One of the major impediments to growth in the farm sector were the APMC Acts. The Agricultural Produce Markets Act prescribes the setting up of mandis (Markets) for agricultural products. The Act prevents farmers from selling their produce directly to retailers. They have to go through regulated mandis and bear mandi charges. The Act restricts trade in agri-commodities to those who have paid market fees, have the necessary licenses, and permits. In other words, they first restrict the farmers marketing channels to state-regulated markets; they then charge multi-point market fees as well as sales taxes in some cases. The lack of adequate storage facilities at most markets makes the farmers bargaining abilities that much weaker in such market places.
The APMC acts have been in existence in all the major producing states of India. The Central Government had initiated agricultural reform measures. However, since Agriculture is a State subject, a lot more had to be done before Indian Agriculture was rid of the problems facing it. The private sector needs policy reforms that will allow it to make much larger investments in the sector, thus propelling the growth rate of agriculture sector. The center drafted a model APMC act in 2002, which the states were expected to implement. For a long time, the states dragged their feet on this. However, in last one year significant movement has happened on this.
a) States that have implemented the model laws in part or wholly – AP, HP, MP, Maharashtra, Punjab, Haryana, Gujarat, TN, Rajasthan, Chhatisgarh, Nagaland and Sikkim.
b) States that did not have APMC acts to start with – Kerala, Manipur, Daman&Diu, Dadra and Nagar Haveli, Arunachal Pradesh
c) West Bengal is yet to amend its laws, but its act was anyway not as restrictive as in most other states
d) UP and Karnataka are two major states yet to implement the changes
e) Bihar, has leap-frogged all other states and has scrapped the APMC Act.
The results have been instantaneous. Sample the following:
a) Metro Cash and Carry is investing heavily in wholesale of agricultural products in AP, WB and Maharashtra
b) Reliance Retail is expanding furiously in AP, Maharashtra and Gujarat and has plans to go to 700 cities within 5 years
c) ITC is wholesaling F&V and has set up stores in Hyderabad, Pune, Chandigarh and Kolkata. Further plans are being made
d) Bharti is aggressively building agricultural plans in Punjab
The impact is likely to be big and fast. Massive investments are coming up in all these states in the area of storage, transportation, cold chain, with corresponding multiplier effects in employment. Specialized services players are entering the fray (cold storages, refrigerated vans, etc.)
This could truly be a revolution in the making. So much so that I am surprised that newspapers seem to have missed the story altogether
Monday, November 27, 2006
Well meaning ………… but off track
I have been listening to many well-meaning speakers on the topic of addressing the farming crisis in India. They are all well meaning but somehow it jars when they harp on accelerating the agricultural growth rate to match industrial growth rates and to take agriculture to 30% of the economy. That is not possible, unless the economy goes into a tailspin and shrinks!
The economic history of mankind clearly illustrates the role of technology in accelerating welfare. There is only so much that one can make off the land, and that cannot support 6 billion people. It was all right to be pure agrarian at below 1 billion population, not any more. The industrial revolution created a new set of economic assets and the communication revolution has created another new set. Today these assets far outstrip the land provided by nature, in value and in the ability to generate economic income.
Look at any economy over a period of time. If the economy is progressing, the share of agriculture (and any other natural resource based sector) must come down, and it does. The US is the largest agricultural economy in the world and yet the share of agriculture today is only about 3% in its economy, and it will keep coming down. China is another agricultural powerhouse, but in China the share of agriculture is below 15% and it will go down to below 10% in another decade or so.
India is following a well-treaded path. The share of agriculture has gone from above 75% in 1947 to about 20% today, and by 2025, it should be below 10%. This is not to say that the agricultural sector will not grow. It will grow, but the long term trend can at best be 3-4% pa. That is about the limit. Grow it must, because productivity is still pretty low at aggregate levels.
However, this growth will not and cannot avert the disaster alone. The crux of the problem is not that the share of agriculture is going down, it is the fact that 60% continue to depend on agriculture for their livelihood. It is this 60% which needs to be brought down. In China, at present only about 30% depend on agriculture and in the US less than 1% depend on agriculture (which makes an average farmer richer than the average man in the economy).
If India has to tackle the agrarian problem, it must push for sustained growth of 3-4% and it must also expand manufacturing and rural services to suck out the labor surplus in the farm sector. This has to be a big effort if we are to bring down the dependence to about 30% in 20-25 years.
It means that sectors such as organized food retail, food processing, etc need to be boosted with friendly policies. These are sectors that have the capacity to absorb large labor forces and investment in these sectors should be encouraged.
