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In the past, India’s has undergone a major transformation, unwavering focus on food production helped from dependence on food aid to becoming it to achieve self-sufficiency, but a legacy of a consistent net food exporter. The gradual that effort is a complex web of policies and reforms in the agricultural sector (following institutions that now arguably constrain more the broader macro-reforms of the early 1990s) robust, sustainable agricultural growth, limit spurred some unprecedented innovations the performance of agricultural markets, and and changes in the food sector driven discourage much-needed diversification. The by private investment. These impressive natural resources that support productive achievements must now be viewed in light of agriculture (namely land and water) are the policy and investment imperatives that declining in quality, and competition for lie ahead. Agricultural growth has improved them is intensifying. Rainfall remains a major in recent years (averaging about 3.5 percent source of volatility in Indian agriculture. Heavy since 2004/05), but at a long-term trend public investments, particularly in irrigation rate of growth of 3 percent, agriculture has and technology, have helped to offset the underperformed relative to its potential. worst effects of weather, but the deceleration The pockets of post-reform dynamism that of growth in the late 1990s and early 2000s, have emerged evidently have not reached persistent increases in food prices in recent a sufficiently large scale to influence the years, and declining water tables have revived sector’s performance. For the vast population concerns over food security. Climate change will that still derives a living directly or indirectly almost certainly magnify the challenges and from agriculture, achieving “faster, more expectations for agriculture. inclusive, and sustainable growth”—the objectives at the heart of the Twelfth Five India is a large, heterogeneous country. One Year Plan—depends critically on simultaneous study alone cannot address the multitude of efforts to improve agriculture’s performance issues surrounding agriculture, certainly not and develop new sources of employment for in sufficient depth to be meaningful. This the disproportionately large share of the labor study was designed through a broad-based force still on the farm. consensus to focus on strategic issues related to agricultural productivity. It gives particular Maintaining India’s hard-won food security attention to the dynamics and sources of and achieving shared prosperity are proving productivity growth, the sustainability of 1 Republic of India: Accelerating Agricultural Productivity Growth growth, and areas where the potential for natural resource base, placing the hard- growth has been overlooked, all with a view to won productivity gains of the past—and the informing the debates on strategic priorities future—at risk. Other parts of the country face a and policy interventions. dilemma of another sort. Although they are far less agriculturally developed, these Low-income The scope of this study is broad in the sense States (LIS) could unleash considerable growth that it marshals considerable empirical evidence in agricultural productivity, yet weak public and analyses to address those issues. Yet the investments, undeveloped markets and weak scope is restricted in the sense that the study institutional and governance capacity have long does not address all of the issues. A wealth of stood in the way. knowledge exists (and continuing analytical work proceeds) on other major strategic A major puzzle seems to be the co-existence of issues—water and irrigation management, food widespread undernourishment and rising food grain management, and public expenditures prices on the one hand, and record production on agriculture, for example—and the findings levels of food and overflowing stocks on of this study must be seen in that context. The the other. Across India, diversification into lack of sufficient quality data, and often the lack higher-value crops and livestock products has of access to such data, also prevent some issues proceeded too slowly to increase agricultural from being explored in greater depth. Finally, growth appreciably. The supply of high-value some important issues require more focused commodities has not kept pace with demand and dedicated analysis, such as food safety generated by rising incomes and urbanization, and quality standards, agricultural trade, and resulting in rapid increases in their prices. food price increases. This relationship between Cereal prices have again started to rise, adding longer-term strategic issues and contemporary to an agricultural conundrum in which per concerns, such as water resource management capita availability of food is falling even as per and food prices, are highlighted in this study capita production of cereals is at all-time highs through the prism of productivity, but they and rising, and domestic markets are effectively too require further analysis to fully address the insulated from global market pressures. Rising underlying issues. Minimum Support Prices (MSPs) create a cereal supply response, but the increased production is diverted to stock silos rather than benefiting The Conundrums of Contemporary consumers through lower prices. Thus MSPs Agriculture drive domestic cereal prices—especially Contemporary Indian agriculture presents producer prices—higher, while a combination a number of seeming contradictions and of trade and storage policies stabilize them. conundrums. India’s traditional breadbaskets The resulting low risk-to-return ratio for cereals face the food security–sustainability tradeoff. creates strong incentives for farmers to produce The irrigated rice- and wheat-producing areas cereals rather than other (more risky) crops, appear to be facing diminishing returns to the limiting diversification and income growth, technology that sparked the green revolution. putting further pressure on prices—this These areas are singularly focused on increasing time through the higher-valued non-cereal production, often at the cost of mining the commodities. 2 OVERVIEW The short-term welfare impacts appear to be is less obvious. Because the slowdown coincided contained, as rural wages have risen rapidly with the agricultural policy reforms of the in recent years, compensating for rising mid-1990s (following the general economic prices. Rising real prices benefit the net-selling reforms of the early 1990s), a natural conclusion farmers, and rising real wages are good for often drawn is that the reforms triggered the workers, but both trends have implications weakness. The influence of rainfall on Indian for the sustainability of the ensuing growth. agriculture is widely acknowledged—60 percent The critical question is whether the changed of it remains rainfed—but rainfall’s role in incentives afforded by rising real output prices patterns of growth has not been fully explored. are accompanied by growth in productivity— are the sources of that growth sustainable? At the district level, a credible association emerges between rainfall shocks and productivity (defined as value of output Trends in Agricultural Performance per hectare). Aggregated up to the national at the National and Subnational level, these data show a strong association of Level an unusual sequence of sustained negative rainfall shocks and the prolonged stagnation Over the past six decades, agriculture grew in productivity growth between 1999 and at a steady but modest 3.0 percent, changing 2004. The weather-induced weakness provides imperceptibly but becoming relatively more an explanation for the deviation in trends for stable. After almost two decades of sustained several key indicators during the early 2000s, expansion (with growth peaking in the early including the slowdown in wages identified in 1990s at about 3.6 percent), growth decelerated previous studies. By extension, poor rainfall in from 1996/97 to 2004/05. This prolonged the more recent years may partly account for slowdown was widespread, with few exceptions. the sluggish supply response in noncereal crops, The most recent period—from 2004/05 which are found to be more susceptible to such onwards—shows a marked, equally widespread shocks, and perhaps partly explain the upward return to growth of 3.5 percent per year. pressure on their prices. Performance and rainfall. What started The sensitivity of crop productivity to rainfall agriculture on its long decline after 1997, and varies considerably across districts, reflecting what spurred the equally decisive turnaround the availability of irrigation to compensate after 2004? Explanations for the slowdown for annual rainfall deficits. Over the long run, include slow generation of new technologies, districts in the Semi-Arid Temperate Zone are poor dissemination of existing ones, weak generally less vulnerable to rainfall shocks and inefficient institutions, poor governance, and relatively more productive on average. But and inadequate investment in public goods. the sustained rainfall shocks between 1997 Irrigation, terms of trade, and technology are and 2004 hit those districts the hardest, with the major determinants of agricultural GDP a large aggregate and cumulative impact on growth. These factors are crucial for long-term agricultural productivity. The cyclical as well growth, but their immediate role in the post- as random anomalies that are characteristic of reform slowdown and the subsequent recovery rainfall in the Indian sub-continent call for both 3 Republic of India: Accelerating Agricultural Productivity Growth ex ante risk mitigation and ex post adaptation/ near to medium term, and the anticipated management strategies. intensification of the spatial and inter-annual variability