1

M.A. Part I
Economics Paper - I
Agricultural Economics
1. Demand for Farm Products
Characteristics of demand for farm products-Concept and
measurement of own-price cross-Price and income elasticities
of demand and their interrelationship-Quantity and components
of demand for food-Growth in demand for food in developing
and developed countries-Forecasting of demand for food
products-Rationale for and types of government intervention for
food and nutrition security in developing countries.
2. Supply of Farm Products
Characteristics of supply of farm products-Issues relating to
specification of supply response function (Distributed laps,
acreage vs. production response etc.)- Rigidities in farm supply
response-Supply response of individual crops and aggregate
production-Market supply a subsistence crop-Supply response
in Indian agriculture-Price vs. non-price factors in induction
aggregate supply growth-Characteristics of farm product
markets in India-Role of farmers marketingco-operatives-
Futures trading-Towards free trade in agricultural commodities.
3. Economics of Production and Resource Use and Instability
in Agriculture
Resource and input use-Public/private capital formation-
Important production relationships-Economics of input and
product substitution-Imperfections in product and input markets
in developing agriculture-Decision making under risk and
uncertainty-Sources of price variability and income instability-
Rationale for and types of government intervention for price
support and reduction in instability-Alternative concepts of cost
of cultivation and determination of minimum support prices in
India-Role and optimum size of buffer stocks.
4. Rural Money Markets
Credit fragmentation Organized and unorganized sectors-
Credit rationing-Moral hazards - Evolution of credit systems in
India-Imperfections in rural credit markets in India.
2
5. Labour Markets
Concepts of work, skill and productivity-Methods of
measurement of employment and unemployment-Free and
unfree labour -Types of employer-Employee relationships-
Determinants of wage rates Labour market segmentation-
Gender based discrimination Biases in data sources time
disposition studies.
6. Land and Lease Markets
Types of farming-Historical evolution Segmented property
rights-Characteristics and functioning Economic, extra-
economic and legal restrictions-Lease market-Formal and
informal leases-Economics of share tenancy-Crop-sharing
practices in India-Inequity in distribution of holdings-Market
interlocking and inter linkages-Analysis of rural classes-Agraian
structure and agrarian relations in India.
REFERENCES :
1. Agarwal, Bina (1996), Women and Land rights in South Asia
(Module 6).
2. American Economic Association ( ), Readings in
Agricultural Economies (Module 1,2)
3. Bardhan, Pranab and Christopher Udry (1999), Development
Microeconomics, Oxford Publication, (Modules 4, 5, 6)
4. Basu, Kaushik (1990), Agrarian Structure and
Underdevelopment, Harwood (Modules 5, 6)
5. Cheung S.N.S. (1969), The Theory of Share enancy.
6. Dantwala M.L. (ed.)(1991), Indian Auricular Development
since Independence, Second Revised Edition, Oxford & IBH
Publishing Co. (General Reference)
7. Ghatak S. (1976), Rural Money Marketing Macmillan Co
(Modul 4)
8. Heady E.O. (1961), Economics of Agriculture Production and
Resource Usa, New Yark Englewood Cliffs Prentice-Hall
(Module 3)
9. K. Subbarao (1989), Agricultural Marketing Credit, ICSSR
(Modules 2,4)
3
10. Mellor J. W. (1969), The Economics of Auricular
Development, Vhora & Co. Cernell University Press
(Modules 1, 2)
11. Mies Maria (1986), Indian Women in Sub??????nce and
Agricultural Labour ???? Publication (Module 5)
12. Penson J.B., Capps Orai. Rosson C.P. (1991) Introduction to
Agricultural Economies prentice-Hall, Inc. (Module3)
13. Rudra, Ashok, (1982), Indian Agricultural Economics : Myth
and Realities, Allied Publishers (Modules 5,6).
14. Sen Bhowani (1962), Evolution of Agricultural ????aions in
India. Peoples Public House, New Delhi, (Module-6)
15. Thorner, D. and Thorner A. (1962),Land and Labour in
India, Asia Publishing House (Modules 5,6)

4
1
Module 1
DEMAND FOR FARM PRODUCTS
Unit Structure
1.0 Objectives
1.1 Quality and Quantity Components of Demand for Food
1.2 Concept of & Measurement of Price and Income Elasticities
of Demand & Their Relationship
1.3 Contract Farming
1.4 Measures taken by the Government to deal with uncertainty
1.5 Questions
1.0 OBJECTIVES
- To study quality and quantity components of demand for
food
- To study the of Concept of & measurement of price and
income elasticities of demand & their relationship
- To study the measures undertaken by the government for
food and nutrition security
1.1 QUALITY AND QUANTITY COMPONENTS OF
DEMAND FOR FOOD
Consumers preferences affect his demand for goods.
Farmer is not interested has one individual behaves, he is
interested in the market demand for the products which he
produces & input which he uses. Market demand of a commodity is
the sum of all individuals demand & shows the aggregate
relationship between the supplies of goods for the sale & the price
paid for various quantities. Thus, the amount of a commodity that
households wish to purchase is called the quantity demanded of
that commodity.
5
There are four hypotheses about what determine the
quantity of a commodity demanded by households :
a) Quantity demanded is influenced by the price of that commodity.
b) Quantity demanded is influenced by the size of income.
c) Quantity demanded is influenced by the price of other
commodities; &
d) Quantity demanded is influenced by the households tastes.
Thus, the amount of commodity a household is prepared to
purchase is a function of the price of goods in question, the price
of all other goods, the households income & its tastes.
Demand function can be symbolically expressed as follows :
d
n n 1 n
q D(P ,P,......P , Y, T) = where :
d
n
q : The quantity that household demands of some
commodity say n
n
P : the price of this commodity,
1 n 1
P ....P

: The prices of all commodities,
Y : The households income &
T : The tastes of the members of the family.
Quality & Quality components of demand for food
Changes in product demands are influenced by the
following:
1. Population
2. Income
3. Taste
4. Techniques applicable within consuming units.
5. Other institutional & organizational arrangements
Population increase :
With increase in population the effects depend upon the
behaviour the families. This particular change in demand is referred
to as population effect. The population effect arises from an
6
increase in the size of the family with other conditions remaining
unchanged.
Increase in income :
To explain the demand effect of change in income, we must
know find of all the income & price elasticities. If the income
elasticities of farm products of all families were zero & if food in no
way a substitute for other products, all the increase in demands
would go for the products of the rest of the economy.
The new income situation postulated requires some
contraction of agricultural production before a new long run
equilibrium can be established. Relative pries of products will
change in the process, depending in the short run on the price &
income elasticities of the demand modified in the long run by basic
costs conditions.
New technique Employed by consuming units :
Let us assume, this new better technique increases the want
satisfying capacity of one class of product (food) & all families
adopt this technique. This can introduced at the demand for food or
supply of food at the point of consumption.
The price of food will fall as not many farm products are
required to give consumers as large an intake of food nutrients as
they were accustomed to prior to the advance in the knowledge
about nutrition. The demand effect of fall in price an be divided into
an income effect & substitution effect.
The income effective can go either way since some products
are negative while other positive in terms of consumer response to
changes in income. The two effects together will increase the
quantity taken.
1.2 CONCEPT OF & MEASUREMENT OF PRICE AND
INCOME ELASTICITIES OF DEMAND & THEIR
RELATIONSHIP
There exists at any one time a definite relationship between
quantity demanded & price. The relationship is usually an inverse
relationship. The Law of demand states, other things remaining
constant, that more will be demanded at a lower price & less when
price is higher.
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Following is the demand schedule for an agricultural
commodity (vegetable)
Price of a vegetable per K.G. Quantity Demanded
Rs. 25 kg.
Rs. 20 1.0 kg.
Rs. 12 1.5 kg.
Rs. 08 2.5 kg.
Rs. 05 3 kg.
We can plot the data on a graph with price on vertical axis &
quantity on horizontal one. This curve is called demand curve. Its
downward slope shows that the quantity demanded increases as
the price falls.
y
30
25
Price - Rs. 20
15
10
5
0 1 2 3 4 5 6 7 8 x
Quantity demanded in kg
Figure 1.1
The demand curve that an individual farmer faces for his
product is perfectly elastic. He is among the large number of
producers, he is unable to influence the market price. In the market
is simply a price taker. At the prevailing market price he can sell
whatever quantity of produce he has produced.
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A rise in income shifts the demand curve to the right, while a
fall in price, shifts it to the left. In case of an inferior goods, a rise in
income will cause a reduction in the quantity demanded at each
market price & the whole demanded curves moves to the left. The
effect on the demand curve of a change in price depends upon
whether the good, whose process changes, is a complement or
substitute. A rise in price of a commodity complementary to X will
shift the demand curve for X to left, indicating that less X is
demanded at each price. A rise in the price of commodity that is
substitute for X will shift the demand curve for X to the right
indicating that more X will be demanded at each price.
The effect on the demand curve of a change in tastes of
households indicates that each price, more will be demanded if the
taste is in favour of that commodity & less is demanded if the taste
goes against it. Thus the whole curve either will move towards the
right or towards the left.
Elasticity of Demand :
The Law of Demand simply shows the direction in which
demand will move when the price changes. But it does not show by
how much as to what exact a change in price will affect the
quantities demanded. It is important for the farmers to know the
responsiveness of consumers to price changes. The degree of
responsiveness determine the changes in total revenue resulting
from changes in price. The responsiveness of consumers to
change in price is known as elasticity of demand.
Price elasticity of demand is the relative change in the
quantity bought resulting from a given relative change in price. Let
E stand for elasticity then :
relativechangeinquantity
EP
relativechangeinprice
Q
Q
EP
P
P

=

A
=
A
Where Q is quantity
P is price
9
Q
Q
A
is relative change in quantity &
P
P
A
is relative change in price.
The numerical value of E may vary from zero to infinity. The
range of elasticity of demand from zero to infinity can be classified
into five categories.
Numerical measure
of Elasticity
Description Terminology
1. Zero (0) Quantity demanded
does not change as
price changes.
Completely inelastic
2. Greater than zero
less than one
( ) 0 1 > <
Quantity demanded
changes by a
smaller percentage
change than does
price
Inelastic
3. One (E = 1) Quantity demanded
changes by exactly
the same
percentage as
does price
Unitelastic
4. Greater than but
less than infinity
( ) 1 > <
Quantity demanded
changes by a large
percentage than
does price
Elastic
5. Infinity ( ) E =
Purchasers are
prepared to buy all
at some price &
none at all of an
even slightly higher
price.
Perfectly elastic
1.3 CONTRACT FARMING
It involves contractual agreements in money terms between
the farmer, manufacturing firms and input suppliers. Such
10
agreements guarantee the farmer a certain price for a given grade
of a product at a given time. This agreement helps the farmer not
only to mitigate the inherent price and income uncertainties of the
traditional marketing system, but also establish useful links with
manufacturing firms and input suppliers.
Other Methods :
1) Choice of Reliable Enterprise farmer knows yield from certain
enterprises is more stable than from others.
2) Uncertainty can be avoided by farmer by continuing to stick to
the traditional crops rather than the involving new innovations
even if these may be more remunerative. Innovations in
activities / involving biological element have more uncertainty
around them and consequently slow to be adopted. In fact, one
will not be wrong if one says that keenness to avoid uncertainty
is one reason for the slow rate of technological progress in
agriculture as compared with that in industry.
3) Discounting for Risk implies that the farmer uses insufficient
inputs and produces less than the optimum level of output in
order to reduce loses under unfavourable circumstances.
Smaller production will reduce the losses if the situation turns
out to be unfavourable.
4) Maintaining reserves is another form of flexibility. Maintenance
of extra multipurpose equipment and labour force larger than
what is normally necessary, to meet some types of uncertainty
for e.g. Floods etc. may be helpful. Maintenance of food
reserves may be also be helpful at times.
1.4 MEASURES TAKEN BY THE GOVERNMENT TO
DEAL WITH UNCERTAINTY
These measures can be of three types :
1) Guaranteed Agricultural Prices
2) Buffer Stock Schemes
3) Crop Insurance
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Guaranteed Agricultural Prices :
It involves enactment of legislation giving the farmer more or
less precise guarantee of the price level or the minimum price he
may expect some time ahead. These prices generally lie within
certain fixed percentages of the parity prices.
India has a system of guaranteed prices under which
minimum support prices are announced by Government for major
food grains well in advance of the saving season with the clear
objective of mitigating price uncertainty. According to Agricultural
Prices Commission, one of the major uncertainties which afflicts
farming activity emerges from the not infrequent phenomenon of
sudden and precipitous fall in prices of agricultural commodities.
The objective of guaranteed minimum prices as universally
understood is to remove this uncertainty.
Buffer Stock Scheme : It also aims at removing price uncertainty.
In this method, the buffer stock authority, ordinarily or Government
agency, purchases stocks of agricultural commodities in years of
bumper crops & unloads them into the market in years of crops
shortages with a view to raising price in times of glut and lowering
them in times of scarcity. Thus by neutralizing year to year
fluctuations in output, buffer stock operations can bring about
greater regularity in the year to year availability of crops and at the
same time promote rational economic decision on the part of
farmers by reducing price uncertainty.
An essential condition for smooth and efficient functioning of
the buffer stock scheme is that the buffer stock authority must be
able to maintain a balance between its purchases and sales over a
period. Continuous purchase, by buffer stock operating agency of
a commodity due to its glut in the market for a very low period will
put a great strain on the resources of the concerned agency. Its
continuous sale for a very long period will lead to a complete
exhaustion of its stock lying with the agency. Both ways, the
operations of buffer stock scheme will suffer. This implies that
buffer stock schemes will be more successful if the price changes,
needed to be controlled are not unidirectional only.
12
Buffer stock operating agency must fix judiciously, the ceiling
and floor prices which it wants to maintain. If the ceiling price is
fixed at quite a high level and the floor price at rather a low level,
then the scheme would be very easy to implement but it may not
achieve any meaningful stabilization because a high ceiling price
and a low floor price of the concerned commodity can fluctuate
without any interference. If the ceiling price it relatively low and the
floor price high, the degree of price stabilization achieved would be
high but this may jeopardize the scheme itself because the buffer
stock authority would be required to purchase stocks even in case
of wild glut and to sell stocks even when there is only a little fall
production.
Crop Insurance :
It deals with yield uncertainty. By means of crop insurance,
the farmer can insure himself against certain chance occurrences
such as loss due to poor weather, insect infestations and diseases.
The farmer incurs a small known cost, the insurance premium, and
thereby transfers the risk of much larger losses to the crop
insurance agency.
Crop insurances can be of several types. It can be :
1) Insurance for Specific Crops
2) Insurance for all crops taken together
3) Voluntary Crop Insurance
4) Compulsory Crop Insurance
Crop insurance can be based on the individual approach in
which the assessment of the indemnity payable by the insurance
agency is done separately for each individual farmer and is based
on the actual crop output of the concerned farmer each year or
compared with his normal output.
It can also be based on the area approach in which the
assessment of indemnity is not done separately for each insured
farmer, but is done together for all. The farmers in a given area on
the basis of the actual average crop production over the whole area
as compared with the normal crop output of the area of these
different type of insurance, an insurance scheme for all crops taken
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together, preferably of the compulsory type would be more feasible
than crop wise insurance for the obvious reason that the variability
of all crops taken together is generally much lower than yield
variability of individual crops. The area approach is more
practicable than the individual approach as it does not require
ascertaining the crop outputs of the individual farmers for
determining their classes. All that is needed is the estimate of
average annual yield of the crops over the whole area which is
agro-climatically homogeneous.
1.5 QUESTIONS
1. Discuss the quantity and quality components of demand for food
2. Explain in detail the measurement of price and income
elasticities of demand.
3. Describe the types of government intervention for food and
nutrition security in developing countries.

