The Telegraph
Since 1st March, 1999
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- Protecting farm income and stimulating industrial output have a price

The dependence of industrial growth on agriculture is solidly supported by facts. Over the last seven years, whenever agriculture has failed to perform, industrial growth has suffered, albeit with a lag. For example, in 1995-96, industry grew at a fabulous rate of 13 per cent but agricultural output exhibited negative growth. As a result, industrial growth went down next year to 6.1 per cent. This is not a case in isolation. The same pattern can be observed in 1997-98, 1999-2000 and 2000-01. In each of these years agricultural output either went down, compared to the previous year, or remained almost stagnant. This was invariably followed by a dip in industrial performance.

On the other hand, a decent agricultural growth has always been followed by a lagged rise in industrial growth. Thus good agricultural output in 1996-97, 1998-99 and 2001-02 has been followed by a spurt in industrial expansion in 1997-98, 1999-00 and 2002-03 respectively.

In short, though the extent of association between the two growth rates varied from year to year, as is expected, because agriculture is not the only determinant of industrial growth, the empirical connection between the two is just too evident. Such clear statistical regularity can hardly be a coincidence. It must indicate a causal relationship. It must also mean that part of the fluctuations in industrial output is due to fluctuations in agricultural output, which in turn can be attributed to the fancy of the monsoon. This is well recognized in the official literature as well. So much so that each year the economic survey of the government of India devotes a whole section to the nature and extent of the current monsoon. How does agriculture affect industry'

Agriculture, so far as textbook economics goes, helps the industrial sector essentially in two different ways. First, it supplies inputs to be used in the industrial sector and second, it provides a market for industrial goods. With the importance of traditional agro-based industries gradually going down, we shall ignore the role of agriculture as a supplier of inputs and focus only on the second aspect of the agriculture-industry relationship. How does agriculture work as an outlet for industrial goods' The standard argument is that higher output in the agricultural sector translates into higher agricultural income, which, in turn, creates higher demand for industrial goods. The argument sounds apparently reasonable, but does not stand a closer scrutiny. The trouble is, there is no guarantee that agricultural income would rise if there is an increase in agricultural output. The reason is straightforward. A rise in output leads to a fall in the price and so the revenue or income of the farmers, which is the product of the price and the quantity sold, may either go up or down.

In fact, demand for agricultural goods is pretty inelastic, that is, a fall in price leads to a relatively small increase in demand. So to make the market absorb the increased output, a large fall in the price is necessary. A large fall in the price, in turn, implies a fall in the income of the farmers. In other words, a rise in agricultural output is likely to reduce farm income instead of increasing it. Indeed, we do hear about farmers complaining about over-production and low prices because of too much supply in the market.

There is, however, an indirect channel through which an expansion in agricultural output may raise industrial demand. Given that demand for agricultural goods, especially that for foodgrains, is inelastic, a rise in output and a consequent fall in price lead to a fall in the total revenue of the farmers. But this means that consumers outside the agricultural sector are spending less on agricultural goods. So they must be spending more on industrial goods. This, in turn, should raise industrial demand. This rise in demand, however, has to be weighed against the fall in demand coming from the agricultural sector. Demand coming from the agricultural sector should fall because farm income is falling due to a fall in farm price. The net effect on industrial demand may still be positive, but the magnitude is not likely to be big, surely not as big as is needed to explain the strong relationship between agriculture and industry.

The right explanation, in our opinion, can be provided in terms of minimum support prices for major agricultural products and the subsequent government procurement. It is well known that before the harvest, the government typically announces a price for each important crop and after the harvest it procures the crop at the pre-announced price. Initially, the main objective of the government was to procure foodgrains for the public distribution system. But over the past few years, the importance of the public distribution system seems to be on the decline. Indeed, dismantling the public distribution system is now thought to be not only appropriate but almost necessary as a part of the more general scheme of market-oriented reforms. But this does not mean that procurement is on the decline. On the contrary, procurement of foodgrains as a percentage of output has steadily increased over the past few years, especially since the Bharatiya Janata Party has taken charge.

Just for the record, procurement of rice and wheat as a percentage of total output has increased from 15 per cent in 1998-99 to 25 per cent in 2001-02. On the other hand, offtake of foodgrains through the standard distribution channels like ration shops has not significantly increased and in some years has actually fallen. The two, taken together, has led to a steady rise in public holding of food stocks.

Clearly, the objective of the government has changed. The emphasis has shifted away from public distribution of food to the poor consumers towards providing price support to rich farmers. Clearly, procurement of stocks in a year of bumper harvest prevents the market price from crashing and this artificial price is maintained over time because the procured stocks are sparingly offloaded to the market. The whole exercise, it goes without saying, protects farm income and is undertaken especially to insulate rich farmers from the ups and downs of the market. Undoubtedly, small farmers who are big enough to sell to the market are also gaining in the process. Finally, as a result of the procurement exercise, farm income is unambiguously going up in a year of good harvest leading to increased demand for industrial goods and a lagged increase in industrial growth.

Should we complain' After all, industrial growth and protection of farm income are both desirable outcomes. But the trouble is that these outcomes are not reached costlessly. A huge amount of public money is spent on procurement of stocks which are never made available to the consumer. This money could have been spent on productive public investment, which would have enhanced the future growth potential of the industrial sector. It would have boosted private investment as well. Moreover, stimulating industrial demand through a good harvest exposes the industrial sector to the whims of the monsoon god. This, in turn, leads to undesirable cycles.

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