of rainfall over the very long term. Coming back to the question of role of policy reforms in agriculture’s performance, a key Dynamics of agricultural productivity question is what growth rates might have growth. Wide differences in performance prevailed had rainfall been normal from the across states in the 1980s appear to have 1960s to 2010. A simple simulation reveals a disappeared since 2004/05, suggesting that sharp deviation between the actual and the growth may now be more inclusive, with counterfactual (simulated assuming normal lagging states starting to grow at par with other rainfall, all else remaining the same) trends states. But within states (and agro-ecological starting in the mid-1990s, suggesting that had zones), performance has varied widely across rainfall been normal, the growth trajectory districts over time. A few districts have done would have been significantly different and well but most have not, and the relative may possibly have been higher than the actual rankings across districts are mostly preserved observed trend, potentially ushering in a with persistent large differences. The lagging much-desired, positive structural change. An districts are not growing fast enough yet to important implication of these findings is that achieve real convergence. For example, in there is little evidence to suggest that the policy 2007–08, productivity was 50 times higher in reforms of the mid 1990s had a significant the most productive versus the least productive adverse impact on agriculture, as may be districts. Within LIS, increased growth in some tempting to infer from the observed growth districts widened inequality—the exception trend. Another, perhaps more important, being Odisha—but in the more advanced implication is the urgency of improving agricultural states, lagging districts are catching agriculture’s resilience to the shifting trends up with the others, indicating convergence in in anomalous weather patterns over the growth rates. Messages and Implications There is little evidence to support the assertion that the policy reforms of the 1990s likely had a negative impact on agriculture. At the same time, the long-term strategic public investments in technology and irrigation have been very successful in increasing food production and mitigating the worst effects of rainfall shocks. The large aggregate and cumulative impact of a series of negative rainfall shocks between 1999-2004 serves a very important purpose—as a harbinger of the potential impacts of changing weather patterns over the short to medium term and the highly uncertain climate change outcomes over the long term. The experience underscores the urgency to address the current strategic issues. It highlights the critical importance of more efficient water management practices to weatherproof agriculture; develop strategies and make investments to mitigate climatic variability and increase resilience amid climate change (climate-smart technologies, sustainable irrigation, water harvesting and watershed development); improve markets and marketing to allow real-time risk sharing across states and districts in response to emerging market signals; and diversify and stabilize sources of income (outside the crop sector) through livestock and productive nonfarm employment. It is essential to quantify the costs and benefits of alternative ex ante risk-mitigation strategies and ex post risk-sharing strategies—issues for further detailed study. 4 OVERVIEW To more closely examine performance and growth districts, unlike the low-yield/stable drivers of productivity, districts are classified by districts, switched area from low-value crops to growth typology based on their initial (1970s) higher-value crops such as cotton, horticultural yields (high or low) and their subsequent crops, and soybeans. performance (relatively stable or fast-growing) over the study period (1970–2008). Most District-level indicators to explain changes growth in agricultural productivity occurred in in agricultural productivity are limited, but northern and southern districts. Agro-ecological the available data convey some important conditions and rainfall anomalies by themselves information. Markets per capita declined in do not sufficiently explain the disparities low-yield districts relative to the others, likely among districts. What sets the growth districts reducing producer incentives and productivity apart from the others is better access to growth. Road density has improved in the irrigation (and fertilizer use, which is influenced laggard districts, bringing them on par with by irrigation). In addition to intensification, the other districts. But while roads continue diversification into nontraditional and higher- to show significant positive impact in the value crops is also a major driver of growth in high-yield areas, they have not yet translated the high performers. For example, the low-yield/ into improved productivity in the lagging Messages and Implications At the subnational level, growth has been pervasive—but not sufficiently broad-based. While the pace of agricultural growth appears to be converging somewhat across states, at the district level the expansionary phase of the 1980s and early 1990s was not very inclusive. A few lagging districts “caught up” with the better-performing districts, but a substantial number fell further behind, despite registering positive but low levels of growth. Differences across districts are rooted in strategy and the enabling environment—and that is where policy attention is needed. Weather alone does not explain the differences in performance as weather shocks affected the productive districts disproportionately. At the same time, the findings caution against a “silver bullet” approach, highlighting the complementarity of policies and investments tailored to particular circumstances. For example, roads and improved seeds alone do not account for differential performance among districts. The main drivers of productivity at the district level—and hence the key entry points for action— appear to be markets and irrigation. Market density has fallen more in the low-yield/stable districts than in the others, likely constraining productivity growth (through producer incentives). Irrigation and the associated adoption of fertilizer have contributed to significant changes in productivity in the growth districts. Improved seeds, the other key element of the green revolution technology, have spread faster and wider, but by themselves they have not narrowed the productivity differentials across districts. The rapid expansion in irrigation occurred mainly through groundwater extraction, well-known among policy instruments as a double-edged sword. The recurrent theme of sustainable water management emerges as a policy priority, with the important lesson from the faster-growing districts, consistently appearing across the low–high yield typologies, that diversification needs to be prioritized for a possible win-win strategy. That said, some areas will inevitably have limited prospects for irrigation, and their agro-ecological endowments may limit the scope for certain types of agriculture. Localized strategies will be needed for these areas to identify viable opportunities, including livelihood options outside of agriculture. 5 Republic of India: Accelerating Agricultural Productivity Growth districts, calling attention to the importance nonagricultural workers. The widening of of complementary investments. A slightly this gap is a worry for policy makers. The low higher share of the population in low-yield productivity of a large proportion of the labor districts was rural to begin with; this indicator force places a heavy tax on overall well-being of urbanization has changed relatively slowly in and shared prosperity. But how atypical is the districts where yields were initially low but India’s experience? shows no obvious links with the pace of growth within the low- or high-yield cohorts. Similarly, Evidence suggests that developing countries literacy remains marginally lower in the low- are now taking longer to reach their “turning yield districts, but this basic measure of human point”—the point at which the inter-sectoral capital development has also improved more labor productivities start to converge. The rapidly in those districts, again without a clear implication is that the development context association with productivity growth. is changing, and it is increasingly harder to absorb labor outside agriculture. India seems to be experiencing this phenomenon An International Perspective on and is behaving no differently than the India’s Structural Transformation average developing country (in a cohort of The slow pace of India’s structural 88 developing countries). Consequently, India transformation (that is, the decline in the must pay particular attention to accelerating share of labor in agriculture relative to the pace of labor absorption outside of the decline in the share of agriculture in agriculture, and it must redouble efforts to aggregate GDP) is reflected in the large gap increase labor productivity within agriculture. in productivity between agricultural and Making agricultural labor more productive is Messages and Implications Technology has been a consistent driver of productivity in all four countries. Investing in technology is a globally proven and tested strategy for promoting productivity growth. Brazil, India, and China are among the largest investors in public research, and all have benefited significantly from such investment. China’s and Brazil’s investments, however, have been relatively more effective, making them global leaders in agricultural innovation. In Indonesia, the benefits of technology have also been pivotal, but they have accrued through open trade rather than domestic research. A second major driver was agricultural diversification, both for domestic and export markets, supported by appropriate technology, policy, institutional reforms, and investments. Brazil, Indonesia, and China all benefited significantly more than India from openness in trade. The backbone of China’s and Brazil’s more rapid transformation has been a more predictable enabling and policy environment. With a strong record of implementation, continuous innovation in public sector management for agriculture and rural development, and more effective decentralization in decision making, they have achieved significantly greater productivity growth. For example, major and fundamental reforms have greatly increased water-use efficiency in Chinese agriculture. Conducive policies paid significant dividends in production efficiencies and diversification, and better access to technology, whether from the international public research system, national research organizations, or the private sector (notably in relation to genetically modified crops). 