Listen to the podcast:
Many older Indians remember the painful food shortages the country faced during the 1960s. At that time, India had to rely on food shipments from the U.S. under a controversial program named Public Law 480. It enabled the U.S. to support food-deficient, cash-poor countries. However, when the U.S. suspended food shipments because of political differences, it set India on a mission to achieve self-sufficiency in food. Today, the country has become a net exporter of food grains and is among the world’s largest producers of wheat, rice and other crops.
This success, however, masks widespread distress across rural India. Agricultural policies aimed at holding down the prices of farm products have in many cases resulted in severe economic hardship, leading to farmer suicides.
This paradox of plentiful food production and impoverished farmers needs to be solved. To do this, government policies will need to encourage investment in technological innovation, notes Ashok Gulati, professor for agriculture at the Indian Council for Research on International Economic Relations, a not-for-profit research organization based in New Delhi.
The Indian government’s recent budgetary allocation for cash transfers to farmers ahead of parliamentary elections in May 2019 is “the price of not doing reforms in agricultural marketing,” adds Gulati. A prominent agricultural economist, Gulati focuses his research on agriculture and food security, agri-trade and agri-value chains, crop insurance, subsidies, sustainability and poverty alleviation.
Knowledge@Wharton interviewed Gulati when he visited the Penn campus to deliver a lecture titled “Who Will Feed India: Political Economy of Agricultural Policies and its Implications” organized by the Center for the Advanced Study of India.
An edited transcript of the conversation follows.
Knowledge@Wharton: Indian agriculture has seen a dramatic change for the better since the 1960s because of technological innovations. Tremendous progress has been made in food self-sufficiency, and even exports of food. And yet there has also been tremendous distress. We hear about farmers committing suicide because of lack of earning capacity. Could you start by exploring this paradox? How do we explain it and what could we do about it?
Ashok Gulati: Every society has two sides – the glass is half-full or half-empty, [and it depends on] how you want to look at it. But definitely the worst is over. In those days of the 1960s, we were importing about 10 million to 11 million tons of wheat every year. There was back-to-back drought. The country didn’t have enough foreign exchange. Even if it had spent its entire foreign exchange reserves, it could have imported only seven million tons of grain. At that time, the U.S. helped through PL 480.
But we also learned a very important lesson. [In mid-1966], for three days, the ships were stopped, and there was panic in India. We learned that the [U.S.] president [Lyndon Johnson] himself had ordered a suspension [of shipments] because India had issued some statement in favor of Vietnam, and the U.S. was at war with Vietnam at that time. That taught us a very important lesson, that you cannot rely on any country for your basic food; you must produce it yourself.
So, the priority [to increase India’s food production] became very high. Ultimately it was a miracle seed, which also was invented by an American, Norman Borlaug, [which helped], and 18,000 tons of seeds of high-yielding varieties were imported from Mexico; he was based in Mexico at that time.
Within four or five years, India changed the scene, and it became self-sufficient in wheat. Today, India is the largest exporter of rice in the world. We are the second largest producer of rice as well as of wheat. Between 2012 and 2015, three years, India exported 63 million tons of grains. It is a tremendous achievement to go from a massive [food] deficit and staring at starvation to being in a reasonably comfortable position and becoming an exporter. But resources are under pressure, and the water table is also under pressure. If we don’t take the right policy decisions, the situation could reverse.
Knowledge@Wharton: India’s population is projected to surpass that of China by 2024. What implications will this have for India’s food, feed and fiber needs?
Gulati: After 2024 we will have the largest population on this planet. Unlike China, 65% of Indians today are less than 35 years of age. The average household spends 40% to 45% of its expenditure on food. So, for the next 20 to 30 years, the demand for food, feed and fiber will increase very fast.
That challenge offers a business opportunity, too. Technological innovations could help overcome this challenge. But if [policy makers] don’t rise to the occasion, then India could become a very big importer of food.
“If we don’t get our policies right on water or on technology or land, then India could become a big [food] importer.”
Knowledge@Wharton: By 2030, India is expected to have 600 million people living in urban areas. What logistical challenges do you think this will present in terms of moving food from the hinterland to the cities, and how could these challenges be addressed?
Gulati: That [pace of urbanization] means that every year we have to create one more Chicago – every year until 2030. Now those Chicagos of India are not going to be producing food. Food has to come from the hinterlands, and you need to be building proper value chains, especially for perishable commodities like fruit, vegetables, milk and meat.