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2
Module 2
SUPPLY OF FARM PRODUCTS
Unit Structure
2.0 Objectives
2.1 Introduction
2.2 Characteristics of Supply of Agricultural Products
2.3 Issues Relating to Specification of Response Function to
Supply of Farm Products
2.4 Rigidities in Farm Supply Response
2.5 Supply Response of Individual Crops and Aggregate
Production
2.6 Supply Response in Indian Agriculture
2.7 Characteristics of Farm Product Markets in India
4.7.1 Agricultural Marketing
2.8 Future Trading
2.9 Questions
2.0 OBJECTIVES
15
- To study the components of supply of farm products.
- To know the importance of supply of farm produce in the
agricultural economy of India.
- To understand the importance of agricultural marketing under
global perspective.
- To observe the conditions of free trade in agricultural
commodities under globalization.
2.1 INTRODUCTION
Agriculture is the occupation of a majority of the human race.
The FAO of United States estimate that the world as a whole, over
50 percent of population is engaged in agriculture or dependent on
agriculture for a living. Most of the worlds, millions of farmers are
peasants, who has very small land holding; would be neither
insufficient in its use of physical resources nor commercially
negligible. In developed countries like Japan whose typical family
holding may be one hectare but technically advanced through
improved seeds, fertilizers, horticultural tractors and also developed
a comprehensive system of agricultural co-operation and marketing
and of agricultural education.
Most of the developing countries consist of peasant holding.
The major exporters of rice like Siam, (Bramhadesh), Thailand,
Malaysia have two-fifth of peasantry holdings. But it leads to
uncertain contribution to food supplies.
In United States, less than 10 percent people of total
population are engaged in agriculture as their family farm business.
The another type of farming is large scale farming it can be
state farming or collective farming which was originated in former
USSR in 1930s, United States, Russia and China are known for the
grain surpluses in west and also the agricultural conditions in Asia
has been improving the food prospects.
But in most of the cases agricultural production is influenced
by agricultural demand and supply marketing and governments
role.
16
The geographical and climatic position facilitated most of the
Asian countries to accept agricultural sector as an important sector
of the economy.
The development would be incomplete without the new
possibilities of agricultural production design in this sector. The
agricultural sector fall back to achieve desired level of development
lies in its lacking in transference and utilization of full-fledged
resources into agricultural activities.
The explanation of these activities as an economic behavior
in agricultural sector, is the base of the study in Economics of
Agriculture, therefore its significance can not be overlooked.
The performance of the agricultural sector influences the
growth of the Indian economy. Agriculture accounted for 17.8
percent of the Gross Domestic Product (GDP-at constant prices) in
2007-08 as compared to 21.7 percent in 2003-04. Notwithstanding
the fact that the share of this sector in GDP has been declining over
the years, its role remains critical as it accounts for about 52
percent of the employment in the country. Apart from being the
provider of food and fodder, its importance also stems from the raw
materials that it provides to industry. The prosperity of the rural
economy is also closely linked to agriculture and allied activities.
Agricultural sector contributed 12.2 percent of national exports in
2007-08. The rural sector (including agriculture) is being
increasingly seen as a potential source of domestic demand; a
recognition, that is shaping the marketing strategies of
entrepreneurs wishing to widen the demand for goods and
services.
2.2 CHARACTERISTICS OF SUPPLY OF
AGRICULTURAL PRODUCTS
1. Raw Material:
Agricultural output, which is mainly sold in the form of raw
materials is used subsequently for processing. Sugarcane is to be
converted into sugar, oil seeds into oil, jute into carpet, cotton into
cloth, wheat into floor and paddy into rice-before all these are used
for consumption. Hence the raw materials produced by agriculture
are to be processed at one stage or the other before final
consumption.
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2. Bulkiness:
Compared to other products, agricultural commodities are
bulkier in nature. Bulkiness is more pronounced in products like
cotton, chilies, sugarcane, jute, fruits, vegetables etc. and is
common to all types of cereals and pulses. Bulkiness affects
marketing functions concerned mostly with physical handling.
Further, the products that occupy a lot of space in relation to their
value, almost automatically raise unit-transportation and storage
costs. A railway wagon of cloth is more valuable than a wagonload
of wheat or chilies.
3. Perishability:
In relation to other products, agricultural products by nature
are perishable. All products ultimately deteriorate. Fruits and
vegetables must move into consumption very quickly, otherwise
they would completely lose their value. Cereals and pulses, through
these and be stores for a considerably long period without much
deterioration, should be sold before the arrival of new crops. Unlike
industrial products, however, they cannot be stored for long, for
reasons of qualitative deterioration. The more perishable products
require speedy handling and often-special refrigeration, which
raises the cost of marketing.
4. Substitutability:
There is always the possibility of substitution of one food
grain by another. Wheat can be substituted by barley, maize or
jowar, and vice versa. Substitution is more effective in times of
shortage of a crop, than at other times. Prices play a vital role in
substitution of coarse by superior grains, if the price of substitutes
rises too high, the same way, the price of coarse grains drops
relatively, to the other high priced products. Usually, when there is
cheaper the items, fewer effective substitutes are available.
5. Varietal Differences:
The production of most farm products is a composite of
several varieties. These varietal differences are of relatively little
significance in the marketing of others. The characteristics of each
of the latter varieties affect the marketing and consumption patterns
for the concerned products. The fruits, vegetables are varietal and
hence price differences are common on account of consumers
preference. If the marketers are aware of the varietal preferences,
18
they would store those which would fetch higher price, as
compared to those which would not
6. Colour, Palatability and Nutritive Values:
Colour, palatability and nutritive values are important
characteristics of many farm products that are related to
consumption Consumers prefer local wheat to Mexican wheat
because it is tasty and palatable, nutritious, easy to chew and
digest and good for health, white in colour and makes good
chapattis. Those who consume red wheat prefer it because it is
cheap, easily available, habit has been developed for it can be
taken when local is not available.
Eggs are an illustration of the part played by colour. Poultry
specialists have indicated that there is no nutritional difference
between white and brown eggs and no difference is observed in
their palatability. Yet people in one locality prefer white eggs, while
those in another, brown eggs.
7. Size of the Product:
Size of the individual units of the product is yet another
major characteristic of farm products. Long stable cotton fetches
higher price as compared to short staple cotton. Large-sized eggs
are sold more in number as compared to the medium and pullet
size. Similarly large-sized potatoes, apples and bananas have more
demand than small or medium-sized ones. Consumers, how ever,
shift from one size to another depending on the price relationships
Thus, size is important in marketing because the uses made of the
different sizes vary, as do the possible outlets and prices. With
most products, the largest and smallest sizes are quite limited in
volume, whereas the medium sizes are quite plentiful. Market
agencies take advantage of this and try to secure high price for
large-sized products, which by nature are limited in supply. Small-
sized products are the poor mans choice as they are available at a
lower price.
8. Quality of the Product:
The degree to which a product will be accepted depends
upon its quality. There is direct correlation between the quality of
farm products and their consumption. It is the grade and standard
attributed to a product that make it possible to market each quality
to the groups of consumers representing the best outlet for it. The
19
use of grades generally limits top quality supplies and makes
possible certain monopolists advantages that go with reduced or
controlled supplies.
Farm products differ widely in quality. Generally their grades
are marked for most of the products while grains and fibers are
classified as grade I, II and III or fine, medium and coarse or long,
medium and short. All these grades have markets but with different
prices. Superior grade products fetch high price as compared to the
inferior grade products. Quality is of real importance to market
agencies since it is their job to sell products of different qualities in
the markets, large or small, where they will have the greatest price
advantage or the least disadvantage. Thus, many marketing
agencies specialize in handling the finest qualities, while others
handle inferior qualities. There are markets for all qualities (at a
price), and consumers have the opportunity of buying that grade or
quality which they can best afford.
2.3 ISSUES RELATING TO SPECIFICATION OF
RESPONSE FUNCTION TO SUPPLY OF FARM
PRODUCTS:
A) Distributed Lags
In case of supplying goods the time period plays an
importance role. In case of agricultural goods the gestation period
is relatively long since it depends on natural and climatic conditions.
Thus for agricultural goods the lag is critical. The farmers always
take into account those time lags which considering their farm
operations till the harvest. They also consider prices in existing year
and the supply will take place in the next year Therefore supply of
agricultural products as the result by to prices of last year.
It means
S
t
= f (P
t
-1)
S
t
= Supply of time period t
Pt - 1 = Prices of the time period of the last year
B) Area, Production and Yield in India
Growth in the production of agricultural crops depends on
acreage and yield. Limitations in the expansion of agricultural land
suggest that increase in gross cropped area can come from
20
multiple cropping. In view of this, the main source of long-term
output growth is improvement in yield. The trends in indices of area,
production and yield of different crops in 2007-08 (Base 1981-
82=100).
Rice
Compound growth rates of index of area under rice show a
negative of (-) 0.1 per cent per annum during 2001-08 compared to
the 1990s. The area under rice cultivation has remained more or
less stagnant in the recent years while growth in yield has shown
increase.
Wheat
Area under wheat that was around 25 million hectares in
2002-03 increased to 26.4 million hectares in 2005-06 and further
to 28 million hectares in 2007-08. The coverage under irrigation has
been about 87 to 89 per cent of area for wheat. The compound
growth rates of indices of area production and yield of wheat during
1991-2000 and 2001-08 show a perceptible decline index of yield
increased significantly, leading to an increase in the growth in
production.
Pulses
Gram and tur are the major contributors to the total pulses
production in the country. During the period 2000-01 to 2007-08
there has been an improvement in the growth in the indices of yield
and in area resulting in considerable increase in the growth in
production.
Sugarcane
The area under sugarcane showed an increase from 3.93
million hectares in 2003-04 to around 5.04 million hectares in 2007-
08. Production increases from 233.86 million tones in 2003-04 to
348.2 million tones in 2007-08. Accordingly, yield increased from
59.4 tones per hectare to 69.1 tones per hectare in 2007-08.
Despite a decline in growth in index of yield during 2001-08 as
compared o the 1090s, the index of production growth was more or
less sustained by the growth in index of area during the period.
Cotton
Cotton occupies an important place among the cash crops in
India. Cotton is grown in nine major states namely, Punjab
Haryana, North Rajasthan, Gujrat, Maharashtra, Madhya Pradesh,
Andhra Pradesh, Karnataka and Tamil Nadu.
21
The area under cotton increased from 7.60 million hectares
in 2003-04 to 9.43 million hectares in 2007-08. The yield of cotton
went up from 307 kg. per hectare in 2003-04 to 466 kgs per hectare
in 2007-08. The compound growth in index of yield has shown an
increase from (-) 0.4 per cent during the 1990s to 1508 per cent
during 2001-08. However, the growth in index of area moderated,
bur remained positive. The combined effect on index of production
was an increase in growth from 2.3 per cent during the 1990s to
17.5 cent during 2001-08
Oilseeds
Area covered under nine oilseeds, which stood at 23.66
million hectares in 2003-34 increased to 26.54 million hectares in
2007-08. Production of oilseeds, which stood at 25.19 million tones
in 2003.04, increased to 29.76 million tones in2007.08. The growth
in indices of yield and area under oilseeds has shown a perceptible
improvement during 2001-08 as compared to the 1990s.
C) Agricultural Acreage in India
The operational land holding increased from 71 million
hectors in 1990-71 to 115.6 million hectors in 1995-96.
The average size of land holding in India is 1.41 hectares.
The small and marginal level holdings account for go percent of
total holding
During 2008-09, the area south at all India level under Kharif
2.3 percent of the total cultivable area, means 1039.23 lakh
hectares and for Rabbi crops 638.33 lakh hectares of land
accounted.
It aims at fixing of acreage for certain basic crops.
It results into controlling crops and prices simultaneously.
The government intervens and provides some incentives to the
farmer for participating in the acreage program. It also helps to
reduce misuse of land and optimum use of land. It helps to utilize
better farm practices through the planning. The wastage of land can
be controlled by reducing exploitative crops.
Through the acreage the yield can be targeted. The acreage
and prospective yield do not have predetermined formula by the
demand for casting and prices, it can be established. The total
national land can be subdivided into small allotments which helps to
build up networking of farm plots, through area-wise, crop-wise,
farmer wise, which gives total picture of farming.
22
2.4 RIGIDITIES IN FARM SUPPLY RESPONSE:
There are various obstacles in increasing supply of farm
products. They are natural, manmade and psychological.
1. Farmers as non-maximisers:
Farmer normally at the age fifty are not tend to maximize
their produce and prefer leisure according to price rise, hence they
are non maximisers. It can be a general tendency. They may be
non maximisers when by expanding output the marginal revenue
begins to fall below marginal cost due to the operation of law of
Diminishing Returns.
2) Perverse Response of Supply to Price:
First supply may increase in response to price rise up to a
certain point and thereafter while prices continue to rise, supply
may decline. This is because of price of inputs, technology increase
more, opportunity cost of labour and capital in other occupations is
low than in agriculture.
Figure 2.1
Secondly supply may not fall in response to falling price
because of perish ability of farm price. Thus the supply becomes
backward sloping as shown in the diagram.
S
D
D
P
r
i
c
e
Demand & Supply
23
3. Changing Technology:
The change in technology, innovations reduce the hard work
and complexities which reduces cost of production and the supply
curve shifts right hand side. This is shown in the diagram.
Figure 2.2
With the use of fertilizers high yielding seeds the supply of
food grains increased from Q to Q,
3. Joint Products
Many agricultural products are joint so that productivity
increases automatically by improving the production of main
product. Examples are animals for milk meat and wool, Grain and
straw. The farmers can increase or reduce the relative proportions
of such joint products. If wool prices fall, farmers have store fleeces
in hope of price rise and prices of lamb rise, then sheep rearing
becomes more profitable. Thus these are the better option to alter
the proportions of joint products by changing the policy.
4) Complementary Products:
Farmers can produce complementary products in a planned
rotative crops so as to maintain soil fertility and to avoid the
Y
D
S
S
1
D
X
Q Q
1
S
1
Quantity Supplied
P
r
i
c
e
24
proliferation of soil borne diseases. This system saves cost and
increases yield.
5) Production Period:
The increase in farm produce supply depends upon harvest
basically. As soon as harvest is over and farm produce supply
increases the sudden price fall may occur and results into less plan
for sowing that farm produce in the next year. This probably
increases price and production is the next production cycle.
It is also noticed that it is not easy to increase the agriculture
supply in short period since the supply and production life is the
outcome from natural resources. Such flexibilities may affect
adversely the income of producing country.
6. Perishable Products:
The nature of agricultural products are considered to be
perishable like dairy products, horticultural products, vegetables
which require separate storage system with separate budget.
Their supply can vary according to the facilities. Thus the
regidities in supply can be reduced through the several facilities to
the farmers. The government provides various facilities to the
farmers for stabilizing the conditions of supply of farm products,
these are mentioned below.
1) Guaranteeing Agricultural Prices:
Marketing Boards and Agricultural Federations can
guarantee the agricultural prices for controlling increase of
decrease in prices. It can implement minimum price for imports for
importing county and the government can maintain buffer stocks.
The guarantee price or administered price is a measure to boost
the production and stabilize income of farmers.
2) Physical control on supply:
It is the simplest and oldest method of physical control on
supply which brings the method of storing the produce in time of
surplus for use in times of scarcity.
The co-operative marketing societies are helpful to boost
physical controls on production.
25
3) Quotas:
In many countries supply of certain commodities is restricted
by imposition of quotas which apply either to the overall production
or to the amount of unit for which individuals are allowed to market.
4) Controlling or Increasing Supply:
Controlling or increasing supply by the means of providing or
withdrawing agriculture inputs by the government is also one of the
methods of handling agri-supply.
When government wants to increase output it may undertake
scheme of land reclamation, allowing use of land through
government quota, whereas for controlling supply withdrawing of
land, ban on certain production can be undertaken.
In case of labour as an input, the labour in underdeveloped
countries tends to be disguised unemployed whereas in developed
counties the substitution of capital for labour will allow the
agricultural labour force to change without any effect to total supply.
Agricultural infrastructure, social benefits to labour indirectly
improve agricultural supply. In case of capital, subsidies,
mechanization, improving technology, entrepreneurial
development, and subsidies may increase the agricultural prices.
Subsidizing the inputs such as fertilizers, fuel will not save
labour but it needs more labour and will raise output. Hence the
capital investments by the farmers aims at increasing output and
also cost effectiveness, since the prices for their output are low
after harvest.
2.5 SUPPLY RESPONSE OF INDIVIDUAL CROPS
AND AGGREGATE PRODUCTION
Individual supply and market supply of farm products as a whole is
the function of price level supply is originated from stock of
production. It is marketable surplus at a point of time that farmer is
willing and able to sell in the market.
26
A) Individual Supply Schedule:
A supply schedule for wheat
Price (in Rs) Quantity wheat in (Kgs)
5 7
10 12
15 16
20 25
Figure 2.3
Supply curve is upward sloping which indicates direct
relation between price and quantity supplied.
The farm produced is normally supplied under conditions of
perfect competitions.
Supply Schedule for Wheat
0
5
10
15
20
25
30
0 5 10 15 20 25
Quantity of Wheat
P
r
i
c
e
Wheat
27
These Conditions are:
1) There are large numbers of independent producer none of
