True inclusive growth requires longterm vision for agriculture by HIMANSHU

The euphoria about the better-than-expected farm performance in the current agricultural year may be short-lived. The drought may not have had the impact that most of us feared, but has still been instrumental in putting agriculture back on the agenda. As if the erratic monsoon was not enough, the massive failure on the price front at the consumer and producer end will be difficult to ignore whether in relation to growth or food security and livelihood.

It is obvious that agriculture is in crisis but it would be pre- mature and naive to blame this on the monsoon failure.
The crisis is deep-rooted and is a result of years of neglect, especially in the last decade or so.

Given the declining share of agriculture in the gross domestic product (less than 17% last fiscal), this may not be worrying to those who judge its value in terms of this con- tribution. But things get more complicated from the point of employment, livelihood and food security.

Agriculture remains the big- gest employer, with more than half of the Indian population depending on it for livelihood.

However, its share of total investment is ridiculously low at around 7%, having dropped from an average 10%-plus during the National Demo- cratic Alliance regime and around 20% in the beginning of the 1980s. Although there has been a recovery in abso- lute terms since the United Progressive Alliance took over in 2004, in real terms, public investment in agriculture has remained less than what it was in 1980-81. It has in- creased by an average 2% per year in the last 27 years, less than the average rate of growth of agricultural output.

But the neglect in financial investment and allocation is only part of the story. In the last two decades, there has been a collapse of extension services, which are meant to educate farmers on the latest research and techniques to help them raise productivity.

In the Situation Assessment Survey of Farmers in 2002-03, only 8% said they had re- ceived information from ex- tension services or through government demonstrations.
The slump is linked to the de- cline in the agricultural re- search system, which has suf- fered as a result of under-in- vestment and technological stagnation.

The mismanagement on the price front comes on top of all this. The situation has been worsened by political inter- vention in agricultural pricing, particularly in foodgrains such as rice and wheat. As men- tioned earlier, the procure- ment and public distribution systems aren't helping pro- ducers or consumers. The dra- ma surrounding sugar cane pricing was only one aspect of this. While farmers struggled to get remunerative prices for sugar cane and consumers paid through their nose, the sugar mills saw profits surge.

The net result has been the deceleration in yields and in- creased vulnerability to weather fluctuations. Between 1999-2000 and 2007-08, the average rate of growth in yields was 1.3% for rice and 0.1% for wheat. On the other hand, the yield in pulses de- clined at the rate of 0.2% per annum and that for sugar at 0.4% per annum. The only major crop which saw yields increase by more than three times in the past five years is cotton, thanks largely due to the adoption of Bt cotton.

Compared with this, rice yield grew at 2.7% in the 1980s, wheat at 3.4%, pulses at 2% and sugar cane at 1.2%.
Naturally enough, total annual foodgrain availability has de- clined from 186.2kg per head in 1991 to 160.4kg per head in 2007.

Fortunately, agriculture is back on the agenda. Not be- cause of the farmer's plight but because of food price in- flation, which is fuelling gen- eral inflation that has now gone beyond acceptable lim- its. This is despite the farmer putting up a much better per- formance than expected. Un- fortunately, the government has mismanaged the food economy so badly that even increased production is of no use. How else does one ex- plain the fact that vegetable production has increased 5% but vegetables remain the driver of food price inflation?

Of course, there are limits to what we can expect from the Budget. Partly because ag- riculture remains a state sub- ject and very little can be achieved unless states also contribute.

But at the Central level, some urgent measures are needed, among them a step- up in agricultural investment, particularly in irrigation in dry-land areas, research and extension. Secondly, there has to be an increased effort to re- duce regional inequality with particular attention to the eastern states and dry-land ar- eas. Third, there is an urgent need to reform agricultural marketing, including a revamp of the Agriculture Produce Marketing Committee Act.

Finally, there has to be a concerted effort in managing the food economy, including changes in the procurement and public distribution sys- tems. There is no better time than this to enact the National Food Security Act.

While these are some of the short-term measures that may be essential, there is an urgent need to have a long-term vi- sion for agriculture and farm- ers for inclusive growth. And that includes a strategy for im- proving the profitability of ag- riculture. This is not only es- sential for maintaining the growth rate of the economy but is necessary if there has to be any meaning to the agenda of inclusive growth. How can one think of inclusion if more than half the population is ex- cluded from the growth pro- cess?

Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

COLUMN -EXPERT VIEW - Basic economic freedom: why can't we get it done?

by BINDU ANANTH & NACHIKET MOR

In a country of 1.2 billion individuals, if we exclude children, we should at
least have 900 million bank account holders before we can say the job of
basic inclusion in banking is complete. No matter how we count, however,
the actual number of bank account holders do not seem to cross 200 million.