You need investments in an advanced value chain up to the consumer. It is not just about moving [food] through the roads, but also about the reefer (refrigerated) vans, containers, cold storage and retailing in the system. All of those will undergo massive transformation in the next 10 to 15 years.
Knowledge@Wharton: What is your assessment of the current status of the infrastructure that caters to these value chains?
Gulati: After having seen where we were, the worst is over, but we can do much better than we have so far. India holds that potential. China started off reforms in 1978; we started off in 1991. What you observed in China during the last 15 years will be repeated in India in the next 15 years. That opens vast business opportunities for global players to look at India.
Knowledge@Wharton: For those of our readers and listeners who may not be familiar with the Chinese experience, could you walk us through that, and what might be some of the lessons for India?
Gulati: China’s rate of growth over the last 30 years or so was between 9% and 10%. India’s rate of growth since economic reforms began in 1991 has been hovering at 7% per annum.
However, China had imposed a one-child policy in 1981, which they lifted in 2016. With the one-child norm, its per-capita income increased, and that led to explosion of demand. Until 2002, it was a net exporter of food, but now, it is a massive importer of food. For instance, it is importing about 80 million tons of soybean [annually], when its domestic production is about 12 million tons. (China’s food imports have been growing at a compounded annual growth rate of 14.6% over the last 20 years, according to reports citing government data.)
The question is whether India will go the Chinese way, or will it find its own way. One major difference is China is a meat-eating society, which needs a lot of feed material. India is still not a big meat-eating society, and [that is partly because of] cultural factors. So, the pressure on feed will be much less in India compared to what the Chinese had to experience.
Knowledge@Wharton: But still, as you said earlier, there are some challenges. With limited land and depleting water tables, could India produce enough food for the growing population, or do you think the country will become a huge importer of food again?
“In order to protect the poor by suppressing [food] prices, you have made the farmer poor, because that very price is his income.”
Gulati: At present, we are suffering from over-production [of food]. Prices have collapsed, and farmers are crying that they are not recovering even their costs. One [reason] is the lack of basic infrastructure to store or process food products.
Let me give you one little example. India today is the largest producer of milk in the world – 177 million tons. The next biggest producer is the U.S., with 98 million tons. However, we are processing only 21% of its production through the organized sector. So, there is a massive business opportunity, but if [the infrastructure doesn’t keep pace], then excess production will lead to a collapse of prices, farmers will not recover their costs, and that will hit back at the system.
Overall, India will remain reasonably self-reliant in food up to 2030. There are [exceptions] like edible oils, where 65% of the consumption is being imported.
But India is a net exporter of agricultural products. This may remain so in the next five to 10 years, but the challenge will be after that with more population and rising incomes. If we don’t get our policies right on water or on technology or land, then India could become a big [food] importer.
Knowledge@Wharton: What is your assessment of the policies that India has followed over the past few decades? What has been their impact, especially on poverty, malnutrition and farmers’ incomes?
Gulati: Policy making in India has been [walking] a razor’s [edge]. You’ve had a lot of poverty in the country, and therefore protecting the poor always took the precedent. What that meant was: Keep the prices of food low. One of the biggest items in the country’s budget [for 2018-2019] is food subsidy – Rs. 184,000 crore, or about $25 billion. There are unpaid bills of another $20 billion or so. So, the total food subsidy to protect the poor is $35 billion to $40 billion [annually].
The bigger subsidy [for the poor] is by suppressing prices for farmers. If prices [of some crop] rise, [the government] immediately bans exports of it. It doesn’t allow the private sector to hold food stocks. Some states also impose restrictions. A classic case involves potatoes in West Bengal [in 2013]. Prices went up, and [so the government] did not allow the potatoes to go to the next state. Those types of restrictive policies try to suppress prices. In order to protect the poor by suppressing [food] prices, you have made the farmer poor, because that very price is his income.
Those policies were made in 1950s and 1960s when there was a huge food deficit. Today we are not in that situation. There is an in-built consumer bias in the system in the name of the poor. That must change, and we have to have a level playing field for farmers and consumers. If you want to help certain poor consumers, use an income policy, or directly give them whatever you want to give from the general exchequer. Don’t try to suppress prices for farmers, because you are trying to protect the poor at the cost of farmers.
“Don’t try to suppress prices for farmers, because you are trying to protect the poor at the cost of farmers.”
Knowledge@Wharton: If you look at the agricultural policies that India has in place today, do you think they help, or do they hinder the technological and other changes that are required to solve the problems you are describing?