whom is able to influence market price by offering or
withholding his product.
2) There are large numbers of independent buyers none of
whom is able to influence market price by offering or
withholding his price.
3) The produce in any market is homogeneous.
4) The buyers and sellers have at one time full information
about the ruling price in the market.
Thus there are millions of farmers in the world economy,
each of whom produces only a small fraction of total global supplies
of the produce. They might be from unorganized sellers and hence
the farmer is a price taker.
A) Factors Influencing Supply:
i) The supply of agricultural produce depends upon its cost of
production, i.e. the prices of factors of production which are
involved in the production of the commodity. Land is subject to the
law of diminishing returns, land is limited in supply. There is a limit
beyond which output does not increase. Additional units of labour
and capital may give rise to higher returns for sometime but then
returns per unit of input becomes smaller and smaller till a stage is
reached when an additional unit of labour and capital does not yield
any increase in output. Beyond this point it will be judicious not to
spend more on those inputs. The supply of land fixed and limited by
nature with compared to other factors of production. Not only
worlds land resources are limited in nature a larger land area is of
no use in agriculture. It also faces the heterogeneity of land quality
which leads to increasing cost of production. Because the best
lands come under the plough the first and lands of poorer quality
are sought thereafter. The soil qualities differ due to ecological
conditions and topography which results into variations in
production and costs
ii) Labour is most important human factor of production to
increase the agricultural production from physical asset since the
olden days. When the land was abundant the increasing volume of
production was directly related to the volume of labour and
multiplication of labour resulted into the faster manipulation of
returns. But since supply of land does not increase considerable
beyond certain limits, the man land ratio goes on increasing and
automatically productivity per unit of labour declines and hence the
remuneration per unit of labour as well; till it becomes constant at
28
the subsistence level. In India where farming is predominantly
dependent upon monsoons, variations in demand for labour also
affect supply of labour. The uncertainties in monsoon and non-
scheduled agricultural operation lead to variations in labour
supplies. It results into sometimes excess supply and fall in wage
rates and vice versa. The demand for labour is completely upset
and farm labour suddenly becomes redundant.
In underdeveloped countries since farming is not managed
scientifically with proper adjustments as and when required for
making the agriculture as a full time business for all seasons.
Shortage of labour is felt in peak seasons and labour is regarded
surplus in slack seasons.
B) Concept of Market Supply:
Supply means the amounts or quantities that will be offered
for sale at different price levels at a given time and place. Like
demand, supply is the amount available at one particular time and
in one particular place. One may refer to supply at the national
level. Time is very important in supply, since it may refer to the
present next day, next week, next month next season and so on.
Further, it is important to distinguish between supply and stocks. By
supply we refer to the amount available at a given price, while by
stocks we refer to the total amount of an item, regardless of its
price. The total amount of an item on farms, in storage or
somewhere else makes up the stocks. At any time only a part, and
not the whole of the stocks available can be offered for sale. Supply
and stocks are, therefore, no more synonymous than demand and
consumption. This supply is simply the quantity that will be sold at a
given price, time and place and the law of supply is the logical
relationship which exists between quantities offered for sale and
prices. Usually the higher the price, the more will be offered for
sale, and the lower the price, the less will be offered for sale. The
exception is the subsistence economy where incentive is limited to
the satisfaction of immediate needs.
Market Supply Schedule:
A supply schedule is defined as quantities of commodities
will be offered for sale at different prices i.e. it summaries the
sellers quantity to various prices.
29
(a) SUPPLY SCHEDULE FOR POTATOES
Sr. Price of Potatoes
(Rs. Per Quintal)
Quantity Supplied
(Hundred Quintals)
1. 20 120
2. 40 200
3. 60 250
4. 80 330
5. 100 400
6. 120 500
Figure 2.4
Supply Schedule for Patatoes
0
100
200
300
400
500
600
0 20 40 60 80 100 120 140
Quantity Supplied
P
r
i
c
e
Quantity Supplied
30
The market supply is similar to individual supply curve, which
indicates up ward sloping curve to the right side of graph.
Supply curve shows the relationship between the price of the
commodity and the maximum quantity that can be produced, given
(1) the technology, (2) Prices of other products and (3) the
condition of supply of the factors for the firm or group of agricultural
firms concerned. In agriculture however, most of the supply curves
show the response of producers to changes in the price of a
particular commodity, other thing being equal. They show what
happens when a short crop, for example, raises the price of
potatoes Even though farmers know that the price is likely to be low
again, as it is high now, when the new crop is harvested, still they
increase their acreage of potatoes in response to the temporary
higher price.
Market Supply Curve of Agricultural Products:
The agricultural supply curve indicates intentions. The
horizontal bars on the curve represent the range quantity likely to
be produced. This likely quantity may be above or below intentions.
Factors beyond the farmers control, mainly weather, cause
production of agricultural products to vary widely from that expected
with average conditions.
Figure 2.5
Y
X
S
S
4
Quantity Supplied
P
r
i
c
e
S
1
S
2
S
3
S
1
S
5
S
4
S
3
S
2
S|
1
S
1
S
2
S
3
S
4
S
5
31
2.6 SUPPLY RESPONSE IN INDIAN AGRICULTURE:
Price V/S Non-Price Factors
Though agriculture is the main occupation but being
profession it has many differences in developed countries and
underdeveloped countries. In underdeveloped countries agricultural
activities are not taken as profession rather as a way of life. In
developed countries the factors other than price such as rainfall,
irrigation, weather conditions, seeds and fertilizers are relative
available sufficiently, therefore the producers response positively to
the price variations solely. Means if price of agricultural produces
increases the farmers can manage to increase the supply through
intensive or extensive cultivation, improving technology and
increasing use of fertilizers.
Thus there is direct relation between price and agricultural
products in true sense. There can be wide scope for increasing
agricultural production through the agricultural inputs, unused
agricultural land plots due to less population, support from
government and financial institutions. The reallocation of resources
can bring positive changes in agricultural supply, which helps to
bring further changes in the international market.
The agricultural as well as manufacturing goods both are
important variables in the international markets for increasing
international income in developed countries.
But in undeveloped countries there are many factors along
with price of the agricultural product affect the supply of agricultural
products. The price and supply are not directly related in pure
sense because the price increases but since intermediary factors
are not sufficiently available, the supply cannot take place in
required amount.
The factors which affect supply response of farmers are as follows:
1) Size of Holding:
Most of the land holding in underdeveloped countries are
small and which devote a larger portion of its produce to the
32
minimum subsistence requirement. In India average size of holding
is 1.57 hectors of land, which proved to be uneconomical for the
country itself. The farmers with large size of holding can take
different types of risks regarding variety of produce, innovative
practices whereas small farmers are vulnerable for such changes.
The small farmers use most of their land for producing food grains
and hence they are not ready to shift from food grains to the new
crop which is demanded in the market or whose price is increased
sufficiently for time being.
2) Differential Productivity:
When the productivity differentials are so large that the effect
of small price charges is not noticed by the farmers.
3) Price Stability:
An average farmer would prefer to earn a low but stable
income rather than take risk of switching over to the more profitable
but risky crops. Because farmers have to survive rather than to
earn profit.
4) Weather Conditions:
Weather and climatic conditions are natural conditions which
are totally uncertain on which the agricultural activities are
depended, therefore farmers prefer to grow low-income yielding
crops rather than the commercial and more profitable crops which
require high regular water doses.
5) Rotational Crops:
Farmers in underdeveloped countries prefer rotational crop
pattern to maintain fertility of soil and therefore they can change
their pattern of farm products.
Hence due to change in price the farm products do not take
place, but apart from it many factors influence the crop pattern and
there is controversy between the price and non price factors for
determining overall crop pattern of the economy.
2.7 CHARACTERISTICS OF FARM PRODUCT
MARKETS IN INDIA
Market Structure
In the case of agricultural industry the farm products are
produced by numerous small farmers and it may not be possible for
33
each farmer to sell his produce to the potential consumer himself.
The farmer producing on a small-scale has usually neither the time
nor the ability to undertake directly the marketing of his produce.
His produce is too small for him to undertake economically the
direct marketing of his products to the final consumers. In most
cases, the farmers entire output is turned over to one or a small
number of agent middlemen for marketing his produce. It is
common for the bulk of commodities to change hands three or four
times between the producer and the consumer. Usually, farmers
sell their produce to small merchants and traveling traders at the
village level. This then is taken to the wholesale markets where it is
again sold to retailers through which it reaches the final consumer.
Farmers with bigger holdings may bypass the village merchant and
sell directly in the major wholesale market. Certain commonly
encountered and easily recognizable types of markets, which
generally exist between the farmer and the final consumer are:
1) Local Assembling and Processing Markets
Before the supply of any agricultural product can be equated
to the demand and distributed to the competing buyers, the
available supplies of the product will naturally have to be collected
from the innumerable farmers who produce it. Most farm products
pass through some small markets located close to the point of their
production where produce is sold by the farmer to the local buyer
who assembles the products of a number of farmers, and sends
them to either the district or central market. These local markets,
also known as growers, markets or primary markets, are located in
small towns and at other convenient places where agricultural
producers can bring their goods and sell to the prospective buyers.
2 District Concentration and Processing Markets:
Some commodities are processed either wholly or in part at
local markets where consumers purchase them directly from the
farmer. But most the commodities are processed at the large
central markets Between these two types of processing markers, in
case of some products, we find district processors markets, in case
of some products, we find district processors or markets where the
produce from a considerable number of local assembly markets are
assembled and processed for transporting to central markets or
direct to consuming markets.
3 Central Markets:
There are large central markets where goods from many
local assembly markets or district processing points are
concentrated for processing or for additional processing or for
34
additional processing, storage, grading, conditioning and
distribution to other processing and secondary wholesale markets
or to markets abroad. Central markets, thus are the last step in the
assembling or concentration and the first step in the dispersion
process. The big wholesale markets can be compared to reservoirs
in to which flow the fluctuating and seasonal supplies from different
producing areas, and from which is met a constantly fluctuating
demand. It is in this market where price- making activities take
place. It is the these markets where buyers and sellers representing
regional, national or even international demand for the agricultural
products are seen more clearly in the wholesale market than in
producing areas. The adjustment of demand and supply may be
said to take place in the central markets. As a matter of fact, a
central or terminal market is the meeting point of the marketing of
fact, a central or terminal market is the meeting point of the three
marketing processes- concentration, equalization and dispersion.
4 Seaboard Markets:
Seaboard market specifically serves the place for ocean
shipment to foreign centers. These markets either receive the
agricultural goods from the central market or directly from the local
and district assembling markets. These markets have facilities for
unloading storing, loading ships and rendering incidental services
such as grading and price reporting. Corresponding facilities for
handling imports of agricultural goods are also available in such
markets.
5 Wholesale Distributing Markets:
The agricultural goods which are now assembled in the
central market have to be dispatched to consumers through the
retailers. Wholesalers operating in the central markets mostly prefer
to deal in bulk which cannot be afforded by retailers. Therefore,
separate wholesale markers specially for the dispersion of goods to
retailers have been developed in between the large central markets
and the retailers. These markets are often called Secondary
wholesale markets to distinguish them from primary or central
wholesale markets. Another term sometimes applied to them is
jobbing markets.
These markets operate on a smaller scale then the central
markets. They do not major role in the determination of prices.
They are concerned only with those operations, which are essential
to meet the needs of their retail clients.
6 Retail Markets:
In retail markets, the good are ultimately placed before the
individual consumers for acceptance or rejection. Every retail store
35
in the city, town and village, which sells to the final consumer, is a
retail market. Retailing is, perhaps, the most difficult part of the
marketing process to perform, and certainly is the most expensive.
For producers of consumer goods, the retail store is the ultimate
point of contact with the uses of their products. Here in the retail
store, the battle of the market is fought out to a final conclusion.
2.7.1 Agricultural Marketing
Role of Farmers Marketing Co-operatives in India:
Agricultural marketing is the most important in the
agricultural economy especially in case of small farmers who have
small surpluses for marketing. Since the farm products are
relatively perishable therefore the sale of agricultural good should
take place at proper place, proper timing as well. In case of
absence of marketing facilities the farmers are forced to sale farm
produce to money-lenders-cum trader, brokers at the daily or
weekly local markets.
To improve the marketing activities in India and to break long
chain of middlemen, co-operative marketing societies were
established since 1954 with the aim of providing credit and
marketing facilities. The marketing society provides various facilities
to the people from rural areas. Such as buying and selling the
produce, credit supply, weighing and grading the goods; AGMARK
facility.
If prices are likely to raise the societies stock the goods and
sell them in future with good profit earnings for members. It also
arranges quick transportation, standardization, co-operative
storages, and agricultural inputs.
The government buys food grains for FCI through marketing
societies.
In India there are 160 central marketing societies, 3500
special commodity marketing societies and 6000 primary marketing
societies. There are moreover State Level and National Level co-
operative Marketing federations like NAFED for cotton growers,
tobacco growers and also for the Tribal producers.
The agricultural co-operative processing societies especially
for sugar mills, dairy and milk products are the best examples for
generating employment through installation of distilleries, paper
mills. Co-operative marketing societies also work for establish
educational institution and hospitals.
36
Thus co-operative marketing is the special activity performed
by the various marketing societies, Boards and Federations under
Governments Co-operative Societies Act 1904. It had helped to
improve the export potentials through Agro Export Zones (AEZs) by
15 percent to the total exports.
In 2002 the government appointed Inter-ministerial Task
Force on Agricultural Marking Reforms like use of information
technology using negotiable warehousing receipt system and
expansion of future trading.
When supply and demand are in equilibrium each seller will
cover his total cost including normal profit at this point marginal cost
and marginal revenue will be equal, that is the amount each farmer
receives for the last unit of supply, which he is willing to sell at the
prevailing price equals the cost to him and bringing it to market.
If price would be established above point A more farmers
would come forward with their supplies till the price fell again.
If price would be established below A farmer would supply
less and would to raise price.
Figure 2.6
If the demand and supply for agri products show normal
movements then the pure competition model works over a period of
time but as seasonal and natural changes affect supply, the price
and other factors (Which are linked) may vary.
P
D
S
D
37
Farm Produce and Market Supply:
The family farm operators in India are makers of farm
supply. The quantum of farm products sold by majority of farmers is
small, however these small farm firms are comparatively less
specialized than the business firms. With introduction of new
technology during the green revolution say 1960s, farm firms are
becoming more specialized. All the firms are interested in
production, rather than marketing basically.
The variations in farm produce and prices have made the
farmers conscious and increasingly aware of selling arrangements
and price patterns.
2.8 FUTURE TRADING:
As per agricultural reforms the Government permitted the
resumption future trading in gur, potato caster seed pepper, cotton,
coffee etc. Recently in 2003-04 the Government of India
established National Level Commodity Exchanges for most of
agricultural goods for future trading.
The goods are sold or bought on the basis of warehousing
receipts instead of their physical movements. The transaction are
backed by judicious protection against price and quality risks. The
future trading as the pilot project started in Gujrat, Madhya Pradesh
and Andhra Pradesh. It had facilitated to develop marketing
activities fast and through modern techniques like computers, which
maintains transparency in transactions.
This has also facilitated for price risk management. Its
effectiveness depends upon the wider participation of the
stakeholders; in 2008-09 the daily average value of trade
accounted for Rs. 17042.07 crore.
2006-07 2007-08 2008-09
Group of
Commodity
VOT Section 1.02
alue
VOT Value VOT Value
Agri.
Commodities
5023.92
(81.96%)
1317125.21
(35.82%)
3139.03
(56.32)
941283.33
(23.15%)
2309.35
(33.655)
627303.14
(11.95%)
Grand Total
6129.29
(100%)
3676926.67
(100%)
5573.41
(100%)
4065989.47
(100%)
6863.49
(100%)
5248956.18
(100%)
38
Glossary:
1) Agricultural Marketing:
Selling and buying off agricultural produce and inputs by the
farmers or marketing society.
2) Future Trading:
Trading of major agricultural commodities through the
warehousing receipt or otherwise, on the basis of National
Commodity and Derivative Exchange Mumbai.
2.9 QUESTIONS
1. Explain the characteristics of supply of farm products.
2. Bring out the issues relating to specification of supply
response function.
3. Discuss the rigidities found in farm supply response.
4. Explain the factors which affect the supply response in
Indian agriculture.
5. Explain the role of Farmers marketing co-operatives in India.

