Economic Liberalization and Agrarian Crisis in India

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1 IJAR-BAE ISSN: IJAR-BAE (March 2012) Vol. 01. Issue 01. Article No Full length Original Research Paper International Journal of Applied Research in BUSINESS ADMINISTRATION & ECONOMICS Economic Liberalization and Agrarian Crisis in India Tushar Das 1 1 Research Scholar, Netaji Subhas Open University, Kolkata, India. *Corresponding author s tushar_das8@yahoo.com Article History Received: Accepted: Available online: Keywords: Economic Liberalization in Agriculture, Agrarian Crisis. JEL Classification: Q12, Q14, Q16, H71, H72. ABSTRACT The rural economy of India have faced several challenges since 1991, the year which is demarked as the introduction of the market evolved reforms in India. Among them, the important is the downward tendency of agricultural growth. Though the reform measures have put Indian economy on a higher growth trajectory, the severe agrarian crisis during the reform periods seems to have arrested the rural growth of India. This paper examines the nature and extent of deceleration in agricultural growth in the age of economic liberalisation in Indian agriculture. As agriculture directly contributes to national economy at least through GDP growth, employment generation and foreign exchange earnings, our focus of attention has directed to study the pattern of changes of the composition of GDP, labor concentration and the forex' earning potentiality of agriculture especially in reform periods. We observed that continuous decline in the share of agriculture in the total GDP, a large share of work force depending on agriculture with low per worker productivity and the decreasing trend of foreign exchange earnings resulted in the agrarian crisis in India under liberalisation. Though the government has undertaken several measures to reverse the deceleration of agricultural growth, it seems that time has come to look beyond the agriculture for rural growth and the rural non-farm activities may deserve reprioritization in our development thinking. Citation: Das T, (2012), Economic Liberalization and Agrarian Crisis in India, IJAR-BAE 1(1), p Das T.et al. This is an open access article distributed under the terms of the Creative Common Attribution 3.0 License. 1.0 Introduction Since 1991, following economic policy reforms, the agricultural, industrial and trade policies of India have undergone several changes with the prime objective of globalization of the economy where the changed economic environment is expected to bring market forces to operate with lesser constraints. One important feature of this policy shift has been the curtailment of the role of Government giving top most priority to the relaxation of Government controls in various economic activities like production and trade thereby ushering a new era of economic liberalization. At the time of the introduction of economic liberalization in India in 1991, there was not much about the reforms in agriculture. But as soon as the WTO came into the picture in mid-1990s, Indian agriculture was exposed to many policy reforms. The economic liberalization package in agriculture focuses mainly three areas-external Trade Sector, Internal Market Liberalization and Fiscal Reforms. International trade in agriculture is liberalized emphasizing mainly the liberal import of agricultural products. All Indian product lines are placed under Generalized System of Preferences (GSP). All most all agricultural products are removed from Quantitative Restrictions (QRs) and brought under tariff system. Trade trading agencies are replaced and most of the Journal homepage: 17

2 products are brought under Open General Licensing (OGL). The average tariffs on agriculture products are reduced significantly. As the measures related to Internal Market Liberalization, trade in High Yielding Varieties(HYV) seeds was opened to private trade, hundred percent foreign equity was allowed in seed industry and restrictions on import of seeds were relaxed. Fertilizer subsidy was reduced noticeably. Power and water incentives were withdrawn, Power tariff increased and power sector was thrown open to private sector investment. Water rates were revised upward. The commercial banks and the Regional Rural Banks are given the additional responsibility of priority lending to weaker sections in rural areas. The relaxation of restriction on the interstate movement of farm produce, enactment of model agricultural market act and encouragement of Contract Farming are the crucial reform measures related to agricultural marketing. In the fiscal front, the measures are directed towards giving emphasis on tax reduction and public expenditure in order to reduce