Real farm problems...

We don't know what they are.  Our colleagues in India do, and it could be dragging this vibrant emerging country down.

Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.

Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill. This at a time when India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year. "Starting last year, the government missed key opportunities" to fix the economy, says Gokarn. In fact, he adds, "there has been no significant reform done at all in the past four years"—the time the Congress coalition has been in power.

Even the most bullish on India are hard-pressed to recall any significant economic reforms made in the recent past. A plan to build 30 Special Economic Zones is virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Agriculture, distorted by fertilizer subsidies and technologically laggard, is woefully unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the courtrooms, have been ignored.

A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use. "The will to implement all these needs leadership," points out Poddar. [More]

India is, of course, one reason fertilizer prices have detonated. But it is also, unlike China, the one country where liberal democracy means farmers have enormous political clout.  Like farmers tend to do, they seem to be intent on choosing actions that exacerbate their problems, rather than fix the underlying causes.

Farmers were handed over loan-waiver certificates, along with a letter signed by Prime Minister, which stated: " Agriculture is the lifeline of our economy... I assure that government will stand by you and other farmers while you continue to engage in agriculture."

Under the debt waiver scheme, government has waived all outstanding farm loans of small and marginal farmers having up to two hectares of land that were overdue on December 31, 2007.

Meanwhile, other farmers will get up to 25 per cent of the due amount under one-time settlement scheme by paying the rest of amount. [More]

I think India will labor to escape the agrarian trap, while Chinese farmers migrate rapidly to the city for other work.  In fact, a pronounced two-part economy seems to be developing there with knowledge workers (consulting, medicine, information technology, etc.) making rapid gains in income and living standards, but the vast majority stagnating.

For Moët and other luxury purveyors, India is a land of enormous promise. Sure, two-thirds of India's 1.1 billion population lives in the hinterland with little access or means to such luxury, but there are almost 100,000 dollar-millionaires in the country. American Express (AXP) predicts that India's millionaire brigade will balloon by 12.8% a year for the next three years. Its nouveau riche could spend $30 billion on high-end goods by 2015, according to consulting firm A.T. Kearney. They now spend about $4 billion, while the Chinese spend more than $5 billion. A survey by by A.C. Nielsen early this year shows that India is the third most brand-conscious place in the world after Greece and Hong Kong.  [More]

Given the current food crisis, how India approaches their agricultural problems will have enormous impact around the globe. But their bloated and unimaginative government does not give much reason to hope.