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RESERVE BANK OF INDIA COLLEGE OF AGRICULTURAL BANKING UNIVERSITY ROAD, PUNE 411 016 OVERVIEW OF THE AGRICULTURE AND

RURAL SECTOR 1. INTRODUCTION

The health of the Indian economy is closely linked to that of the agricultural sector. Agriculture constitutes about 22 % of the GDP of the country and hence a drop in agriculture production by 4.5 % will necessarily translate as 1 percentage point drop in GDP. But the impact does not stop there. There are several demand and supply side linkages that are affected by the changes in agricultural production. Since 70 % of the population are directly or indirectly dependent on agriculture, their purchasing power is determined by the performance of the sector. Thus increases in agricultural production will mean increased rural income that will then result in greater demand for the goods and services produced by the secondary and tertiary sector. Positive correlations with increase in farm income have been established through studies in the case of sale of large variety of products like shampoos, soaps, bicycles, televisions, radios etc. On the supply side, increased agricultural output naturally results in more marketable surplus of cereals, fruits, meat, eggs, vegetables etc. and appear on the plates of both rural and urban consumers in larger quantities. The increased output also result in lower prices, due to several reasons like perishable nature of agrarian products, the need for money, the propensity to convert produce into cash, the lack of storage facilities, seasonality of markets, etc. While this phenomenon will result in a less than proportionate increase in the income of farmers, (in relation to the increase in production), it may result in increase of real income of net buyers of agricultural produces. Thus, both the farming community as well as the net buyers of food shall have increased disposable income to spend on non-agricultural products. In addition to such inter sectoral linkages, agriculture also provides raw materials to several industries like sugar, jute, cotton textiles, oil, milk products, fruit and vegetable based industries etc. Abundant availability of raw material at lower costs will result in higher production in the secondary and tertiary sectors. Thus the developments in the agricultural sector influences the performance of the other sectors directly. While increase in agricultural income creates buoyancy in other sectors, depressed income levy a heavy toll. The demand for goods automatically reduce. But, since production systems in the secondary and tertiary sector has to carry significant element of fixed costs, either it will lead to industrial sickness or rise in prices. On the other side, when agricultural income increase, large numbers of marginal and small farmers are able to move from thrift to real savings, which improve risk taking ability. Thus, if agricultural income can be increased on a sustained basis, the conditions for entrepreneurial development, adoption of better farming techniques, etc. will improve. This will eventually
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cause the migration of population from farm sector to non farm sectors. It will also result in better wages to those who continue to depend on agriculture. 2. OVERVIEW

Any analysis of the status and prospects in agriculture brings into stark focus the dominance of the small and marginal farmers. These households also constitute the bulk of the rural poor in our country. It is seen that significant level of increase in income may not be achieved by improving the yields in their small operational holdings. This is the result of two factors. One is the fact that possible rise in yields in the existing crops will not result in any substantial increases in income. The second factor is that the small holdings do not render itself to exploit much of the technology and sophistication that has brought rich dividends to the larger farms with the same crops. There is thus an imperative need to expand the base of the rural economic activities of these farmers. They will have to find economic activities beyond the crop production activity, which will increase employment and income. Such grass root level diversification will result in making the small and marginal farmers economically viable. With India refocusing its attention on agriculture, and with a deepening recognition that only a vibrant agriculture sector shall sustain the robust growth of the secondary and tertiary sector, all major institutions directly or indirectly linked to development have to pick their lessons from the issues and the prospects of the agrarian sector. Dominant institutions in the financial sector like the banking sub sector, will have to reorient their business processes to meet the challenges posed. In this context, the average banker also needs to expand her/his comprehension and perspective of changes needed and emerging in the agrarian economy of our country. Despite the passage of almost 5 decades of planned development (including the 10th plan terminating in 2007) and a plethora of programmes, the Indian agriculture continues to be beset with the most basic problems germane to least developed economies. The most significant feature is the population dependency. Table 1: Population dependency and per capita GDP in primary sector Particulars 1950-51 1980-81 2003-04

Agriculture share in GDP 57.7 39.78 22 Population dependent on agriculture % 77 70 67 Estimated population dependent on agriculture (crore) 28.5 59 71 Per capita sector contribution to GDP (approximate) 2991 4096 7850 Rs. The absolute numbers dependent on agriculture, in fact, have increased by 2.44 times between 1950-51 and 2003-04. It is empirically clear that the pattern of GDP expansion in both the tertiary and secondary sector has not facilitated shifting of population from primary to other sectors. One major reason is that our secondary sector which would have supported agriculture
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and rural sector activities never expanded in any significant manner as shown below. This is evident as we look at the contribution of the secondary sector to GDP across time. In 195051, the sector contributed 14.8 % which increased to 23.7 % in 1980 81, and decreased to 16 % in 2003-04. A rapid and substantial expansion of such activities would have resulted in three fold benefit to the agriculture sub system in addition to creating structural employment: (1) Manufacturing sector dependent on agricultural sub sectors for raw materials would have resulted in large scale increase in the production. This would act as incentive for positive action for yield improvement in high value crops amenable for use as raw material for processing and manufacturing. Generally speaking, the high value crop returns more income per unit area on the one hand and is labour intensive in comparison to grains on the other. This means that both the farmers and the farm labour gets to enjoy more income. The expansion of the secondary sector, particularly those sub sectors interlinked with agriculture outputs and rural labour would have resulted in the sectoral migration of population from primary to secondary.