6 OVERVIEW imperative in any case, because a declining A Micro-level Perspective on India’s farm population will have to meet the Structural Transformation consumption and raw material requirements of a growing nonfarm population. A unique longitudinal study at the village level in Bihar, one of India’s poorest states, In this context, comparisons among four large draws attention to major changes at the micro developing countries, Brazil, Indonesia, India, level. Semi-feudal production relations—long and China, are useful. Starting with comparable associated with Bihar’s agriculture—have conditions in 1961, China and Indonesia virtually disappeared, while numbers of poor achieved more success in reducing poverty peasants, shares of casual landless agricultural and improving rural well-being. Brazil was labor, and the proportion of nonagricultural relatively more advanced from the start and households all increased. Nonagricultural has continued to perform well. While Brazil income, dominated by remittances, is the main has reached and China has almost reached source of income for all economic classes. their turning points, structural transformation Poor peasants have similar sources of income, in India and Indonesia has been slower. If the but they largely undertake nonagricultural status quo prevails, their turning points are production activities. The middle and big projected to be at least two decades away. peasants have a higher share of agricultural income, but it is still less than half their total China is a more relevant comparator in terms of income. the scale of farming. The main difference with India is that despite having a larger share of its Another aspect of structural transformation workforce in agriculture, China has seen much is the significant diversification in men’s higher growth in agricultural value-added, with occupations. Levels of migration out of the significantly more rapid technological change village are high, and migration income is and diversification, and a much greater reliance the largest share of household income. At on efficiency than input use as the main driver least initially, migration seems to have been of growth. With more rapid increases in labor a response to the lack of opportunity in productivity, living standards among China’s local labor markets. Migration affects rural agricultural population improved much faster. production systems by pushing up local wages, Messages and Implications Even villages in poor and backward areas, typical of Bihar, are experiencing significant agricultural and socioeconomic change. Nonagricultural incomes, particularly remittances, dominate household incomes. But agriculture, with a steady increase in yields (faster than the national average for rice and wheat), has not been stagnant. Real incomes appear to be rising, along with agricultural productivity, and agricultural diversification is yielding significant benefits. Structural transformation is more challenging in Bihar than elsewhere in India. Despite high levels of migration (Bihar is unusual in this respect), a substantial proportion of the population remains in agriculture; consequently, the person-land ratio is significantly worse, keeping the productivity of agricultural labor low. Concerns about the sustainability of migration as the major engine of continued growth call for more rapid nonfarm and on-farm diversification as sources of income growth. 7 Republic of India: Accelerating Agricultural Productivity Growth promoting labor-saving cultivation techniques, the recovery (after 2003), but since 2007, area and increasing the feminization of agricultural expansion has slowed as expected. Importantly, labor markets. yields’ contribution to growth diminished considerably, and diversification remains modest despite rapidly changing diets and Did the Drivers of Growth Change rising commodity prices. Qualitatively in the 2000s? To assess whether the recent recovery in Evolution of Productivity at the agricultural growth can be sustained, it is National, State, Household, and vital to learn whether the drivers of growth changed qualitatively in the mid-2000s. Farm Levels Agricultural growth is increasingly driven by Given India’s binding land constraint, the rising shares of high-value commodities agricultural growth depends on making in value terms, but food grains still occupy land (for crops) and animals (for livestock two-thirds of the cropped area, and the shares products) more productive. In the case of land, of rice and wheat are unchanged. Except productivity, often equated to yields, can be for cotton, yields of high-value crops have enhanced through intensification (using more not increased significantly, raising concerns inputs per hectare), through technological about the sustainability of their growth. A advances (better inputs), and/or improved decomposition of growth confirms these efficiency (using inputs more effectively). apprehensions. Total factor productivity (TFP) captures the contributions of technology and efficiency and Yields dominated growth until the mid- provides a summary measure of the health 1990s, as green revolution technology spread. of the production system. For growth to be Diversification has been a consistent but ecologically and economically sustainable, TFP moderate contributor to growth. Since the must improve. 1980s, diversification consistently accounted for about one-quarter of growth, somewhat To build a convincing body of evidence, TFP less than might be expected from a rapidly is assessed using multiple sources of data, at transforming agriculture. Prices contributed different levels of aggregation, and employing increasingly to growth in the 1990s, and in different methodologies. The various analyses recent years they have again become the main consistently demonstrate that productive driver. Area and yields rebounded early in resources are being used highly inefficiently. Messages and Implications Two worrying trends emerge from the analysis: The contribution of yields to productivity is declining, and prices have emerged as the main driver of growth toward the end of the 2000s. In 2010, 55 percent of the increase in the real value of output resulted from price increases. This finding raises concerns about the sustainability of the recent growth spurt: Farmers (specifically the net-sellers) gain from higher prices, but without underlying improvements in productivity, the current growth may be short-lived. 8 OVERVIEW At the national level. Analyses based on sustained growth even during the slowdown different methodologies and data sources period). In contrast, efficiency has stagnated suggest that the recovery in recent years has over the long run. It improved in the 1980s but been robust, with TFP growing at its fastest rate. has started to decline in recent years, indicating Previous studies noted decelerating growth after that the gap between actual production and the mid-1990s, but a longer time horizon (and the realizable potential (production frontier) is hindsight) demonstrate, as discussed earlier, widening. that this unusually long slowdown coincided with an anomalous rainfall pattern. It also Another important finding is strong divergence means that the recent growth in TFP needs in TFP growth for the traditional crops (cereals, to be interpreted with caution: the period of pulses, oilseeds, cotton, and sugarcane) from analysis is short, and the recent growth partially that of the agricultural sector—which includes reflects a rebound from a sharp decline in the higher-valued horticulture and livestock previous period (reaching the lowest point in subsectors, both of which are important for 2003). It will be important to track performance inclusive growth, and both of which have with data from additional years to ascertain if been major drivers of agriculture value- the growth is robust. added in recent years. Yet neither subsector has commanded the attention of policy and Irrigation, an important long-term driver of public expenditure to the same extent as the growth, appears to be contributing less to traditional crops. Given the magnitude of the output growth in the 2000s, perhaps reflecting resources tied up in traditional crops, their low limits on expansion. Increased inputs have TFP growth (0.28 percent) contrasts starkly with historically contributed the most to output the sector-wide estimate (1.77 percent). growth, but in the 2000s, TFP has been the main source. Other emerging trends are a rise in The continued reliance on subsidized inputs as labor productivity and capital deepening in the the main driver of growth in traditional crops, most recent period. with declining efficiency, is reason for serious concern. Intensification in the lagging states When TFP growth is decomposed into the where input use has been lower may be less contributions of technology and efficiency, worrisome, but the continued or accelerated the key finding is that technical change use of inputs (often imbalanced applications of has consistently been the primary driver of nutrients and overexploitation of groundwater) productivity growth over the past three decades, in the advanced states demands corrective growing fastest during the past decade (showing action. Messages and Implications For traditional crops, which receive most of the resources devoted to agriculture, TFP growth has stagnated. Technical change has been the primary driver of productivity growth, while efficiency has stagnated and appears to be declining in recent years. The fact that three-quarters of the growth is still driven by inputs for the bulk of the sector (traditional crops) raises concerns about the quality and sustainability of agricultural growth. 