Political Economy of Liberalisation of Agriculture in India (PART 1)

By Dr Kalim Siddiqui

In this compelling exploration, Dr. Kalim Siddiqui delves into the intricate dynamics of India’s agricultural sector amid liberalization. This first installment of a two-part series meticulously unpacks the historical shifts, policy transformations, and pressing challenges that small farmers face, offering a profound understanding of the socio-economic landscape and its global intersections. 

Introduction 

India is primarily an agrarian economy, where agriculture and its allied fields serve as the main source of livelihood for nearly 70 percent of the population. It employs approximately 52 percent of the labour force and contributed 13.7 percent to the Gross Domestic Product (GDP) in 2020. Over the past five decades, Indian agriculture has seen steady growth, transitioning from a food-deficit to a food-sufficient status. However, the sector still faces numerous challenges, including low productivity. A significant percentage of those involved in agriculture are small and marginal farmers. One key reason for the low productivity is that over 50 percent of these farmers lack access to information that could help them improve their yields and secure better market prices. In India, most knowledge dissemination is conducted through government-funded agricultural institutes and rural extension officials. 

India’s food grain production has been increasing annually, rising from 51 million tonnes in 1950-51 to 256 million tonnes in 2018. The country is among the top producers of several crops, including wheat, rice, pulses, sugarcane, and cotton. It is the highest producer of milk and the second-highest producer of fruits and vegetables. In 2018, India contributed 25 percent to the world’s pulse production, the highest for any single country, 22 percent to rice production, and 13 percent to wheat production. It also accounted for about 25 percent of the global cotton production and has been the second-highest exporter of cotton for several years (FAO, 2022; Siddiqui, 2018a). 

Since joining the World Trade Organization (WTO) in 1995, there has been a growing influence of agribusiness and corporations in India’s agricultural sector, raising concerns about the marginalization of small farmers and the sustainability of traditional farming practices. International organizations and trade agreements continue to shape India’s agricultural policies, pushing for greater liberalization and integration into the global market. 

However, the country’s food grain requirement is projected to be 300 million tonnes by 2025, necessitating an annual crop output growth of 2 percent. India’s population increased more than three and a half times from 361 million in 1951 to nearly 1.3 billion in 2021. Despite this, food grain output grew fivefold, from 51 million tonnes to 260 million tonnes in the same period. Consequently, the country became self-reliant in food grains by the end of the 1970s. This significant increase in food output was primarily achieved through higher yields and increased cropping intensity. The net sown area under cultivation increased by only 18 percent over the past seventy years, while the gross cultivated area under irrigation grew from 23 million hectares in 1951 to nearly 94 million hectares in 2021, a fourfold increase (Datt et al., 2019; Siddiqui, 2021). 

Agriculture, along with its allied sectors, is the largest source of livelihood in India. Approximately two-thirds of rural households still depend primarily on agriculture, with 82 percent of farmers being small and marginal. Increased mechanization in the agriculture sector has significantly reduced labour absorption, displacing many workers. To address this, a more proactive fiscal policy is needed, and monetary policy should extend beyond inflation targeting to be part of a comprehensive rural development strategy focused on job creation and poverty alleviation. 

Over the past seventy-five years, the share of agriculture in India’s total GDP has sharply declined, while the proportion of people relying on this sector for their livelihoods has only marginally decreased. The agriculture sector faces numerous challenges, including rising costs, falling returns, and lower growth rates. A severe crisis is evident in the alarming rise in farmers’ suicides; according to the National Crimes Records Bureau of India, more than 300,000 farmers have committed suicide since 1995 (Government of India, Economic Survey). 

This paper aims to examine the changes occurring in the Indian agriculture sector, particularly since the early 1990s. While much academic literature has focused on India’s growth rates in recent years, the ongoing agrarian crisis has received less attention (Datt et al., 2019). This study seeks to fill that gap by analyzing the factors behind the current crisis in the agriculture sector, such as the slowdown in agricultural growth rates, rising rural unemployment, food insecurity, increasing numbers of farmers’ suicides, declining agricultural commodity prices, and the widening gap between the agriculture and non-agriculture sectors in terms of their contribution to GDP. In summary, the agriculture sector is experiencing an unprecedented crisis characterized by stagnating or declining rural employment growth, which in turn reduces food security and job opportunities for the rural poor. 

