7. Enabling Smallholder Prosperity through Commercialization and Diversification

The Green Revolution (GR) was a landmark achievement in technological and institutional innovation that brought about the exponential growth in yields of cereals in many developing countries and saw improved food availability (mainly wheat and rice), a rise in per capita incomes and poverty reduction. This was extraordinary because productivity growth took place in line with population growth, which more than doubled, and when land scarcity and land values were rising (Pingali, 2012). Central to the GR strategy was the use of high-yielding variety (HYV) technology in staples such as wheat, rice and maize coupled with appropriate institutional mechanisms to enable widespread adoption across many developing countries (ibid). In countries like India, GR was effectively implemented on small farms because these technologies were (a) scale-neutral and they could be divided and distributed at no extra cost unlike other technologies such as tractors and irrigation (Birner & Resnick, 2010; G. Feder, Just, & Zilberman, 1985; Hazell et al., 2010; Mosley, 2002); and (b) it was an international public good that had adequate input support in the form of state-subsidized fertilizers and pesticides and extension services (Pingali, 2012), allowing for the adoption of these technologies by smallholders in many parts of India. The positive impacts of the GR were that it led to significant increases in the yields of wheat and rice that led to lowering of food prices and increased availability, improving food security, and the resulting income growth led to a reduction of poverty in many parts of India (ibid).

Although GR technologies were scale-neutral allowing for adoption on small farms, they were not resource-neutral (Bernstein, 2010) and this meant adoption was influenced by the smallholder’s access to resources such as irrigation, markets and credit. Also, as food security was traditionally defined as calorific security, food policy was excessively focused on the promotion of staple grains such as wheat and rice to make available sufficient amount of calories to the population (Pingali, 2015). Relative to staple grains, other crops such as pulses and coarse cereals received limited focus concerning R&D resulting in limited seed technology development and market support such as direct procurement and support price. Therefore, the regional and crop disparity regarding benefits became stark in the years following the GR, resulting in high interregional inequalities in agricultural development. Much of the eastern region (Bihar, Eastern UP, West Bengal, Odisha and Madhya Pradesh) did not see a change in area under production (Figs. 7.1 and 7.2).

As access to irrigation was vital in determining the regions where GR technologies were implemented, Punjab and Haryana and to a less extent the Indo-Gangetic plains saw an increase in area under production of wheat and rice. Also, in Punjab, the wheat yields are 2 to 2.4 times higher than of other states, and rice yields are 1.5 to 2 times that of states such as Odisha, Maharashtra, Madhya Pradesh and Bihar. During this period, we also see a change in cropping patterns. As the economic benefits of increased yields were substantial, it led to the emergence of intensive cropping of wheat and rice in irrigated tracts of India. Figure 7.3 shows the change in the proportion of gross cropped area under pulses in various parts of India. In the irrigated regions that witnessed intense cultivation of wheat and rice, there was a 30–40% drop in area under pulses cultivation, as pulses were substituted for rice cultivation in GR adopted regions and pulses cultivation shifted to the central parts of India (Abraham & Pingali, 2019; Pingali, 2012).

Figure 7.4 shows the per capita availability of various food grains in India from 1951 to 2015. In the case of cereals, we see availability increased from 65.7 to 168 grams per capita per day in wheat and from 158.9 to 186 grams per capita per day in rice to increase production in line with population growth. In the case of pulses where comparable technological and institutional interventions were missing, production and area under cultivation stagnated, leading to a decline in per capita availability from 60 grams per day per person in 1951 to 43 grams in 2015. Yields witnessed only a marginal increase (251 kg/hectare) in the last 65 years. In the case of coarse grains (such as sorghum, pearl millets, finger millets, barley etc.) per capita availability decreased from 109.6 in 1951 to 67.4 grams per day in 2015. Despite an increase in yields from 579 kg per hectare to 1579 kg per hectare in coarse cereals during the same period, the area under cultivation decreased by about 60%, leading to lower supply.

The advantage of the GR was that it was scale-neutral and could be adopted by small and marginal producers provided they had access to irrigation or were in locations with reduced agro-climatic risk. Institutional support and favorable policy in the form of subsidized inputs and extension services and market support through minimum support prices and direct procurement by the state played a crucial role in enabling and incentivizing adoption. GR was also a watershed in agricultural development that played a critical role in poverty reduction and significantly reducing hunger. The limits of GR were that it was focused on significant staple grains such as wheat and rice and was limited to regions that were not resource constrained. The current challenges for the India food system are to ensure diversification to higher value crops to ensure the availability of nutritious foods and ensure income growths through productivity increases, especially in lagging states that did not benefit from the GR. Central to ensuring broad-based growth and development in the agricultural sector is rectifying the institutional and resource constraints of smallholder production. The next section of this chapter discusses the significant production challenges of smallholder agricultural systems in diversification and commercialization.