9 Republic of India: Accelerating Agricultural Productivity Growth At the state level. TFP varies widely across diversification (even within the more restricted states, across crops, as well as across states for group of traditional crops) and technology— the same crops. The biggest gains are associated primarily agricultural research—are the main with new technologies for cotton and maize, drivers of productivity growth. Contrary to but the impact of even these new technologies general perceptions, the analysis shows that is not uniform across states. Among staples, rice the contribution of research has not diminished TFP has improved in recent years for several over time. states, but wheat TFP has slowed considerably, with the exception of reform-driven Gujarat. In contrast, the impact of agricultural extension Sugarcane and cotton offer a telling comparison. is considerably less visible. Persistent yield gaps, Sugarcane experienced consistent declines in even for rice and wheat, suggest that extension TFP growth across all major producing states, has not enabled producers to benefit from while cotton experienced consistent gains. current technology—even though traditional The two differ in that there is substantial crops have long been a priority of public government intervention and significant extension services. This result strongly suggests subsidies for sugarcane, whereas the cotton that the most immediate action to enhance sector has rapidly transformed since the private productivity, and to counter “technology sector introduced Bt cotton technology in 2002. fatigue,” is to increase the effectiveness of extension services. What explains the wide variation in TFP across states? As a residual measure, TFP subsumes A telling result is that rural electrification has many unobserved factors, making it difficult a large and highly significant negative impact, to assess the role of important policy levers. strongly suggesting that the large subsidies An analysis of the determinants of TFP, using for electricity use in agriculture are adversely state-level estimates and controlling for some affecting TFP, probably by contributing to of the confounding factors, gives results with declining water tables (by promoting the significant policy implications. unsustainable extraction of groundwater). Similarly, the negative and statistically The analysis confirms the importance of state- significant impact of nutrient mix on TFP specific factors (broadly reflecting the policy, strongly supports the contention that subsidies institutional, and governance environment) promote indiscriminate applications of nitrogen for productivity growth. Beyond these, that harm soils. Messages and Implications At the state level, policies and institutions strongly influence productivity growth, along with diversification and technology. TFP is negatively affected by excessive or imbalanced input use, arguably driven by input subsidies. Ironically, instead of the intended impact of boosting productivity, subsidies may now be having quite the opposite effect, jeopardizing future productivity prospects. These results have major implications for the environment, productivity, and sustainable growth. An immediate area for action is more effective extension services. Extension services appear to have made little impact on productivity, even in traditional crops, but if they can help farmers to close the existing yield gaps, they could bring about substantial productivity gains. 10 OVERVIEW At the household level. Using a completely highlighting the roles of extension services and different data source, the household-level the policy environment in shaping farmers’ analysis corroborates the major emerging choices. Smaller producers are more efficient, finding that productive efficiency is low. It with higher allocative efficiency, whereas larger also shows that this inefficiency entails very producers showed higher technical efficiency. high costs in terms of forgone farm income. Depending on the agro-ecological region, the Changes in farm-level technical efficiency average farmer is about 30–90 percent less vary significantly by state. Farmers in Bihar efficient than the “best in class”—those farmers represent the case of the “poor but efficient” who are her/his peers within the study sample. producer—they operate at low input-output levels, but their input use is efficient (Schultz The micro-data confirm findings from the 1953). Punjabi farmers are equally efficient, secondary data that technical change, rather but they represent the high input-output case. than economic efficiency, has played the major The absence of any obvious agro-ecological or role in productivity growth. Technical change geographical correlation with performance has generally been good in recent years, with suggests that policies and the enabling large gains in the formerly lagging semi-arid environment at the state level play a strong role topics. Average efficiency fell significantly in in determining efficiency outcomes. the humid and arid zones, indicating that the average farmer is unable to keep up with the In the most widely grown crops (rice and fast moving technological frontier, and is falling wheat), efficiency is lessening, and it is farther away from it. Arid areas have been the declining significantly for pulses and oilseeds. most vibrant, catching up with the meta-frontier Only “other crops”—an aggregate of crops at a rapid rate and closing their historical other than the cereals, pulses, and oilseeds— technology gap with the rest of the country. show marginal improvement in technical efficiency. Across households there is significant The cost of inefficiency in terms of farmers’ dispersion in efficiency levels for all crops. net returns or profits is high. A staggering 68 percent of potential short-run profits Finally, an important finding is the difference (on average) are lost relative to the optimal in economic efficiency at the crop and whole- economic profit that was feasible in 2007 (albeit farm level. Higher allocative efficiency at the a slight improvement over the 73 percent lost individual crop level suggests households are in 1999). These losses can be attributed equally using resources (inputs) reasonably efficiently to technical and allocative inefficiencies, given the relative prices they face. But when Messages and Implications Household-level analysis finds that inefficiency is high and very costly in terms of farm income. Although much of the debate on Indian agricultural productivity has focused on technical or technical production issues, these findings suggest significant scope to improve returns through more economically rational choices. The role of policies, institutions, and the enabling environment, which is central to micro-level economic choices, needs be brought to the front and center of the debate if India’s farmers are to move to a more profitable agriculture. 11 Republic of India: Accelerating Agricultural Productivity Growth it comes to the whole-farm level, allocative of farmers suggests that greater access to efficiency plunges, indicating that the bulk productive land may be beneficial in terms of economic inefficiency stems from farmers’ of overall agricultural productivity and more crop choices. Household decisions to allocate efficient resource use. resources are determined by the relative prices of crops and their associated risk levels, both Among public investments, the importance of of which are influenced considerably by the access to pucca (paved) roads, technology, and policy and institutional (especially market) extension services is reaffirmed by empirical environment. results. An important insight on governance is the impact of women’s participation in What is driving inefficiency at the farm Gram Sabha meetings, which raises productive level? Among the range of factors explaining efficiency. productivity and efficiency, the empirical analysis confirms the inverse land-productivity Are smaller farms still efficient and viable? relationship, but smaller farms are less The 25 years of household panel data from technically efficient. Another important NCAER surveys provide a rare insight into the finding is that at the margin family labor is less relationships between farm size (land owned productive relative to hired labor, suggesting by households) and three levels of farming overuse of family labor (possibly because too returns: gross value of output per hectare, many family members remain on the very small gross-margins per hectare (revenues less paid farms that are now more prevalent). Finally, as out costs, so in essence returns to family labor farm sizes decline through subdivision, land and land), and profits (revenues less paid fragmentation is becoming a problem, with costs and imputed costs of family labor—in direct consequences for productivity through other words, the returns to land only). The lower efficiency. data show a significant and dramatic shift in the relationship between farm size and net Younger and more educated households revenues or profits per acre—from a strong generally are more efficient at farming. The inverse relationship in 1982 to an increasingly higher productivity of the newer generation positive relationship in 1999 and 2007. Messages and Implications Reforming the policy and regulatory framework governing land lease and rental markets is a high priority to sustain productivity and growth in farm incomes. The empirical findings reaffirm the well- established importance of factors like roads, technology, and irrigation while providing new insights. The findings on land fragmentation and the association of profitability with farm size ultimately suggest that some small farms may be getting too small to remain efficient or viable, despite the technical relationship between farm size and yield. Together with the findings that perhaps too much family labor remains and is used on small (and ever smaller) farms, these findings lend new urgency to reforming the tenancy laws and legalizing land lease markets. More efficient lease markets can help to consolidate land in the hands of the more productive farmers, perhaps by improving access to land for younger and more educated farmers, and can provide inefficient or unviable farmers the security to seek off-farm work without fear of losing their primary asset. 