39
3
Module 3
ECONOMICS OF PRODUCTION AND
RESOURCE USE AND INSTABILITY IN
AGRICULTURE
Unit Structure :
3.0 Objectives
3.1 Introduction
3.2 Theory of Production
3.3 Production Relationship
3.4 (B) Factor-Factor Relationship
3.5 (C) Product Product Relationship
3.6 Relationship among the products
3.7 Determination of optimum Product Combination
3.8 Questions
3.0 OBJECTIVES
- To determine and outline the conditions which give the
optimum use of capital, labour, land and management
resources in the production of crops and live stock.
- To determine the extent to which the existing use of resources
deviates from the optimum use.
- To analyse the forces which condition existing production
pattern and resource use.
- To explain means and methods in getting from the existing use
to optimum use of resources.
40
3.1 INTRODUCTION
Agricultural production economics involves analysis of
production relationships and principles of rational decisions in order
to optimize the use of farm resources on individual farms and to
rationalize the use of inputs from the nations point of view. The
primary interest in applying economic logic to problem that occur in
agriculture.
Agriculture production economics concerned with the
selection of production patterns and resource use efficiency in
order to optimize the objective function of farming community or
nation with in a framework of limited resources. The goal of
agriculture production economics are
- Provide guidance to individual farmers in using their resources
most efficiently and
- To facilitate most efficient use of resources from the standpoint
of economy.
As study of resource productivity agriculture production
economics deals with resource use efficiency, resource
combination, resource allocation, resource management and
resource administration. It involves topics like factor product
relationship, factor factor relationship, product production
relationship etc. which in turn involves some laws such as law of
returns to scale, Law of diminishing returns, concepts such as Iso-
quants, production possibility curves, Iso-cost curves etc. It also
covers the problems of Agriculture that is instability of prices in
agriculture, due to risk and uncertainty.
3.2 THEORY OF PRODUCTION
Production refers to the economic process of converting of
inputs into output. Production refers resources to create goods on
services that is suitable for use or exchange in market economy.
The inputs or resources used in the production process are
called factors of production by economics. Inputs are usually
grouped into five categories.
41
- Raw Materials
- Machinery
- Labour Services
- Capital Goods
- Land
Farm production likewise refers to the production food, fibre
and livestock by using several different kinds of inputs. Land is
used by farmers as a factory which helps them produce the desired
crop. To this manufacturing plant (Land) labour and capital are
added to cultivate, plant and harvest the crop. When considered
necessary, fertilizer is also added by the farmers. Water may be
either provided by either rainfall or by artificial irrigation. Application
of all these inputs result in desired crop (output)
Production decision facing the individual farmer are of three types.
Farmer may wish to produce certain amount of a given
product having a certain amount of resource to use. He will
have to decide what is the most profitable amount of
resource to use in the production of a commodity.
Having a certain combination of resources, he may have to
decide the most profitable combination to use to produce a
specific amount of given output.
Having a certain combination of resources he is also faced
with the problem of choosing the most profitable mix of
products of produce.
In order to provide answer to these questions, the farmer will
take the help of production faction analysis with which this section
will be mainly be concerned.
Production Function :
The production function implies the relationship between
physical output and physical inputs used by a farm firm. Production
function relationship can be expressed algebraically as follows.
( )
1 2 3
, , ,....
n
Q f X X X X =
Where Q stands for quantity of farm output
1 2
, ,
n
x x x ...
stands for quantities of factors
1
...
n
X x . This equation shows that
42
total output y depends upon the quantities
1 2
, ,
n
x x x ... of the factors
1 2
, ,
n
X X X ... respectively.
Let us for example the farmer is considering the question of
how much nitrogen fertilizer to use in corn production he may
consider the other inputs as given or fixed in specific in kind and
quantities. In this case we say that
( )
1 2 3
, , ,....
n
Q f X X X X =
Where
Q = Output of corn
1
X = Variable fertilizer input
2 3
, ,
n
X X X ... = fixed inputs
The above function however, does not state by how much
the output y changes as a consequences of change in variable
input in order to express the quantitative relationship between
inputs and output. The production function has to be expressed in
a precise algebraic equation as
Q a bx = +
Which shows that there is a constant relationship between
application of nitrogen. (the only factor input in this case) and the
amount of corn is produced.
Production function is thus Technical relationship between
input and output. As long as technology remains constant the
production function remains unchanged and indicates greatest
output from a given input mix.
Types of Production Function :
Economist in past had formulated numerous algebraic
equations forms but algebraic form of the function and the
magnitude of its coefficients will vary with soil, climate, type and
variety of crop and livestock, resources being varied, resources
being varied state of mechanization etc. Hence the problem before
the farmer economic is to select that algebraic form of function
which appears or known to be consistent with phenomenon under
investigation.
43
There are two types of input output relations or production
functions. The first type of production function concern itself short
run period when the quantities of some inputs are kept constant
and the quantity of one input (or quantities of a few inputs) are
varied. Input output relations of this kind forms the subject-matter
of law of variable proportions. Secondly input-output relations are
studied from a long-run approach when all inputs can be varied.
This forms the subject matter of the law of returns to scale.
A] Quadratic Production Function :
General form
2
y a bx cx = +
Where
y = yield
x = Input say nitrogen
a = yield due to fixed factors like phosphorous, potash,
seeds, irrigation, human labour etc., which have been
kept constant.
Simple quadratic equation with minus sign before c denotes
diminishing marginal returns.
Suppose estimated quadratic equation is
2
1,146 5.22 0.003 y x x = +
2
.003x indicates curve is sloping downwards shows diminishing
rate of return. Optimum dose of N & y can be obtained as
MP of total product curve is
5.22 0.006
dy
x
dx

