How's India's Economy Going to Grow Now? Look to Its Farms

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Agriculture is offering the country a plausible way out of the doldrums.


Indian-Farmer-Banner.jpgMustafa Quraishi/AP

Its economic growth is stalling. So it may be time for India to squeeze more productivity out of its large, poor, sleepy and over-subsidized agricultural sector.

Unlike China, India forgot to urbanize, researchers at Gavekal point out in a note.  And the first step of urbanization should have been land reform. Industrial economies often get there by handing farmers control of their land. This encourages agricultural workers to  save, invest and eventually become rich enough to send their children to university and perhaps move to the cities themselves.

Yet India, Gavekal's Will Freeman writes, remains a land of "tenant farmers, who are little better than serfs, have low entrepreneurial potential and limited labor mobility."

Nearly 70% of Indians still live in the countryside and more than half are farmers, Freeman elaborates. And India's farmers are less productive than those in Thailand, Malaysia, Vietnam, China, Japan, and South Korea.

India, he argues: "remains saddled with a huge pool of unproductive rural labor that cannot contribute to sustainable savings growth and therefore industrialization."

But he has a few suggestions for what India can do next:

1. Open up the land market

According to Freeman, India's failure to redistribute land is one of the primary reasons it has not sustained high speed economic growth.

Freeman points out that most farmers have short-term, unofficial contracts with big landowners where they get to work the land in return for handing over a portion of their crop.   Only around 30 per cent of Indian land is formally tenanted. So agricultural workers have little security and lack the funds or incentive to invest and raise productivity. If the government enabled farmers to have secure land titles and contracts, they might buy modern equipment.

Land leasing also increases "diversification into non-agricultural employment," Freeman argues, presumably as making real money from their land means farmers can save up to send their children to high school or university.

2. Or at least fix the roads

Gujarat, a state in Western India, is one place that is hiking agricultural productivity without land reform, Freeman says. The government's solution was to tackle India's perennial problem with rural roads, which as this World Bank note shows would have been quite an achievement.

In the decade to 2010, Gujarat had near 11 per cent compound annual average growth in agriculture--more than two and a half times the national rate. Freeman writes that first, the government focused on infrastructure, for example ensuring villages were connected to the road network with decent paved roads. Then the state encouraged private investment in agriculture but did not interfere too much. The result, according to Freman, was "robust road and irrigation construction and the diversification of agriculture into genetically engineered cotton, livestock, and cash crops like fruits and vegetables."  He continues: "The state has rightly gotten out of the way of the private economy and instead focused on areas where it is more useful, particularly infrastructure."

3. Then cut wasteful subsidies and control the middlemen

Instead of reforming infrastructure and land tenancies, Freeman writes, India has "has dumped its cash into deeply flawed systems of subsidizing fertilizer, power and water, as well as price supports."

Over the last decade, the Gavekal analyst continues, "India's minimum support prices for major crops have risen by roughly 40% and food subsidies have more than tripled."

According to this report, sometimes India's subsidies do not make it into farmer's pockets.

Madhya Pradesh, a state  in Central India, has cut marketing middlemen out of the grain sector and created large physical marketplaces for farmers to attend, Freeman reports. The state also ensured that farmers receive the promised state price for their grain, resulting in a 70% increase in yields between 2007-2012.

This state and Gujarat are exceptions to the rule in India, Freeman writes. But their examples, as well as land reform, are what India needs to "spur private investment and agricultural growth".

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Naomi Rovnick is a Quartz correspondent based in Taiwan. She is a former senior business writer for the South China Morning Post and she won a 2011 Society of Publishers in Asia award for excellence in business writing.

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