Gulati: There are two aspects. One is adoption of technologies, but technologies are adopted when farmers feel it is profitable for them. Incentives are critical, and they are a catalyst for adoption of technologies. [With technology], your yield will go up, but if prices collapse more than the increase in yield and you end up incurring losses, why will you adopt that technology?
There are two sides to the same coin. One is yield augmentation. But farmers should also get fair prices so that it is a profitable business for them. That is a challenge we have to overcome.
Knowledge@Wharton: What kind of changes do you think are necessary to make sure that farmers have adequate income?
Gulati: You have to increase their productivity in a sustainable manner, so that they can produce more with fewer resources. That calls for R&D in agriculture – to lower [both] costs and water consumption. But you also have to ensure good markets for [the produce].
The natural process should be to remove all restrictions on markets and try to get the markets right. If the infrastructure is lacking, provide that. If there is information asymmetry, try to remove that. Introduce warehouse receipt systems (to enable farmers to store their produce) and introduce and scale up futures markets. [All that makes for] a more sustainable solution. If you do not do that, you will end up giving direct income support to the farmers, as in the latest budget. That is the price of not doing reforms in agricultural marketing.
Knowledge@Wharton: What reforms are needed to help Indian agriculture face the impact of climate change?
Gulati: That is a big issue on the horizon and we are already [feeling the impact]. In the northern part of the country – the so-called Terai belt on the [Himalayan] slopes — there will be [more] floods, and with greater frequency and greater intensity. In the Deccan Plateau, which is in the western and southern parts, there will be more droughts, and temperatures will rise.
While you need to do management of excess water in the upper reaches, you have to do a lot of irrigation and drought-proofing in the western and the southern regions. Massive investments will be required [in those efforts].
We also have to change farming practices. For example, in Maharashtra state, only 18% to 19% of the cultivable land area is irrigated. Sugarcane [accounts for] 4% of the cropped area, but it is 100% irrigated and takes away 65% of the irrigation water of the state. Why don’t we produce [more] sugarcane in the north where there is ample water?
With climate change, we will have to start valuing water [by giving it] a much higher priority, price it properly, use best technologies to produce more drips and sprinklers and other [irrigation devices]. You can save 50% of the water [with those approaches]. We need to get into place all those technologies.
“Direct income support to farmers … is the price of not doing reforms in agricultural marketing.”
Knowledge@Wharton: Parliamentary elections have been announced for India in May 2019. What role do you think the current state of the agrarian economy will play in shaping the results of the forthcoming election?
Gulati: One learning has come as a trailer. In the state assembly elections that we had a few months ago, the ruling [Bharatiya Janata Party-led] government lost in the three major states of Chhattisgarh, Madhya Pradesh and Rajasthan. One of the realizations is that it was the farm distress that led to that [defeat]. [That has prompted], to the best of my understanding, a lot of rethinking within the ruling party. [In the budget that] was announced last month, the PM Kisan program will spend Rs. 75,000 crore, or about $11 billion, in direct income support to farmers.
So, a beginning is being made to rethink the old policy set and try new policy instruments. Now, if it were just for one year, it is more of a bait for votes. But if it is a three-year or five-year policy change, and if they can collapse and input subsidies on to that platform, it can be a tectonic shift in policy-making for the better.
Knowledge@Wharton: If the incoming government were to ask your advice on what its top priority should be on agricultural policy, what would you tell them?
Gulati: Agri-market reforms are low-hanging fruit, but since agriculture is a state subject, the Central government has to take the lead and steer change. That has to be done the way GST (a unified Goods and Services Tax introduced in July 2017) was done. The center should coordinate with the states for basic changes.
For example, the APMC (Agricultural Produce Market Committee) markets are very restrictive and have been hijacked by commission agents. That needs to change. More competition needs to be brought in, and [there ought to be] more direct buying from the farmers. Contract farming is not allowed in most of the states. Land lease markets need to be opened, and farmers should be free to lease their land. These are low-hanging fruit, but they call for the government’s political will. That political will comes only when they feel they may lose power. However, after getting into power, they get into the same routine, unfortunately.
Knowledge@Wharton: Do you have any final comments?
Gulati: You must give freedom to farmers to access the best technologies in the world. Once scientists have declared [something as] safe, then government policy should facilitate getting those seeds or parent stocks of chicken or fish from anywhere else in the world.
[Indian farmers should have the] freedom to pick the best technologies, and similarly the freedom to sell in the best markets. We have to work on both sides – the technology side and the market side. But the third challenge – climate change – is right on our head. Therefore, sustainability issues should be brought to the same level as technology or markets.