=
if
x
P = Rs.20/k.g.
and
y
P = Rs.500/k.g. / Qtl or Rs.5/k.g.
Then,
20
5.22 0.006 4
5
x
y
P
x
P

= = =
5.22 0.006 4 x =
1.22
0.006
x =

203.33 x = k.g.
44
Optimum dose of nitrogen is 203.33 k.g. Now substituting
this value of x in the original equation.
( ) ( )
2
1146 5.22 203.33 0.003 203.33 y = +
1146 1061.38 124.03 = +
2083.08 = k.g.
This is the output at most profitable level of nitrogen
application. Suppose we want to estimate the response of nitrogen,
substitute the value of X in equation.
2
y bx cx =
Then,
( ) ( )
2
5.22 203.33 0.003 203.33 y =
1061.38 124.03 =
937.35 = k.g.
Therefore, fore 203.33 k.g. of nitrogen, the yield is 937.35 k.g.
B] Cobb-Douglas Production function
a b
Q BL K =
B = It is the intercept term called efficiency parameter it
measures the effect of technology on the o / p crop (Q)
L = Units of labour for producing a crop
K = Units of capital used in producing a crop.
Q - Output - crop.
L
MP (marginal product of labour)
( )
1
1
a b
L
a b
Q
MP a BL K
L
a BL K L

c
= =
c
=
45
Let us solve with an illustration
0.43 0.54
80 Q L K = (1)
With 1800 Q = units of output of crop.
Let us assume wages per labour unit Rs. 30 = w and price per unit
of capital Rs. 40 = w
0.54 0.57
34.4 / .
Q
K L
L
c
=
c
(2)
0.43 0.46
43.2 /
Q
L
L
c
= K
c
(3)
For output maximization we should have
/
/
Q L W
Q K n
c c
=
c c
0.54 0.57
0.43 0.46
34.4 / 30
40 43.2 /
K L
L K

=

(4)
0.53 and 0.46 are the elasticity coefficients i.e. (a & b) of capital
and labour respectively. (we are calculating optimum value labour
and capital with given output
( ) ( )
0.54 0.57 0.43 0.46
0.54 0.46 0.43 0.57
40 34.4 / 30 43.2 /
1376
1376
K L L K
K L
K L
+ +
= =
= = 1296
= 1296

K = 0.94 L (5)
L = 0.06 K (6)
46
Equation 5 and 6 are the expansion paths. To solve for
optimal value of L, substitute K = 0.94 L in equation (1)
( )
0.54
0.43
0.43
80 0.94
75.2
Q L L
L
+ 0.54
=

0.97
L 75.2 (7)
Substitute 1800 Q = in equation (7)
0.97
1800 75.2L =
0.97
1800
23.94
75.2
1
0.97
L = =

*
23.94 L =
= 26.41 (8)
Substitute
*
L = 26.41 and Q = 1800 in equation (1)
0.43 0.54
0.54
1800 80(26.41)
1800 326.93
k
k
=
=
0.54
1
* 1.85
0.54
5.51
5.51 5.51
K
K
=
= =
= 23.58
We also have two more production function.
C) Constant elasticity of substitutions production functions.
( )
1
1
p p p
Y Y K L

(
= o + o

Y = output
47
K = Capital
L = Labour.
Here Y is called efficiency parameter and it is equal to Cobb
Douglas production function o is a distribution parameter and its
values lies between 0 and 1 ( ) 0 1 s o s and p is a substitution
parameter and its limits range 1 to ( ) 1 p a o s s .
Elasticity of substitution ( ) 1/1 p o = + .
The value of elasticity of substitution ( ) 0 o = o < o < . If P = 0
and 1 o = CESPF becomes Cobb Douglas production function.
If P = -1 and o = o , CESPF becomes linear production
function.
If p = o and o = 0. CESPF takes form of Leontief of input-
output production function.
3.3 PRODUCTION RELATIONSHIPS
(A) Factor Product Relationship
Factor product relationship is a basic production relationship
between the input and the output. It is mainly concerned with
resource use and its efficiency. It guides the producer regarding
how much to produce. Goal of this relationship is to optimization of
resources. This relationship is explained by law of diminishing
returns.
The law of variable proportion is a new name given to old
classical concept of Law of Diminishing Returns has played a vital
role in history of economic thought Assume that a firms production
function consists of fixed quantities of all inputs (land, equipment
etc.) except labour, which is a variable input. When farmer expands
output by employing more and more labour, it alters the proportion
between fixed and variable input.
48
Law can be stated as follows :
When output of or production of a commodity is increased
by adding units of variable input while the quantities of other inputs
are held constant the increase in total production become after
some time, smaller and smaller.
Here we need to understand certain concepts such as TPP,
APP, MPP, EP
Total Physical Product (TPP) :
It is a total amount of output obtained by using different units
of inputs.
Measuring in physical units like, quintals, kgs, etc.
Average physical product (APP)
It is a average amount of output produced by each
corresponding units of inputs, it is obtained by dividing the total
output at a given level by the number of units of input applied at
corresponding level APP reflects efficiency of variable input.
Total Physical Product
APP =
Input Level
Marginal Physical Product (MPP)
MPP is additional quantity of output, added by an additional
unit of input i.e. the change in output as a result of change in
variable input
ChangeinTotal Physical Product
MPP =
ChangeinInput Level


Elasticity of Production (EP)
It is defined as percentage change in output as result of
percentage change in input
Percentagechangeinoutput
EP =
Percentagechangeininput


To explain the law more clearly let us take example of
farmer. Who has got many acres of land, building equipment etc.
He has now to make decision regarding the number of workers he
is going to hire for coming crop season in real having this decision,
49
the farmer will keep an eye on physical productivity of labour on the
farm O/p of workers productivity in physical units form five acre
land.
No. of worker TP AP MP Stage
1 100 100 100
2 220 110 120 Stage I
3 270 90 50
4 300 75 30
5 320 64 20 Stage II
6 330 55 10
7 330 47 0
8 320 40 -10 Stage III
Figure 3.1
A close look at table reveals that both average product and
marginal product increase in beginning and then decline off the two
marginal product drop faster than the average product. Total
50
product its maximum when farmer employs 6
th
labour, nothing is
produced by the 7
th
labour and its marginal productivity is zero,
where as marginal product of 8
th
worker is -10, by just creating a
crowed the 8
th
labourer only fails to make a positive contribution but
leads to fall in total output.
In the Fig. total production user from zero at an increasing
rate up to point A. the TPP is concave upward to point A. Beyond A
output continues to rise but at a decreasing rate unit it reaches
maximum, at point C. Point A on production function, where. The
total product stops increasing at an increasing rate, is called the
point of inflection. B indicates the point of maximum output. Beyond
B Total Product Curve slopes downwards.
From the foregoing discussion we conclude that there can
be 3 types of input output relationships in the production of a
commodity only one input is varied and quantities of all other inputs
are kept constant. These are
1. Constant marginal rate of return (constant productivity).
2. Decreasing Marginal Rate of Return (Decreasing
Productivity)
3. Increasing Marginal Rate of Return (increasing Production)
1) Constant Marginal Return Function :
Constant productivity or constant returns the true if all the
units of the variable factor which are applied to fixed factor result in
equal additions to the total output of the product. The relationships
between factor input and product output is termed as linear.
Production function denoting constant or linear return is shown in
following figure
In figure the output (rice) has been depicted on the y axis
while the variable input fertilizer is depicted by x axis. The
resulting curve
0
p
y is a straight line and the production function is
said to be linear.
51
Figure 3.2
Constant returns are shown by triangles. Horizontal side of
each triangle corresponds to input of 5 kgs of fertilizer the vertical
side shows corresponding addition to output of 10 kg rice. This can
be expressed as
Y = output x = input (variable)
1 12
1 2
n
n
y y y
x x x
A A A
= = ...... =
A A A
2) Diminishing Marginal Return Function :
Diminishing Marginal return function exists when each
additional unit of input add less to total output compared to previous
unit. Diminishing returns are realised for example if first input added
25 units to total output. While second adds to 20 units, third add 15
units, forth add 10 units and fifth 5 units & so on
52
Figure 3.3
p
y is concave to x axis this relationship can be expressed as
1 2
1 2
.......
n
n
Y Y Y
X X X
A A A
> > >
A A A
Since
1 2
.....
n
X X X A = A = A hence the ratio of / Y X A A goes on
decreasing as we apply more units of the input.
3) Increasing Marginal Return Function :
Increasing return to a single factor exist when each
successive input of variable resource add more to total product
than the previous input increasing factor returns are illustrated in
Fig. by curve
Figure 3.4
53
The curve
p
y is concave to the X axis. Triangles in the
figure illustrate returns. While the return from the first unit of input is
2y, the return from the second unit is 4y, the return from there is 6y
and so forth each additional of the variable factor adds more to
output than previous unit. The relationship can be expressed as
1 2
1 2
.......
n
n
Y Y Y
X X X
A A A
< < <
A A A
Since
1 2
.....
n
X X X A = A = A , the ratio / Y X A A will go on increasing
as more and more units of inputs are added.
Stages of production Function :
Stages 1 : It starts from origin and ends at the point where MPP =
APP in this stage MPP > APP as result of which APP is increasing.
The MPP attains the maximum at point of inflection, thereafter it
begins to decline, thereafter it begins to decline TPP increase at an
increasing rate till the inflection point and thereafter it increases at
decreasing rate. EP is more than are throughout the stage I of
production and EP is one at end of this stage in this stage fixed
resources are abundant relative to variable resources. Technical
efficiency of the variable resource is increasing as indicated by
increasing APP also the technical efficiency of fixed resource is
increasing as reflected by increasing TPP. This stage is regarded
as irrational (sub-optimal) stage of production.
Stage I : It is found from the point of equality MPP and APP and
end where MPP is zero at which input use level, TPP is maximum.
In this stage MPP is less than APP. However, both MPP and APP
exibit declining trend. Average productivity derived from each
individual unit of variable resource is on declining in this stage,
through it is at its peak at beginning of stage II, TPP increases at
decreasing rate as MPP is declining
p
E is less than one throughout
Stage II.
p
E is zero at end of this stage. It is rational stage of
production. The technical efficiency of variable resource declined
as indicated by the declining APP but technical efficiency of fixed
resource increase as indicated by increasing TPP. In this stage
variable resource is abundant relative to fixed resources.
54
Stage III : The starting point of stage III is end of stage II at which
MPP is zero MPP is zero. In this stage MPP becomes negative
APP continuously declines and TPP which is at its maximum at end
of stage II begins to decline
p
E is less than zero. It is irrational
(supra-optimal) stage of production. The technical efficiency of
variable resource and fixed resource declines. Variable resource is
excessive quantities relative to fixed resource.
3.4 (B) FACTOR-FACTOR RELATIONSHIP
Any production activity requires different inputs to produce or
given quantity of output. There are many ways of combining these
resources or production technology in production process. The
managerial problem here is to find out the least cost combination of
inputs for producing a given level of output. The production
function here is
( )
*
1 2
Q f x x =
Where
*
Q - fixed level of output
1 2
, x x are quantities of variable inputs. The factor-factor
relationship deals with two independent variables and dependent
variable giving rise to three dimensional diagram. Iso-quant is
convenient of compressing three dimensional diagram to two-
dimensional diagram.
ISO-QUANT :
Iso-quant is also termed as Iso-product curve, equal product
curve or product indifference curve.
The curve representing all combinations of
1
x and
2
x that
produce the same level of output is called and Iso-quant. For e.g.
an output y amounting 100 units can be produced using different
combinations of inputs
1 2
, x x .
55
Total output
1
x
2
x
100 units
100 units
100 units
100 units
100 units
1
2
3
4
5
13
8
5
3
1
Figure 3.5
Properties of Iso-quant :
1. Iso-quant slope downward from left to right if quantity of input
say
1
x is increased the quantity of other input say
2
x is
decreased to obtained. Same level of output y.
2. Iso-quants are convex to the origin. The absolute slope of Iso-
quant decreases, as we move left downwards to right
indicating diminishing rate of technical substitution. Because
diminishing marginal rate of technical substitution each added
unit of one input replaces less and less than the previous unit.
56
3. Iso-quants place above another represents higher output. Iso-
quants place for higher level of output are placed further away
from the origin.
4. Iso-quants are not intersecting. No two Iso-quants intersect
each other because the same combination of two input factors
cannot produce two different levels of output.
Marginal level of Technical Substitution (MRTS) :
It is the rate of exchange between two productive resources
which are equally preferred. The quantity of one input to be
sacrificed or given up in order to gain another input by one unit in
process of substitution MRTS of
1
x for
2
x is written as
MRTS
1 2
x x =
2
1
x
x