12 OVERVIEW Given that most farms in India are under The all-India weighted averages show significant one hectare, these findings are significant— scope for increasing yields of both crops with politically as well as economically—for growth technology that is already available. But India’s and poverty reduction. The argument of “small biophysical heterogeneity argues against taking and efficient” still applies from a technical such a blanket assessment at face value. Indeed, perspective of higher yields or productivity the states vary considerably in their potential (that is, the value of output per acre), as found yields, their progress in closing the yield gaps, in the productivity analysis discussed earlier, and the size of the remaining yield gaps. Some but the shift in the returns to farming indicates states have made good progress in rice in the that “small and efficient” does not necessarily last 15 years. Growth in wheat yields has slowed translate to more income (profits). The main in most states, although Gujarat, Karnataka, reason behind this reversal is that the higher and Maharashtra substantially narrowed their value of output per hectare is neutralized by yield gaps. very high family labor costs. These trends re-emphasize the point that family labor is Given that no country in the world has reduced overused on the farm. its yield gap below 20 percent, 30 percent may be a realistic target. Some states are approaching this 30 percent target with current Technology, Yield Gaps, and technology and face limited prospects for Growth Prospects further improvement. Maharashtra and Gujarat seem to have exhausted their potential with Many factors contribute to productivity the current wheat technology, whereas Punjab growth (including infrastructure, markets, and and Haryana have limited room to increase education). Among these factors, technology yields. West Bengal and Punjab are close to plays a central role by helping to increase their potential for paddy, but most other states yields. Changes in yields are a joint outcome have significant scope for yield improvement. of contributions by research and extension. In interpreting these findings, two important Research generates new technology that moves caveats need to be kept in mind. One is that the the production frontier (the yield potential) attainable yield, used here as the benchmark for upward and outward. Extension assists farmers the yield gap, assumes that no biotic or abiotic to better exploit the available technology— stresses are present—rarely true in practice. through access to new technology and advice to Second, these are physical or output maximum improve technical proficiency in using it—and potentials, not economically optimal potentials. in essence to close the “yield gap” (which is the Depending on the local policy and institutional difference between actual and potential yields). environment, reducing the physical yield gaps A combination of simulation models, research may not be economically viable (as actual or data, and actual yields helps to identify the yield observed farm yields may more accurately gaps and how they have evolved over time. The reflect). analysis focuses on rice and wheat, for which abundant data are available, and which are an The movement of the production frontier, appropriate choice, given the heavy historical or realizable yields, shows that the potential focus on these green revolution crops. for wheat has continued to rise as new, 13 Republic of India: Accelerating Agricultural Productivity Growth better-yielding varieties are released, but rice How do yield gaps in India compare to those in potential has stagnated. Yet between 1995 other major grain-growing areas of the world? and 2010, yield gaps widened for wheat and The wheat yield gap in Punjab resembles the narrowed for rice. Growth in actual yields is average across the other major production similar for the two crops; the different trends areas, with similar scope for doubling current in their yield gaps originate in the much faster yields. The yield gap for irrigated rice in Punjab rise in realizable yields for wheat—36 kilograms is larger than the global average: Yields in per hectare per year for rainfed wheat and 54 Punjab need to rise by 75 percent to close the for irrigated wheat—whereas realizable yields gap, whereas on average global yields need to for rice have stagnated since 1995, increasing by double. The comparators for rainfed rice are only 6 kilograms per hectare per year. limited, but the data show that Madhya Pradesh Messages and Implications Yield gaps offer an opportunity, but their persistence reflects challenges in technology services. Yield gaps have narrowed over time, more for wheat than rice. But substantial gaps remain for both crops in rainfed as well as the green revolution areas, signaling potential for further gains and lending weight to the need to resolve the “extension problem.” Research too has challenges to confront: dedicating more effort to crops other than rice and wheat, and working with a rapidly emerging private sector to align research priorities to tackle a changing climate and to address the multiple biotic and abiotic stresses prevalent in the LIS. Investing for innovation and change requires institutional innovation. Technology capital is a critical input to accelerate agricultural productivity. India is among the world’s preeminent investors in agricultural R&D. Yet success is more than the sum of public funding. The quality of innovation and the capacity of institutions to reconfigure and reorient themselves to a rapidly transforming agriculture are critical. To remain relevant and stimulate transformative change, the impressive institutions that ushered in the green revolution must take action: ƒƒ In agricultural research, public investment is increasing, but a number of reforms have also been proposed to reconfigure the research system to meet current needs and challenges. The issues of relevance, efficiency, and effectiveness of the research system are well understood, but bold action is needed to implement the reforms. At the same time, private sector investment in research is rapidly increasing, with significant potential to contribute to rapid growth in productivity and incomes, including in the poorer semi-arid parts of the country. To fully exploit this potential, the remaining constraints to private investment need to be removed. ƒƒ In agricultural education, the state agricultural universities face multiple crises in fulfilling their mandate to build the needed human capacity for technical innovation and undertake crucial adaptive research and extension activities. The crises in governance, resources, effectiveness, and ethics is widely acknowledged. These issues are revisited in the Bhubaneswar Declaration. The proposed roadmap for improving India’s higher education system calls for fundamental changes but requires unwavering political will and commitment to overcome the ingrained resistance to change. ƒƒ In agricultural extension, the Agricultural Technology Development Agency models a decentralized, demand-driven approach for advisory and extension services to respond to local demands, priorities, and constraints. The lack of skilled, dedicated personnel in the agency, along with weak research-extension links, limited outreach to farmers, and limited operational flexibility, have yielded disappointing outcomes. Priorities are to renew and improve the focus on community outreach, reinforce organizational autonomy, and improve staff quality. Reforming current service delivery and promoting a pluralistic system is an urgent priority. 