This study is important because the agriculture sector plays a critical role in the Indian economy, and its improved performance is crucial for inclusive growth. Currently, this sector contributes only 17 percent to the GDP while providing employment for 60 percent of the total workforce. Additionally, the forward and backward linkage effects of agricultural growth positively impact other sectors. A major challenge for the Indian economy is that the share of agriculture in GDP decreased from more than 60 percent in 1950 to 25 percent in 2000, 20 percent in 2005, and further to 18 percent in 2018. However, between 1950 and 2018, there was a more than 40 percentage point decline in agriculture’s share of GDP, while the decline in agriculture’s share of employment was only 18 percentage points (Government of India, Economic Survey). 

Moreover, the slow economic diversification from agriculture to manufacturing and services – i.e., from low value-added to higher value-added products – has been one of the significant shortcomings of India’s development trajectory. Despite decades of relatively high GDP growth, most of the workforce remains trapped in low-value employment in agriculture and other primary activities, along with low-paying services. The poor performance of the agriculture sector has created an unstable and unviable situation, with workers overcrowded in this sector despite its sharply declining share of GDP. 

This study utilizes existing scholarly works in agriculture and conventional data sources to illustrate the extent of the agrarian crisis in India today and the logic behind its various causal patterns. 

In 1991, amid a rising balance of payments crisis, India adopted the IMF’s neoliberal economic policy, also known as the ‘structural adjustment programme.’ The key elements of these neoliberal reforms included deregulation—trade and financial liberalization, the sale of public assets, the removal of import and export restrictions, and reducing the fiscal deficit. For the agriculture sector, this resulted in reduced fiscal support, leading to cuts in input subsidies and increased input prices. Additionally, the removal of quantitative restrictions on agricultural imports, as specified by the WTO, has led to a sharp rise in agricultural imports in recent years. 

Despite the introduction of neoliberal reforms in 1991, which resulted in higher economic growth rates, the manufacturing sector’s performance was not as impressive as in East Asian countries and China. India lags behind other developing countries in the industrial sector’s contribution to GDP, with 25 percent in India compared to 45 percent in Brazil, 44 percent in China, and 41 percent in Malaysia in 2017. In contrast, the services sector in India has experienced faster growth rates relative to other sectors, accounting for over half of the GDP, while the agriculture sector accounts for only 17 percent of the GDP but employs more than half of the total labour force (Datt et al., 2019). It appears that after more than seventy-five years, the promise of successful industrial development to address unemployment challenges has not been realized. 

Moreover, the rapid GDP growth rates in the Indian economy have not addressed the basic needs of the rural poor (Siddiqui, 2014). Food security has not improved, nutrition indicators have stagnated, and per capita calorie consumption has either remained stagnant or declined. The National Family Health Survey (NFHS) data of 2006 indicate that “46 percent of children below three years are underweight; 33 percent of women and 28 percent of men have Body Mass Index (BMI) below normal; 79 percent of children aged 6-35 months have anaemia, as do 56 percent of ever-married women aged 14-49 years and 24 percent of similar men; and 58 percent of pregnant women. The national averages mask location differences: all these indicators are much worse in rural India” (quoted in Ghosh, 2010: 33). 

Several studies have pointed out that Indian agriculture has underperformed, especially since 1994. India has 40 percent more cultivable land than China, but average agricultural yields are 50 percent lower. Although India’s population is younger and growing faster than China’s, the demographic dividend is not being utilized effectively (Datt et al., 2019). 

The growth rate in the agriculture sector declined for both foodgrains and non-foodgrains in the 1990s compared to the 1980s. The largest decline was witnessed in oilseeds, which fell from 5.2 percent per annum in the 1980s to 1.6 percent per annum in the mid-1990s. Land areas under rice and cotton experienced higher growth rates of nearly 2 percent per annum. However, during 2001-2011, all crop output growth declined, with a more significant decline in food crops than in non-food crops. 