fiscal deficit. All these measures had implications for the farm sector. The most prominent manifestation of these measures is the remarkable deceleration in agricultural growth. The drastic decline in the growth rate of agriculture points to the acute agrarian crises which have affected the vast majority of the population. In this paper we have made an attempt to study the nature and extent of the crisis which have arrested the rural growth in the reform periods. Our focus of attention is directed to explore critically the contribution of agriculture towards GDP, employment and foreign exchange earnings. The rest of the paper has been organized as follows: Section-1 briefly discusses the reform measures undertaken in Indian agriculture and the objectives of the paper. Section-2 gives an overview of the pattern of the structural change in terms of the changing composition of GDP in the Indian economy with an emphasis on the current trend. Section-3 studies the employment pattern and labor concentration in Indian agriculture. The pattern of rural GSDP, rural employment and the state wise employment-output relationship is discussed in section4.the potentiality of agriculture to earn foreign exchange is presented in sectin-5. Finally, in section6 the concluding remarks with some policy implications are highlighted. 2.0 Changing composition of GDP Indian economy was moved to higher growth path during reform periods. But the sectoral composition of GDP growth which is associated with the betterment of large section of population is not at all impressive. Agriculture has failed to maintain its pace of GDP growth with non-agriculture in the reform periods. Table-1 shows the pattern of structural changes taking place in India in respect of broad sectoral share of GDP over the period The share of agriculture in GDP has declined from 32% in to 23 % in and further to 16% in The industry have marginally gained in terms of GDP share over the period to but the gain is significant (7%) over the period The share of service sector has increased from 51% in to 58 % in Table 01: Changing Composition of GDP (%) Years Sectors Agriculture Industry Services Source: Handbook of Statistics on Indian Economy, RBI Table2 highlights the plan wise trend of growth of total GDP, targeted GDP in agriculture and actual agricultural GDP. It is observed from the table that agriculture has grown more than targeted growth rate during the 6 th, 7 th and 8 th five year plan but fell short of targeted growth during the 9 th and 10 th plan. During the 5 th plan, the actual agriculture GDP and targeted GDP are almost same. The most striking feature is that during the 10 th plan agricultural GDP grew at an annual rate of mere 2.1 percent against the targeted growth rate of 4 percent. Journal homepage: 18

3 Table 02: Percent Growth Rate of Total GDP and Agriculture GDP during Different Plan Periods. (At constant prices) Plan Periods Total GDP Targeted GDP in agriculture Agriculture GDP Fifth Plan ( ) Sixth Plan ( ) Seventh Plan ( ) Eighth Plan ( ) Ninth Plan ( ) Tenth Plan ( ) Source: SO (2007) From table-1 and 2 it follows that at the economy level agriculture is not contributing to the overall GDP growth especially in recent past. This is mainly due to the faster growth in industry and services. During the reform periods, most of the new investments are directed towards manufacturing and services. This kind of structural change may hinder the rural growth. 3.0 Distribution of labor force Though the share of agriculture in total GDP is gradually decreasing, majority of work force still depend on agriculture for livelihood. In rural areas dependence on agriculture is as nearly as 75 percent of rural population. Table-3 exhibits changes in the employment shares of the three sectors namely, Agriculture, Industry and Services. A look into the table-3 reveals that the share of agriculture in total employment has diminished from 68% in to 63% in and further to 58% in The share of employment in industrial sector has remained remarkably small and it has increased only marginally from 14 percent in to 15 percent in Between and , the share of service sector in total employment has increased from 18% to 26%. Over the period the share of service sector in total employment has decreased by 1 percent only. Table 03: Distribution of Labour Force (%) Years Sectors Agriculture Industry Services Source: Handbook of Statistics on Indian Economy, RBI If we look at the sectoral share of rural work force, the picture is also disappointing. Table- 4 shows the pattern of change of sectoral share of rural work force over the period to It is evident from the table that the share of rural work force was percent in It has decreased marginally to percent in Like the pre reform periods, in the post reform periods also the labor concentration in agriculture is alarmingly high. It may be due to the fact that there was no substantial increase in the share of rural non-farm sector in rural India during the reform periods. Another interesting observation from table-4 is that the employment status of rural labor is tending towards relatively more insecure casual labor while self-employment and regular employment show a declining share. Table 04: Changing Sectoral share of Rural Workforce (%) Rural Employment Agriculture Non agriculture Journal homepage: 19

