Looking Back at Independent India’s First Agriculture Reform – Expectations, Promises and Unintended Consequences.

 

The three farm bills recently passed by the Parliament have triggered massive protests by farmers and opposition parties on one hand. On the other, the passage of these bills is celebrated as the ‘watershed moment’ for agriculture sector. Without taking a systems approach to policy design, and with limitations of reliable research data, policies can lead to massive market distortions and irreparable unintended consequences. I look at independent India’s first agriculture reform - Green Revolution. It was designed to addressing the market failure of food grains production and reduce poverty. While it did address the issue of food grain production, it distorted the entire agriculture and economic system and widened economic inequality.

Post-independence, the two biggest policy challenges that India had to tackle were food shortage and poverty. India’s food grain production in 1950 was around 50 MT grossly inadequate to feed a population of over 360 million of which around 40 per cent lived below the poverty line. India depended on the Public Law 480 (PL 480) food for peace aid from United States to meet the gap in food grain supply. This was not sustainable for India for a variety of reasons including self-sufficiency, independence, and political stability.

The solution to this issue was for India to take a quantum leap in food grain production and become self-sufficient. To address this the Indian government started with a Comprehensive Food Policy. India removed controls on the food market to allow free market forces to step in to address the shortage. Increasing agricultural yield was the only way to address the problem of food shortage as land was limited and nature of India’s agriculture was small-holder farming. High Yielding Varieties (HYV) seeds had shown promising results in other countries. India imported large quantity of HYV seeds from Mexico and distributed them in the highly irrigated areas of North India. The multi-phased intervention was called HYV Program which is popularly referred to as ‘Green Revolution’. The objective of the Green Revolution was two-fold – a) to make India self-sufficient in food grain and b) address the issue of poverty

In the first phase, government started an awareness program for farmers to adopt HYV food grain production. It also assumed that private sector would respond positively to a huge potential market of fertilisers and other inputs. Another assumption was that banks will offer lending support to overcome financial gaps in the market.

However, the intervention did not receive the market response that the policymakers desired. The shortage of food grains continued, prices kept rising and poverty levels increased. One of the primary reasons of this market failure was the lack of market information or ‘information asymmetry’. Agriculture in India was (and still is) predominantly small holder in nature and perceived as subsistence farming. The HYV required significant investments from the small-holder farmers in inputs and irrigation. The market did not think that the poor farmers will be able to make the necessary investments to benefit from the Green Revolution.

Access to finance was another roadblock and the market doubted the ability of poor farmers raising finance to support the needed investments. The banking sector did not respond to government’s attempt to increase lending to agricultural sector. Bank credit to the agricultural sector grew negligibly from 1.1 to 2% of total advances between 1951 and 1968.

In addition to these risks, the history of Indian agriculture was not promising because agriculture was rain-fed, and rainfall patterns were not reliable. These were significant information gaps for private sector to respond positively to the HYV market opportunity.

In response, the government exercised paternalistic behaviour by offered subsidies for fertiliser, irrigation, and water pumps. This distorted the market economy. As food grain production started increasing government had to intervene to provide price support to the HYV by offering a higher minimum support price than other existing varieties and to regulate trade and pricing. This further distorted the market by coercive action on pricing. By setting up the Food Corporation of India in 1965, government to provide price support by offering a higher minimum support price for HYV than other existing varieties. Access to finance gaps were addressed after the nationalising of banks in 1969 that resulted in better penetrating of finance in rural areas and agricultural loans. Both these actions led to monopolising the market and concentrating power in the hands of government.

The series of state interventions under the Green Revolution resulted in a quantum jump in food grain production from 51 million tonnes between 1951-52 to 95 million tonnes between 1967-68. During 1978-79 India produced 131 million tonnes of food grains establishing India as one of the biggest agricultural producers in the world. India became self-sufficient in its food requirements and in fact became net exporter of food grains in 1978-79. The level of self-sufficiency also allowed India to end its dependence and free itself from the shackles of US food aid in 1971.

While the Green Revolution was able to meet the first objective of addressing food shortage it failed to achieve the second objective of addressing poverty. The percentage of rural people below poverty line increased from 38% in 1960-61 to 53% in 1967-68.

The unintended consequence of this was widening of economic inequality between rich and poor farmers and regional disparity. The assumption that Green Revolution will increase the demand for labour, food prices will come down and there will be a trickle-down effect on poverty. However, Green Revolution resulted in increased mechanisation in agriculture in States like Punjab leading to a reduction in tenancy farming rather than increasing. More mid-large farmers shifted to farming due to increased earnings potential.

This intervention clearly shows that this was a situation where market failure was present and existing political compulsions pushed for a quick solution. An intervention was chosen based on technical data and expected outcomes linked to that. However, the intervention lacked a systems-thinking approach. This was presumably because of constraints on reliable research and data in that period. It also highlights that people respond to incentives. For instance, with subsidies to fertiliser and irrigation sectors private players responded positively but otherwise did not.

We will find out, in several years, if the 2020 agriculture reforms deliver on the promises and expectations or not.