A
A
MRTS computed with following equation
MRTS =
Quantity of input sacrificed
Quantity of input gain
Units of
1
x Units of
2
x A
1
x A
2
x
MRS of
1
x
for
2
x
1 12
2 9
3 7
4 6
5 5.5
6 5.25
1
1
1
1
1
- 3
- 2
- 1
- 0.5
- .25
- 3.0
- 2.0
- 1.0
- 0.5
- 0.25
Substitutes :
If two resources
1
x and
2
x are said to be substitute (perfect
substitutes). Example Family labour and hired labour owned
bullock labour and hired labour farm produced and purchased input
etc. These Iso-quants are linear and negatively sloped.
57
Figure 3.6
Complements :
Resources which are used together in fixed proportions are
called perfect complements when inputs ( )
1 2
x x are perfect
complements Iso-quants are L shaped. Example tractor and driver,
a pair of bullocks and human labour etc.
Figure 3.7
Iso-cost Line :
It is known as price line or Iso-outlay line or budget line.
Iso-cost line represents various combinations of two inputs
that can be purchased with the given outlay of funds.
Suppose farmer has a fund of Rs.400/- and he has to spend
on two inputs that is
1
x and
2
x . The price per unit of
1
x is Rs.10/-
58
and
2
x is Rs.8/-. Then with the given price if he purchase only
1
x
input then he can maximum purchase 40 units of
1
x and 50 units of
2
x to produce fixed output.
Figure 3.8
Line AB shown in figure is Iso-cost line.
Least Cost Combination :
Factor-factor mainly concerned with determination of least
cost combination of resources. There will be many combinations of
two resources that produce the same level of output. The problem
here is to find out that particular combination of inputs, which
produces a given quantity of output with minimum cost. Following
different methods of finding out the least cost combination.
Tabular Method :
Given the input, combinations the prices of inputs, the total
cost of each input combination can be computed. The combination
which cost the least is selected.
1
x
Units
2
x
Units
1
x @
Rs.4/-
2
x @
Rs.2/-
Total Amt.
50 219 200 438 638
55 206 220 412 632
60 194 240 388 628
65 182 260 364 624
70 171 280 342 622
59
In the table combination of 70 units of
1
x and 171 units of
2
x is the
least cost combination.
Algebraic Method :
Step 1 Compute marginal rate of technical substitution
2
1
Number of units of resource x
MRTS =
Number of units of resource x
2
1 2
1
MRTS
x
x x
x

A
=
A
(when we substitute
1
x for
2
x )
1
2
x
x

A
=
A
(when we substitute
2
x for
1
x )
Step 2 Compute inverse price ration (PR)
1 1
2 2
Price per unit of
PR = =
Price per unit of
x Px
x Px

1
2
Px
Px

(when we substitute
1
x for
2
x )
2
1
Px
Px

(when we substitute
2
x for
1
x )
Step 3 Finding least cost combination by equating marginal rate
of technical substitution with price ratio
2 1
1 2
x Px
x Px

A
=
A
Graphic Method :
To find out optimum combination both Iso-quant and Iso-cost
are drawn on same graph. The point of tangency between Iso-
quant line and Iso-cost line indicates least combination tangency
slope (MRTS) of Iso-quant equals.
60
Slope (PR) of Iso-quant
Figure 3.9
Expansion Path :
The line or curve, connecting the points of least cost
combination for different levels of output is called expansion path.
Expansion path is an Iso-line on which the slope of Iso-quant
(MRTS) equals the slope of Iso-cost line (price ratio). The
expansion path indicates best way of producing different levels of
output, given the prices of inputs and technology. If expansion path
is straight line starting from origin, it implies that inputs will be used
in the same proportion at all output levels and hence it is also called
scale line. On the other hand expansion path is curved it implies
that inputs are used in various proportions.
Figure 3.10
61
3.5 (C)PRODUCT PRODUCT RELATIONSHIP
The basic resources of farming viz. land, labour and capital
are scarce. However, these scarce resources have many
alternative uses. Scarce resources can be used in producing
different crops and livestock enterprises. Therefore, the farmers are
faced with the management problem of what to produce. Farmers
have to decide whether to produce crops alone or livestock alone or
their combinations. The farmer should choose such a combination
of crop and livestock enterprises that maximizes profits.
Product-product relationship deals with the allocation of
resources among different crop and livestock enterprises. The
objective of product-product relationship is profit maximization. In
product-product relationship, resources are kept constant and the
product-product relationship. Substitution and price ratios are used
as choice indicators in the determination of optimum combination of
enterprises. Algebraically the product-product relationship can be
shown as :
( )
1 2 3 4
, , ......
n
Y f Y Y Y Y =
This expression reveals that a farmer is having an option of
growing four or more crops in the same season in his operational
holding. Then acreage proposed to be allocated under crop
1
Y is a
function of acreage under crops
2 3 4
, , Y Y Y and
n
Y .
Production Possibility Curve :
Production possibility curve an be drawn from production
functions. Suppose a farmer has a limited input i.e. 5 acres of land.
He has two alternatives i.e., the production
1
Y product and
2
Y
product. The problem here is as to how to allocate this limited input
between two alternatives. The alternatives are using the entire 5
acres of land for the production of
1
Y alone or allotting 5 acres of
land for production of
2
Y alone.
In between these to extreme possibilities, we have different
options like allocation of 1 acre for
1
Y and 4 acres for
2
Y , two acres
for
1
Y and three acres for
2
Y and so on. If the entire area of 5 acres
62
is allotted to the production of
2
Y , 300 units of
2
Y would be
obtained, while that of
1
Y is zero (Table 20.1). Analogously, if the
total area of 5 acres is allotted to product
1
Y , 300 units of
1
Y would
be received but the production of
2
Y would be zero. Suppose a
farmer wants to product some quantity of
1
Y , he has to withdraw
some area of land from the production of
2
Y . If one acre is allotted
to
1
Y , he will obtain 100 units of
1
Y and the remaining 4 acres in the
production of
2
Y yield 250 units. Likewise 2 acres of land under
1
Y
and 3 acres of land under
2
Y would yield an output of 150 and 190
units respectively. Other possibilities can be seen from the table.
The different levels of land input and the corresponding
levels of output of
1
Y and
2
Y represent two production functions.
Production possibility curve is a convenient method of depicting two
production functions on a single graph (Fig. 1).
Production possibility curve represents all possible
combinations of two products (
1
Y and
2
Y ) that could be produced
with given amount of resources.
TABLE 1
Possible Production Levels from the given acreage of Land
Area allotted between two products in acres Output
1
Y
2
Y
1
Y
2
Y
0 5 0 300
1 4 100 250
2 3 150 190
3 2 200 100
4 1 250 50
5 0 300 0
63
Figure 3.11
Production possibility curve
Production possibility curve is also known as Iso-resource
curve or Iso-factor curve, since all the combinations of two products
require the same amount of resources. Production possibility curve
presents the producer all the production opportunities available with
a given amount of resources and hence it is called opportunity
curve. The slope of the production possibility curve indicates the
trade off between the two products. it indicates the rate at which
one product is transformed into another product. Therefore it is
called transformation curve. It is also a frontier because the limited
resources cannot help to produce anything beyond production
possibility curve. It demarcates what is possible given the available
quantity of inputs. The area under the production possibility curve
including the axes is called the feasible set or the attainable set of
outputs.
Characteristics of Production Possibility Curve
1. It is concave to the origin.
2. slope of production possibility curve indicates the marginal rate
of product substitution, and
3. Change in input levels, shifts the production possibility curve.
3.6 RELATIONSHIP AMONG THE PRODUCTS
These relationships are of different forms viz., joint products,
complementary products, supplementary products, competitive
products and antagonistic products.
64
Joint Products
Products which are produced from the same production
process are called joint products the two products derived through
the production process are combined in fixed proportions.
Production of one without the other is not possible. In agriculture
almost all products are joint products. The proportion of the joint
products can be altered or manipulated through research break-
through in the long run. The examples are : paddy and straw,
cotton lint and cotton seed, meat and wool, etc. Production
possibility curve for joint products can be seen as a point for given
quantity of resources. The points are as many as the levels of
resources (Fig. 2).
Figure 3.12
Production possibilities for joint product
Complementary Products :
The products are complementary, if an increase in one
product causes an increase in the other product, when the total
quantity of inputs used on the two products are held constant.
Similarly, a decrease in the production of one products results in
the decrease in the production of other product. They do not
compete for the resources. One of the products contributes an
element of production required by another thereby helping each
other in production. An example that can be cited here is rice
succeeding a legume crop. The legume fixes nitrogen thereby
improving the soil fertility for the next crop. Similarly, paddy and
livestock are complementary as paddy crop provides straw to
livestock and livestock in turn makes the availability of farmyard
manure to the paddy crop. Here these two contribute to their mutual
production. The complementary products would become
competitive, when large quantities of resources are diverted to one
65
product, affecting the production of the other. The marginal rate of
product substitution is positive. The production possibility curve in
Fig. 3 presents the range of complementary of one product to the
product.
As can be seen from the figure that
1
Y is complementary to
2
Y between A and B, while
2
Y is complementary to
1
Y between C
and D, between the points B and C, the two products become
competitive. Farmers can take the advantage of complementarily
by producing both the products till they become competitive.
Figure 3.13
Supplementary Products :
Two products become supplementary, if the quantity of one
product can be increased without increasing or decreasing the
quantity of the other product. They do not compete for the
resources. Instead they make better utilization of resources, which
are being unutilized by one enterprise. They together add to the
income on the farm. Crop production is seasonal in nature, and
during off-season the resources are slack. They can be better
utilized by adding supplementary enterprises viz., a small dairy unit
or poultry unit or piggery unit. A farmer should take best advantage
of the products by producing both of them till they become
competitive. The marginal rate of product substitution is zero.
Production possibility curve for supplementary enterprises is shown
in Fig. 4. The product
1
Y can be increased up to AB without
affecting the production
2
Y . If it is further increased the two become
66
competitive. It can be seen in the diagram that the two products are
competitive between the points B and C.
Figure 3.14
Complementary Enterprises
Competitive Products :
Two products are said to be competitive, when increase or
decrease in the level of production of one results in decrease or
increase in the level of production of another, given the fixed
amount of resources. The marginal rate of product substitution
between the products is therefore, negative. Most of the decisions
regarding the selection of products involve competing products.
The examples are, paddy and sugarcane, paddy and groundnut,
groundnut and sunflower etc. in general, crops grown in the same
season are competitive because of limited resources.
MARGINAL RATE OF PRODUCT SUBSTITUTION :
Like factors, products also substitute each other. The
absolute amount, by which one product is decreased in order to
gain another product by a unit is called marginal rate of product
substitution.
arg
Number of units of replaced product
M inal rate of subtitution
Number of units of added product