During the pre-reform period from 1950-1990, agricultural growth rates were higher than population growth rates. In the decade before the launch of neoliberal reforms, i.e., 1980-1990, agricultural output grew at 4 percent annually, and India was self-sufficient in food and even exported rice and wheat. However, since the economic reforms, agricultural growth has reduced to an average of 1.5 percent per annum, resulting in a decline in the availability of food grains. The agriculture sector became less profitable due to several factors, including falling food grain prices, which led to a decline in areas under cultivation. 

Government spending on agriculture has been reduced to meet World Bank and IMF recommendations (World Bank, 2006). For example, government spending on rural development, including agriculture, irrigation, flood control, and village industry, was reduced from 14.5 percent in 1985-90 to 6 percent in 1995-2001. Spending on irrigation saw annual growth of 2.6 percent in the 1980s, which was reduced to just 0.5 percent per annum from 1992-2008. Since 1992, the government has cut subsidies, resulting in increased production costs. Institutional credit availability has sharply declined, forcing farmers to rely on moneylenders, which has further increased borrowing costs, especially for small and marginal farmers. When farmers are unable to repay high-interest loans, they are drawn into a debt trap.

Historically, at independence in 1947, Indian agriculture was extremely backward, with much of the land owned by absentee landlords and merchants. During the first half of the 20th century, agricultural output grew at a dismal rate of only 0.9 percent annually. India’s agriculture sector was integrated into the metropolitan capitalist system, which not only extracted surplus value but also imposed an international division of labor along with unequal terms of trade for primary products needed to expand the industrial sector in Britain. During the colonial period, large parts of the land were converted for the production of cash crops such as indigo, coffee, tea, and opium. The colonial authorities aimed to maximize revenue through higher land rents. High revenue demands left peasants with little or no surplus to reinvest, forcing them to rely on private money lenders for monetary needs. This led to increased indebtedness and landlessness despite the introduction of commercial crops. 

The paper is divided into several sections: The introduction lays out the background and significance of the study. The second section examines post-independence developmental experiences. The third and fourth sections deal with the deepening crisis and the growing issue of farmers’ suicides. The fourth section analyses food sovereignty and food security. Finally, the conclusion summarizes the findings and presents brief recommendations. 

The Post-Independence Experience 

The performance of agriculture post-independence has undoubtedly been far better than during the pre-independence period. Between 1950 and 1990, the growth rate of all crop outputs was nearly 2.7 percent per annum, significantly higher than the negligible 0.9 percent per annum during the first half of the 20th century. Post-independence land reforms had varying impacts in different states, leading to changes in ownership holdings. While these reforms placed some limitations on the power of landed elites and provided certain benefits, they failed to completely break the land monopoly and significantly reduce rural inequality. Increased public investment in irrigation, power, and rural development helped boost agricultural output (Siddiqui, 2022). 

However, despite the increase in food output, it was not sufficient to keep pace with population growth, leading to food shortages. To address these challenges, the government sought a technical solution to increase agricultural output. In the mid-1960s, the ‘Green Revolution’ was launched in selected regions, initially targeting large cultivators who had the financial capacity to invest in new technologies such as tractors, tube wells, electricity, new seeds, fertilizers, and pesticides (Siddiqui, 1999). The government aimed to raise agricultural output, achieve self-sufficiency in food production, and eliminate food shortages. Additionally, the nationalization of commercial banks in 1969 promoted the policy of ‘social and development banking,’ making banks important sources of finance for the agricultural sector. The government also established minimum support and procurement prices for certain crops to protect farmers from price fluctuations (Ghosh, 2010). 

Punjab was among the key states where the Green Revolution was launched. Data on agricultural growth shows that Punjab’s agricultural growth rate was the highest among all Indian states during 1960-1986. During this period, the annual growth rate in the production of food grains for Punjab was more than double that of India as a whole. The percentage of High Yielding Varieties (HYV) of seeds in the total area under food grain in Punjab was quite high—73 percent in 1975 (compared to 31 percent for all India)—which rose to 95 percent in 1985 (all India 54 percent) (Government of Punjab, 2004). 