Diversification of production at the farm level is critical for food security through increased availability of nutritious food and for improving incomes. However, the ability to diversify is determined by both policy and access to factors of production such as seeds, fertilizer and pesticides, credit and extension services. Food policy in India has traditionally focused on concerns of calorific security, where it aimed to ensure the availability of sufficient calories for its citizens (Varshney, 1998). GR technologies focused mainly on wheat and rice and agricultural policies focused on price support and direct procurement aimed to bring about intensive cereal-based transformations (de Janvry & Subbarao, 1986; Dorward, Kydd, Morrison, & Urey, 2004; Freebairn, 1995; Goldman & Smith, 1995).

In comparison, food grains such as coarse cereals and pulses did not see much technological intervention or market support. The unintended consequence was that it reduced the incentives for the cultivation of micronutrient-rich coarse grains and pulses in favor of wheat and rice affecting the availability of micronutrient-rich foods.

Costs of producing and selling different crops vary depending on their characteristics as commodities or products. Commodities are “Standardized agricultural products that have had little or no processing and often raw materials for further procession” (Schaffner, Schroder & Earle, 1998, p. 6). Products are commodities that are differentiated based on attributes (organic, processed, branded, variety, perishability) or commodities with value addition (Reardon & Timmer, 2007). The notable difference between commodities and products is that commodities are fungible (substitutable) raw materials or produce like corn, wheat, rice, crude oil or iron ore, while products are of higher value, perishable and often require specialized value chains.

The cost dynamics for growing commodities and products are fundamentally different and this influences the ability of farms to diversify. Table 7.1 highlights the various features on which commodities and products differ at the farm level. As products such as fruits and vegetables, milk, and so on are highly differentiated, they may require higher labor inputs, monitoring and higher levels of credit access to procure quality inputs as grades and standards requirements for marketing products may be more stringent. This raises the costs of production and management at the farm level for products in comparison to commodities.

The capacity of small farms to diversify from commodities to high-value products has production and management costs and risks associated with them. The willingness of farming households to diversify or stay in semi-commercial production systems will depend on behavioral characteristics such as levels of risk aversion and the ability to withstand and manage those risks. Therefore, access to infrastructure such as irrigation and inputs such as credit and quality inputs in the forms of seeds, fertilizer and pesticides plays an essential role in the ability of smallholders to diversify. Credit availability, changing labor costs and costs of inputs are determining factors not just for diversification but also for agricultural production growth in general.

The ability of small farms to access credit, labor and inputs such as quality seeds, fertilizers and pesticides determines their capacity to commercialize and improve household level incomes. Access to these factors of production is influenced fundamentally by credit availability. Capital market imperfections limit access to credit for farms with low land endowments because they have limited value as collateral (Besley, 1995a, 1995b; Bhaduri, 1977; J. Ghosh, 2013; P. Ghosh, Mookherjee, & Ray, 2001). As the scope for internally financing agricultural production is limited due to slow turnover of capital for small farms, the need for credit is essential. To assess the potential for smallholder production to commercialize and diversify, we look at the challenges in accessing credit and input markets and the changing dynamics of labor markets.

In smallholder agricultural systems, the cost of accessing inputs, information and R&D is a challenge for resource-poor small farms. Institutional interventions that can offset disadvantages of small farms and enable effective implementation and uptake of policy targeted at improving production become important. Aggregation models such as producer organizations and cooperatives, where smallholders organize themselves in groups to jointly access resources and market their produce, have shown to reduce transaction cost and form market linkages (Barrett et al., 2012; Bellemare, 2012; Boselie, Henson, & Weatherspoon, 2003; Briones, 2015; Reardon, Barrett, Berdegué, & Swinnen, 2009; Schipmann & Qaim, 2010). Promoting these institutions will help smallholders mitigate some of the transaction costs associated with market entry, as it addresses problems associated with economies of scale.

