Debating India


Rural India in Ruins

Friday 12 March 2004, by PATNAIK*Utsa

The gains made in agriculture and food availability over four decades have been wiped out in a single decade of reform, and nearly nine-tenths of the fall has taken place during the five years of National Democratic Alliance rule.

A MOST remarkable and disastrous feature of the last five years of National Democratic Alliance rule in India, has been the slide-back to levels of hunger in rural areas not seen for over 50 years. Reports of starvation, farmers’ suicides and deepening hunger during the last three years should cause little surprise when we consider the official data on foodgrains output and availability. Net foodgrains output per capita has fallen by about 7 kilograms since the mid-1990s owing to the slowing of output growth. Availability (defined as net output plus net imports and minus net additions to public stocks) however, has fallen by thrice as much as output, as Table 1 shows. (A large gap between per capita output and availability was last seen during the food crisis of the mid-1960s, but in the opposite direction - at that time, since output fell, 19 million tonnes of foodgrains were imported over two years to ensure enough domestic availability. By contrast in recent years availability has been much lower than output, yet massive food exports have taken place.)

Availability is the same as the actual absorption of foodgrains, and the two terms will be used here interchangeably. There was a slow decline in the absorption of foodgrains per head between 1991-92 and 1997-98, after which it has fallen very sharply, from an average annual level of 174.3 kg in the three-year period ending in 1997-98, to only 151 kg by the pre-drought year 2000-01, an abysmally low level last seen during the early years of the Second World War, which included the years of the terrible Bengal famine. Thus, by 2000-01 the average Indian family of four members was absorbing 93 kg less foodgrains, compared to a mere three years earlier - a massive and unprecedented drop, entailing a fall in average daily intake by 64 grammes per head, or a fall in calorie intake by 256 calories from foodgrains (which accounts for 65 to 70 per cent of the food budget of the poor). Since the richest one-sixth to one-fifth of the population, mainly urban, has been improving and diversifying diets, the nutritional decline for the poorer three-fifths of the population, mainly rural, has been much greater than the average fall indicates.

Last year’s drought, despite very low output, because it galvanised efforts to implement food-for-work programmes in the drought - hit areas, in fact resulted in slightly improved availability per head compared to 2000-01, though it remained lower than the 158 kg level of the previous year, 2001-02 which had registered the highest foodgrains output ever seen - 212 million tonnes. Nevertheless, the average annual foodgrains absorption taking all three years ending in 2002-03 is only 154 kg per head, an absolutely inadequate level given the large inequality in its distribution.

THE massive decline in foodgrains absorption, as compared to 1998, is the result of an unprecedented decline in purchasing power in rural areas following directly from a number of deflationary policies at the macroeconomic level, combined with trade liberalisation, both of which are integral to neo-liberal economic reforms. The continuous decline in purchasing power and hence decline in foodgrains absorption, has been reflected in a continuous build-up of public food stocks year after year starting from 1998, with the cumulated total standing at 63.1 million tonnes by the end of July 2002, nearly 40 million tonnes in excess of buffer norms - and this in spite of declining per capita foodgrains output, and 2 to 4 million tonnes of grain exports every year.

Last year, the worst drought year for over a decade, between June 2002 and June 2003, the NDA government exported a record 12.4 million tonnes of foodgrains and continued to export a million tonnes a month, bringing the declared total exports to over 17 million tonnes by November 2003. Independent India has never before seen such huge exports, only made possible by more and more empty stomachs. It is an utter scandal that when millions of the rural poor were going hungry and those already hungry were being pushed into starvation, the government, rather than undertake widespread food-for-work programmes, preferred to feed foreigners and their cattle by exporting foodgrains, applying a heavy subsidy to beat low world prices. The concerned Ministry has placed full-page advertisements in newspapers recently celebrating, among other things, its export earnings.

Now that the perception of drought has ended, food-for-work projects have been wound up, and the media are full of a good monsoon and record projected grain output in 2003-04, the prognosis for a recovery of absorption levels to anywhere near those of 1998, remain bleak. Let us remember that millions of people were going hungry with the meagre average absorption level of 158 kg in the year of the largest harvest seen to date - 212 million tonnes in 2001-02, or 177 kg average output. The difference of nearly 20 kg per head, between output and absorption, was going as addition to stocks, held at increasing costs, and as exports.