=

2
1 2
1
Y
MRSYY
Y
A
=
A
67
Marginal rate of product substitution of
1
Y for
2
Y implies that
the amount of
2
Y to be given up in order to gain
1
Y by one unit.
TYPES OF PRODUCT SUBSTITUTION :
The shape of the production possibility curve depends upon
the type of product substitution. Competitive enterprises substitute
either at constant rate or at increasing rate or at decreasing rate.
Constant Rate of Substitution :
Two products substitute at constant rate when a unit
increase in the production of one replaces the same amount of
another product throughout the process of substitution. In other
words, a constant amount of replaced product is sacrificed in order
to gain added product by one unit. Constant rate of substitution
occurs when one of the production functions has an elasticity
greater than one (increasing returns), the other has an elasticity of
less than one or both
1
Y and
2
Y production functions have stages
of both increasing and decreasing returns. The production
possibility curve is linear when products substitute at constant rate.
When we find two products substituting at constant rate, the
production of only one product is economical based on the relative
prices of the two products. This is case of specialization. The
example here is tow varieties of the same farm commodity. The
relevant dates are presented in Table 2.
When we shift from A combination to B combination,
1
Y is
increased by one unit
2
Y is decreased by 6 units and the marginal
rate of product substitution is 6. i.e., we need to reduce 6 unit of
2
Y
to increase
1
Y by one unit. Similarly, when we shit from
combination B to C, C to D, D to E and E to F the amount of
2
Y to
be given up is same. Fig 5 indicates the products substituting at
constant rate.
68
TABLE 2
Two Competitive Products Substituting at Constant Rate
Combination
1
Y
2
Y
1
Y A
2
Y A MRS of
1
Y for
2
Y
A 0 60
B 1 54 1 6 6 / 1 = 6
C 2 48 1 6 6 / 1 = 6
D 3 42 1 6 6 / 1 = 6
E 4 36 1 6 6 / 1 = 6
F 5 30 1 6 6 / 1 = 6
1 2 2 2 2
1 1 2 1 1
.......
n
n
Y Y Y
Y Y Y
A A A
= =
A A A
Figure 3.15
Constant Rate of products Substitution
Increasing Rate of Substitution :
Two products substitute at increasing rate when increase in
one product requires larger and larger sacrifice in terms of another
product. This type of substitution occurs when the production
function of each independent product exhibits decreasing returns.
Substitution of this nature is more common in agricultural
production as the diminishing marginal resource productivity is a
general situation in agriculture. Production possibility curve is
concave to the origin when products substitute at increasing rate.
69
The examples here are, all the crops grown in the same season
viz., paddy and sugarcane, groundnut and sunflower, paddy and
groundnut etc. When products substitute at increasing rate it is
economical to produce a combination of products. The general
pattern of production is diversification. An hypothetical example of
increasing rate of product substitution is presented in Table 3.
Shifting from combination A to combination B, results in
increase in
1
Y by 8 units and decrease in
2
Y by 15 units. Marginal
rate of substitution is 1.88. It means 1.88 units of
2
Y are to be
sacrificed to gain
1
Y by one unit. When we shift from B to C, C to D,
and D to E, the amount of
2
Y to be foregone is successively
increasing as indicated by the increasing marginal rate of product
substitution. The graphical representation is shown in Fig. .6
TABLE 3
Two Competitive Products Substituting at Increasing Rate
Combination
1
Y
2
Y
1
Y A
2
Y A MRS of
1
Y for
2
Y
A 0 75
B 8 60 8 15 1.88
C 16 44 8 16 2.0
D 24 26 8 18 2.25
E 32 0 8 26 3.25
1 2 2 2 2
1 1 2 1 1
.......
n
n
Y Y Y
Y Y Y
A A A
< < <
A A A
Figure 3.16
Increasing Rate of products Substitution
70
Decreasing Rate of Substitution :
Two products substitute at decreasing rate when increasing
in one product requires lesser and lesser reduction in another
product. This type of substitution is observed when the production
functions of both the products exhibit increasing returns. This type
of substitution is very rare in production process, because
increasing returns are seen in I stage of production which is
irrational. It is economical to produce only one of the products is
specialization. The production possibility curve is convex to the
origin. An hypothetical example is presented in Table 4.
Shifting from combination A to combination B results in
increase in
1
Y by 2 units and decrease in
2
Y by 16 units. It means
8 units of
2
Y are to be sacrificed to gain
1
Y by one unit. When we
shift from B to C, C to D and D to E, the amount of
2
Y to be forgone
is successively decreasing as indicated by the decrease in marginal
rate of product substitution. The graphical representation of found
in Fig.7
TABLE 4
Two Competitive Products Substituting at Decreasing Rate
Combination
1
Y
2
Y
1
Y A
2
Y A MRS of
1
Y for
2
Y
A 0 43
B 2 27 2 16 8
C 4 15 2 12 6
D 6 6 2 9 4.5
E 8 0 2 6 3
71
Figure 3.17
Decreasing Rate of products Substitution
1 2 2 2 2
1 1 2 1 1
.......
n
n
Y Y Y
Y Y Y
A A A
> > >
A A A
ISO-REVENUE LINE :
It is a line, which defines all possible combinations of two
products, which would yield equal revenue. Suppose we wish to
obtain total revenue of Rs. 5,000, when price of
1
Y ( )
1 Y
P is Rs. 10
and price
2
Y ( )
2 Y
P is Rs. 20, the expected revenue of Rs. 5,000
could be earned by producing 500 units of
1
Y or 250 units of
2
Y .
Similarly, 300 units of
1
Y and 100 units of
2
Y or 100 units of
1
Y and
200 units of
2
Y would help to earn the same revenue. By plotting
these two extreme points of 500 units of
1
Y and 250 units of
2
Y and
by joining these two points, we get the Iso-revenue line (Fig.8).
Characteristics of ISO-revenue Line
1. Iso-revenue line is a straight line, as the output prices do not
change with the quantity of the output sold.
2. As the total revenue increases, the Iso-revenue line shifts
upwards and moves away from the origin.
3. The Iso-revenue lines are parallel to each other, since price
ratio remains constant, and
4. The slope of the Iso-revenue line indicates the inverse price
ratio of the products. The slope is affected by price changes.
72
Figure 3.18
Iso-revenue Line
3.7 DETERMINATION OF OPTIMUM PRODUCT
COMBINATION
To get the revenue maximizing combinations of two
products, two relevant questions need to be answered viz., what
combinations should be produced and how can that combination be
determined. To answer these questions, the following methods
need to be examined.
Algebraic method :
Step 1 Compute marginal rate of substitution between products
1 2
2
1
YY
Number of units of replaced product
MRS
Number of units of replacing product
Y
MRS
Y

=

A
=
A
Here
1
Y is replacing product and
2
Y is replaced product.
1
2 1
2
Y
MRSY Y
Y
A
=
A
Here
2
Y is replacing product and
1
Y is replaced product.
Step 2 Compute price ratios (PR)
73
1 2
2 1
Priceper units of replacing product
Priceper units of replaced product
( )
Y Y
Y Y
PR
P P
PR or
P P

=

=
Step 3 Finding out the optimum combination of products by
equating MRS with price ratio.
Priceper units of replacing product
Priceper units of replaced product
Number of units of replaced product
Number of units of replacing product

=

( )
2 1 1 2
1 2 2 1
Y Y
Y Y
Y P Y P
or
Y P Y P
A A
= = =
A A
Graphic Method
To determine the optimum combination of products through
graphic method, production possibility curve and Iso-revenue line
are depicted on the same graph (Fig.9). slope of production
possibility curve indicates the marginal rate of substitution and that
of Iso-revenue line represents the inverse price ratio of the
products. The optimum combination products are at the point where
the Iso-revenue line is tangent to the production possibility curve. At
the point of tangency the slopes of production possibility curve and
Iso-revenue line are the same.
Figure 3.19
Optimum Combination of products
OUTPUT EXPANSION PATH :
Iso-cost lines are the lines or curves that pass through the
points of equal slope on a production possibility map. Output
74
expansion path is that Iso-cost line, which connects the points of
optimal product combinations on the successive production
possibility curves (Fig. 10).
RIDGE LINES :
Ridges lines are the borderlines that separate ranges of
competition and product complementarity. In the Fig. 20.10, OA
and OB are the ridgelines. That portion of production possibility
curves, falling between OA and OB have negative slope indicating
the existence of competition between the products, while that
portion of the production possibility curves falling outside OA and
OB, have positive slopes indicating complementarity. Along the
path OA, the marginal rate of substitution of
1
Y for
2
Y is zero, while
along the path OB, the marginal rate of substitution of
1
Y for
2
Y is
infinite.
Figure 3.20
Expansion path and ridge lines
Summary of Three Basic Production Relationships
75
Relationship
Factor product Factor factor Product product
It is concerned with
resource use efficiency
It is concerned
resource combination
and Substitution
Resource allocation
Objective is optimization
of resource use
Cost minimization Profit maximization
Management problem : How to produce What to produce
How much to produce
Determination of
optimum input to use and
optimum output to
produce
Least cost
combination of
resources
Optimum combination
of enterprises
Choice indicator
Price ratio Substitution ratio and
price ratio
Substitution ratio and
price ratio
Single variable
production function
Output is constant
and inputs are varied
Input is constant and
products are varied
Law of diminishing
returns explains the
factor-product
relationship
Principle of factor
substitution, explains
factor-factor
relationship
Principle of product
substitution explains
product-product
relationship
( )
1 2 3
, , ,....,
n
Y f x x x x = ( )
1 2
, Y f x x = ( )
1 2 3 4
, ,.... Y f Y Y Y =
3.8 QUESTIONS
1. Write notes on the following relationships
a) Factor-Product relationship
b) Factor-Factor relationship
c) Product-Product relationship
2. Explain the different forms of relationship among products.
3. Describe how optimum product combination is determined to
get maximum revenue.

