Context: The ongoing debate on India’s farm policies invites comparison with China whose agricultural output, investment in research and development concerning farming practices, and incentives to farmers are better.
Relevance:
Mains: GS-III- Agricultural reforms.
| Introduction |
- India and China are the most populous countries in the world, having a population size of 1.35 billion and 1.39 billion, respectively, in 2018.
- With limited arable land (about 120 million hectares (mha) in China, and 156 mha in India), both face the challenge of producing enough food, fodder, and fiber for their population.
- Both have adopted modern technologies in agriculture, starting with High Yielding Variety (HYV) seeds in the mid-1960s, increased irrigation cover, and the use of more chemical fertilizers to get more food from this limited land.
- China’s irrigation cover is 41% of the cultivated area, and India’s is 48%.
- As a result of this irrigation, China’s total sown area is 166 mha compared to India’s gross cropped area of 198 mha.
- But with much lesser land under cultivation, China produces agricultural output valued at $1,367 billion—more than three times that of India’s $407 billion.
| Comparative Analysis |
- Investments in R&D Department
- The agricultural GDP increase by INR 11.2 per rupee investment in R&D.
- In 2018-19 China invested $7.8 billion in Agricultural Knowledge and Innovation Systems (AKIS) while India invested $ 1.4 billion.
- India invests about 0.35 % of Agri-Gross Value Added (GVA) and China on the other hand invests about 0.8 % of GVA.
- Better seeds that result from higher R&D expenditures generally demand more fertilizer.
- It is worth noting that China’s fertilizer consumption in 2016 was 503 kg/ha of the arable area compared to just 166 kg/ha for India, as per World Bank estimates. No wonder, China’s productivity in most crops is 50 to 100% higher than India’s.
- Incentives
- China provides better incentives than India for its farmers according to producer support estimates (PSE) standards.
- PSE standards compute the out prices (in free trade environment) and the input subsidies provided to farmers.
- PSE for Chinese farmers was 15.3% of the gross farm during TE 2018-19 while that of Indian farmers was a tad 5.7%.
- Direct Income Support Scheme
- To enable farmers to produce any crop they wish, China has invested heavily in providing Direct Income Support to its farmers on basis of arable land owned by them.
- China has combined its major input subsidies in a single scheme that allows direct payment to farmers on a per hectare basis and has spent $20.7 billion in 2018-19. This gives farmers the freedom to produce anything, rather than incentivizing them to produce specific crops.
- Inputs are priced at market prices, encouraging farmers to use resources optimally. India, on the other hand, spent only $3 billion under its direct income scheme, PM-KISAN, in 2018-19, but spent $27 billion on heavily subsidizing fertilizers, power, irrigation, insurance, and credit.
- This leads to large inefficiencies in their use and has also created environmental problems.
- It is for this reason that the farmers have limited to certain crops in India. For instance, the government has provided such huge incentives on paddy/rice that its production has surpassed the storage capacity of FCI.
- High MSP has brought down the rice exports for the country and as rice requires plenty of water, free electricity, and water supply brought down the groundwater level in many states of the country.
- Strict Irrigation Policies
- In recent years China has invested in providing water-saving irrigation facilities.
- About 48% of the irrigated land in China has micro-irrigation systems that use water efficiently.
- China also invited private companies to invest in the micro-irrigation system very early and during 2005-14, it spent around RMB 2.3 trillion on water infrastructures, while India invited private companies in 2006.
- China issued Three red lines water policy to limit water usage and applied a strict water tariff system.
- On the other hand, India provided free water and electricity for farmers.
Chinese experience:
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| Post-Agricultural reforms in India and China |
- By making agriculture the starting point of market-oriented reforms, a sector that gave the majority of the people their livelihood, China could ensure widespread distribution of gains and build consensus and political support for the continuation of reforms.
- Reform of incentives resulted in greater returns to the farmers and in more efficient resource allocation, which in turn strengthened the domestic production base and made it more competitive.
- Besides, prosperity in agriculture favoured the development of a dynamic rural non-farm (RNF) sector, regarded as one of the main causes for rapid poverty reduction in China as it provided additional sources of income outside farming.
- The rapid development of the RNF sector also encouraged the government to expand the scope of policy changes and put pressure on the urban economy to reform as well, since non-farm enterprises in rural areas had become more competitive than state-owned enterprises (SOEs).
- Reforms of the SOEs, in turn, triggered macroeconomic reforms, opening up the economy further.
- Between 1978 and 2002, the rate of growth in agriculture nearly doubled over the 1966 to 1977 period and this was the main reason why poverty in China came down from 33 % of the population in 1978 to 3% in 2001.
- In stark contrast, in India, the most rapid poverty reduction occurred from the late 1960s and the late 1980s but this was not because of reforms, rather due to strong policy support to agriculture.
- India still continues with state food procurement and distribution, mainly because it is seen as affirmative action for over two-thirds of the population, including the poorest, who are dependent on agriculture and the rural economy, for livelihood.
So what was the most important differentiating factor between the two strategies?
- The Chinese policymakers first created the incentives and institutions required by the market economy and then, in the mid-1980s, they began to slowly open up markets, by withdrawing central planning and reducing the scope of procurement while expanding the role of private trade and markets.
- Of course, it is no one’s case that India could have simply replicated the China model. It is crucial to note that China had more favourable initial conditions — even in 1970, China had a significant edge over India be it health, education, more egalitarian access to land, and growth of the power sector.
- This is the reason why, despite the private and economic restrictions imposed on the Chinese rural population, the country could achieve sustained growth even before the reforms.
- Seen in this perspective, the whole issue of Minimum Support Prices is essentially about flawed incentives.
- Notwithstanding the economic logic that greater play of free markets will improve outcomes for farmers, it is unreasonable to expect farmers of Punjab and Haryana to give up on the safety of MSPs overnight.
- Ideally, the government should have built up the case for markets ground up and allowed farmers the time to adjust to market forces.
- But if you move away from agriculture for a moment and examine the essential nature of policies in other sectors, you would find that there too policies suffer from the same issue.
- For instance, the production linked incentives to boost India’s manufacturing is essentially about shielding the domestic firms from market competition. So are the policies justifying import bans and higher import tariffs. Similarly, India’s decision to stay out of RCEP is also driven by the same notion — shielding the domestic firms from market forces. The undermining of the Insolvency and Bankruptcy Code is again essentially a story of not letting market forces hurt the existing promoters.
- Data shows that the bulk of farm produce was traded privately even before these laws came into force.
- The key concern for India should be the creation of incentives and institutions for a market economy to function because therein lies the only sustainable solution to allaying deep-set suspicions.
| Lessons for India |
- Increasing R&D investment:
- For increasing total factor productivity, India needs to increase expenditure on agri-R&D while making the Indian Council for Agricultural Research (ICAR) accountable for targeted deliveries.
- Improve incentives structure
- Large-scale agri-marketing reforms (APMC and Essential Commodities Act) need to be carried out.
- India needs to reduce the gamut of commodities under the MSP system and keep MSPs below international prices. Else, India will also suffer from the same problems of overflowing granaries as China did.
- Investing in smarter value chains
- Public-Private Partnerships could help spur the development of the food processing industry, one of the newest sectors in Indian agriculture.
- An important role of the government, besides funding, will be to create an enabling environment for private investment.
- This needs to be done through tax rationalizations, duty exemptions, increases in public spending, priority sector lending, and FDI.