Neither the government nor its policymakers are prepared to recognise the fact that falling availability reflects a contraction of effective demand. On the contrary, the explanation put forward in official publications of the Finance Ministry and the Reserve Bank of India and propagated by most academic economists, is that there is `overproduction’. The Economic Survey 2001-02 (pages 118-130) argued that excess stocks were a surplus over what people voluntarily wish to consume, and represented a "problem of plenty". National Sample Survey data on falling share of cereals in the spending on food were quoted to argue that not only the well-to-do but all segments of the population were voluntarily diversifying their diets to high value foods away from cereals. It said that minimum support prices (MSP) to farmers have been "too high" resulting in excessive output and procurement. RBI’s Annual Report 2001-02 (pages 20-25) repeated this argument, explaining the alleged mismatch between supply and demand as arising from rising administered acquisition price for rice and wheat against the global trend of falling market prices, leading to `wrong’ price signals to the farmers and hence to `excessive’ output and procurement of these crops.

For a country which has been seeing falling per capita foodgrains output and sharply rising rural unemployment, these arguments are illogical to the point of being foolish. We now know why the Central government undertook massive food exports last year in a situation of steeply falling food availability and despite a severe drought: it has all been justified and rationalised already, simply by interpreting deepening hunger and starvation as `voluntary choice,’ and way below-normal consumption as over-production, in a grotesque travesty of reality. J. Maynard Keynes had once remarked that the world moves on little else but ideas: and the socially irrational outcome we see before our eyes, of increasing hunger amidst relative plenty, illustrates starkly the effects that fallacious theories and wrong policies following from them, can have in lowering mass welfare.

The fallacy involved in the official view is the fallacy of composition, where a statement that is correct for a part of the whole is wrongly assumed to be correct for the whole. With income distribution shifting sharply in their favour, the top one-sixth of the population has certainly been voluntarily diversifying diets, but the poorer majority of the population cannot afford to do so, any more than the hungry poor of Paris in 1789 crying for bread, could heed Queen Marie Antoinette’s advice to eat cake.

It seems that the question of effective demand, and of demand deflation is simply not understood by most people. While everyone understands food shortage as in a drought, namely a physical output shortfall which curtails supply, it appears to baffle many that even more severe consequences can arise when the effective demand of the masses falls; that is, even though the physical supplies of foodgrains are there, people starve or move into deepening hunger, owing to their inability to purchase food or to access food.

THE reasons for declining rural mass effective demand in the 1990s to date are many, and are connected with deflationary neoliberal reforms combined with trade liberalisation.

First, rural development expenditures, which averaged 14.5 per cent of gross domestic product (GDP), during 1985-90, before reforms, were reduced to 8 per cent of GDP by the early 1990s as part of the deflationary policies advised by the Bretton Woods Institutions (the World Bank and the International Monetary Fund). Since 1998, they have been reduced further, averaging less than 6 per cent of GDP and in some years falling to less than 5 per cent. In real terms, there has been a reduction of about Rs.30,000 crores annually in development expenditures on average during the last five years, compared to the pre-reforms period. If we assume a plausible value of between 4 and 5 for the Keynesian multiplier, this means a drop in incomes in agriculture annually to the tune of between Rs.20,000 crores to Rs.150,000 crores - a massive contraction indeed. This order of income fall, combined with real income declines owing to other causes detailed below, is broadly consistent with the observed fall in the contribution of agriculture to GDP during the 1990s, from around one third to barely a quarter at present.

Let us remember that rural development expenditures include all employment generation programmes, special areas programmes, village industry, irrigation and flood control, energy and transport, apart from agriculture and rural development. Further, public capital formation in agriculture has also continued to decline even more sharply in the 1990s. It is hardly surprising that the rate of agricultural growth has slowed drastically in the 1990s and has fallen below population growth for the first time in 30 years, and that the NSS employment surveys show an alarming collapse of rural employment growth to below 0.6 per cent annually from 1993-4 to 1999-2000 compared to 2 per cent annually during 1987-88 to 1993-94. Rural job losses are reflected in a lower participation rate, higher open unemployment, and an absolute decline in the number of people employed in agriculture.