(2)

(3)

The paradigm of development in India saw bypassing of the manufacturing sector and rapid expansion of the tertiary sector. Even within the tertiary sector, the sub sectors that provided greater impetus to the GDP growth absorbed only highly educated and technically skilled individuals. An explicit example of this is the Information technology sector which is expected to grow at geometrical proportion from Rs.87000 Crore in 2003 to Rs. 247000 Crore by 2008. The Indian rural population was virtually by-passed in participating in the growth of these sectors. An analysis of this phenomenon is beyond the scope of this paper, but the need to take a hard look at the paradigm of growth cannot be gainsaid. The second feature leaving India far behind the developed world is the continued severe incidence of seasonal unemployment and under-employment in agriculture. Unfortunately, increasing the production and productivity may not make any significant dent in this situation. This is because the pattern of employment will not change. Studies have shown that the rate of increase in employment ranged from 0.4 to 0.5 with one percent increase in output. It is also to be appreciated that the past half century witnessed the near total collapse of the joint family system. The result is the continuing fragmentation of agricultural holdings. The average holding size has shown a steady decline over the years. It is evident that the advantages of scales are not available to the vast majority of the farmers. This, automatically, through pure economic logic, result in depressed earnings in the sector due to low productivity. Monoculture is another contributory factor chaining the sector to its underdeveloped bedrock. In spite of innumerable plans and programmes supporting irrigation, only 40.5 % of the net cropped
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area in the country is irrigated. The cropping intensity has only marginally improved, but remains much below what is possible with assured moisture availability. Table 2. Net cropped area and Irrigated area 1950-51 118.75 NCA 20.85 Net Irrigated area [A] 131.89 Gross Cropped Area [B] 111.10 Cropping Intensity [ B/A %] Land use data : Ministry of Agriculture , Govt of India 3. DIVERSIFICATION Particulars 1980-81 140.00 38.72 172.63 123.30 Million Heactare 1999-2000 141.23 57.24 189.74 134.30

While bulk of the agrarian/rural economy is subjected to symptoms of underdevelopment as stated above, there are several sub sectors which are making strides of progress. The advent of the reforms with liberalisation, and globalisation as its major planks, have brought many changes in the demand pattern for goods and services. It is seen that the Indian consumption basket is now getting richer in fruits, eggs, milk, meat, processed foods etc. in addition to cereals. This shift in demand is seen not only in urban and semi-urban, but also in rural areas. This provides us an insight into the segments available in markets. The changes in the consumption patterns and the emergence of several market segments give rise to possibilities for diversification of products and services, including in agricultural sector. The major drivers of such diversification in agriculture can be divided into demand side and supply side drivers. Demand side Drivers i. Urbanisation

Several studies reveal that the production pattern undergoes changes in the urban, near urban and rural areas. Studies by Parthasarathy et al (2002) shows that the production of fruits and vegetables are more in areas proximate to urban and near urban areas as compared to remote rural areas. ii. Education and Exposure

With increased awareness, there is a developing market segment looking for healthier diet, processed foods, better quality of every day consumption items, etc. There is, in fact, the desire to realise push demand" in several segments of the rural market, which offer opportunities for diversification of products including agricultural produces.

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iii.

Income Levels

The increasing rural income also tend to both increase pull demand, make the realisation of push demand easier and also create new market segments. Supply side Drivers i. Infrastructure

The growth and development of infrastructure provides better facilities, access, costeffectiveness etc. leading to favourable conditions for diversification. Such infrastructure include roads, water and irrigation, markets, energy, financial service providers, extension mechanism as well as network of outlets, information technology, transport, storage etc. It is obvious that there is a cyclical relationship between the development of infrastructure, the diversification of products and services and expansion of demand. ii. Changes in Technology

The access to post harvest technologies is another important driver for diversification and value addition. The improved shelf life, quality and better prices trigger this diversification. iii. Relative Profitability

As the markets get segmented, and access to technology improve, the choices for agricultural production also improve. Based on the profit potentials, even small and marginal farmers are able to choose cropping patterns and crops. Thus, the potential profits act as catalyst for diversification. iv. Small Holdings

The presence of very large number of small holdings abetted by the continued shrinkage in the average holding size propel small and marginal farmers to take up subsidiary activities to smoothen income curves. This stimulates the search for diversification of enterprise, both farm and non farm sector as well as the search for employment. Both the factors positively impact diversification. However, there are also several constraints in accelerating the process of diversification in agriculture sub system. 1. Some of the drivers for diversification have been discussed above. It is evident that the availability of several favourable conditions are necessary to speed up the process. This results in the emergence of pockets with accelerated development (read diversification) based on the conditions prevailing. Thus diversification is not taking place on an equitable basis.
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2.

