Agriculture reform key to India budget

India is to embark on an overhaul of its struggling farm sector in an effort to cool rising food prices that have landed the country with the highest inflation of any leading Asian economy.

Pranab Mukherjee, India’s finance minister, put the rural economy at the heart of a national budget on Monday, saying ridding the farm sector of crippling supply bottlenecks would be his “focus” in the coming fiscal year.

A market-neutral budget supporting agriculture, welfare schemes and the extension of banking services to more people was designed to dispel any sense that the Congress party-led government was in drift after a series of high profile corruption scandals.

Yet its timidity was met with widespread criticism for failing to push forward a reform agenda.

Lord Desai, the economist and UK Labour peer, said: "It's a disappointing budget. The government has lost direction. All Pranab Mukherjee is doing is treading water.

“The government has decided to abandon the urban middle class and go to the rural areas."

Rajiv Kumar, the director of the Federation of Indian Chambers of Commerce and Industry, described the budget as"pro-growth" but holding no bold outcomes.

The 74-year-old finance minister assured parliament that India would hit 9 per cent growth next year, and cut its fiscal deficit to 4.6 per cent.

He warned that India needed to invest far more in agriculture to boost productivity and enlarge storage facilities to help reduce the spiralling prices of fruit and vegetables.

He announced a credit flow target of Rs4,750bn ($105bn) to the agriculture sector and offered a 3 per cent interest subsidy to farmers.

The finance minister stressed the need to achieve balanced nutrition in a country where severe malnutrition afflicts a large number of people, and to combat the degradation of the nation’s soil.

An immediate reduction in food prices is key to Manmohan Singh, India’s prime minister, in meeting a target of bringing inflation down to 7 per cent or below by the end of next month. Inflation was 8.2 per cent in January, while food prices were rising 11 per cent.

Mr Singh will be hoping that the measures announced on Monday will help knock down what he calls “the kingpin of India’s price structure” – high agricultural commodity prices.

Rising food prices in a country where an estimated 60 per cent of the 1.2bn population live off the land are one of Mr Singh’s worst problems of his second term in office. His government has been beset by price bubbles in such crops as onions and sugar that have hurt urban and rural populations.

Confronting a structural shift in the agricultural economy, where supply shortages, rising costs and market distortions have created unpopular price pressures, is one of New Delhi’s top priorities.

Duvvuri Subbarao, the governor of the Reserve Bank of India, called at the weekend for “major productivity gains” in a second Green Revolution to advance gains made as far back as the 1960s with more modern farming methods.

He said: “Since rural incomes are going up, people are eating better by shifting from cereal to protein and it is leading to food scarcity".

Farm reforms are long overdue, according to agriculture experts who claim the sector has been badly neglected.

Ashok Gulati, the Asia director of the International Food Policy Research Institute, said agriculture is “strangled” by government controls, suspension of futures markets and export bans.

He said: “Agriculture is crying for a clean sweep of market reforms as was done for industry [20 years ago],”.

Performance in the farm sector varies considerably across India. Some farmers have benefited from market prices and crop diversification, while others suffer hardship under the government’s minimum support price regime.

E Vadivel, former dean of the horticulture department at Tamil Nadu Agriculture University, said returns to Indian farmers were higher for fruits and vegetables over staple crops like rice and wheat.

He said: “I tell farmers, don’t go for paddy, pulses or oilseeds. Abandon these crops. They are all linked to the public distribution system, and the government will never allow the price to rise.”

Ranjit Singh Ghuman, head of economics at Punjabi University in Patiala, said the government had sleepwalked into an agrarian crisis where incomes were declining and rural people increasingly searching for other avenues of work.

He said: “The view was that the Green Revolution would take care of everything. There was no focus on the quality of education and skills to make the youth employable in non-farm sectors.

“But now the opportunity in farming is shrinking.”