4 Status of Rural Labour Self-employed Hired regular Hired Casual Source: Shiela Bhalla (2005) In order to understand the relative position of the employment growth in agriculture, it is perhaps necessary to study the employment growth of other sectors of the economy. Table-5 shows the sectoral employment growth of nine major sectors of the economy for the periods and Table 05: Annual Growth Rate (%) of Employment by Sector Sectors Agriculture Mining Manufac Electricity Construction Trade Transport Finance serv Comm. Serv Source: NSSO, Different Rounds of Employment-Unemployment Survey It is evident from table 5 that annual agricultural employment growth rate was negative over the period 1993 to 1999 but we find a reversal during the period when agricultural employment has grown at the rate of 1.68 percent annually. It is to be noted hare that over the period , employment growth rate in agriculture (1.68 percent) was substantially higher than that of average growth of 1.2 percent for rest of the sectors. From table-3, 4 and 5, it is clear that even now, after decades of planned economic development programmes the share of agriculture in total employment is alarmingly high and this observation itself suggests that the appropriate kind of structural change needed for promoting accelerated development in India is yet to take place. Again, it seems that continuous decline in the share of agriculture in the total GDP and an increasing share of work force depending on agriculture result in decline in labour productivity which leads to higher rates of poverty in rural areas. On the other side per worker productivity in nonagriculture has been consistently increasing during reform periods. This perhaps indicates the necessity the rural nonagricultural activities for overall rural growth. 4.0 Rural GDP and employment Output relationship Regarding the changing composition of GDP and employment, what is evident at the national level may not be reflected at the state level. Again agricultural development in India is constitutionally the responsibility of the states rather than the central governments. So it is necessary to study the contribution of agriculture to rural Gross State Domestic Product and employment. Table6 presents the state wise distribution of Rural GSDP and employment for the periods and Here we have considered 18 major states as these states account for the bulk of Indian Population and GDP. As indicated in table-6, all the states exhibit higher Rural GSDP growth over the period Though the trend is also almost similar during , but we notice an exception for Tamilnadu only. The states like Andhra Pradesh and Maharastra have experienced a very high growth of nine percent per annum during but the corresponding growth in employment is less than 3 percent. On the contrary states like Jharkhand, Haryana and Assam have experienced a moderate but equated growth on both GSDP and employment. For Jammu and Kashmir and Bihar, rural employment growth has declined during the period as compared to Table 06: Annual Growth Rate of State Wise Rural GSDP and Employment States Rural GSDP g(%) Rural Employment g(%) Employment Elasticity Journal homepage: 20

5 AP Assam Bihar CG Gujrat Haryana J and k Jharkhand Karnataka Kerala MP Maharastra Orissa Punjab Rajasthan TN UP WB Source: National Accounts Statistics, Different Years Table-6 also presents the employment elasticity which represents the extent by which changes in GSDP cause employment change. It is observed from the table that the employment elasticity is strong during the period 2000 to as compared to the period for most of the states. Among them, the employment elasticity of Uttar Pradesh is significantly strong (3.5) in than that of The trend across the states suggests that the recent growth is inclusive for states such as Assam, Haryana, Jharkhand, Karnataka, Madhya Pradesh and Uttar Pradesh. In some of the advanced states like Andhra Pradesh, Maharastra, Gujrat and Kerala the rural growth is driven by productivity and not by participation. This would have increased the inequality gap in these states. 