Cooperatives have been promoted globally to remedy the disadvantages of scale to small farms with differing levels of success (Devaux et al., 2009; Kherallah, Delgado, Gabre-Madhin, Minot, & Johnson, 2002; Stockbridge, Dorward, & Kydd, 2003). In countries like Japan, South Korea and Taiwan that were founded upon small farms,¹cooperatives were set up, and factors that put small farms at a disadvantage were neutralized through state-provisioned extension services, key inputs, irrigation and market intervention operations (Huang, 2006; Kajita, 1965; Lin, 2006). Aggregation of producers will help reduce the fixed cost of accessing resource and services and once made available these institutions can disseminate it with little additional costs. However, in many developing countries and in India, cooperatives in the past have been less successful. Their effectiveness was limited by issues of poor organization and incompetent management, political interference in their functioning, financial irregularities and corruption within the organizations (Akwabi-Ameyaw, 1997; Attwood, 1982, 1987; Baviskar, 1987; Holloway, Nicholson, Delgado, Staal, & Ehui, 2000; Lalvani, 2008). In India, the significant challenges the cooperatives faced were structural and incentive based. The structural problems were political and bureaucratic interference, poor management and governance, and elite capture of the activities to their benefit. Cooperatives also faced incentive problems characterized by dormant membership and poor participation of members, hindering the growth of these organizations. These incentive problems were due to non-percolation of benefits to members, especially the demography the cooperatives meant to empower.

Since the early 2000s, there has been a significant drive in India to promote producer organizations in the agricultural sector. The amendment of the Companies Act in 2003 that enabled the formation of Producer Companies (PCs) was a vital step in this direction. The producer-owner system increases the agency of members and reduces the role of the state and bureaucracy, preventing exogenous power capture. More agency for these organizations may prove to be a crucial step in addressing some of the structural issues that hindered the effectiveness of cooperatives. State support to set up aggregation models and capacity building to help producers manage these organizations and help in forming linkages to input and output markets will be important. These institutions can rectify scale-related disadvantages for smallholders in accessing technology, credit, information and inputs while reducing transaction costs to enable commercialization.

Improving agricultural production in regions that the Green Revolution did not benefit will be important to rectify regional disparity through agricultural development and improved incomes. Agriculture’s share in state GDP of the eastern states of Bihar, Chhattisgarh, Jharkhand, Odisha, eastern Uttar Pradesh, West Bengal and Assam is high, while productivity remains low. Improving agricultural production in regions that did not reap the benefits of the Green Revolution is important to rectify regional disparity in agricultural development and incomes. According to the National Bureau of Soil Survey and Land Use Planning (NBSS&LUP), the LGP in these regions is 240 days and the annual rainfall range from 1000 to 2500 mm per annum (GOI, 2015). The availability of groundwater in these regions is also high but remains untapped for agricultural development.

Despite these advantages, the exposure to abiotic stress resulting from droughts, floods and submergence is high due to poor access to irrigation and infrastructure of flood control. In many states such as Odisha, Assam, Jharkhand and Chhattisgarh, households only have a single sowing season. Eighty-two percent of the fallowed land is in the eastern part of India (Singh, Praharaj, & Sandhu, 2016). In the post paddy season, the land is often left fallow although there is potential to grow crops such as pulses using the residual moisture of the previous season. Practices of open grazing and labor outmigration during this season also make the adoption of second sowing problematic. In these states mentioned above, the rate of migration to urban areas and urbanizing states are high as off-farm wages have increased in recent years resulting in the pull of labor from the agricultural sector.

Getting agricultural productivity going in these regions requires infrastructural development and institutional interventions. Development of irrigation in these regions is vital to reduce abiotic stress during the growing seasons. Micro-irrigation and communal irrigation facilities such as water user groups can help reduce overuse of water and promote judicious use of water resources. Improved access to irrigation and reduced abiotic stress resulting from late rainfall and drought, increase the scope for diversification and may improve access to credit as risks reduce. Improving access to cold chains and specific value chains for perishables will also improve connectivity to markets and marketing opportunities (this is discussed in detail in the next chapter). Institutional interventions such as good extension services, R&D focused on the advantages of these regions and aggregation models to reduce the disadvantages of scale are especially relevant in the eastern states. This region may not have the same potential as Punjab, Haryana and the southern Delta regions in reaching yield potential in paddy, but have the scope to develop a comparative advantage in growing crops such as pulses and certain fruits and vegetables. Development of extension services to help with cropping transitions is essential. Traditionally, R&D has focused on significant cereals, and extending this to other crops will disproportionately benefit these regions. Technologies in increasing yields in pulses and coarse grains, short duration crops to adjust to climatic conditions, and crops with improved resilience to abiotic stresses will be crucial to this region. These technologies along with mechanization can offset the effects of migration by reducing the drudgery of women and improving productivity. Lastly, aggregation models can remedy the disadvantages of scale in accessing resources and technology and will prove essential for the development of the agricultural sector in this region.