De-risking agriculture

The performance of the south-west monsoons so far raises fears of a repeat of 2002.

Until last week, 16 out of 36 meteorological sub-divisions across the country reported deficient rainfall, meaning that precipitation was 10 per cent or more below normal. This is close to the 20 that were deficient at this point in the season in 2002.

As this newspaper reported last Friday, almost half the country's 524 districts are now in a state of deficiency.

Although the Indian Meteorological Department indicates that rainfall is likely to pick up in the coming days, the first half of the season is more or less gone. The victims are the usual suspects -- large tracts of the western and southern parts of the country.

There is a certain irony in this story, which comes in the wake of a major thrust in the Union Budget towards agriculture. There are many components to this thrust, but to the extent that there is an underlying theme that runs through them, it is best described as "de-risking".

Agriculture accounts for slightly less than a quarter of the GDP, but has shown enormous volatility since 1997. This volatility obviously impacts the overall growth rate in a purely arithmetical sense.

But, its consequences on the process of growth as well as the ability of policy interventions to influence it, are the deeper issues we should be worrying about.

The Economic Survey for 2003-04 had clearly revealed the finance ministry's perceptions that, in order to achieve overall growth in the 7-8 per cent range, industry would have to grow at over 10 per cent. The willingness to accept the inevitability of industry's role as an engine of growth is re-assuring.

Its corollary is that we cannot expect agriculture, on the average, to contribute very much to growth. This is the historical reality. However, we certainly can and should do everything we can to ensure that whatever growth we get out of this sector is stable. Even if this sector cannot be expected to provide the propulsion, it is critical to providing the balance.

The emphasis on de-risking, or minimising volatility around the trend, is entirely consistent with this perception. Virtually every major initiative outlined in the section on agriculture and the rural economy in the Budget speech directly relates to risk mitigation.

Specifically on the issue of water, the Accelerated Irrigation Benefit Programme allocates resources to the completion of stalled irrigation projects, prioritising those, which are closest to completion. Some parts of the country, at least, will be a little more immune to the vagaries of rainfall in the coming years.

However, the fact is that, south of the Indo-Gangetic basin, irrigation systems are typically fed by rain. Putting the infrastructure in place doesn't guarantee that water will flow.

Here, the budgetary provisions for restoring water bodies and providing fiscal incentives for water conservation are important. If rainfall cannot be controlled, at least the water that does fall should be used as efficiently as possible. Finally, there are provisions for a flood control programme.

Other components of the Budget package also address risk. The crop diversification scheme, though narrowly focused on horticulture in this Budget, emphasises the need to simultaneously shift cropping patterns towards crops that are more consistent with the region's resource constraints and create a reliable nation-wide marketing channel for such crops. This initiative is reinforced by the tax holiday provided to the agro-processing industry.

In terms of providing security directly to households, which should insulate the demand for at least some industrial products from agricultural volatility, two programmes have been indicated.

An Employment Guarantee Scheme, along the lines of the Maharashtra programme, has been proposed for 150 districts (most of which will be, presumably, in the drier half of the 524).

Also, insurance products are now being made available (or their scope is being expanded) to cover losses of farm incomes, from weather or other sources.

This certainly adds up to an impressive menu of risk mitigating measures. Some of them have been around for some time in various incarnations, while others are original. Regardless of vintage, however, the fact remains that, there is a cohesive theme to the package, which is appropriate for the macro-economic role that is envisaged for the agriculture sector.

However, like in most good things, there is catch; in this case, perhaps a couple. Both are well-known and widely commented on, so this is repetitive.

However, the effectiveness of the de-risking strategy that has been laid out in the Budget is entirely dependent on them. Its significance, therefore, can only be judged against the backdrop of these factors.

The first is the bugbear of implementation. Most of these schemes will depend on state governments and local bodies for delivery.

The central government can either provide the money and risk it being diverted or wait for credible mechanisms to be set up before releasing funds, which may never happen. Bypass strategies, for example, direct transfers from central to local governments are tempting but offer no guarantee of success in current circumstances.

Going the non-governmental route may be an option in certain situations. For example, in the area of reclamation of traditional water sources and the setting up of conservation schemes, NGOs are already active in several states and may help to get these programmes quickly off the ground.

But, broadly speaking, the de-risking strategy relies heavily for its success on delivery by people it has little control over. This is, unfortunately, never a sign of good strategy.

The second is the burden of past distortions and the fact that the budgetary announcements have simply not addressed them. Distorted output and input prices, and we have plenty of those, are likely to swamp any possible progress on the crop diversification and substitution initiatives.

Water is at the heart of the strategy, but free water (aided and abetted by free power) will induce farmers to draw on water that simply isn't there.

Unless farmers make their cultivation decisions in a rational pricing environment, the vulnerability to the availability of water is simply not going to be mitigated.

Subsidies in the form of direct income transfers (a small pilot has been proposed in the Budget) are the only way in which macro-economic risk management and household welfare objectives can be reconciled. But, here again, we come up against the brick wall of an inadequate delivery system.

In sum, the Budget lays out a cohesive strategy for de-risking agriculture. However, it focuses primarily on production and income risks.

Unfortunately, high levels of implementation and policy risks are a threat to the strategy. Growth with stability will not be achieved unless these risks are also addressed.

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