Despite all its recent strident talk of development and the costly media publicity to every project, the reality is that no government has followed more systematically anti-development policies than has the NDA during the last five years. (It must be remembered that a rise in the size of the budget deficit as such is no indicator of an expansionary impact on material production, if the rise is owing to reduction in the tax-GDP ratio and increasing interest payments to the well-to-do, as has been the case with reform policies.)

The decline in rural purchasing power has also contributed substantially to industrial recession, through demand linkages for simple consumer goods and manufactured inputs. The economy has undergone de-industrialisation with the contribution of industry to GDP, which had been rising in the 1980s, falling from 28 per cent to just over 25 per cent in the course of the 1990s, and large net job losses have taken place in the organised sector. The only sector that has grown fast is the services sector, which has ballooned at the expense of the material productive sectors. As income distribution has shifted to the urban elites, a modern version of the medieval Mughal economy is emerging with dozens of service providers to each individual rich household. Only a small segment of the services sector is highly-paid computer related services: the major expansion comes from low-paid service activities.

Secondly, at the very same time that unemployment was growing and real earnings of the rural masses falling owing to deflationary policies, the government, under the pressure of advanced countries, removed all quantitative restrictions on trade by April 2001 and exposed farmers to unfair trade, global price volatility and recession-hit external markets. This, even before it was required to remove the restrictions under the World Trade Organisation (WTO) regime. While global primary prices were rising up to 1996, they went into a prolonged decline thereafter, with between 40-50 per cent (cereals, cotton, sugar, jute) to 85 per cent (some edible oils) fall in unit dollar price between 1995 and 2001. Prices of goods like tea and coffee continue to fall and others have seen only 10 to 15 per cent rise from the trough, in the last two years. It is one thing to open the economy to trade when markets are expanding and quite another to do so when the world capitalist economy is in recession.

Anyone with a rudimentary knowledge of the behaviour of commodity markets should have been able to predict the crashing prices after the sharp rise of the early 1990s, and also predict the fact that advanced countries would immediately raise their subsidies as they have always done (this author had warned of both in a 1997 paper), but India’s policymakers have been unequal to the task and have in effect sacrificed our farmers at the altar of the Bretton Woods and WTO dogmas. These free trade dogmas ensure reduction of protection to their own producers by gullible developing country governments, at the same time that advanced countries increase their non-tariff barriers and massively raise their subsidies - which they have, for their own convenience, already defined as non-trade distorting and placed outside reduction commitments in the Agreement on Agriculture.

Producers of all export crops, including raw cotton, have been badly hit by falling prices, especially as input prices rose with reform policies, inducing a severe squeeze on their already low incomes. With the implementation of the Narsimham Committee Report after 1994, bank credit became more expensive and reliance on private high-cost credit perforce rose. Reduction of input subsidies and higher power tariffs, all part of the reforms pushed by the Bretton Woods Institutions, were mindlessly implemented even as farmers were in difficulty, plunging virtually all of them, including the normally viable ones, into a downward spiral of indebtedness and causing many to lose land as the latest data indicate. Sale of kidneys and suicides are stark indices of deepening agrarian distress.

While the main prize for utterly servile implementation of deflationary Bretton Woods dictates against mass interests goes to the Central government and its policy advisers, a big consolation prize for the most disastrous State-level policies should go to the Chandrababu Naidu government in Andhra Pradesh which, entering into a direct structural adjustment programme with the World Bank, has hiked power tariff on five occasions. This State has seen more than 3,000 recorded cases of farmer suicides in the last five years as well as suicides of entire families of weavers. In 2002 alone, according to police records (The Hindu, Hyderabad edition, January 6, 2003) as many as 2,580 deeply indebted farmers killed themselves mainly by ingesting pesticides in three districts - Warangal, Karimnagar and Nizamabad. We have no record of suicides on this scale in colonial India: our present day politicians in their servile implementation of imperialist dictates routed through the BWI, have outdone even the colonial masters of the past in their disregard for the welfare of the mass of the people. At least agrarian distress at that time led to official commissions and inquiries: all we now see is bad theory and open apologetics.