However, by 1985, the Green Revolution had largely spread to only five states, accounting for 62 percent of the increase in foodgrain production. In contrast, traditional rice-growing states like Bihar, Bengal, Orissa, Kerala, and Tamil Nadu together produced only a 14 percent increase in rice production between 1965 and 1985. By the end of the 1990s, agricultural output growth began to slow down. One reason could be the rise in input prices, which reduced agricultural profits. Another issue is the excessive use of tube wells for irrigation, which has lowered water levels and increased costs. Additionally, the lack of further development in post-Green Revolution technology and research to increase yield productivity led to a leveling off of productive investment. 

Deepening Crisis in the Agriculture Sector 

Indian agriculture has witnessed a deepening crisis since the mid-1990s as the growth rate in the agriculture sector began to slow down, while rural unemployment continues to rise. Agriculture has been growing at slower rates in the post-reform period compared to the pre-reform period. For instance, the average agricultural growth rate during 1991-2006 was 1.9 percent annually, much lower compared to 3.4 percent for 1980-1990. During the 1980s, both food and non-food growth rates were higher than in the 1990s (Siddiqui, 2015). 

Although the agricultural output for main crops has risen over the years, its growth rate has slowed down since 2002, as indicated in Figure 1. Despite high levels of production, agricultural yield in India is lower than in other large-producing countries. Agricultural yield refers to the quantity of a crop produced on one unit of land. The agricultural yield of food grains has increased by more than four times since 1950-51, reaching 2,070 kg/hectare in 2015-16. However, India’s yield is still lower compared to countries such as Argentina, Brazil, China, and the US. In India, the main factors affecting agricultural productivity include the decreasing sizes of agricultural land holdings, continued dependence on the monsoon, inadequate access to irrigation, loss of soil fertility, uneven access to modern technology across different regions, lack of access to formal agricultural credit, and limited procurement of food grains by government agencies. 

Figure 1a: Agricultural Growth in India (in %)

Figure 1b: Yield in different countries in 2021 (tonne/ha)

The trends in the percentage of share of agriculture and allied services to the total gross value added (GVA) of the economy during the last decade at current prices. The share of the agricultural sector in the total GVA of the economy indicates a long trend of around 18 %. However, this sector improved to 20.2 % in 2020-21 during the Covid-19 pandemic, when industries were closed down and workers have to move back to their villages as a result, the GVA rose during this period as indicated in Figure 2.  

Figure 2: Percentage Share Gross Value Added (GVA) in Agriculture and Allied Sector to Total GVA (at current prices). 

An important element in the neoliberal reforms was trade liberalisation, introduced in agriculture in the early 1990s in India. This involved the progressive reduction of trade restrictions on various commodities. For instance, export subsidies were initially removed from tea, coffee, and other products. This process accelerated after India joined the WTO, leading to the removal of quantitative restrictions on imports and exports of commodities such as agricultural seeds, pulses, rice, wheat, butter, and groundnut oil in 2000. This meant the end of state subsidies and other support to the rural sector, making it difficult to promote rural industries. These developments raise serious concerns about whether India can pursue an independent sovereign development strategy, including industrialisation, technology upgrading, and the development of rural industries and food security. 

Since joining the WTO, the agriculture sector has faced various challenges. Government price support measures, such as minimum price support (MPS) extended to a few crops, are under attack. The Agreement on Agriculture (AoA) signed with the WTO prevents the country from providing export subsidies to agricultural commodities and constrains the use of the National Food Security Act (NFSA), which provides subsidised food to poor households (Dhar, 2023). The procurement system that supports farmers and sustains the agriculture sector is also under threat. India’s MPS is being challenged by the WTO, which claims that India has breached AoA rules. As a result, the Indian government is gradually withdrawing subsidies provided to farmers, which have been crucial for protecting farmers’ incomes. Moreover, public stockholdings of foodgrains intended to safeguard low-income groups are also under attack. 

