The year 1991 witnessed a series of bold economic reforms that changed the course of the Indian economy. In response to the balance of payments crisis, it aimed to improve productivity and efficiency by welcoming changes that created an environment for healthy competition. Barriers were revoked and systems to promote economic activity were sanctioned. As a protectionist nation, this reform paved the way for India to be integrated with the world economy.
The WTO shared the view that the 1991 reform policies have left the agricultural sector relatively untouched. Nevertheless, the 1998 WTO’s Secretariat’s report read, “but, agriculture has benefited from the price realignments resulting from manufacturing sector trade reforms.” Also, the WTO was in conflict with India’s export-oriented liberalization, where the liberalization of capital goods meant cheaper inputs for industries making them competitive in the domestic and export market.
The WTO Agreement on Agriculture, which came into effect in 1995, had sought to create market-oriented policies in terms of market access, domestic support, and export subsidies. Tariffs had to be reduced by an average of 24% in 10 years that is by 2004 for developing countries. The total domestic support policy had to be reduced by 13.3% in developing countries; however, categories that received less than 10% of the value of production of domestic support were exempted. This meant that direct subsidies on agricultural products and on inputs such as electricity, water, credit, and fertilizers were down to less than 10% of the product value. Also, export subsidy expenditure had to be reduced by 24% and volume by 14% over the course of 10 years.
India committed to binding its tariff on agricultural commodities. It bound its tariff for agricultural products at 100%, processed food products at 150%, and edible oils at 300%. These were assumed to be sufficient to protect domestic products from cheap imports (cheap due to support from the country of origin). Moreover, India did not provide any direct export subsidy (indirect subsidy on agriculture export tax exemption and subsidy for the cost of freight on certain products exist).
It was theoretically hoped that the favorable exchange rate policy and deregulation, following the 1991 NEP, were expected to stimulate trade in the sector. The domestic prices were expected to fall and match the price of the world market. India’s alliance with the WTO rose hopes to foster the growth of agricultural commodity export and benefit from favorable farm import prices. Further, it was assumed that these changes would encourage private investment in the sector which would bring about infrastructural and technological development.
However, the growth pattern did not seem to have felt the above changes as strongly as one could have hoped for. Neither could the sector achieve increased growth rate nor did it avail itself of the expected benefits. The contribution of agriculture and allied sectors to GDP had declined. In 1988 agriculture, forestry, and fishing accounted for 27.98% of the GDP. By 1995 it was 24.46% and by 1998, it was 24.38%. Furthermore, from 3.1% annual trend growth rate of agricultural production in the 1980s, the 1990s saw the rate drop to 2.2%.
In the periods 1990-1991 to 1994-1995, agricultural and allied exports comprised 17.5% of total exports. The share of exports fluctuated during the post-WTO period. From 1995 to 1997 there was an increase followed by a decline in the share till 2005-2006, where the proportion dropped to 9.9%. The average value reduced to 14.5% over 1995-1996 to 2006-2007. This posed a contradiction to the expectation that the Agreement on Agriculture of WTO would improve the country’s agricultural exports.
This decade of reform also witnessed a significant variation in the level of agricultural output with an absolute decline for five years. These unfavourable changes were in sharp contrast to the general trend that the country experienced. The focus will be on the deceleration in the growth rate of the agricultural sector, owing to the limited scope of this article.
The evident deceleration in the growth rate of the agricultural sector has been attributed to the reform in the economic policy regime by some, while others link it to structural factors affecting the supply side of the agricultural sector. However, there is little strong intrinsic evidence to state that the policy was damaging to the sector. This is true because while the rate of growth decelerated in this sector, other sectors seemed to be doing just fine.
The import liberalization and the role of WTO are also often pointed as a cause for adverse performance. It was thought to have pushed down the real price and reduced profitability. Studies claim to have multiple explanations and they vary with the context and time in which they were produced. A study report by RBI on Agricultural Growth in India since 1991 claims, “for the majority of Indian crops there is no statistically significant worsening of their real price.”
Further, price volatility is regarded as a potential consequence of the globalization of trade. But the report revealed that for a majority of the crops, compared to the global market price volatility, the Indian price volatility was substantially low. Specifically, food crops became less volatile while the volatility of non-food crops increased. The report indicates that since 1994, increased volatility was not a phenomenon that had caused a deteriorating performance.
Conclusively, the study strongly held the view that fluctuation in relative price was not a strong propeller of the decline in agricultural growth. Relative price change because import relaxation had a marginal impact too, with the exception of a few crops during a certain period. Instead, it suggested that the gravity of non-price factors had been immense.
Shrinking farm sizes and declining land holdings of large farms has been observed as one of the reasons for the slowing growth. This indicated that cultivation was done increasingly in smaller farms. Over 60% of the cultivated area in 1960-61 came under farms larger than 4 hectares. By 2002-2003, it was under 35%. The effect of this is manifold. Smaller farms compel families to look beyond the sector for income generation, which might affect productivity and thus, profitability. Also, the fragmentation leaves them at a disadvantage in adopting new technology as credit availability is reduced.
Furthermore, public investment is integral to the development of the agricultural sector and irrigation is the most important investment in public capital formation. The report points to the stagnation and decline in public investment which began in the 1980s. The level of public investment in 2004-2005 was about 20% less than that of the investment in 1980-1981. Stressing on the impact on the sector, as per international standards, India had already low levels of irrigated area. The rate of growth of irrigated areas (all the main crops) decelerated in the 1990s and the irrigated area for oilseed and cotton had declined.
Nevertheless, public expenditure on irrigation had not declined at the same time. Consequently, researchers have suggested three aspects to explain this: planning, implementation, and management. Governance is important as the resource itself, for, without proper allocation, use, and management, inefficiency is the product.
The role of WTO in the globalization of the Indian market has been immense — positive and contradictory. The words of a certain official of the Ministry of Agriculture resonate well with the paranoia built around the WTO and its efforts to mediate global trade, quite appropriately— “Self-sufficiency in agriculture is still seen as the single most important achievement after independence, and there is a feeling that the WTO is out to undo this very achievement by its insistence on liberalization, without acknowledging the importance of self-sustainable domestic production”. This poses a different problem of how the trade agreements on agriculture are perceived in India.
India, a developing country, has had and continues to have several disputes over its stand to support the resource-poor farmers in a pursuit to address the inherent inadequacies of the agreement. It campaigns the elimination of farm subsidies in advantaged countries and revising subsidy cap to a higher level in less advantaged countries. There is a constant negotiation to arrive at a fair agreement that would enable the developing countries to expand not at the cost of developed countries and vice versa.
Globalization is the world’s way of life and agriculture is our way of life. The two, indeed, must accommodate each other to progress. While India must constantly fight to get its views heard it should focus on the internal reforms by inspecting closely the internal rotten roots. Multiple factors—policy and structural—have had a say in the decelerated growth of the agriculture sector post the reform, where internal actions have had greater consequences. Therefore, to address the issues, internal and external reform must be undertaken. In a country where about half the population depends upon agriculture, to achieve inclusive growth, the agricultural sector should not be overlooked.
Gby Atee is a second-year Economics major at Ashoka University.