High transaction costs are another reason for the slow down in diversification. These transaction costs can be tracked to losses in post harvest handling, costs due to remoteness of market access, costs on borrowed capital, particularly due to dependency on informal sources etc. For example, it is estimated that approximately 10 - 15% of the food grains produced is lost (i.e. about 25 m. tons). The estimation is much higher at 30 to 40% in fruits and vegetables.

3.

Lack of Infrastructure : Similarly micro level studies show that the lack of market access lead to distress sale of market surpluses. Though 54% of marketable surplus is estimated to be contributed by small and marginal farmers, it is empirically seen that about 50% of such surplus is subjected to distress sales. The causes of this are many - lack of market, poor access, lack of institutional support, poor access to technology, lack of storage, lack of alternative income sources etc. are some of the reasons. THE CHANGING AGRICULTURAL SCENE

4.

Signs of Transition Parallel to the underdeveloped segments there is also emerging vibrant, pro-market sub sectors in agriculture. While the underdeveloped segment demand a deep understanding from a developmental point of view albeit linked to inter sectoral dynamics of growth, the emerging sectors ask for different competencies. These revolve around in-depth understanding of market forces, domestic and international demand, competition and price, cost-effective technologies, internal competencies, etc. Linkages with institutions involved in development of these sectors, access to sector based current information etc. are also necessary. It will be seen that those engaged in agriculture/rural sector financing is expected to have widely divergent capabilities and skills. The emerging changes are discussed in brief below. (i) Dietary Mix Changes

It is seen that with increase in per capita income in general and emergence of pockets of moderate to greater affluence in particular the dietary mix and its flavour of the Indian consumers is changing fast. It is seen that there is significant growth in the consumption of meat and egg, fruit, milk and vegetable as shown below. The change is much more pronounced in the case of all rural consumers.

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Table 3:

Changes in Dietary Mix

Kg. Per capita Low Income Group1 All Rural Consumers2 1983 2000 % Growth 1983 2000 % Growth Meat and Egg 1.9 3.8 100 % 3.9 6.7 72 % Fruit 1.6 4.2 163 % 2.8 9.6 243 % Milk 15.7 20.5 31 % 37 63 70 % Vegetables 36 54 50 % 46 74 61 % 1 2 Source : Kumar and Mrutyunjaya 2002; NSSO 1999-2000 Similar trends are available for urban centres too. In addition to the changes in the commodity off-take, the urban and to a limited extent, the near urban markets are showing segmentation linked to prices and quality. (ii) Export of high value commodities

The sector is also witnessing a massive expansion of exports of high value commodities. Table 4 : Growth in Exports 1981-82 1991-92 % Growth between 8182 and 91-92 164 % 5% 9% 44 % Exports in Million USD 1999-00 % Growth between 91-92 and 99-2000 25.3 12550 % 145 21 % 198 150 % 263 119 % 1125 144 %

Egg Processed Fruits Meat Fruits and Vegetables Fish

0.4 45 75 110 320

0.2 119 79 120 461

The expansion of exports creates opportunity for linked development of several areas like storage and transport infrastructure, cold chain, packaging, quality control, technology, technical skills, marketing arrangements etc. All these areas have high investment potential. (iii) Expanding Food Chain

With changes in consumption basket, the production mix induced by various drivers, the expansion of exports, segmentation of markets etc., the food chain is also expanding. This is on account of higher degree of processing, grading and packing. (iv) New Production - Market linkages in food supply chain : Contract Farming

The production - market linkages has hither-to been dominated by middlemen, regulated markets or agricultural/produce cooperatives. Contract farming is currently developing into an efficient
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link with the added advantage of potential to vertically integrate small and marginal farmers with markets. Contract farming has several specific advantages like : (i) assured procurement (ii) minimisation of production risks (iii) reduction in risks related to marketing (iv) adoption of new technologies (v) promote shift of input delivery and agricultural extension system from public to private sector. (vi) Help generate employment opportunities in the rural and near urban areas, thus checking rural - urban migration (vii) Improve income through increase production and yield (viii) Reduce transaction costs Reduce price margins between producers and consumers and in raising farm gate prices.

Prepared by Shri C.P.Mohan, Member of Faculty College of Agricultural Banking, Reserve Bank of India, Pune - 411016

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