Of the three major sectors of any economy, agriculture is the primary sector. It is prior in time and naturally enough forms the basis for the other two sectors — manufacturing and services. Without a solid foundation provided by an efficient agricultural sector, no society can prosper.
Everybody — factory workers, quantum physicists, doctors, programmers, musicians, writers, politicians — needs food. Farming is the oldest occupation and all civilizations begin as essentially agrarian societies. Agricultural success is the necessary precondition for the advancement of civilization. Without an agricultural revolution there can be no avenues for social, technological, and economic development.
The claim of this essay is that India has not had a comprehensive agricultural revolution. All the other problems that India faces derive from that failure. The good news is that India has the opportunity to have an agricultural revolution. It has always had that opportunity. Primarily because of plain idiocy — let’s not sugarcoat this bitter fact — India has failed in progressing much beyond subsistence agriculture. India’s abysmal poverty follows relentlessly from that fact.
First let’s briefly lay out the outlines of how an economy grows from an agrarian society to become a complex modern economy. Subsistence agriculture is the first stage. Most of the labor is involved in growing food and a bit of animal husbandry. There is very little surplus. When times are good, population expands and maintains a precarious balance between the available food and the number of mouths to feed. It’s a Malthusian era. Life isn’t complicated but there are no luxuries either. Everybody is materially very poor.
At the start, technology is very primitive, and is mostly agricultural. By technology, we mean the knowledge people have about how to get things done. They know what to plant, when to sow and reap, etc. Slowly people discover better methods to grow things more efficiently. That’s technological advancement. The invention of the plough, the use of draft animals and irrigation were technological breakthroughs that raised agricultural productivity. That meant fewer people were needed for food production and therefore labor could be available for non-agricultural occupations such as weavers, potters, carpenters, metal workers, etc.
All these non-agricultural workers traded their produced goods and services for food. Continued increases in agricultural productivity led, first, to a fall in the proportion of labor employed in agriculture; and second, the surplus from agriculture could be used to build the non-agricultural sectors. That is, the surplus from the agricultural sector was used to grow the non-ag sector. How? By making the terms of trade disadvantageous to the ag sector. That is, the exchange rate was biased in favor of the non-ag sector.
Thus, in the initial stages of economic development, the ag sector is taxed and the non-ag sector is subsidized. Why? Because the non-ag sectors are too small and don’t produce any surplus anyway. You can’t make infants work. But with time the non-ag sectors begin to grow relative to the ag sector in terms of value of production as well as labor employed. Ag may have employed 80 percent of the labor force and non-ag 20 percent, at some time; gradually that situation gets reversed and you end up with only a very small fraction of the labor force in agriculture.At that stage of economic development, the non-ag sectors are taxed and the ag sector is subsidized.
The US has had its agricultural revolution and therefore graduated to be a post-agricultural economy. More than 50 percent of the US labor force was in agriculture a century ago. Today, less than 2 percent of US labor is in agriculture. American farmers are subsidized. The manufacturing and services sector of the US are taxed. American farmers get umpteen billions from the government.
The situation at present is this: India has not had an agricultural revolution. Farm productivity is extremely low. Around 60 percent of Indian labor is in agriculture. Indian farmers are taxed. The Indian non-ag sector is subsidized. It came as a big surprise to me when I first encountered that idea.
What’s the basic mechanism for this taxing of ag and the subsidy of non-ag? It’s through the aforementioned terms of trade adverse to the ag sector. Primarily what you do is protect industry through various policy levers. One of those is called “infant industry protection.” By providing protection to industries, industrial output is more costly than they need to be. This cost is passed on to the ag sector.
Suppose efficiently produced tractors can be exchanged for 1000 units of agricultural products. But inefficiently produced tractors are exchanged for 2000 units of ag products instead. That’s how the ag sector gets the short end of the deal.
There are various ways of allowing the industrial sector to be inefficient, all of which are used in India. One way is to limit competition in the industry through licensing; another way is make the industry exclusively public sector; a third way is to have barriers to imports (tariffs and quotas); and so on.
The story of the transition from an agrarian economy to a modern 3-sector economy is simple. You start with all of the labor engaged in agriculture. Then productivity increases lead to release of labor from ag for employment in the non-ag sector. The two sectors trade with each other — food in exchange for no-ag commodities (goods and services.) As ag productivity continues to grow, more labor is released which gets absorbed in the manufacturing and services sectors. The manufacturing sector produces the tools that the agricultural sector needs, such as farming equipment. Labor continues to move away from the ag sector till only a very minor fraction of the labor force is in agriculture.
This is “agricultural demand led industrialization” or ADLI. Here’s what I wrote in 2003 December about that:
The transition from an agrarian to an industrial society was the great challenge that faced economies before. Much attention was paid on ways to make the transition. Of the various models of development (such as export-led growth, import-substitution industrialization, and others) used it is instructive to recall one called agricultural development led industrialization, or ADLI.
