Nearly a quarter of a century after India launched its first big liberalizing reforms in 1991, setting off a new spurt of growth, one area of the country's economy remains hardly touched: farming.
Prime Minister Narendra Modi launched a 24-hour state-run TV channel for farmers in May but has fostered no public debate about how to improve India's dreadfully backward agriculture.
About 600 million Indians, or roughly half the population, depend upon growing crops or rearing animals to survive. Many farming practices, along with India's agricultural markets, infrastructure, insurance and rules on leasing land, have barely changed in decades. Reform is long overdue.
On the surface, things do not look too bad in the countryside. Rural poverty has fallen sharply in the past 15 years. Yet this is because such services as selling mobile phones or motorbikes have boomed across India. It has also helped that previous governments greatly increased welfare spending in the countryside.
But the productivity of farming itself has been woeful. Contributing just 13.7 percent to Indian GDP, agriculture has grown by around 3 percent a year in recent years, far slower than the rest of the economy.
Farmers' woes have recently made headlines again. In the spring, unexpected rain damaged northern wheat. A summer heat wave has killed more than 2,000 people in India — mostly those toiling in fields in the south — as well as hundreds more in Pakistan. And a run of farmer suicides has drawn national attention. Official concerns linger over the monsoon: rains may fall short, for the second year in a row. Since three-fifths of Indian farmland lacks irrigation, patchy or weak rainfall can spell disaster.
Rural incomes are already under strain. One reason is volatile prices. Farmers near Delhi, the wealthy capital, are getting as little as 2 or 3 rupees (4 or 5 American cents) per kilo of potatoes, a quarter of last year's price. Cotton farmers who had prospered from strong exports to China have recently been hit by weaker demand. The government has bought millions of bales to shore up prices.
Another reason for lower rural incomes is the decision Modi made a year ago, soon after coming to office, to cut the minimum government support-price for staples, notably wheat and rice. It was the right move and has since helped bring down inflation. But it should have come with more transitional support for farmers hurt by the adjustment. On June 17, a new, only slightly higher, minimum price for rice was set for the coming year.
Low productivity is a bigger long-term problem. One cause of this is the shrinking size of cultivated plots. As India's population expands, the average plot size has fallen from nearly 5.7 acres in 1970 to under 3 acres today. Two grain harvests a year are common, but India's yields are low by global standards.
Productivity is also held down by state laws limiting the amount of farmland a single person may own. Even leasing land is famously hard, since strong tenancy rights discourage owners from renting out fields.
A newly completed but not yet published report for the government on reforming agriculture, led by Ashok Gulati of the Indian Council for Research on International Economic Relations in Delhi, is likely to blame politics. Food inflation upsets voters, so politicians respond to sudden spikes in food prices by imposing national export bans. Regional politicians do something similar. When potato prices soared in West Bengal last year, the state banned traders from shipping potatoes to other states. Amid such uncertainty, farmers are disinclined to invest or specialize.
Price swings are exacerbated by a 1955 law that bans the storage of large quantities of any of 90 commodities, including onions and wheat. The aim was to deter "hoarding." The effect is to discourage traders or farmers from investing in cold storage and warehouses. So lots of crops rot before they reach a plate, and prices swing erratically. If a bumper crop can neither be exported nor stored, the only way to sell it is to slash prices.
Agricultural markets are fractured and distorted. Across much of India, state marketing boards known as Agricultural Produce Marketing Committees (APMCs) restrict trade in fruit and vegetables. A trader in Delhi, for instance, is not allowed to bid for coconuts in Karnataka. It is often easier to import from abroad.
Gangs of local commissioning agents squeeze farmers like ripe mangoes. The mandi, or marketplace, in Azadpur on the edge of Delhi is said to be Asia's largest for fruit and vegetables. Enormous trading houses are piled high with garlic and potatoes. Presiding over all are plump agents sporting gold chains. Many are the fourth generation of their family to hold the license to do the job. They add little value, but admit to taking a hefty 6 percent commission on sales. In other markets, fees are reportedly as high as 14 percent.
Gulati suggests the international norm for commissions is more like 0.5 percent. The state government in Delhi is trying to scrap the local APMC's monopoly, but there is a lack of available land to open a rival marketplace.
Many farmers struggle to obtain finance. Agricultural banks are notoriously corrupt. State aid for small farmers is skewed toward providing cheap inputs — by subsidizing the provision of fertilizer, water and electricity — rather than, for example, helping to insure farmers' crops against bad weather or natural disaster. If it cut the input subsidies, the government could help with insurance. Or it could help poor rural folk by simply giving them cash.
Farmers would welcome some reforms, such as cutting the power of middlemen but would resist others, such as lifting ceilings on land holdings. They worry that this would allow them to be pushed off their land by the rich and powerful.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.