5.0 Foreign exchange earning of Indian agriculture The importance of agriculture in Indian economy may be judged by its foreign exchange earning potentiality. Though the objective of liberalization started in India in 1991 was to boost the export share of Indian products but it may not be an end in itself. Ultimately, we need be concerned with net foreign exchange earnings. True, more export means more foreign exchange earnings. But more export may mean more import requirement (direct and induced) also. Again some of the exportable goods for their domestic production need very little direct and induced imported inputs and some other exportable goods may require substantial imported input. So, to deal with the above, in this section, our focus of attention is directed to explore the relationship between imported raw materials and exports in agriculture products in the reform periods. Here the relevant critical parameters are Net Foreign Exchange Inflow Rate (NFEIR), export intensities, direct import intensities and finally the Forex Intensity. The measurements of all these parameters are explained in end notes. Now, on the basis of export intensity and direct import intensity of the sectors (presented in table-8), we have estimated the Forex Intensity of various agricultural sub-sectors as originally suggested by D. Sathe (1997). The industries have been divided, following Sathe (1997), into four categories Category-1: High forex intensity This category consists of those industries which have high export intensity but require very little or negligible amounts of imported raw materials per unit of sales, i.e. very low import intensity. The industries under this category may be termed as highforex intensive industries or more commonly forex earners Category-2: Medium forex intensity Journal homepage: 21

6 This type of industries is characterized by medium export intensity with low import intensity. Such industries may be called medium forex intensive industries Category-3: Low forex intensity This category consists of those industries which have low export intensity as well as low import intensity. Another type of low forex intensive industries can be defined as the industries with high export intensity and high import intensity Category-4: Forex drainers These are the industries which are characterized by low export intensity and high import intensities. These industries do not have any meaningful forex implications while formulating policies. The high and low forex intensive industries have been divided according to the following norm as suggested by Sathe(1997). Top 25 percent have been classed as high forex intensive, between 25 to 50 percent as medium and the rest as low forex intensive. Table 07: Agricultural Sub-Sectors NFEIR (%) Paddy Wheat Cotton Coffee Other crops Tobacco Coconut Forestry Fishing Source: Own calculation based on the formula presented at end note-2 Table-7 presents our results of agricultural sub sectors NFEIRs for the years , , , and It is to be kept in mind that simply high value of NFIER may not have much sense if absolute value of export ie, foreign exchange earnings and the sectoral share of export is not significant at all. All though the export share is not significant for most of the sub sectors of agriculture, yet, we have considered the NFEIRs for only the sub-sectors which have some export performance. We find that many of the agricultural sectors - Cotton, Coffee and paddy, wheat, coconut and fishing have high NFEIR over the period The sector Cotton shows 100 percent NFEIR in the years and and It slips down to percent and further to percent in and respectively. Though coffee had a high NFEIR (100%) in and , the NFEIR of this sector has gradually decreased in the subsequent years (99.99 % in , 99.85% in and % in ). The NFEIR for paddy sector was significantly high for the years (92.20%), (99.89%) and (99.99%). It increased to 100 percent in but again decreased to percent in It is interesting to note that for all the sectors the NFEIR has decreased over the period To get the correct picture of net foreign exchange earnings, sectoral export shares and just industry wise NFEIR s are not enough (particularly, when they are to be assessed from the point of policy making). The concepts of export intensity and direct import intensity may be useful to assess the relative performance of a sector judged in terms of forex earning. Table 08: Export and Import Intensity: Year and Sectors Export Import Intensity Intensity Paddy Journal homepage: 22

