What can Indian Elephant learn from Chinese Dragon

Once again, India (the elephant) will fail to achieve its targeted growth rate in agriculture in 2007-08. The economic advisory council to the Prime Minster in its Economic Outlook for 2007-08 identifies agriculture as a special sector needing attention, as its growth rate is not likely to cross 2.5% against a target of 4%. Comparing with China (the dragon), the report goes on to state that India is not very unfavourably placed either in terms of irrigation, or tractor intensity, or farm size, but still Indian yields for major crops like rice, wheat, groundnut, etc. are almost half of those in China. The council explains this difference in yields primarily through differences in fertiliser consumption.

But if Indian policymakers have to learn anything from China with respect to agriculture, they better go back to 1978, when China started economic reforms. IFPRI’s research in this area (The Dragon and the Elephant edited by Gulati and Fan, 2007, forthcoming, Johns Hopkins University Press) reveals that the initial six years of reforms in China, 1978-84, were the most critical for Chinese agriculture.

The land tenure system was changed from commune-based to household responsibility system and procurement prices for most of the staple crops were revised upwards by as much as about 20%. These two policy changes together created a highly favourable incentive environment in agriculture, leading to increased private investments and higher usage of fertilisers in agriculture. As a result, agricultural GDP grew at 7.1% per annum during 1978-84. And since agriculture prices increased much faster than the overall price index of the economy, agriculture incomes increased even faster than the agricultural GDP, by more than 10% per annum, and poverty in China declined from 33% to 15% in just six years.

This generated a huge demand for goods produced by town and village enterprises (TVEs) in China, thus spurring a next round of rural non-farm growth and employment. These TVEs have been the real catalysts in making China as the manufacturing hub of the world today.

The lesson from China story is clear: that agriculture led reforms can spur growth in rural non-farm sector and the two together can go a long way in cutting down poverty fast. Thus, firing the economic pyramid from the bottom can bring rich dividends (see figure). But in India, growth spurred from IT boom (top of the economic pyramid), and the economic reforms focused more on industry and service sectors than on agriculture. As result, while India’s service sector is doing very well, and manufacturing has picked up momentum during the last five years or so, but agriculture is still limping.

The sceptics of China story often doubt whether there is anything worth while for India to learn as India already has its agriculture in private hands. There are at least three points that one can still learn from China. First, China had heavily invested in rural infrastructure, education and health. Although these investments are not strictly counted as investments in agriculture, yet they laid a basic foundation for agricultural growth.

In 2004, adult literacy rate in India was still as low as 62% while China’s was as high as 92%. Most of villages in China now have access to all weather roads, while India is far, far away from that target. Second, China spends almost 1% of its agriculture GDP on agriculture R&D, while India had its expenditure levels below 0.5% for most of the years, which are lately raised to 0.6% last year. Rural roads, and agriculture R&D, the two together, can be powerful engines of growth in agriculture and associated rural non-farm activities.

Third, it may be noted that in China, for the last 10 years or so, much of the growth in agriculture is coming from the high-value segment (livestock, fruits and vegetables, and fishery), which are growing in the range of 5% to 8% per annum while food grain segment is growing at less than 1% per annum.

China is increasingly importing land demanding commodities like soybeans (imports exceeding 30 million tons) while exporting labour and care intensive commodities (fruits and vegetables). This is all driven by rising incomes, changing consumption patterns, and rational usage of resource endowments. Similar things are likely to happen in India over the next five to ten years. An important lesson to learn here is that high value agriculture needs fast moving infrastructure, and each commodity value chain has its specificity. Both public and private sectors need to invest heavily in logistics and infrastructure, processing and modern retailing. This will unlock huge potential in non-farm employment and promote rural-urban migration.

It may be noted that in China, during 1978-1997, rural non-farm GDP was growing at more than 24% per annum, and rural non-farm employment at almost 10% per annum. More than 180 million of Chinese farmers migrated to urban sectors since the reform in the late 1970s. Despite rapid overall economic growth, rural urban migration and non-farm sector in India is till embryonic.

Authors are the director, development strategy and governance division at International Food Policy Research Institute