Development Days-Bihar’s growth strategy: a failure of imagination

Development Days

Bihar’s growth strategy: a failure of imagination

By Michael Neri

 Where will Bihar be in 20 years? Will it be like Punjab is today, with its dominant agriculture sector supported by a thriving small scale manufacturing industry in urban pockets, or will it be like Gujarat or Maharashtra, with their robust industrial economies and their sophisticated services sectors dovetailed into the global economy?

The World Bank, in a 2005 report (http://tinyurl.com/3befoh7), created a growth strategy for the state that leverages its rich land and water endowment to paint a future for the state as an Indian agro-horticultural powerhouse. Soon after, Bihar’s Planning Commission pretty much parroted the same wisdom (http://tinyurl.com/3bq92v9), and then in 2009, ASSOCHAM, the national trade association that speaks on behalf on a collective of Indian business chambers of commerce, unveiled a vision for Bihar which emphatically underlines agro-horticulture as the center piece of the state’s growth strategy. What they have all done is move from a present to a future in linear extrapolation, with little imagination.

Compare this to the way even municipal and district leaders in several Chinese towns and regions imagine for themselves a future based on becoming dominant global players in specific manufactured products in which they have no known competitive advantage, and then aggressively support private companies to successfully achieve this larger vision, and Bihar’s failure of imagination stands out in ragged insufficiency. In Singapore, a national strategy and plan is underfoot to make the island a global center for bio-engineering, which is expected to become the engine of future growth worldwide. Singapore’s remarkable growth story is a prime example of how imaginative strategy and state intervention can catapult a state from underdeveloped status to supra-developed status in one life time.

In saying all this, I am by no means suggesting that Bihar should not pursue agricultural growth, or that there is anything inherently disrespectful about agriculture. Several middle income countries and even a small handful of rich ones have dominant agriculture sectors. But as I shall attempt to argue in this article, agriculture led growth is intrinsically constrained and limited by land, water and current technology, and extrinsically limited by population and competition, and is thus unsuitable for sustained long term growth.

Fragmented and overcrowded

Let’s look at Bihar’s agriculture sector in a little more detail. Agriculture currently accounts for 38 % of state GDP of $ 35 billion, compared to the national average of 18 %. 85% of Bihar’s 103 million people live in rural areas, and with total arable land measuring a mere 8 million hectares (ha.), the land to man ratio is a miniscule 0.1 ha. /person, which is simply incompatible with modern agriculture. Averages hide some inequality in the actual distribution of land, but over 95 % of farms are smaller than 4 ha., accounting for about 75 % of total cropped area. By developed world standards, where farms could measure thousands of hectares, these are very small, and small in agriculture means lower factor productivity for land and non-labor inputs such as energy, fertilizer and machinery and irrigation/drainage systems.

Crop yields on Bihar’s farms are also very low by global standards, and can in theory be improved significantly. For instance, rice yield is in the region of 1.6 tonnes/ha., compared to China’s average of 4 tonnes, and the world record of 15 tonnes/ha. Wheat yield is 2 tonnes/ha compared to average of 4 tonnes/ha in the US and the global record of 15 tonnes/ha, and fruit and vegetable yield are about a third to half the world average. Diary and meat yield is a pathetic 10 % of the average in the US and thus has the most potential for improvement.

Constraints on productivity

However, there are several impediments to increasing productivity. Higher yields require investment in technology, inputs, and knowledge which are simply not cost-effective for small farms to acquire. The solution is farm consolidation, but for that to happen, farmers must have legal security of title either to ownership or use. Like elsewhere in India, land records and legal title are a total mess in Bihar, and there can only be a political solution to the problem, which unfortunately, is not on the table just now. Thus, the yield revolution is Bihar is likely to be confined to bigger farms which account for a maximum of 20 % of all acreage in the state, and as such are unlikely to have as large an economic impact on the state as planners expect.

