Prime Minister Modi and India’s Agricultural Conundrum

(We originally published this insight here)

In 1931, the Indian National Congress adopted a flag designed by Indian freedom fighter Pingali Venkayya, with some input by a middle-aged barrister named Mohandas Karamchand Gandhi. That flag, which looks only slightly different to the present-day iteration, was replete with symbolic meaning.

Fast forward almost a century, and societal reverence for agricultural and economic independence remains strong in India. Prime Minister Narendra Modi, elected in 2014, promised sweeping economic reforms—such as reliable power, water, and roads coupled with diminished graft. 

Unfortunately for Modi, the climate had other plans. Across the subcontinent, an El Ni?o-induced drought has squelched seasonal monsoon rains, the lifeblood of both the country’s farmers and the more than 60 percent of Indian farmland which is rain-fed.  In response, the Modi administration has decided to double down on efforts to bolster the agricultural sector. From billions allocated to farming in this year’s budget to a crackdown on foreign GMO producers, the Indian government has made historic agricultural decisions in the first few months of 2016—and potentially at the expense of other industries.

Thus, as legislative elections loom—four states, representing 228 million people, will head to the polls within the next two months—and voters begin to evaluate the country’s progress over the past two years, the future of the Modi administration may ultimately hinge on the success of these last-ditch agricultural reforms. But will they be enough?

Origins

Responsible for more than three quarters of India’s total rainfall, last year’s June-September southwest monsoon fell far short of expectations—14 percent below the 50-year average —thanks largely to the ongoing El Ni?o. El Ni?o events can make the monsoon rains more unpredictable, and in some cases reduce overall precipitation. The fact that climate change is expected to increase the frequency of El Ni?o events, therefore, does not bode well for the 600 million Indians whose livelihoods depend on the greater agriculture industry. (For more of our insight into the science behind India’s monsoon, read here).

The monsoon has defined the subcontinent’s history. Ancient Indus Valley societies, nestled between modern day India and Pakistan, are thought to have developed and thrived during a period of reliable and bountiful monsoon rains between (roughly) 3300 and 1300 BCE. As growth outpaced the region’s progressively unreliable water resources, many of these societies dissolved, leading to a period of mass exodus toward more fertile regions farther east.  

Centuries later, the Mughal Empire was able to thrive for over 300 years in part by developing elaborate irrigation systems that enabled prosperity through the subcontinent’s chronic cycles of climatic instability.  At its peak, the empire—which stretched from modern-day Myanmar to Afghanistan—and its 150 million residents accounted for nearly 25 percent of global gross domestic product (GDP).

Unfortunately, the reforms implemented by the next major empire to rule India would be less inclusive. The British, who had been trading with India since the early 17th century, soon pushed toward a system of “company rule” through which the British East India Company exercised dominion over much of the sub-continent. Cotton, silk, indigo dye, and tea were all particularly important commodities for the company, and with cotton in particular, not only was the crop grown regionally, but it was also woven into cloth within the subcontinent before being sold by the company internationally.

In 1690, Britain passed the first of its Calico Acts, prohibiting the importation of Indian cloth, which was higher quality than what British weavers could produce. The acts therefore played a role in the start of Indian “de-industrialization,” wherein India was relegated to the production of raw materials, from which English weavers could produce finished products. It was only with the advent of mechanical cotton “gins” later that century that Britain relaxed its prohibitions on Indian cloth, as it was finally able to produce textiles of competitive quality. By the mid-19th century, British presence had shifted from company rule to direct colonization, and its stranglehold on India continued to tighten. Colonial authorities soon gave British products preferential status in India, flooding Indian markets and effectively shutting down domestic industries like cotton weaving.

Company rule engendered an accumulation of land under private, and primarily European, control. Generally unconcerned with local food security, wealthy landowners often converted the country’s most fertile land into cash crop farms. As a result of this type of farmland conversion and draconian taxes, millions of Indians died in no less than six famines—including The Great Bengal Famine of 1770, in which 10 million people died.  While the British did help modernize some forms of infrastructure, such as irrigation and railways, these too were often designed for extractive purposes rather than economic or agricultural stability. 

It was in this agricultural context that Gandhi’s policy of civil disobedience, which ultimately helped win India’s independence, proliferated. Gandhi’s movement called for the boycott of 

imported, machine-spun, Western-style British cloth and the increased production of hand-spun, traditional Indian textiles. Indians were zealous in their embrace of the movement, putting 74 British textile mills out of business within four years of the textile boycott. 

When India finally gained independence in 1947, a clear nationalist fiscal policy had been decades in the making. In fact, India’s first Prime Minister, Jawaharlal Nehru is widely credited as saying, “a second-rate Indian good is superior to a first-rate foreign product.”  It came as no surprise, therefore, that India turned inward as it sought to grow and develop its economy. Unfortunately, annual economic growth floundered at around 3 percent until 1990, while corruption and bureaucracy flourished. 

