Of Agriculture, Inflation and the Public Distribution System in India

GDP sector composition is broken up into 3 areas primarily: agriculture, industrial and service. Worldwide averages show a clear majority of services contribution to a country's output and then industrial comes second followed by agriculture. In fact, industrial output is the highest contributor only for China in the top 15 countries by GDP. As far as India is concerned, the breakup goes like this: 18% for agriculture, 20%  for industrial and 62% for services (by the way contribution from agriculture in US GDP is under 1% and India has the highest percentage contribution in the top 15 countries by GDP by a long way). So if agriculture contributes to only so much of India's GDP, then why it is so significant to India?

It is for many reasons. I will talk about only a few here. Firstly, over 50% of India’s population depends on agriculture for a living and therefore a good monsoon directly impacts all other sectors. India fared better than most nations globally in the recent global economic crisis because it depended lesser on exports and more on internal consumption & spending that was fueled by rural demand. Secondly, the country's population and spending power is growing much faster than its ability to produce food output and this is fueling the supply side inflation that most Indians are a victim of today.

Agricultural productivity in India is at very poor levels. Irrigation facilities are abysmal and the country is extremely dependent on a good monsoon. Hardly any modern techniques and practices are used anywhere and the fact that the average size of land holdings is very small makes it extremely expensive to employ modern agricultural technologies. Government policy is inconsistent and subsidized electric power is leading to over-pumping and drop in water table levels. Of course, a lot of progress has been made since freedom, but it has been extremely slow.  The Green Revolution (post 1965) ensured that widespread famine in India became history (though today it is blamed for land degradation).

The Indian government in its attempt to control inflation has banned export of certain commodity food items (though this can be discriminatory to farmers who could have got a better price outside the country). On the consumption side, the government fares terribly. There is a Public Distribution System(PDS) that  is meant to provide rationed amounts of basic food items and other non food products at below market prices to consumers through a network of Fair Price Shops all over the country. However, per a Planning Commission study, only about 42% of subsidized grains issued by the Central Pool reach the target group and the PDS is clearly almost ineffective. To put it simply despite the PDS, India accounts for over 400 million poor and hungry people. Also grains and food meant for the poor lie rotting in the India's storages and food release is rather poorly managed.

The actual poverty rate is India is under much debate. Government estimates put it under 30% percent. The Tendulkar committee report puts it at 37% and the World Bank put it around 42%. However, what is important here is that meaningfully perhaps the poor and the vulnerable section  is almost 60% of the Indian population.