But even if yield can be increased, market issues still remain and are potentially more challenging. India’s cereal production (where yields can potentially be doubled at the least), is already at saturation levels, and global cereal markets are still dominated by subsidized supplies from the US and other developed nations, against which India is simply not competitive, despite its own subsidies on energy and fertilizer. With domestic “buffer” food stocks already running at an excessive 50.2 million tonnes, demand is lagging behind supply and will force a move away from these crops into horticulture.

However, the potential for productivity increases by using higher yielding seeds and inputs in horticulture is nowhere as large, and often no more than 30-40%. Sectoral GDP can be increased significantly though processing fruits and vegetables, but even here, the issue of finding global or even national markets for some for this produce has not been fully explored, and may not be as great as imagined. For instance, some varieties of mango have only a local preference, and some do not lend themselves to canning.

Produce quality issues are serious limitations in marketability, and the current non-exclusive state sponsored procurement system encourages production of low quality produce since it offers the same price for low quality as high. Free markets, especially global “free” markets, discriminate between different qualities, but to get into these markets requires significant investments in phyto-sanitary quality control measures, which again limits the opportunity to corporate players and big farmers with the resources to make these investments.

Infrastructure bottlenecks are a serious concern too. Though Bihar is one of the states that has liberalized its produce markets from the stranglehold of monopoly procurement by state agencies, the fact that 70 % of farms in Bihar are still unconnected by motorable roads means that their access to national markets is still limited, and it could take at least 2 decades to create road linkages to integrate them into the national and global economies. Electricity shortages in Bihar are endemic, and attempts to undertake the wholesale reform of the electricity sector in the state are still nowhere to be seen. Here again, it could take years before such reform happens, and till then energy shortages will continue to hobble both agriculture and industry.

Limits to growth

All of these factors considered, the likelihood of Bihar maintaining the targeted 8 % growth rate in agriculture, and emerging as an agro-horticultural powerhouse in 20 years is not particularly realistic. But let’s assume that Bihar miraculously sorts out its land title issues, encourages land consolidation, rapidly ramps up rural road connectivity, and most important of all, reforms its electricity sector. Productivity will then increase. Assume also that this increased product finds markets. If all of this happens (a big IF) , then Bihar’s agricultural GDP could double on account of yield increases and with some luck even double again on account of value addition in food processing, from $ 15 billion currently to about $ 60 billion in 20 years.

Compare that with Punjab, a state with a quarter of Bihar’s population and half the land area, where agriculture generates $ 17 billion currently, and is projected to rise to $ 45 Billion in 20 years, and it is easy to see that Bihar’s ambition is not vaulting by any means. Maharashtra has a current GDP of $ 190 Billion, and is projected to top $ 500 billion in 20 years, with over 85 % of that growth coming from industry and services. That is the measure of growth that Bihar may be foregoing by its sub-optimal choice.

For states that pursue an agriculture led growth strategy, the issue is not only what happens in 20 years, but what happens thereafter. The productivity of land is finite, and there is a point beyond which it cannot be increased cost effectively. Indeed, as we are now witnessing in Punjab and other green revolution states, long term productivity reaches a plateau and then declines due to soil degradation, requiring very expensive reclamation. Punjab’s trend line farm growth has in fact dropped below 4 % per annum, below the national average for India as a whole of 5 %. Even in the western world, there is some evidence that factor productivity is stagnant despite rising input use and technology improvements.

Thus, a long term growth strategy focused on agriculture, even if it succeeds in the short run, runs into a wall at some point and derails. Bihar is thus charting a trajectory that is less than optimal at best, and possibly unrealistic and unattainable at worst. Does Bihar have other options? Can it take Karnataka’s IT services route? Or is the Shenzen (China) model of small scale manufacturing for global markets the better route? Can it make a success of tourism based growth? Is medical tourism the answer? These questions will be addressed in a future column: please watch this space.

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The author is a writer and consultant based in Fort Lauderdale, Florida.