Shreekant Sambrani: The middle to the rescue

Agriculture will make an incremental contribution of over 0.4% to the overall growth rate

Agriculture is doubtless what has saved the government’s bacon, according to last Friday’s early estimates of national income for 2016-17. This Cinderella of the Indian economy is expected to grow at 4.1 per cent this year, as against 1.2 per cent the previous year, unlike the favoured sisters of industry and even the long-time star, services, both of which grew at rates slower than the year before. Thus, agriculture will make an incremental contribution of over 0.4 per cent to the overall growth rate. Without this, even the massive increase in government consumption would have failed to prevent the growth from sliding by a good percentage point from the 7.6 per cent of 2015-16. 

That piece of fortune, as everyone now knows, is due to the good, if patchy, monsoon in 2016. The record kharif crop has helped tame the inflation beast as well. But the demonetisation of large denomination currency notes coinciding with the onset of rabi was feared to affect the winter crop and the rural economy badly. That could have reduced, if not wholly negated, the positive impact of the kharif. I had argued in these pages that these fears appeared to be a priori not quite justified (“Bharat will carry on,” November 29). The present projections based on reported acreage sown and off-take of fertilisers suggest that the rabi harvest will be in line with pre-notebandi forecasts. There is no particular reason to doubt this; currently available field evidence, mostly anecdotal, supports this expectation. 

This outcome in the face of rural branches of commercial banks being particularly illiquid in the last two months and the co-operatives being kept away from cash exchange will not be mere serendipity. Much of the input and a part of the cash requirement for the winter crop must have come from private sources, the much-maligned money-lender-trader nexus. 

The epitome of this evil firmly etched in public imagination is the leering Sukhi Lala (Kanhaiyalal) making an indecent proposal to the beleaguered Radha (Nargis) in the Hindi film classic Mother India. The learned perception is not far off either. Studies beginning with this writer’s on horticulture in 1986 have noted that the Indian agriculture supply chain from the farm to the table was long, resulting in sizeable retentions. Later works, the three McKinsey Faida reports up to 2013 as also Rabobank’s food and agribusiness studies, confirm this. But somewhere along the line the critical role of the supply chain was ignored. Instead, attention was focussed on how to reduce the retention by shortening the chain, based on the assumption that middlemen worked against the interests of both consumers and producers. 

History is replete with instances of traders and money-lenders who were usurers and expropriators. But that does not render the entire class of middlemen rapacious, nor the intermediation they perform redundant. To deny this role is as bereft of logic as to say that wholesalers on the distribution side are not needed.  The two roles are mirror images of each other. 

Even rudimentary processing of produce before it enters the distribution chain requires bulking, particularly as production is from widely dispersed small holdings.  Intermediaries are thus the original aggregators. That is their major role, but by no means the only one. They manage transportation and subsequent sales. They also bear the attendant risks of spoilage and transit losses, which are often substantial.  For fresh produce, they do some grading, sorting and increasingly, packaging. We are concerned at the producer often getting only 20 paise of the consumer rupee (that proportion is not much different elsewhere either), but we do not always reckon these costs. The net margins are low at each stage, in single-digit percentage points. 

This is not to say that traders are always honest brokers. They could become hoarders and price manipulators, as we have experienced with increasing frequency. The right way is to regulate them and enforce the rules diligently. Outlawing trade channels, as former prime minister Indira Gandhi tried to in the mid 1970s, is no answer and will never work. The Maharashtra monopoly cotton procurement scheme barring brokers inflicted pain all around, but in Gujarat with well-regulated open auctions involving agents, everyone gained. 

Nearly half a century after bank nationalisation ostensibly for improving farmers’ access to funds, the reality is that commercial banks are still a distant source of comfort to rural India. Loans, not always available even after cumbersome paper work, are for narrowly defined cultivation purposes. Pressing needs such as medical emergencies or rebuilding assets lost to natural calamities are seldom met. So the village sahukar is not just the lender of the last resort, but often the only lender, despite high interests. That could explain the recent trend of declining share of formal sources in rural credit, especially among smaller farmers. The just announced finding that over 80 per cent of farmer suicides on account of overdue loans are from among borrowers of banks speaks volumes. 

No wonder then that in this winter of their discontent, farmers have relied on their long-standing if exploitative support system.  And by that slender thread hang India’s hopes of staying on its chosen growth path in the face of the self-inflicted ordeal. 
 

The writer is an economist