The case of agricultural diversification in India


Atul K Thakur | June 18, 2012

The decline in the share of agriculture in India’s GDP has been rapid in the post-liberalisation era; despite the fact that the growth of agricultural income during the 1990s has been marginally better than the corresponding rate of growth in the 1980s. Growth in agriculture stagnated towards the end of the 1990s and has decelerated thereafter. In this context, the composition of income from agriculture and allied sectors of the economy has been suited.

Agricultural diversification has been achieved as a larger area of land is now utilised for the cultivation of high value crops. With trade liberalisation, the relative prices of exportable commodities have increased rapidly and those of importable commodities have comparatively decreased. In the short run, a continuous increase in the relative price of a commodity enhances its production more often by substituting it for importable commodities without any statistical effect on the cropped area. As a result, the share of exportable commodities has increased in the total value of agricultural output.

Here it would be apt to rely on a study based on alternate measures (namely the Simpson index) of diversification for understanding the state of affairs and concentration of non-food crops on several factors such as income, land distribution, irrigation intensity, institutional credit, road density, urbanisation and market penetration. Regression analysis suggests that increased road density and urbanisation encourages commercialisation of agriculture and with commercialisation, farms in a region are increasingly specialised in the production of certain crops and crops-groups as per the resource infrastructure and institutions of the region.

Considering the multi-dimensional importance of agriculture diversification, it is important to understand the drivers of agricultural diversification in the country. Changes in the relative prices of corps have influenced the crop enterprise mix immensely. Price is basically a reflection of the demand and supply situation. In a closed economy, the prices that farmers receive alternately, farm harvest price is influenced by the minimum support price (MSP) and the MSP has been influencing acreage under crops. But in several growing economies, MSPs for agricultural commodities have been increased in recent past. Apart from contributing to food price inflation, this increases the spread between prices paid to producers and subsidised prices charged to consumers, fueling the fiscal burden. Since MSPs need not always extend to all agricultural commodities and public procurement need not cover all commodities either, this creates perverse price signals and distorts resource allocation. 

Triggered by food price increases, there have been interventions on the consumption side, including price controls, consumption subsidies, food aid, food for work arrangements, cash transfers and the elimination of taxes on consumption across a range of countries. Are these fiscally sustainable? Do they lead to additional distortions? Do they lead to supply-side adjustments or are they knee-jerk reactions? But in India’s case, agricultural diversification has not affected much through the price rise or policy response directed on that —so the case of agricultural diversification remains positive in India.

The per capita income is hypothesised to affect the diversification as measured with the percent of non-food crops in either way. The non-food crops more specifically, fruits and vegetables are increasingly recognised as a new source of growth in agricultural income. On the other hand, an increase in the per capita income is the cause of a shift in consumers’ preferences from staple food items to fruit and vegetables. Such changes in the dietary pattern are the causes of a diversification in the production portfolio. This implies a positive effect of income on the percent of gross cultivation areas (GCA) under non-food crops in the country.

The size and the quality of land has always been an important factor in agricultural production relations. The average size of operational holding is often considered an important determinant of crop diversification. These variables are supposed to have a negative effect on diversification indices. Many populous states of India such as Bihar and UP are witnessing the growth of small size of farmland, which is affecting productivity and income involved with this. After an extent, the role of technology in improving productivity while alternately reducing the unit cost of production and conserving natural resources cannot be overemphasised. Thus, land management is the need of hour to sustain the welcome pattern of agricultural diversification.

The growth in agriculture during the 1990s has widened rural inequity. Leakage in the rural economy has increased with the inequitable growth of income in the system. Some of the increased leakage in the rural economy is also associated with the kind of growth of manufacturing and how the process of rural development is being handled by the (state) governments and policy agencies. Consequently, it’s evident that very few policy measures are properly responding to the haunting problems in rural areas under the inefficient local administrative machinery that instead forward the pace of implementation of central plans and create many bottlenecks for stretching the project for all wrong ends.

A forward looking, speedy metamorphosis of India’s bottom tier administration would be the pre-imminent step for retaining agriculture as an occupational option and further for thinking of carrying on with its bright materialistic side that comes through diversification and knowledge based farming.



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