14 OVERVIEW rainfed yields must grow by 150 percent to close substantial dairy surplus for export, but it is the current yield gap. already a leading exporter of bovine (buffalo) meat and a highly competitive exporter of Certainly yield is not the only metric of mutton and pork. Expanding markets for research achievements. Research also aims processed meat and halal-certified products to develop varieties capable of withstanding provide additional opportunities for export specific growing conditions (evolving pests and growth. Growth in meat output has mainly diseases, for example) and supporting other come at the extensive margin—from growth in local priorities (tastes or the timing of growing livestock numbers. Substantial scope remains cycles, for example). Future research will need for improvement at the intensive margin. to emphasize varieties capable of adapting to the pressures of climate change. For example, More than two-thirds of livestock output is early maturing varieties may be better adapted from the dairy industry. India leads the world in to rising temperatures, which are expected to milk production, but milk yields are about half reduce yields significantly. Varieties specifically the world average. Formal milk processing has suited to the needs of crop-livestock systems expanded rapidly, driven by deregulation of the or agro-processors will also be in increasing dairy industry in the early 1990s. Even so, less demand. than 20 percent of milk is formally processed. The challenges. Despite this potential, Livestock Subsector: Significant India’s public expenditure on livestock is Opportunities and Policy Priorities low, declining, and ineffectively targeted. The livestock subsector has grown at twice the The impact of public programs must be rate of the food grain subsector. Continued monitored to inform policy, develop a strategy income growth and demographic change for the sector, and enhance service delivery. in India will heighten demand for livestock Most public funding goes to administrative products and offer significant opportunities rather than productivity-enhancing activities. to increase production and incomes. Mixed Allocations for the smaller species (small crop-livestock farming systems predominate ruminants, poultry, and pigs) that yield more among smallholders and are an important tool benefits for smallholders remain low and have to target rural underemployment (particularly declined. The limited public expenditure on of unskilled and family labor), diversify risk, livestock must be rationalized between public and stabilize income throughout the year. and private goods. Livestock production is more inclusive than crop agriculture, with livestock ownership more The policy interventions. Policy interventions widespread than land ownership. Women and to raise productivity in the livestock subsector other socioeconomically marginalized groups must target services and institutions for stand to benefit the most from better livestock technology, marketing, and animal health. The productivity. National Dairy Plan is a multi-pronged approach along those lines that would work for the meat The potential. India has the world’s largest industry as well as poultry and pig production. livestock herd. It is unlikely to have a Aside from encouraging commercial and 15 Republic of India: Accelerating Agricultural Productivity Growth Messages and Implications Aside from additional and better-targeted public spending, priority actions include strengthening the institutions for technology, animal health, and smallholder marketing. The prospective socioeconomic and environmental gains from the livestock subsector offer substantial scope for economic and green growth. Measures that increase livestock productivity can enhance incomes, mitigate the environmental impact of livestock production, and enable livestock to adapt to India’s challenging and changing climate. In this context, it is imperative to rely on intensification for growth. Improvements in breeds, feeds, and animal management and productivity are the other critical elements of any strategy to mitigate the environmental impacts of growth in the subsector. large-scale operations, attention must be many areas are 5–10 times the recommended given to technologies, institutions, and levels, and water use per liter of milk exceeds policies enabling smallholders to produce the world average in most intensive and semi- more efficiently and sustainably and compete intensive systems. Producers must aim to profitably in a price- and quality-conscious maintain vegetative groundcover, reduce soil market. erosion and down-slope sedimentation, improve water infiltration and groundwater recharge, The states urgently require better strategies to and increase pasture production. Greenhouse meet local requirements for animal breeding gas emissions per head of cattle depend (cattle, small ruminants, pigs), improved greatly on animal breeds and the type of feed nutrition and feed (to realize the gains from provided. Climate change will affect livestock breeding), improved animal health systems productivity through a higher incidence of heat with better livestock support services (including stress, drought, and flooding. A large number disease surveillance), and policies to attract of adaptation strategies exist, but greater and private investment. better implementation is needed. Investments in market infrastructure and Investments in Agriculture for quality standards are integral to the efficient distribution of livestock products, value Growth and Sustainability addition, and food safety. Much of the Private and public expenditures to expand investment will come from the private sector. productive capacity. Private investment in Aside from encouraging such investment, the agriculture has increased rapidly since the mid- public sector must implement measures that 1990s. It accounts for more than 80 percent help smallholders improve their bargaining of the investment in agriculture and largely power and build their capacity to absorb consists of on-farm investments, primarily production and market risks. in irrigation pumps and to a lesser degree in machinery. Overall investment on the farm Strategy and policy for the livestock sector remains low, and farmers prefer to allocate must incorporate a range of environmental more of their disposable incomes to financial issues. Improvements in animal management savings and expanding business capital. and productivity are critical for mitigating greenhouse gas emissions and relieving Shares of public and private agricultural pressure on land and water. Stocking rates in investments in capital formation are declining, 16 OVERVIEW however. For a sector deemed to be a priority, Private irrigation investments, public agriculture’s diminishing share of public subsidies, and declining productivity. Two investment appears contradictory. When related trends in public and private investment public expenditure is defined more broadly—to are the rapid growth in private irrigation and include expenditures in the sector (through the large and growing volume of subsidies agricultural programs and institutions) and in public expenditures. The importance of expenditures for the sector (for complementary irrigation for agricultural growth is clear. public investments like rural roads and But the dominant mode of private irrigation electricity)—it is clear that agriculture does development—groundwater extraction—may indeed command a much higher priority. not be sustainable in its current form. Distorted Based on those criteria, public expenditures incentives encourage excessive extraction and were equivalent to one-third of agricultural GDP highly inefficient use of water. Power and credit in 2009, up from about one-fifth in 1995, subsidies are the major drivers of groundwater about half of which was from the central extraction. Marginal returns to these subsidies (union) government. Infrastructure accounted in terms of improved productivity and poverty for the largest share (34 percent) of these reduction were high in the 1960s and 1970s expenditures, with input support services but are now significantly lower than returns following at 26 percent. Input support services to investments in rural roads and technology (essentially private goods and subsidies) services. have grown the fastest (22 percent per year). In sharp contrast, research, education and The political economy of subsidies in India extension services, which have been shown has relegated expenditure efficiency as well as to have the largest returns among public budgetary implications to the extreme margins expenditures in India, had a combined share of of public decision making. Yet concrete evidence less than 2 percent. is emerging that current policies will have an outsized negative impact over the long run. For Even those estimates do not capture the example, electricity subsidies lead to an increase totality of subsidies supporting agriculture. A in the area planted to water-intensive crops fuller (but still not exhaustive) accounting of such as rice and sugarcane but also lead to a subsidies (including food, fertilizer, irrigation, large negative impact on groundwater levels. A power, and others) shows that they dwarf public fall in groundwater level by 1 meter is found to investments, irrespective of how the latter are reduce production of food grains by 8 percent, defined. A vivid example is the pervasiveness water-intensive crops by 9 percent, and cash of subsidies in two of the largest government crops by 5 percent. A 10 percent reduction in programs or “missions” directed to increasing the average electricity subsidy would reduce agricultural productivity (the National Food groundwater extraction by 6.7 percent. Security Mission and the Rashtriya Krishi Vikas Yojana). A review of their implementation in Contrary to their intended objectives, electricity three states shows that 88-98 percent of funds subsidies set a vicious circle in motion, under the NFSM and 42-87 percent under RKVY, jeopardizing agricultural productivity over the depending on the state, were directed toward long run. Together with other policies such as the provision of inputs or other private goods. MSPs, these distorted incentives have altered 17 Republic of India: Accelerating Agricultural Productivity Growth Messages and Implications Although the budgetary implications of the large share of subsidies have little apparent weight in public policy decisions, policies intended to increase production and productivity clearly impose substantial costs in terms of resource degradation and lost future productivity. Consistent with the priority placed on