ADVANCED countries, as they have always done in the past, have been increasing support to their farmers as global prices fall (the U.S. has legislated subsidies into the future, which will give transfers to its farm sector of $180 billion by 2008, compared to $84 billion in 1998). The majority of our economists, by contrast, are busy kicking the Indian farmer when he is already down, by saying that `the MSP is too high’ and should be cut for these kulaks, and by shedding crocodile tears for the poorer farmers and labourers on grounds that they are net food purchasers and would benefit from lower prices. They are obsessed with the question of support price alone, not the issue price which is the relevant one; and by focussing on price alone, they implicitly assume that the population is on the same demand curve as before, whereas in fact the demand curve itself has shifted down so drastically for the mass of the rural population that tinkering with the support price is now likely to deepen the crisis. They seem not to realise that unemployment and income deflation have swamped this sector, that every price is also an income, and cutting MSP when agrarian crisis is a realilty, would further widen and deepen income deflation and lead to more indebtedness and more suicides.

They forget that for years and decades India’s surplus farmers, the much reviled `kulaks’, sold grain, without complaining, to the Food Corporation of India at half the global price when global price was high, thus ensuring cheap food for urban areas. Now, when the global price has crashed, they have a moral right not to be abandoned to unfair competition from heavily subsidised foreign grain, and a right to be given enough price support to prevent their total ruin. If these misguided economists with their unethical arguments about lowering MSP were seriously interested in the cause of the poorer farmers and labourers, they should be demanding an expansionary fiscal stance, a large hike in public investment and in rural development expenditures to restore purchasing power.

AN argument often heard is that since per capita income is rising, it is to be expected that people should consume less cereals and pulses, which become inferior goods, and more high-value food; in short, people should diversify their diets. A falling share of grains in the consumer budget as income rises, is known as Engel’s Law. So, it is argued, there is nothing wrong if we see falling absorption of foodgrains per head. This is a total misconception regarding Engel’s Law and it seems to have contributed to the incorrect official explanations of large stocks as arising from `overproduction’. It is a misconception because Engel was referring to the fall in expenditure for the direct consumption of grains as income rises, and not to the total absorption of grains which includes direct use as well as indirect use - as feed for livestock, to produce milk, eggs, meat, and so on. This total absorption of foodgrains is always found to rise, not fall, as the consumer’s average income rises. The figures of availability given here, as indeed the official figures of availability, refer to absorption of grain for all purposes.

Availability of foodgrains thus includes not only direct consumption (as roti, boiled rice, and so on) but also the part converted to animal products by being used as feedgrains (a part of the animal products are exported). It also includes the part converted to industrial products like starch and into processed foods with an urban market. The availability, or absorption of foodgrains per head, because it is for all uses, always rises as a nations’s per capita income rises. This is a very well known fact and supported by an extensive literature on the global food chain, and by the Food and Agriculture Organisation’s time-series data covering virtually every country. China, with a per capita income about twice as much as India’s, absorbed 325 kg per capita of foodgrains in the mid-1990s, compared to India’s less than 200 kg at that time. Mexico absorbed 375 kg per capita, high income Europe absorbed over 650 kg per capita and the United States absorbed the maximum, 850 kg per capita, of which about three-tenths was directly consumed and the rest converted to animal products, processed or put to industrial use.

