INDIAN FARMER AND FDI

AMONG THE fascinating aspects of economics is the tendency for events or actions in one area to have a significant impact on a seemingly distant and unrelated area. Recall the events of the years leading up to 2000 — the developed world was in a panic over the authoritatively predicted collapse of all computerised systems at the dawn of the new millennium. No such thing happened, but the scare led to the worldwide recognition of India's strengths in the IT sector and India becoming a major IT player.

Sometimes, the only solution to a major problem in one area lies in a seemingly unrelated area — rather like an acupuncturist inserting needles in one's feet to alleviate migraine. Such is the relationship between the economic welfare of India's farmers and foreign direct investment in India's manufacturing and service sectors.

India's farmers and farm labourers are among the poorest in the world. Since Independence, all governments, some more than others, have directed considerable resources and effort at improving the economic well being of farmers. While these actions have all been essential, they have ignored the only reliable means of achieving the objective.

Farmers deal with just a few simple economic equations. To increase their production, they must increase their productivity and that of their land. That done, they rely on price increases to increase revenue. They and their families provide the labour, augmented by that of farm labourers. Water, their primary material input, is essentially free. So is electricity and fertilizers are subsidised. So, their focus is perforce on the revenue equation. Opportunities for upgrading the product mix are ephemeral in the aggregate. Hence, their attention must be focused on yields and prices.

The growth rate in farm yields has been declining from a level of over 2 per cent a year, although the potential is clearly greater. The multi-decade trend in the real (above the general rate of inflation) prices of agricultural commodities has been markedly negative (FAO report, 2004) and it would be highly imprudent to bank on its reversal. This negative trend more than offsets the actual or potential positive trend in yields, resulting in a declining trend in real revenue. The Indian agricultural sector, taken as a whole, has no sustainable, long-term prospect of increasing its revenue in real terms. Yet, our governments persist in what promises to become a relentlessly Sisyphean task before too long.

The situation is even more stark at the level of the individual farmer. Cultivated land in India amounts to some 165 million hectares, spread over 116 million holdings, and is operated by about 130 million cultivators and 110 million labourers. The average holding is thus 1.4 hectares. For the 99 per cent of holdings that are below ten hectares, the average is 1.2 hectares. This minuscule farm has to support about 6.5 people on average. Since such a farm will be hard pressed to generate annual revenues exceeding Rs. 30,000, over six people have to be supported on under Rs 2,500 a month, supplemented by such non-farm work as may be available.

Shrink the number of farms


I submit that the only resolution of the plight of the Indian farmer is to get him out of the farm; to keep him there is to sentence him to dire poverty. Far fewer calloused agricultural hands than now can feed India sumptuously, if they could afford the necessary machinery. They could, if the average farm size were to increase dramatically, not by increasing total farm acreage, but by deliberately and methodically shrinking the number of farms.

The average textile worker in India earns more than Rs 60,000 a year in wages, bonus and benefits. The average automotive industry worker's income is double that. On such incomes, these workers support households of about five people. For the smaller Indian farmer to reach such per capita income levels, the size of his farm will nearly have to quadruple. The number of households dependent primarily on agricultural income will have to drop by almost 75 per cent.

What happens to all these displaced farmers and labourers? Opportunities will have to be created for them in the manufacturing and service sectors. The average invested capital per manufacturing worker is over ten lakh rupees. Despite the service sector's lower capital intensity, the total investment required to engineer such a tectonic shift in the workforce would exceed a hundred trillion (100,000,000,000,000) rupees, excluding the associated investment in infrastructure, education and training. India cannot muster such massive savings on its own; we will have to rely on those of foreigners. We will have to throw open our doors to foreign direct investment and welcome it wholeheartedly.

(Sourced from : www.thehindu.com)