7 Wheat Jowar Bajra Maize Gram Pulses Sugarcane Groundnut Jute Cotton Tea Coffee Rubber Coconut Tobacco Other crops Milk, prod Animal serv Oth.livest Forestry Fishing Source: Source: Own calculation based on the formulae presented at end note-3 and 4 Based on the export intensities and direct import intensities of different sub sectors of Indian agriculture presented in table-8, forex intensities are estimated and shown in table -9 to12 We have classified the industries into four categories, the characteristics of each category and the norms of classification are already indicated earlier. Table 09: Category -1: High Forex Intensive Sectors (High export intensity but Low import intensity) None Qualified 1. Tobacco 2. Forestry and Logging Source: Own Estimation based on table-8 As indicated in table-9, none qualified to be high forex intensive sector in But in the year Tobacco and Forestry and Logging emerged as high forex intensive sub-sectors of agriculture. Table 10: Category -2 : Medium Forex Intensive Sectors (Medium export intensity with Low import intensity) Jute 1. Groundnut 2. Rubber 2. Gram Source: Own Estimation based on table-8 We find from the above table that under this category out of two medium forex intensive sectors of , none has retained its place in the group in and all happen to new entrants in Table 11: Category -3: Low Forex Intensive Sectors (Low export intensity with Low import intensity and high export intensity with high import intensity) Gram 1. Milk and milk products 2. Tea 2. Fishing 3. Milk and Milk Products 3. Rubber` 4. Fishing Source: Own Estimation based on table-8 Journal homepage: 23

8 A look into the above table reveals that the sector milk and milk products appears as the low forex intensive sectors in both the years and gram, tea, fishing were the other low forex intensive sectors in the group in In , they are replaced by the new entrants namely fishing and Rubber. Table 11: Category -4: Forex Drainers (Low export intensity with High import intensity) wheat 1. Coffee 2 Animal services 2. Animal Services Source: Own Estimation based on table-8 We find from the table-12 that out of two forex drainer sectors in , only one sector namely animal services continues to belong to the same group in also. While the wheat was the other forex drainer sectors in the group in , in , the new entrants in this group is coffee. The forex intensity pattern of Indian agriculture under liberalization reveals that very few sub sectors of agriculture are high or medium forex intensive. Most of the sectors are either low forex intensive or forex drainers. 6.0 Conclusion In this paper, we have made an attempt to study the impact on economic liberalization in Indian agriculture on rural growth. We know that agriculture can directly contribute to the national economy at least through GDP, employment and foreign exchange earnings. So, we have tried to capture the nature and extent of agrarian crisis during the reform periods from the view point of the pattern of changes of GDP, distribution of labor force and the forex earning potentiality. The main findings of our study are as follows: 1. The Indian economy was moved to higher growth path during the reform periods. But the sectoral composition of GDP growth is not at all impressive. Agriculture has failed to maintain its pace of GDP growth with industry and services in the reform periods. The share of agriculture in total GDP was 32 percent in It came down to 16 percent in Though the share of industry in GDP increased from 17 percent in to 26 percent in , the share of services increased from 51 percent to 58 percent over the period just mentioned. At the economy level, agriculture has become virtually irrelevant to the overall GDP growth especially in recent past. This is mainly due to the faster growth in industry and services. During the reform periods, most of the new investments are made towards manufacturing and services. This kind of structural divergence may hinder rural progress. 2. The share of agriculture in total employment has diminished from 68% in to 58% in The share of employment in industrial sector has remained remarkably small and it has increased only marginally from 14 percent in to 15 percent in Between and , the share of service sector in total employment increased from 18% to 26%. Over the period the share of service sector in total employment decreased by 1 percent only. Further, the employment status of rural labor suggests that it is tending towards relatively more insecure casual labor while self-employment and regular employment show a declining share. Even now, after decades of planned development programmes the share of agriculture in total employment is alarmingly high and this observation itself suggests that the appropriate kind of structural change needed for promoting accelerated development in India is yet to take place. 