makes it necessary to look at the factors that affect this performance. In fact, all the years that recorded higher national GDP had strong agriculture output following a good monsoon (see table). It is clear that howsoever small the contribution of agriculture GDP to the overall GDP may be; it plays a critical role in deciding the performance of the country’s economy.
While a host of factors affect the performance of agriculture with almost two-thirds of India’s cultivated area dependent on monsoon and monsoon-led recharging of ground and land water systems, the performance of monsoon is very crucial in deciding the fate of those dependent millions. In fact, it takes at least two years of good monsoon for growers to recover from the impact of one bad monsoon year and invest more in their cultivation process. This is clear from the bad monsoon year of 2004-05 that the credit flow continued to increase during the next two years.
Credit flow determines farmers’ ability to make most of a good monsoon and is, in turn, determined by interest rates. Lower interest rates boost demand for credit, while higher credit demand does not necessarily affect interest rates. Here, the relative or real price change, i.e. inflation or deflation, plays an important role. Easing or tightening of interest rates determines farmers’ access to credit from formal and informal sources. This macroeconomic cycle persists in the economy and affects the real GDP. Therefore, though monsoon plays a critical role, credit flow into agriculture is also vital to boost agriculture economy. In good production years too, prices of commodities may fall and hence the agricultural GDP. In contrast, GDP of the services and industrial sectors may rise as the prices of their inputs may have increased or there may have been a perceived rise in the value added by them. Also, the terms of trade between agriculture and other sectors as determined by existence or non-existence of certain policies and institutions play an important role in the same.
Increase in agriculture production and productivity also significantly depends on capital formation both in the public and private sectors as it largely determines the existence of efficient infrastructure for production and marketing of crops. Though the fact that GCF in agriculture as a proportion to total capital formation had continuously declined at the start of this century, relative to the agriculture GDP it had shown a growth to 12.5 percent in 2006-07 from 9.6 percent in 2000-01. Implementation of expected policy changes, including that of Warehousing Development and Regulation Act, would go a long way in improving investments if an enabling environment also develops along. Besides monsoon, credit flow, interest rates, input availability, and infrastructural availability, a major factor that affects farmers’ decision-making towards growing a crop or investing in it is assured returns and the availability of a market. The statutory support prices (by the government) from time to time also determine farmers’ sowing decision. The availability of market for whatever a farmer can grow given his risk/return perception would still be a limiting factor considering the lack of physical and information connectivity between producers and end-users. Reforms in agricultural marketing policies, market infrastructure development, and growth of initiatives such as the National Spot Exchange would only determine the ultimate freedom of choice of growing a crop that a farmer would like to have.

Given the current economic slowdown, the performance of agricultural GDP would play an effective role in regaining the growth momentum we aspire for. It is, therefore, essential that policymakers ensure that necessary investments are made and healthy returns are derived thereof, besides enabling a policy and institutional environment that is conducive to a higher growth path for agriculture.

[1] Author is Chief Economist with Multi Commodity Exchange of India Ltd., Mumbai. Views are personal.