Agriculture, however, represented a bright spot in independent India’s first forty years of economic history, thanks in large part to the Green Revolution of the 1950s and 1960s. By focusing on the distribution of higher yield hybrid seeds and pesticides, the movement was credited with at least partially disrupting India’s traditional cycle of deadly droughts.  These high-yield varieties, however, also demanded far more water, requiring farmers to seek out alternate forms of irrigation, such as earth canals and groundwater wells.  

Structural reforms

Despite India’s agricultural progress, by the early 1990s, its poorly structured economy was in dire need of an overhaul. By 1991, its balance of payments crisis nearly resulted in government default—some estimates asserted that India’s foreign reserves could barely cover three more weeks of essential imports. 

Thus, newly elected Prime Minister P.V. Narasimha Rao turned to the International Monetary Fund (IMF) for a $1.8 billion loan and in return, and India agreed to undergo a series of liberal structural adjustments. Without much choice in the matter, India liberalized its economy and opened its doors to global investment and the global economy.  India’s economy quickly took off, growing at an average annual rate of around 6 percent—roughly double the rate of growth prior to liberalization.  

For some, the wrong type of growth

Of course, this is not to say all Indians have prospered equally. Since 1994, India’s GINI index—a measurement of a country’s economic inequality—has actually increased.  

Disconcertingly, economic growth has done little to abate a particularly troubling phenomenon among India’s rural poor: farmer suicides. In the last twenty years, roughly 300,000 Indian farmers have taken their own lives.  Although there are various competing theories regarding the causes of these suicides, several major themes have emerged: economic reforms have exposed farmers to the capricious nature of global markets; increased access to credit and pressure to spend on new technologies have pushed farmers into debt; and the growing likelihood of crop failure due to climate change and adverse weather have made earnings unpredictable.  

While India’s agricultural challenges are not limited to farmer suicides, the trend does indicate the depth of the challenges that rural Indians are facing. Thus, as more Indians begin to voice their frustration with growing inequality, and as farmers continue to grapple with a stifling drought, Prime Minister Modi and his Bharatiya Janata Party will face a very different set of challenges from the 2014 General Election, many of which may be out of his control.

Can Modi beat the heat?

Often referred to as the “real finance minister” of India, the monsoon has long demonstrated its ability to destabilize the subcontinent and so far, the ongoing El Ni?o-induced drought has done little to disprove such notions.  As early as November 2015, food prices for various staples began to climb gradually, while milk prices had already risen by 10 percent over the previous two months. In January 2016, food price inflation eventually peaked at about 6.85 percent.

The drought has also highlighted the water-intensive nature of the agricultural practices introduced to India during the Green Revolution. Although high-yield crops produce record yields, they also demand more water, fertilizers, and pesticides.  Although such crops worked well for years, Indian farmers constructed so many wells that water tables in some places were dropping as much as three feet a year, not to mention the issues around water pollution that came from increased chemical use. 

Drought-struck farmers are now pushing the government even harder to give more support to agriculture.   Aware of the drought’s destabilizing potential, the Modi administration has since made massive overtures toward the industry.

In the first few months of 2016, the government announced plans to borrow $12.6 billion in overseas funding for new irrigation projects. The funds are expected to add an additional 32 million acres of irrigated farmland over the next decade, and add additional security to the country’s millions of farmers; India has 18 percent of the world’s population but only 4 percent of its water resources, and only about 35 percent of its agricultural area is irrigated. Meanwhile, the $12.7 billion allocated to rural development included pledges to double investments in rural roads, provide cooking gas for millions of new homes, construct irrigation projects, and increase spending on internet access and rural employment programs.

The details of India’s 2016-2017 budget were unveiled just a few weeks after the $12.6 in overseas funding. The government reaffirmed its commitment to farmers by hiking up the budgetary allocations to agriculture to over $5.4 billion. 

Though the promise of the budget alone may please rural communities, many of these projects won’t be completed until the next decade, including Modi’s larger promise to double farmer’s incomes by 2022.

This pledge comes on top of the administration’s bold Soil Health Card Scheme launched last year. The government is, through the scheme, creating detailed soil maps based off satellite information and soil surveys, distributing the results to farmers throughout the country, and offering farmers tailored advice based off those results. 

And just last month, the Modi administration decided to confront a global agricultural titan in the name of protecting Indian farmers: Monsanto.

Caught on cotton

Emblematic of both the country’s historically tenuous relationship with the global economy and Modi’s recent populist push, India’s cotton industry serves as a potential bellwether for much of the country’s agricultural industry. In 2015, for the first time, India became the world’s largest producer of cotton, and the commodity now represents India’s second biggest export by value (behind rice).

Still, the harsh realities of the current drought have quickly disillusioned even the most loyal of voters. In fact, Prime Minister Modi’s Bharatiya Janata Party (BJP) actually lost village council elections in Gujarat late last year, despite Modi running the state for over a decade.  In response, the BJP has tried to quell discontent among farmers by raising the crop’s minimum support price, a subsidy which has guaranteed price floors for farmers since 1960’s, but with little success thus far.