3. It seems that continuous decline in the share of agriculture in the total GDP and an increasing share of work force depending on agriculture result in decline in labor productivity which leads to higher rates of poverty in rural areas..on the other side per worker productivity in non-agriculture has been consistently increasing during reform periods. This perhaps necessitates the rural non-agricultural activities for overall rural progress. 4. The trend across the states shows that the recent growth is inclusive for states such as Assam, Haryana Jharkhand, Karnataka, Madhya Pradesh and Uttar Pradesh. In some of the advanced states like Andhra Pradesh, Maharastra, Gujrat and Kerala the rural growth is driven mainly by productivity and not by participation. This has also increased the inequality gap in these states 5. For most of the agricultural sub sectors net foreign exchange inflow rate has decreased over the period As far as the forex intensity is concerned, we observed that in no sub sectors Journal homepage: 24

9 of agriculture qualified to be forex intensive. In only two sub sectors namely tobacco and forestry and logging emerge as high forex intensive. 6. In general, our study implies that as more and more time passes, the liberalization gets deepen and the consequences of relaxation of controls is manifested in greater degrees. Agriculture has lost its importance as a significant contributor to GDP. Large employment share of agriculture indicates the structural bottleneck. Forex earning potentiality of agriculture is not worth mentioning. In a word, the importance of Agriculture as the engine of rural growth is being reduced. It seems that time has come to look beyond agriculture for rural progress and in this context the rural non-farm activities may deserve some reprioritization in our development thinking. Notes: 1. The Employment Elasticity has been measured by the ratio of percentage change in rural employment to the percentage change in rural GSDP. 2. Net Foreign Exchange Inflow Rate (NFEIR) is basically the ratio of foreign exchange value of net exports to total value exports of a specific industry expressed as percentage. In symbols, Net Foreign Exchange Inflow Rate, NFEIR = (X i I i)/ X i *100 Where X i = Exports of i th industry and I i = Imports of i th industry. The export and import data have been taken from the Input-Output Tables for the years , , , and published by CSO, Govt. of India. 3. The Export Intensity of a sector is defined as the ratio of value of export of the i th sector to value of total output of that sector. Formally, it can be written as e i = E i/o i where E i = the export of i th sector and O i = Output of i th sector.the export and output data have been taken from the Input-Output Tables for the years and published by CSO, Govt. of India. 4. The import intensity has been calculated by using the Input-Output tables for the years and published by CSO, Govt. of India. As per the standard Input-Output framework if X ij(m) be the Imported input of i th sector to j th sector, X ij(t) be the total supply of input of i th sector to j th sector and X ij(d) is the domestically produced input of i th sector to j th sector, then we may write X ij(d) = X ij(t) - X ij(m). Now, we may define m j = a ij - a ij(d) where (a ij) = (X ij/x j) and (a ijd) = (X ijd/x j) as the direct total import requirement for the j th sector per unit of output. References Ahhuwalia, Montek (1978) Rural Poverty and Agricultural Performance in India, Journal of Development Studies, Vol-14, No-3 Ahhuwalia, Montek S (1996) New Economic Policy and Agriculture: Some Reflections, Indian Journal of Agricultural Economics, Vol-51, No-3 Bhalla, GS and G. Singh (2009) Economic Liberalisation and Indian Agriculture: A State wise Analysis, Economic and Political Weekly, Vol-44, No-52. CSO (2007) Central Statistical Organisation, National Accounts Statistics Desai, Bhupat M, D souza, J Mellor, V.P Sharma, P. Tamboli (2011) Agricultural Policy Strategy, Instruments and Implementation: A Review and the Road Ahead Economic and Political Weekly, Dec-31, Vol-28 No- 53, Pp Input-Output Tables, Years , , , and , Central Statistical Organisation, Govt. of India MajumderN.A (2006) Centrality of Agriculture to India s Economic Development, Economic and Political Weekly, Jan-7, Pp Nayyar, Deepak and AbhijitSen (1994) International Trade and the Agricultural Sector in India, Economic and Political Weekly, Vol-19, No-20 NSSO (2006) Employment-Unemployment Situation in India, Report No-515, 61th Round (July 2004 to June 2005) Reddy D. Narashima (2006), Economic Reforms, Agrarian Crisis and Rural Distress, Prof. B. Janaradhan Rao Memorial Lecture, Dept. of Public Administration and Human Resource Management, Kakatiy University, Warangal, Andhra Pradesh, India Journal homepage: 25