Trade liberalisation in agriculture meant that uncertainties related to international price movements became directly significant for Indian farmers, as the government did not provide any assistance to absorb these price volatility shocks (Siddiqui, 1998). Under such circumstances, Indian farmers were pushed to compete against highly subsidised large farmers in developed countries. For instance, in cotton, such uncertainty has given misleading signals to farmers, who responded by changing cropping patterns without anticipating sudden price drops. It has also affected farmers producing soybeans and groundnuts due to palm oil imports. Government policy changes encouraged farmers to diversify crop production, but the negative outcome has been a reduction in the land allocated for the cultivation of food grains. Furthermore, according to National Sample Survey (NSS) data on rural development, government spending was reduced from 14.5 percent of GDP pre-reform to 8 percent of GDP in 1994 and less than 6 percent by 2000. During this time, Indian markets opened to subsidised foodgrains from the US, EU, and Japan. Between 1996 and 2001, the prices of most agricultural products fell in international markets by 40 to 60 percent, forcing Indian farmers to sell their products at lower prices, resulting in lower returns and huge losses. 

With liberalisation, initial market signals suggested that changing acreage would be profitable, and farmers responded positively. As a result, in the mid-1990s, a widespread shift towards cotton cultivation occurred, even in areas unsuitable for growing cotton. Farmers borrowed money, often from informal sources due to a lack of formal credit availability, coupled with a growing inability to meet debt service payments due to crop and price volatility. Landlessness increased, as NSS data show that the proportion of rural households with no land rose rapidly. At the same time, shifts in cultivation towards non-food grain crops led to a sharp decline in per capita food absorption in rural India since the mid-1990s (Government of India, 2013; Patnaik, 2003). 

The formulation of agricultural policies based on the principle of a ‘free market’ poses significant social and economic implications for India. Several factors contribute to this issue: 

1. Non-Continuous Production: Unlike industry, where production is a continuous process, agricultural output is seasonal and cannot be adjusted to meet immediate demand conditions. 
2. Scale of Operations: In India, agriculture is predominantly carried out on small and medium farms, unlike industrial operations that benefit from economies of scale. 
3. Output Fluctuations: Agricultural production is highly susceptible to fluctuations due to weather and other natural factors. 
4. Limited Stock Holding: Farmers have limited capacity to hold stocks after harvests, making it difficult to increase supply rapidly when needed. 
5. Price Inelastic Demand: The demand for agricultural commodities tends to be price inelastic, meaning that changes in price have little effect on the quantity demanded. 

Given these conditions, government intervention in agricultural markets is necessary to stabilize prices, ensure food security, and support farmer incomes. 

The Green Revolution, which focused on crops such as wheat, rice, maize, and cotton using chemical fertilizers and pesticides, led to the neglect of traditional sustainable practices like intercropping with nitrogen-fixing legumes. This resulted in land degradation through soil erosion, alkalinity, and salinity, and deteriorated soil fertility and micronutrient levels (Walker, 2008). 

Regarding job creation in the rural sector, neoliberal reforms have failed to generate sufficient employment opportunities and diversify the economy. Over the past two decades, there has been some employment diversification, particularly in rural areas. However, employment rates for males in rural areas have remained stagnant since the early 1980s. For rural females, the situation is even more concerning. The employment rate for women decreased from 34% in 1983 to a mere 17.5% in 2018, with only a slight recovery in 2021-22. This current rate is still significantly lower than it was in 1983. 

These trends highlight the need for policies that support agricultural development, job creation, and economic diversification in rural India, moving beyond the limitations imposed by free market principles. 

Figure 3: Rural Employment Rates in India (%) 

Since the 1980s, there have been notable shifts in the structure of employment, particularly for rural male workers. Data shows a significant decline in the share of employment in agriculture, from 77.5% in 1983 to 51% in 2021-22. This decline is largely attributed to the rise of the construction sector, which has become a major employer, accounting for 16.6% of rural male employment by 2021-22. Despite this shift, the share of employment in manufacturing remained relatively stable at around 8%, indicating that the rural industrialization strategy has not significantly impacted job creation. In contrast, employment in services such as hotels, restaurants, and transport has more than doubled. 