Just a few months later—in what appears to be far from coincidence—the Modi administration announced that it would be cutting royalty fees by 70 percent on genetically modified cotton seeds produced by American agribusiness giant Monsanto and its local joint venture Mahyco Monsanto Biotech.  Currently sold to around 7 million farmers, the majority of whom are concentrated in Gujarat, Monsanto’s “Bollgard 2” cotton seeds have been adopted around the world for their ability to resist pests and increase yields. 

Available data also suggests that Indian cotton farmers have good reason to appreciate the Monsanto seeds. Bollgard seeds were available beginning in 2002, and from the 2002-3 to 2003-4 crop year, cotton yields jumped by 98 kg/ha, production quantity rose by roughly 700,000 tons, and exports ballooned from just 12,192 tons—the lowest in over a decade—to 152,407 tons in 2003. Within five years, both cotton yields and production quantity had roughly doubled, while cotton exports had increased by a factor of a hundred.  The fact that these increases occurred at a time when global cotton prices were relatively stable and when government support for cotton farmers were also stable further corroborates the idea that Bollgard seeds have played a principal role in the revitalization of India’s cotton industry.

Given such dramatic gains, it is hardly surprising that about 95 percent of Indian cotton now comes from genetically modified seeds. 

Anti-GMO legislations from some of India’s main agricultural competitors suggest that few countries are in a rush to adopt new varieties of genetically-modified crops.  A 70 percent royalty cut, moreover, will ultimately increase revenue for farmers and seed distributors.

Monsanto is unhappy about what it considers an “arbitrary and innovation-stifling government intervention.”  For evidence of what backlash the government’s price fixing may have, there may be no better example than Monsanto’s recent forays into another country halfway around the globe: Argentina, as we covered in greater depth here. Monsanto and its Indian affiliates have since filed a lawsuit in the Delhi High Court, but the government has already moved forward with its decision.  It is also unlikely that Monsanto would seriously pursue, much less find success in, international litigation following its similar failure with Argentinean soybeans in 2010. 

The chief executive of Monsanto India, Shilpa Divekar Nirula, had already made the company’s only viable threat when he warned that the company would withhold its forthcoming version of the modified seeds, Bollgard 3. The main arguments in favor of complying is that Bollgard 3 will provide even higher yields than its predecessor, and that pests may be developing, or soon develop, resistance to Bollgard II.  

Ultimately, even if Indian cotton production starts to suffer on a noticeable scale, the sheer size of India’s agricultural industry and wider economy would make it a very costly decision for any company to forgo access to its market, regardless of past disagreements.

All’s well that grows well

Regardless of the ultimate success of the current administration’s most recent reforms, it is likely that budgets and promises alone will benefit Prime Minister Modi and his party in this year’s elections, especially considering that vote counts are scheduled just over a month from now. Moreover, 63 percent of the voters in the four states headed to the polls starting next week live in rural areas, increasing the likelihood that Modi’s reforms will have significant influence on the results. Lastly, food price inflation has finally started to abate after January’s high, which may allay voter fears on a more immediate level than any promised future reforms.  In other words, the administration’s recent agricultural overtures may help Modi retain the rural electorate that helped propel him to victory in 2014.

However, 2017 is arguably even more significant to Modi’s future and legacy. Seven states (including cotton stronghold Gujarat), representing 300 million people are slated to vote next year, roughly 72 percent of whom live in rural areas. And, at least among the cotton-farming electorate, India’s move to cut Bollgard royalties in the name of protecting cotton farmers will likely resonate favorably.

Looking beyond the upcoming legislative elections, however, the future of India’s economic well-being becomes more opaque. The 2019 general election should be shaped more by results than by promises; still, exogenous and unforeseen fiscal forces could derail even the most tangibly successful domestic policies.

In China, for example, even positive but slowing growth rates have been enough to ignite capital flight. According to government officials, Chinese GDP grew by 6.9 percent in 2015 —- in 2015 -— for most countries, a more-than-respectable figure, but for China, the slowest in a quarter of a century. So when growth slowed and the renminbi was devalued in the third quarter of the year, net foreign direct investment (FDI) quickly turned negative. This should be especially unsettling for the Modi administration as, according to the World Bank’s 2015 “Ease of Business” index, India is currently considered the world’s 130th most business-friendly country while China sits at 84th on the list.  Setting price caps on the royalty fees of some of the world’s largest multinationals is not likely to help.

Lastly, and somewhat paradoxically, the success of Modi’s agricultural reforms—such as his plan to increase irrigated land around 10 percent by 2017—may only be evident during the country’s next drought, which could occur well after Modi has already been voted out of office. 

It is likely that the next general election will be closer than the last. But even if Modi’s reforms do not bear fruit, or crops, in time for the forthcoming elections, India’s deeply rooted agricultural history will ensure that the well-being of the country’s farmers is never far from the public conscience. And, lest any Indians forget, all they need to do is look up to the center of their nation’s flag.