The recent trend in India of sharply declining foodgrains absorption per head while average per capita income has been rising, is thus highly abnormal, not only in the light of international experience but also in comparison with our past experience - we have always seen rising grain absorption per capita as average incomes rose in the past. Between 1950 and 1991, per capita absorption rose slowly from 150 kg to 177 kg. These gains made over four decades have been wiped out in a single decade of reform, indeed nearly nine-tenths of the fall has taken place during the five years of NDA rule. The only explanation for this is the sharp increase in the inequality of distribution of incomes entailed in the collapse of rural effective demand. While real disposable incomes for the top segments of the urban population have been rising fast owing to reform policies of tax cuts and cheapening of primary goods and durable goods, rural mass incomes in real terms have been falling. There is rising absorption of foodgrains for the elites with a higher proportion going to processed foods and animal products, while the majority in rural areas are plunged into deepening undernutrition, owing to their reduced purchasing power and reduced institutional access to food. Very recent analysis of NSS data by fractile groups has confirmed this writer’s earlier diagnosis of sharply widening inequalities in the last five years.

The five-year period of NDA rule has seen the most violent increase in rural-urban income inequalities since Independence. The urban elites have every reason to feel good as they play with their new toys in the form of the latest automobiles and consumer durables, enjoy a more diversified diet and reduce their resulting adipose tissue in slimming clinics: but the same neoliberal policies that have benefited them have immiserised millions of their fellow country men and women who are getting enmeshed in debt and land loss, and struggling harder merely to survive.

THE solution does not lie in trying to justify a bad situation with blatantly illogical theories, or by putting forward spurious estimates showing a reduction in the share of rural population in poverty, as the government and the Bretton Woods Institution economists and their domestic counterparts have been doing. The official and academic estimates of poverty have not been capturing the reality on the ground for a long time now owing to the faulty methodology they use. But this divergence between ground reality and official estimates has now reached ludicrous proportions.

The basic problem is that the quantities consumed by people 30 years ago are being used in current poverty estimates. These quantities, derived from the 28th Round of the NSS relating to 1973-74 (which corresponded to a calorie intake of 2,400 in rural areas) were multiplied by the prices at that time to obtain the `poverty-level income’ in the base year, and since then a price index is periodically applied to update the resulting estimate. Thus a Laspeyres index is being used with quantities in a base year, which by now is far in the past.

If the Planning Commission when it presented its estimate in 1979 had said that it had used the quantities of various foods people consumed 30 years earlier, that is, 1949, no one would have taken their estimate seriously. But present-day poverty estimates are based on a 30-year-old consumption pattern even though the pattern itself has changed, and not owing to voluntary factors alone. The change has occurred because, among other things, wages to rural labour are no longer paid mainly in grain and common property resources have been destroyed forcing people to buy firewood.

The NSS consumption data for 1999-2000 (Table 2) shows that only one-tenth of the rural population had a calorie intake around the norm of 2,400 calories, while two-thirds were below it, giving a total of 77 per cent at or below the norm compared to 69 per cent in 1993, indicating both very high levels of nutritional deficit and a substantial worsening over time. As much as 40 per cent of the rural population in 1999-2000 was at or below an intake of 1,950 calories. Since then the situation has worsened with further fall in grain absorption.

Yet the corresponding official poverty level estimates, even though they use the same nutritional norm based on the roundabout and faulty Laspeyres index method, show only about 37-38 per cent of the population as being in poverty in 1993 and, according to the government, this declines further to 27 per cent by 1999-2000. It is at most 33-34 per cent or so in that year according to the maximum adjustments made taking into account the change in the reference period in the latter year.

The academic poverty estimators are doing a grave disservice to the people by continuing with an indefensible methodology, and are thereby complicit in the formulation of incorrect policies lowering mass welfare. If these poverty estimates remained in the ivory tower of academia it would not matter: but now targeted food distribution is being directly linked to poverty estimates, so their failure to capture ground reality becomes very dangerous. The poverty estimates currently being thrown around have no meaning, and are not worth the paper they are written on. It is high time that the academics and administrators working in the area of poverty estimation used the direct indicators provided by the NSS data and by per head availability.

See online : Frontline


Utsa Patnaik is Professor of Economics at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. One of the country’s foremost scholars on agrarian issues, she has authored The Long Transition: Essays on Political Economy (Tulika, New Delhi, 1999), Peasant Class Differentiation (Oxford University Press, New Delhi, 1987) and The Agrarian Question and the Development of Capitalism in India (OUP, New Delhi, 1986).

in Frontline, volume 21 - Issue 05, February 28 - March 12, 2004.

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