agriculture, public spending has grown rapidly since the early 2000s and now equals one- third of agricultural value added. But only a small fraction of the public expenditure goes toward expanding the productive capacity of agriculture (to public investments or contribution to capital formation). Subsidies dwarf public investments. The substantial costs of these choices are also being borne now. If public policies that encourage these outcomes are not rationalized, they will further reduce productivity and returns to farmers—outcomes that are diametrically opposite to their intent. crop composition to favor water-intensive 1990s, but reforms have been slow, uneven, crops, particularly in the Northwest and Mid- and frequently reversed. When reforms are West, which are experiencing the most severe introduced, even partially, the private sector groundwater crises. This relationship is evident responds swiftly and dynamically—witness in the strong correlation between the “virtual the emergence of contract farming, electronic water export” from the Northwest and public exchanges, ICT-based market information procurement of rice. These policies urgently demand systems and kiosks, and myriad value chain attention—especially in the interests of curbing the improvements. Yet the consensus is that mounting risks occasioned by climate change. the marketing, trade, value addition, agro- processing, and food safety capacity required by Consequences of imbalanced nutrient a diversified, vibrant, and modern agricultural use. The current and long-term costs of sector has not materialized as expected. imbalanced fertilizer use on productivity are Government intervention continues. Parastatals widely recognized, but the associated changes dominate food grain markets, and private in land productivity may not be equally well agricultural trade is heavily regulated. appreciated. The evidence suggests that productivity drops beyond a certain ratio of The traditional chain, passing through nitrogen to phosphorous. While the all-India agricultural wholesale markets and traditional median level is still below that threshold, half urban retail, dominates the marketing of of the farmers in the breadbasket states (Punjab agricultural commodities, but it is inefficient, and Haryana) are above the threshold. In other lacks integration, and is plagued by trader words, they have reduced their productivity collusion in the regulated and restricted from the peak response level. Even in Bihar markets. Even so, alternatives—modern retail most farmers operate on the decreasing part of and the processing and food service sectors— the response curve. are emerging, and even traditional value chains for staples are evolving, with changes in factor markets, innovations that shorten Marketing and Market Reform: supply chains, wider access to information Unfinished Business through mobile phones, and increasing India has long intervened in its agricultural downstream demand for quality and brand markets. Regulations have eased since the differentiation. 18 OVERVIEW Innovations to improve marketing efficiency in effect for the most part: the Agricultural and link small and marginal producers to more Produce Markets (Development and Regulation) remunerative value chains have been attempted Act—APM(D&R) Act—and the Essential on a limited scale, with mixed results. Firms Commodities Act (ECA). The issues related or other private and public entities generally to these regulations are well recognized, have preferred large and medium farmers for including zoning and storage restrictions, contract farming; established or corporate market fragmentation and inefficiency, and retail chains have preferred the more advanced the requirement to sell all produce at a limited agricultural states to the states where most number of licensed, regulated markets in often poor smallholders reside. The main factors nontransparent transactions. The regulations influencing those preferences appear to discourage private investment in storage, be difficulties in enforcing contracts, high handling, and marketing infrastructure; they transaction costs, and challenges in meeting also constrain contract farming or direct quality standards. Initiatives to integrate small purchases by agro-processers and prevent farmers to value chains failed to introduce improvements in value chain efficiencies. or adapt appropriate technology over time, although producer companies appeared more To address the major problems, the government effective than cooperatives at linking small- introduced a “Model Act” in 2003 and urged scale producers to markets. state governments to amend their legislation and regulations accordingly. Most states Alternative market channels—traditional amended their legislation, but the extent and private sector traders, state-sponsored implementation of reforms remain limited. cooperatives, and Rural Business Hubs (a An in-depth study, including field assessments modern private sector innovation)—also show in five states, finds a largely unfinished very mixed results. By and large, the benefits agenda. Despite attempts to modify the ECA, and costs differed little among the alternatives. its essential provisions remain intact. The The alternatives showed no clear improvement multiplicity of control orders issued by multiple in smallholders’ access to inputs or outputs, and agencies (at the central and state levels) creates smallholders experienced no significant price or uncertainty and raises transaction costs. The quality discrimination in any market channel. lack of transparency prevails, restricting trade What emerges is that medium and larger and maintaining market segmentation. farmers have better access to state-sponsored cooperatives, indicating that subsidies (either Different states interpret and implement through access or merely through the scale reforms in different ways, prompting a need effect) are not as pro-poor as intended. to rethink market governance. Agriculture Cooperatives are more beneficial in the more is a state subject, but inter-state trade and remote or backward areas of the states studied, commerce is under the Union list. For where the private sector is thin or nonexistent. efficient markets, it is critical to establish common norms and ensure transparency This evidence from the ground level provides and predictability of rules and regulations to a useful backdrop to two pervasive regulations facilitate private trade and investment. While that have “stifled” agriculture and remain overregulation is clearly a hindrance, the other 19 Republic of India: Accelerating Agricultural Productivity Growth Messages and Implications In most cases, market reforms have not been implemented in full or in earnest, with provisions and omissions that effectively retain the status quo and restrict private investment and trade. India remains a segmented agricultural market; reforms to lift restrictions on movement, stock, and trade remain limited. Different states interpret and implement reforms and regulations in different ways, suggesting a need to rethink market governance. It may be advisable to place agricultural marketing on the Concurrent List and establish common norms for taxation and other charges/fees to make the system more transparent and predictable. State governments face a conflict of interest with the proposed market reforms. Reform of APMCs have fiscal implications for state government, and as such have revenue implications. To overcome this obstacle, a cost-sharing strategy will need to be devised. Another conflict of interest is that state departments or marketing boards both run and regulate markets. An independent market regulator could level the playing field between the state and private markets. extreme of an absence of any regulation is also industry has a dualistic structure, with a not desirable. Markets need to be orderly and relatively small (in number of units) but capital- governed well to create a healthy environment intensive organized segment coexisting with for transactions, calling for an independent a pervasive, mostly rural, and more labor- market regulator. intensive unorganized segment. Rural firms are less capital intensive, less productive, and dominated by small family enterprises. Beyond the Farm: Exploiting the Potential for Food Processing Shares of food processing in all manufacturing in terms of employment and numbers of units Urbanization, the shift to nonfarm activities, have been stable in most states over time, rising incomes, women’s increasing participation while the share of output has increased. Both in the labor force, and changing consumption the organized and unorganized segments have habits will create an outpouring of demand experienced capital deepening and declining for processed foods. Food processing provides labor intensities. The organized segment has a natural entry point for India’s sluggish generated jobs with an increased number of “manufacturing” sector to move into units, but the unorganized segment has lost predominantly agricultural areas and create enterprises and jobs over time. The remaining much-needed off-farm employment. Food enterprises are larger in scale, with rapidly processing has among the largest multiplier growing output per unit and slower but still effects across the economy. It can stimulate growing employment per enterprise. higher agricultural productivity through better and more stable farm prices, reduce wastage by Labor productivity has risen fast, keeping transforming produce unsuitable for wet markets pace with labor productivity in the non-food into value-added consumables (increasing returns sector, but the associated rise in wages (also to farmers), and promote diversification. relative to the non-food sector) has restrained growth in employment, encouraging further Food industry structure and