ADLI recognized that cost-reducing technological change increased agricultural productivity and therefore increased rural incomes. Increased rural incomes provided a demand boost for manufactured goods both for consumption as well as for use in agricultural production. The increased demand for domestically manufactured goods raised wages which in turn were spent on the consumption of agricultural output. On the labor side of the market, as agricultural productivity increased, labor shifted from the agricultural sector to the manufacturing sector. Thus the industrialization of the population was achieved at pace with the labor transition and was based on increased agricultural productivity attained through the use of appropriate technology.
There are two necessary conditions for the transition from an agrarian to a non-agrarian economy. First, education. Without basic education, the labor released from agriculture cannot be absorbed in manufacturing. Second, even with a workforce capable of being absorbed in manufacturing, if there are no jobs in manufacturing, it only leads to unemployment or underemployment.
The Indian government has been the biggest barrier to Indian education. That’s a big problem whose baleful impact affects all sectors of the Indian economy. That’s the first strike against Indian agriculture. So also the government’s policies have prevented the manufacturing sector from growing. Industrial labor and licensing policies are to blame. If industries are prevented by the government from growing, they cannot absorb labor. That’s the second strike. And now for the third strike.
India could have been a manufacturing giant considering its immense labor force. But that did not happen. China became the world manufacturer.
Indian agriculture could have been highly productive. India’s land mass is 7th largest in the world, behind (in order) Russia, Canada, China, US, Brazil and Australia. But India has the second highest quantity of arable land (second only to the US.) With modern technology, India could have had a highly productive agricultural sector. But unfortunately because of the idiotic policies of the Indian government, India is suffering, not just Indian farmers.
I’ve already noted that industrial policies and education system are critical. What else is missing? Markets. Unimpeded markets for land and for agricultural commodities.
The market for agricultural commodities are heavily distorted. Farmers cannot sell their produce in open markets. They have to go through middle-men who are government or quasi-government entities. This drives a huge wedge between farm gate prices (the price that farmers receive) and the consumer prices. The farmer sells onions at Rs 10 a kilo, and the consumer buys them at Rs 30 a kilo. Both the farmer and the consumer suffer — and the government agents (including politicians and bureaucrats) make a pile without any work.
Land markets are distorted. Farm land cannot be sold for non-farm use. Farm productivity dictates the value of farm land — which is almost always lower than non-farm use. Then there’s the grandfather clause about who is allowed buy farm land: you have to prove to some bureaucrat that you or your immediate ancestors were farmers.
Let’s make that concrete with a hypothetical scenario. Farmer Sharad Joshi owns 2 hectares of land. He toils hard and at the end of the year, his net income from the land is Rs 2 lakhs. His family is dirt poor. He is at the end of his tether. He wants to sell the land and get out of farming.
Farmer Amit Singh is somewhat better at farming — let’s say he can get Rs 2.5 lakhs of income from that land. Only a marginal increase in income. So Singh’s offer for Joshi’s land will be limited by that.
Now suppose Manoj Malviya Industries needs land to expand. In those two hectares, Malviya Industries would employ an additional 100 people and have a net increase in income of Rs 100 lakhs. So Malviya would be able to offer 20 times or more Singh’s offer for Joshi’s land. Joshi would exit the farming business, take his money and do something else — perhaps educate his children so that they can find non-farm employment in the cities.
But in India, Joshi will not be able to sell his land to the highest bidder (which will necessarily be a non-farming venture; ask me why.) Instead, some crony of a bureaucrat, Hemant Kapoor, will claim that he’s a farmer, buy the land from Joshi at a very low price of Rs 10 lakhs, work with the bureaucrat to transform it into non-agricultural and sell it to some developer for Rs 200 lakhs. That is why the government does not allow a free market in land — because if they did, the bureaucrats and politicians will not be able to suck the life blood of the poor farmers.
Just by the way, here’s something you can bet your life on. Any policy or regulation that the government makes is always — let’s repeat that — always good for the politicians and the bureaucrats, and almost always not good for anyone else, and definitely harmful for at least some. Therefore, if you wish to find out if a policy will be enacted, just note whether it will benefit the government; if yes, then it will happen; if no, then it will not happen.
Farmers suffering because of bad policies? Look carefully and you will find that it is good for the politicians and the bureaucrats. They make the policies that drive the farmers to kill themselves. And then the politicians and bureaucrats with fresh blood on their hands use it as an excuse to get greater power and use that power to wreak even greater damage and enrich themselves more.
I think that Indians will never be free until the last politician is strangled with the entrails of the last bureaucrat.
With that introduction to the topic, I am ready to look at the problem of farmer’s distress in India. Next up.
[This post is in response to a request for comment from Keshav Bedi.]