The economic history of mankind clearly illustrates the role of technology in accelerating welfare. There is only so much that one can make off the land, and that cannot support 6 billion people. It was all right to be pure agrarian at below 1 billion population, not any more. The industrial revolution created a new set of economic assets and the communication revolution has created another new set. Today these assets far outstrip the land provided by nature, in value and in the ability to generate economic income.
Look at any economy over a period of time. If the economy is progressing, the share of agriculture (and any other natural resource based sector) must come down, and it does. The US is the largest agricultural economy in the world and yet the share of agriculture today is only about 3% in its economy, and it will keep coming down. China is another agricultural powerhouse, but in China the share of agriculture is below 15% and it will go down to below 10% in another decade or so.
India is following a well-treaded path. The share of agriculture has gone from above 75% in 1947 to about 20% today, and by 2025, it should be below 10%. This is not to say that the agricultural sector will not grow. It will grow, but the long term trend can at best be 3-4% pa. That is about the limit. Grow it must, because productivity is still pretty low at aggregate levels.
However, this growth will not and cannot avert the disaster alone. The crux of the problem is not that the share of agriculture is going down, it is the fact that 60% continue to depend on agriculture for their livelihood. It is this 60% which needs to be brought down. In China, at present only about 30% depend on agriculture and in the US less than 1% depend on agriculture (which makes an average farmer richer than the average man in the economy).
If India has to tackle the agrarian problem, it must push for sustained growth of 3-4% and it must also expand manufacturing and rural services to suck out the labor surplus in the farm sector. This has to be a big effort if we are to bring down the dependence to about 30% in 20-25 years.
It means that sectors such as organized food retail, food processing, etc need to be boosted with friendly policies. These are sectors that have the capacity to absorb large labor forces and investment in these sectors should be encouraged.
The importance of social development
The story of India and China has spun off several debates and a lot of it has focused on stuff like Chinese commitment, Indian apathy, the questioning of the readiness of a society for democracy and an assertion that somehow democracy has been holding India back.
Much of these debates ignore social development as a prerequisite to economic development. It is said that the size of the two economies were comparable 15 years ago. True, But what is lost is that the social indicators in China, 15 years ago, were superior to what India has today. Is it any surprise really that China has powered ahead. Economics would have turned on its head if India had somehow managed to match China in spite of this obvious gap.
The world development report gives interesting insights into the India China debate. Let us look at some of the broad indicators
a) Average life expectancy – In 1990 this was 59 years for India and 69 years for China. By 2003 India had moved to 63 and China to 71. India is still behind China of 1990.
b) Infant Mortality (per 1000 live births) - In 1990 this was 84 for India and 38 for China. By 2003 India had moved to 63 and China to 30. India is still behind China of 1990.
c) Adult Literacy (%) - In 1990 this was 62 for India and 87 for China. By 2003 India had moved to 68 and China to 95. India is still behind China of 1990.
If anything, the above set of figures, demonstrate the ability of a democratic system to deliver benefits faster. It is obvious that India cannot hope to better China with the handicap of poor social development. It is also apparent that policy makers need to focus on social development. An educated, healthier population will take care of itself in a democratic economy.
The above argument is reinforced when one looks at social indicators across India. The laggard states are those with significantly inferior social development. All these states function under the same overall economic and democratic framework. Yet the states that are healthier and more literate have been powering ahead and leading the economic growth.
Much of these debates ignore social development as a prerequisite to economic development. It is said that the size of the two economies were comparable 15 years ago. True, But what is lost is that the social indicators in China, 15 years ago, were superior to what India has today. Is it any surprise really that China has powered ahead. Economics would have turned on its head if India had somehow managed to match China in spite of this obvious gap.
The world development report gives interesting insights into the India China debate. Let us look at some of the broad indicators
a) Average life expectancy – In 1990 this was 59 years for India and 69 years for China. By 2003 India had moved to 63 and China to 71. India is still behind China of 1990.
b) Infant Mortality (per 1000 live births) - In 1990 this was 84 for India and 38 for China. By 2003 India had moved to 63 and China to 30. India is still behind China of 1990.
c) Adult Literacy (%) - In 1990 this was 62 for India and 87 for China. By 2003 India had moved to 68 and China to 95. India is still behind China of 1990.
If anything, the above set of figures, demonstrate the ability of a democratic system to deliver benefits faster. It is obvious that India cannot hope to better China with the handicap of poor social development. It is also apparent that policy makers need to focus on social development. An educated, healthier population will take care of itself in a democratic economy.
The above argument is reinforced when one looks at social indicators across India. The laggard states are those with significantly inferior social development. All these states function under the same overall economic and democratic framework. Yet the states that are healthier and more literate have been powering ahead and leading the economic growth.
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