investment. capital intensity and scale of operating units. Like all manufacturing, the food-processing The preference for higher capital intensity 20 OVERVIEW and labor-saving technology reflects the by starting small nonagricultural enterprises perpetuation of informality and a reluctance to or operating such enterprises alongside hire labor, perhaps due to labor laws and other their agricultural ventures for supplemental factors in the business environment. income. Third, industrial investments in individual states are highly concentrated in The significance of these trends for employment specific sectors. Among the factors explaining and transformation, even in the more rural investment patterns, the main results of food-based industry and in the more populous interest for policy are backward linkages to and poorer states, cannot be overstated. agriculture, credit, and public infrastructure. Encouraging new businesses to enter and The food industry’s concentration in existing businesses to expand employment agricultural states clearly suggests that “location more rapidly than in the past will create matters.” Locations with higher agricultural employment, but only with greater attention productivity attract more private investment to the enabling environment and barriers to and employment in food processing. Finally, the entry for smaller firms, especially in the lagging findings on access to credit and infrastructure states. reconfirm their well-known importance as determinants of investment. Patterns and drivers of private investment in food manufacturing. Three major findings Productivity growth in the food-processing emerge from the analysis. First, the organized industry. TFP growth (TFPG) rebounded sharply food industry is more prevalent in less after 2000, following a decline in the 1990s. For industrially developed states with higher shares the unorganized segment, TFPG was positive of income from agriculture; the unorganized but much lower than in the organized segment. segment is more prevalent across states, The strong, positive correlation between TFPG regardless of the level of development. Second, for the organized and unorganized segments food manufacturing is more dominant in across states indicates that states doing states with a higher percentage of poor people. better in one segment also do better in the Individuals tend to diversify out of agriculture other, suggesting a better overall investment Messages and Implications A dual focus on agricultural productivity and creating an appropriate investment climate to attract private investment is needed to promote more rapid rural transformation. States where agriculture is dominant have significant potential to attract private investment in the food industry. Higher agricultural productivity also attracts private investment in food processing, placing a premium on supportive investments in (for instance) irrigation, roads, and better functioning markets. Active promotion of this relatively more labor-intensive industry, through appropriate incentives, in states with low per capita income, high dependence on agriculture, and high incidence of poverty will help create off-farm jobs, which will absorb more people from agriculture and promote structural transformation. These arguments are even more relevant with respect to the unorganized segment of the industry, which is more widespread and has higher potential to absorb labor but currently suffers from low productivity. High levels of efficiency in many states signal that the food industry is well placed to compete in a more liberalized marketplace, with potential scope for foreign direct investment as well as exports. Policies to improve the investment climate for agro-processing, both for the organized and unorganized segments, is thus a high priority. 21 Republic of India: Accelerating Agricultural Productivity Growth climate for food processing in some states. Key and livestock yields are typical, with large determinants of productivity differences across differentials across districts. Rapidly diversifying states include backward linkages to agriculture, production has translated to faster growth infrastructure, and investor friendliness. Beyond and poverty reduction. Despite these seeming the backward linkages, other agglomeration similarities, the two states have experienced economies appear not to be significant. distinct growth patterns. Diversification was strong and consistent in Bihar, with prices The unorganized segment does not playing a lesser role in growth. Improved yield appear to grow through a complementary spurred growth in Odisha in the early 2000s, relationship (for example, through but now growth is led primarily by prices. As outsourcing or subcontracting) with noted earlier, price-led growth raises concerns organized food manufacturing. Both the about its sustainability, given that yields are organized and unorganized segments seem declining. In contrast, growth in Bihar appears to be operating below optimal scales. The more robust. significantly suboptimal scale of operation in the unorganized segment suggests strong Small, fragmented holdings prevail in both disincentives for employing labor in an Bihar (72 percent are under 0.5 hectare) and otherwise efficient industry. Odisha (60 percent smaller than 1 hectare). Tenancy and sharecropping arrangements discourage investment, while fragmented Transforming Agriculture in LIS: holdings and the small scale of operations Challenges and Priorities for Bihar are a drag on efficiency and constrain output and Odisha marketing. Inevitably, transaction costs and market risks tend to be high. The eastern states offer enormous agricultural opportunities if their natural resources are Low input use intensity and efficiency limit managed judiciously, in a framework of productivity growth, although fertilizer use has appropriate policies and institutions and grown faster than the national average in Bihar, supportive infrastructure. Sufficient water, approaching the levels in more advanced states. a suitable climate, and significant scope to As in those states, fertilizer use is imbalanced, improve yields make the eastern states a taxing productivity. The high level of biotic valuable resource for sustaining national food and abiotic stress from many sources—pests, security, and their potential for high-value diseases, drought, floods, acidic and sodic horticulture and livestock production portend soils—means a very high level of agricultural a rapid economic transformation. Analysis in risk, and likely constrains the adoption of new two of the poorest states, Bihar and Odisha, technology, reduces the efficiency of input use, reveals the challenges and priorities involved in and discourages productive investments. realizing this scenario and contributing to the inclusive growth agenda for LIS. Marketing remains a challenge. Relatively low and volatile prices result from thinly spread Challenges to productivity and and underdeveloped markets; market density diversification. In both states, low crop is low, and few markets have sophisticated 22 OVERVIEW infrastructure such as cold storage facilities. irrigation and infrastructure than other states. Bihar’s bold abolition of the APM(D&R) Act Allocations remain lower than the all-India seems to have unintentionally left a void average—inconsistent with the objective of in market governance, with allegations of inclusive growth. Both states improved road noncompetitive behavior. Markets have been density, but other infrastructure deficiencies taken over by private entities; farmers continue persist, particularly in rural electrification. to pay market fees but receive no services, Farmers invested in the more costly diesel and public and private investment in market pumps in Bihar, where irrigation intensity infrastructure is nil. In Odisha the Act is intact, (at 62 percent of net sown area) now surpasses but most markets still have no mechanism for the all-India average (45 percent). Odisha’s price discovery and price determination. irrigation intensity remains low. Bihar has significant potential for surface water Bihar, Odisha, and other LIS historically irrigation; Odisha already sources irrigation received much less public funding for water from canals. Messages and Implications The top priorities for Bihar and Odisha are to tackle the multiple biotic and abiotic stresses, develop markets, and promote livestock development. Small holdings make it a priority to enable people to leave agriculture or diversify into higher-value agriculture. Technological solutions range from sustainable crop management strategies (for overcoming soil acidity and sodicity, multi-cropping, reducing water use, and conserving other resources) to better seed quality and faster seed replacement, and research on abiotic stresses (together with private companies). Collective action—through producer organizations, cooperatives, farmer associations, or self-help groups— is important for scale economies and linking smallholders to value chains. Bihar has successful approaches that can be scaled up (for dairy, vegetables), and Odisha is innovating with farmers’ markets and cluster approaches for specific horticultural crops. These initiatives need to be set within an overall framework conducive to private investment in marketing, agro-processing, and land development. Establishing a regulatory framework for fair, transparent, and efficient markets with free movement of goods and services is essential. Livestock is a “quick win” for inclusive growth, nutritional outcomes, and employment. Priority actions include focusing research on diseases and production constraints; policy and other support for small ruminant, pig, and poultry production; and incentives for private investment in processing, value chains, feed production, and veterinary services. 23