Capital formation in agriculture has stagnated in real terms due to a decrease in public investment, with no corresponding increase in private investment. The notion that public investment ‘crowds out’ private investment is misleading. In fact, public investment, especially in irrigation, has historically played a crucial role in making private investments, such as in tube wells and pump sets, more profitable. Public irrigation systems have facilitated farmers’ access to water and maintained high water tables through canal seepage. Rather than discouraging private investment, public investment has often encouraged it. However, the current crisis in groundwater resources, marked by falling water tables, has made it increasingly difficult for even large farmers to invest in deep bore wells and pumps due to rising costs. 

Globalization has altered the landscape of capital investment. Unlike the pre-reform period, when domestic capital was the primary source of investment, foreign capital is now increasingly used for investment in industries and services. Bernstein argues that the classical agrarian question has become less relevant in the context of globalization. According to Bernstein, the ruling elites in developing countries are less focused on national development and more engaged with international finance and global markets. Economic development now depends on international finance and global commodity chains, rather than solely on national capital and domestic production (Bernstein, 2014). 

The availability of institutional credit is critical for investment and growth in the agriculture sector. Despite growing demand, institutional credit has not kept pace with the needs of medium and small farmers, who have increasingly expanded their cultivation of non-food crops. Consequently, these farmers have turned to informal sources for credit, leading to a rise in indebtedness. Data from the National Sample Survey (NSS) shows that indebtedness among small cultivators increased from 20% in 1991 to 35% in 2012. This often involves collateral such as land or crops, with many farmers borrowing money against the promise to sell their produce to money lenders or traders (Walker, 2008). 

The post-reform period has seen a rise in agricultural distress, most starkly illustrated by the tragic statistic of 250,000 farmer suicides between 1997 and 2012 (Siddiqui, 2018b; Vasavi, 2012). Cotton farmers, in particular, have been heavily affected, with rising debts, crop failures, and falling market prices contributing to their plight. Informal credit systems in rural India are often linked with the product market, meaning that indebted farmers are compelled to sell their produce to their creditors, exacerbating their financial strain. 

Several factors have contributed to the dramatic rise in suicides among farmers, including increased indebtedness, declining productivity, and price uncertainty due to trade liberalization. The shift to commercial crops, which require more capital-intensive inputs compared to subsistence crops, has increased risks for farmers. Additionally, the lack of government investment in dryland farming and the cultivation of marginal lands have further heightened these risks (Vasavi, 2012). 

Farmer suicides have been particularly concentrated in low rainfall regions such as Andhra Pradesh, Karnataka, Maharashtra, and Punjab. In these areas, farmers who invested in deepening wells and cultivating high-value, capital-intensive crops like Bt cotton and spices have faced severe financial difficulties. The high expectations of returns from these crops often failed to materialize, leading to an inability to repay debts. The rapid increase in tube wells and pumps has also led to a decline in groundwater levels, raising costs and affecting water supply. Simultaneously, the decline in prices for cash crops, driven by the liberalization of agricultural imports, has further diminished farmers’ incomes. For example, increased imports of cotton and falling international prices have adversely impacted Indian cotton farmers’ earnings (Siddiqui, 2021). 

In summary, the convergence of rising indebtedness, declining crop prices, inadequate formal credit, and increased risk due to climatic and economic factors has led to a severe agrarian crisis in India, with devastating social consequences such as widespread farmer suicides. The need for comprehensive policy reforms addressing these issues is critical to reversing the current trends and ensuring the sustainability and profitability of the agriculture sector.  

Stay tuned for part two of this in-depth exploration of India’s agricultural sector. The upcoming installment will delve deeper into the ongoing challenges, potential solutions, and future prospects for sustainable and equitable growth in Indian agriculture. 

About the Author 

Dr Kalim Siddiqui is an economist specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less-developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, UK. He has taught economics since 1989 at various universities in Norway and the UK.