This is appalling to say the least--and may also, in part, explain why we
escaped the subprime crisis; many people were simply outside the financial
system. The real mystery is why this should be the situation at all?
India has a concentrated banking system, which means that if five
individuals decide that this needs to be done, it will be done. These five are
the finance minister, the Reserve Bank of India (RBI) governor and the chief
executives of the top three banks. Prompted by proactive statements by the
finance minister in his 2006 budget speech, RBI allowed banks the use of
business correspondents to expand rapidly their outreach in a low-cost
manner.
(Business correspondents are intermediaries who carry out banking functions
in villages or areas where it is not possible to open a branch.) The technology
and the onground capability to make this possible with virtually no frauds,
complete with smart cards and fingerprint readers, came soon thereafter and
have existed for a while now. Most major banks-certainly the top three--have
acquired full familiarity with the system, and are using it, though in isolated
pockets, producing a daily issuance rate of at least 50,000 new accounts and
300,000 transactions.

Brazil, using similar legislation and far more primitive technologies, was able
to go from financial access statistics similar to ours to over 80% penetration
from 2000 to 2005. Given that all the enablers are in place in India, why are
we dragging our feet? Why has this effort reached out to only around 10
million individuals in the last three years against the 900 million that it
needs to?

One issue that has clearly emerged as a barrier is the cost of providing this
service and, more importantly, who will bear it. To provide business
correspondent access at each of the 300,000 gram panchayat (village council)
points, we estimate a one-time cost of around Rs1,000 crore (including the
provision of biometric readers) and an annual recurring cost of around
Rs4,000 crore for the 300,000 business correspondents (one for each
panchayat).

There is a potential additional cost on smart cards that may be needed if the
USO (universal service obligation) fund available to the telecom sector is
unable to provide reliable Internet connectivity to every gram panchayat;
with in excess of Rs18,000 crore at their disposal, in our view, this
connectivity is something the telecom sector should be able to provide, or, in
the interim, use USO funds to pay for the smart cards.

This estimate is indeed a large number, and on the face of it, represents a
barrier. However, on closer examination--even if we discount the considerable
value-add for the 900 million citizens when they get such an account (such as
a far superior transmission of monetary policy and far better allocation of
systemic savings) and the enormous expansion in the opportunity set for
multiple stakeholders across the country--there are several directly connected
sources of revenue that each of the stakeholders could put on the table to
defray these costs, obviating the need to play musical chairs.

RBI with close to Rs7 trillion of issued currency notes alone makes in excess
of Rs45,000 crore (estimated using an interest rate of 7%) annually from
what is referred to as seigniorage--the net revenue derived from the issuing of
currency.

This high income is almost directly a result of the need to hold a large amount
of cash. On the over Rs4 trillion of annual payments (at a 5% saving in the
cost of making these payments), the Union and state governments alone
stands to benefit up to Rs20,000 crore annually if these payments become
completely electronic. Banks with over Rs5 trillion of demand liabilities
(deposits) raised at very low costs on account of controlled interest rates on
them (controls designed specifically so that they may be able to pay for the
provision of financial services to unprofitable areas) would have a
guaranteed profit of Rs15,000 crore on a 3% annual savings in the cost of
resources, apart from the substantial profits from lending to at least a
fraction of the newly banked customers.

If RBI, for example, were to take the lead and agree to directly pay the
business correspondents Rs50 for every account that is made available by
them, the annual sum of Rs4,500 crore that this amounts to would reduce its
seigniorage income by less than 10%. If it chooses to, it could also recover this
amount using various instruments at its command from the government and
the banking system.

Some state governments currently pay a fee to banks for establishing business
correspondent networks. This process would be far more uniform and timely if
brought within the ambit of RBI. The finance minister, in the forthcoming
Budget, could make a commitment in this regard and also mandate that all
government payments henceforth be made only through the business
correspondents, and that all participating banks would need to commit to
making an automated access point available to every client within 1km of
their homes. We have all but achieved this feat for our primary schools; it
would be far easier and quicker to do so for financial access with business
correspondents.

If, as we have argued, cost is not an issue, then what is preventing this
access? Could it be that despite the fact that each of the five individuals
referred to earlier has sufficient resources at their command to get the job
done, if need be entirely on their own, none of them views this as their
problem to solve?

Just as microcredit on its own does not represent full financial inclusion, it is
our view that neither do business correspondent accounts.
However, as a recent book--Portfolios of the Poor, Daryl Collins et al,
Princeton University Press, 2009--points out, the poor lead such uncertain
lives that something available to them on a reliable basis becomes a pillar
around which they can finally start to build a more stable and predictable
life.
In our view, while such access to finance is not by itself sufficient to
eliminate poverty, it is a necessary precondition and a right every citizen of
our country has.

Definitive progress on this count would also obviate the need to allow thinly
capitalized entities to accept bank deposits on their own balance sheets;
permitting this would do nothing to reduce the costs of access on a systemic
level discussed here but, as we have seen in the past, would substantially
increase systemic risk and the risk to which these deposits are exposed.

It would be a matter of great shame if, as one of the few nations in the
world capable of launching its own satellites, we remain the sole country
that is unable to provide all its citizens with the basic means to economic
freedom.

Bindu Ananth is president of the IFMR Trust and Nachiket Mor president
of the ICICI Foundation for Inclusive Growth.