76
4
RISK AND UNCERTAINTY
Unit Structure :
4.0 Objectives
4.1 Decision making under risk and uncertainty
4.2 Buffer Stock Operations
4.3 Minimum Support Price
4.4 Questions
4.0 OBJECTIVES
- To understand and minimize farmers risk and uncertainty and
maximize his return.
- To understand the role of government to reduce instability and
to have growth in agriculture sector.
4.1 DECISION MAKING UNDER RISK AND
UNCERTAINTY
Risk and uncertainties are more pronounced in agriculture
as the laws of nature have the upper hand in these enterprises.
Crop enterprises are subject of fluctuations from year to year on
account of erratic fluctuations in monsoons and damages due to
insects, diseases, storms and other such things.
These risks and uncertainties are permanent phenomena in
agriculture and farmers will always faced, with the problem of taking
suitable action against these. To the extent the farmer succeeds in
minimizing risk and uncertainty, he succeed in maximizing his
returns.
77
Risk :
Risk is the probabilistic phenomenon where on outcomes
are unknown and can be predicted only in a probability sense.
Uncertainty :
Any decision or outcome which can not be predicted
precisely. In contrast to risk the probability of an outcome can not
be established in an empirical or quantitative sense for situation of
uncertainty one can best guess the range with in which an
uncertainty can materialize.
Game Theory :
The theory of games (or game theory, or competitive
strategies) is a mathematical theory that deals with the general
features of competitive situations. The theory is helpful when two
or more individuals or organizations with conflicting objectives try to
make decisions. In such situations a decision made by one
decision maker affects the decision made by one or more of the
remaining decision makers and final outcome depends upon the
decision of all the parties.
The theory of games is based on the minimax principle put
forward by J-von-Neumann which implies that each competitor will
act so as to minimize has maximum loss (or maximize his minimum
gain) or achieve best of the worst. The theory does not describe
how a game should be played it describes only. The procedure
and principles by play should be selected.
Characteristics of Games :
A competitive game has following characteristics
1. There are finite numbers of participants or competitors. If
number of participants is 2, the game, for number greater than 2
it is n-person game.
2. Each participant has available to him a list of finite number of
possible courses of action. The list may not be same for each
number of participants.
3. Each participant knows all the possible choices available to
other but does not know which of them is going to be chosen by
them.
4. A play is said to occur. When each of the participants chooses
one of the courses of actions available to him. The choices are
78
assumed to be played simultaneously so that no participant
knows the choices made by others until he has decided his own.
5. Every combination of courses of action determines an outcome
which results in gains to the participants. The gain may be
positive, negative or zero, Negative gain is called loss.
6. The gain of a participant depends not only on his own actions
but also those of others.
7. The gains (pay offs) for each and every play are fixed and
specified in advance and are known to each player. Thus each
player knows fully the information contained in the payoff matrix.
8. the players make individual decisions without direct
communications.
Game models :
There are various types of game models. They are based on
factors like numbers of players participating the sum of gains or
losses and the number of strategies available etc.
1. Number of persons : if the game involves only two-player, it is
called two-person games if there are more than two player it is
named n-person game. An n-person game does not imply that
exactly n-players are involved in it. Rather it means that the
participants can be classified into n mutually exclusive groups
with all members in a group having identical interests.
2. Sum of payoffs : If the sum of payoffs to the players is zero,
the game is called zero-sum game or other wise non zero-sum
game.
3. Number of strategies if the number of strategies (moves or
choices) is finite, the game is called a finite game if not, it is
called infinite game.
Some definitions :
Optimal strategy : The strategy that puts the player in most
preferred position irrespective of the strategy of his opponents is
called optimal strategy. Any duration from this strategy would
reduce his pay off.
Zero sun game : It is a game in which the sum of payments to all
the players, offer the play of the game is zero, in such a game the
gain of players that win is exactly equal to the loss of player that
lose i.e. two candidates fighting elections, where in the gain of
votes by one is the loss of votes to the other.
79
For example :
Suppose a decision to be taken on modernization of rice
shelters. There are 2 farm managers A and B. each of two has
alternative strategies before him.
Competitor B
status quo modernizes
status quo 0,0 -10,000, 30,000
competitor A modernize 30,000, -10,000 8,000, 8,000
The left hand entry in each cell is payoff to A and right hand
entry is the payoff to B if both the competitors does not go for
modernization then there will not be any increase in profit
represented by (,0,0) increase in profit but if competitor A did not go
for modernization and B goes for it B captures the market share
and have 30,000 as his increased profit and A loses his market
share and has -10,000 as loss. Where as if both go for
modernization then both an increase there market shares and have
pay off or higher profit of 8,000 each. So both will chose to
modernize and here (8, 000, 8,000) can is the optimal strategy.
Decision Theory :
Unlike in the game theory, in the decision theory, there is no
virtual opponent or competitor to oppose or compete with the
farmer. The competitor here is considering being nature itself.
Decisions are make under 4 types of environments that differ
according to the degree of certainty. The degree of certainty may
vary from complete certainty to complete uncertainty. The region
that lies in between corresponds to decision making. Under risk,
1. Decision making under conditions of certainty it is easy to
analyse the situation and make good decisions since the
decisions maker has perfect knowledge about the future,
outcomes, he simply chooses the alternative having optimum
pay off.
2. Decision making under conditions of uncertainty. More than one
state of nature exists but decision maker lacks sufficient
knowledge to allow him assign probabilities to the various state
of nature.
3. Decision making under condition risk. Here also, more than one
states of nature exist but decision maker lacks sufficient.
80
Knowledge to allow him assign probabilistic to each of these
states.
4. Decision making under state of conflict situation exist in which
two (or more) opponents with conflicting objectives try to make
decisions with each trying to gain at cost of others. here game
theory applies.
For example :
A farmer learns from reports that the wheat crop. Which he
is also raising, has been damaged due to floods in the neighboring
area, however he expects a bumper crop from his own land. From
his experienced, he has prior, knowledge that it slump conditions
prevail in the wheat market in his area, three is a 60% of chance
that he will make gain of Rs. 800 per hectare if he does not raise
the price of wheat. But on the contrary there is an equal chance of
losing Rs. 200 per hectare in case he increases the price of wheat.
On the other hand, if he expects boom conditions in the wheat
markets, there is a 40% chance that he can earn a profit of Rs. 900
per hectare in case he does not increase the price of his wheat and
an equal chance of making a profit of Rs. 1,200 per hectare if he
increases the price.
Decision Slum Boom
Leaves the price untouched p = .6 p = .4
g = 800 g = 400
Raise the price p = .6 p = .4
g (-200) a = 1200
Given these 2 situations the farmer estimates his expected
gains by using the concept of mathematical expectation.
( )
1 1 1 1 2 2
.6 800 .4 900
. 840
E g g p g p g p
Rs
= = +
= +

If Raises prices
( ) ( ) .6 200 .4 1200 +
Po. 360
Decision Farmer should not raise the price of his crop.
81
4.2 BUFFER STOCK OPERATIONS
During the planning Commission meeting in May 1972 it was
suggested that food grains stocks with Food Corporation of India
should be conceptually classified into 3 categories.
a) Buffer stock
b) Operational stock and
c) Surplus stock
Buffer stock operations refer to buying of goods and selling
the same with the objective of neutralizing price fluctuation. Buffer
stock serves as a stock absorber in the economy and provides a
defense mechanism against the widely fluctuating price levels.
The foods stocks are stored in government godowns and
warehouse. Such stocks are release for public redistribution
system. The govt. fixes issue price for certain food grains and thus
controls the price in the open market. To safe guard the interest of
poor, govt. supply food grains from buffer stock through fair price
shops. There is a fixed limit for stock to be had. Now the problem
comes when stock is held in more quantity and there is not out go
for simple reason that market price may be at part with the fair price
shops. In that case people prefer to purchase from market
maintaining adequate buffer stock.
Technical group of planning commission recommended
buffer stock of the order of 15-16 million tones in 1988. Basic
purpose of the stock is to compensate any short fall in normal
supply.
Basic objectives of buffer stock method are
1. Availability of food grains in case of Natural Calamities. Natural
calamities such as drought famine etc. causes scarcity of supply
of food grain in the related area. In that case stored buffer stock
can be supplied to affected regions at fair prices.
2. Seasonal production : Agriculture production is based on
seasonal changes and seasonal requirements if there is any
charge in the season such as prolong monsoon which will lead
to shortage or surplus of food grains. Storage of food grain will
be helpful in both the cases.
82
3. Price Stability : As these stocks are supplied to fair price shops
which guarantee no price hike and constant prices.
4. Stability of farm incomes : Buffer stock operations involves
govt. buying food grains in surplus areas and selling them in
deficit areas. This would help in better distribution of the
available food grains besides bringing about regional equality of
prices.
5. If safe guard the interest of poor. As buffer stock is supplied fair
price shops it safe guard the interest of poor.
The buffer stock operations should be implemented and
executed that the govt. is not involved in heavy financial losses
under a buffer stock policy, the govt. builds up stocks of food,
agricultural goods and other essential commodities either though
direct purchase from the domestic market or through imports from
outside and releases these stocks for sale in domestic market when
prices are rising. The buffer stock operation only alters the balance
of demand and supply in the market. It does not obstruct the
essential function of market, namely allocation of goods among
buyers and through that signaling via factor prices, the hanged
decided in allocation of resources. The buffer-stock operations
influences the market forces and through that the allocation of
resources. It does not disturb the market mechanism.
Considering likely size of the crop and fluctuation in
production it was suggested that a buffer stock of about 10 million
tones (which was 10% of production in base period 1968-69)
should be achieved, if situation of excess or short fall in production
were to be meant in 19 out of 20 years.
However it was recognized that the constrained of shortage,
finance and turnover would impose a limit on its size finally a buffer
stock of about 7 million tones was considered more realistic (This
was to be over and above operational stock required for meeting
the normal requirements of public distribution system.
4.3 MINIMUM SUPPORT PRICE
Food grains and prices committee in 1964 recommended the
establishment of Agriculture price commission to enforce a
balanced and integrated price structure in the country, and
83
accordingly it was set up in the year 1965. However in 1985 the
agriculture price commission was renamed as commission for
agriculture Costs & prices. The main function of the commission is
to announce Minimum Support Price (MSP) procurement prices
and to fix prices for a number of agricultural commodities to be sold
to public minimum price is also called Reserved Price.
Definition of MSP :
Support price is defined as price at which the government
would be under obligation to buy the entire stocks that may be
offered to it for sale. the support prices would have no direct
incentives, role to play, but ensure farmers against risk of price
falling below particular level.
The main objectives of announcing MSP are
1. To prevent fall in prices in the situation of over production.
2. To protect the interest of farmers by ensuring them minimum
price for there crop in situation of price fall in the market.
The support price would no direct incentive role to play but
would ensure farmers against risk of prices falling below a
particular level. Under this policy govt. attempts to stabilize the
incomes of farmers by entering the market itself buying and selling
in open market when there is shortage.
What should be the minimum support price?
Guidelines for determining support prices of agricultural
products would depend on objectives that are sought to be
achieved. Objective of agricultural price support policies can be and
are in fact diverse in different countries. By definition a support
price policy assures the farmers against a fall in prices beyond the
stipulated level, in some countries (mainly advanced), such price
insurance has primary objective of maintaining the general level of
farm income. i.e. income oriented approach.
In several other countries (specially developing countries)
the main objective of support price policy is to help augment
overall agriculture production i.e. product oriented approach.
In most developing countries, including India the main
objective in present context is to step up the rate of growth of
agriculture production so as to match the growth of consumer
84
demand. The support price policy, which is production oriented
therefore would seen to have greater relevance. The objective of
improving agricultural incomes will be achieved as a sequel to
increased production and productivity.
For fixation of minimum support price some economist
believed that it should be based on cost of production. But question
is what cost should be considered? As the cost of production of a
commodity depends on number of factors which vary from farm to
farm, size of the farm, soil type, cropping pattern, farm ???? as well
as techniques of production employed. As such it is not easy to
work out the average cost of production. To avoid these difficulties
support price has to be related to the costs of a farms for which the
inputs are mostly purchased and not home produced. The reserve
price has to be related to the cost of production of a model.
Commercial farm, for which alone the cost is measurable concept
the reserve price may thus be deformed as The price than ensures
the cost of production of commercial farm under normal weather
condition. Thus defined it will vary from year to year depending
upon changes in the condition of supply & hence it will have to be
flexible.
However we must sure that primary objective of the support
price policy in our country has to be that of augmenting agriculture
production and not of achieving income redistribution between
agricultural and non-agricultural sector. The deterring support
prices will have to be involved keeping this objective firmly in view.
According to this programme, the govt. should fix the price of
farm produce at a level which is higher than the market price and to
buy from the farmers. Whatever surpluses are not cleared in market
in Fig.
0
P is market price of say wheat
Figure 4.1
85
The support price by the govt. pegs the price
1
P at that
price, according to demand curve
0
D only OA units of wheat are
taken by consumers. But on the other hand OB units of wheat are
offered for sales. Thus the government under the obligation to
purchase this surplus supply and keep it in the buffer stock.
In case this policy is successful we will, firstly have smaller
fluctuations in the price of farm produce than there would be if price
were determined on the basis of completely free market. Secondly
total revenue of the farm producers will get stabilized in face of
fluctuations in production.
In case of long run one can increased the output as the
producer knows he can expand production by increased inputs or
costs. Higher support prices fixed by govt. may stimulate
agricultural production by causing farmers to use none labour and
variable resource inputs to reach higher output level with existing
methods of production and the discovery and adoption of new
agricultural technologies that result in new, lower cost production
possibilities by farmers. Thus it brings about the growth in
production in long run.
4.4 QUESTIONS
1. Explain how farmer minimizes his risk and maximizes his
returns.
2. Discuss the Buffer Stock operations in India.
3. Define and explain the Minimum Support Prices.

86
5
Module 4
RURAL MONEY MARKET
Unit Structure
5.0 Objectives
5.1 Introduction
5.3 Demand for credit
5.4 Classification of demand for credit
5.5 Sources of Agricultural finance
5.6 Non Institutional sources
5.7 Institutional sources
5.8 Questions
5.0 OBJECTIVES
- To study the demand for credit in rural area.
- To study the classification of demand for credit
- To study various sources of Agricultural Finance.
- To study Non-Institutional sources of agricultural credit
- To study Institutional sources of agricultural credit
5.1 INTRODUCTION : RURAL MONEY MARKETS :
A money market is the market for lending and borrowing of
short term funds. In this market short term surplus investible funds
of bank and other financial institutions are demanded by borrowers.
The Indian money market consists of two parts unorganized money
market and organised money market. The unorganized sector
comprises indigenous bankers and non-bank financial institutions.
87
The organised sector consists Reserve Bank, the State Bank of
India and its associate banks, 20 nationalised banks and private
sector banks.
Demand for Credit :
The demand for credit from rural area is for rural farm sector
and rural non-farm sector. The demand for credit is classified as
following:
Classification of demand for rural credit :
1) Fixed and Working Capital :
Fixed capital can be used a number of times without
exhausting its utility. The fixed capital investment is required in
agriculture for the following purpose i) purchase of land and
improvement of land. Ii) provision irrigation like lift irrigation and
provision of well irrigation iii) purchase of capital goods like tractor
and agricultural implements iv) Purchases of livestock and animals
for dairy purpose v) Plant, buildings and machinery vi) construction
of farm house. All the agents in agricultural production which are
durable and posses utility for long time comes under the category
of fixed capital.
The another form of capital required for rural farm and non-
farm sector is working capital. It is required in farm sector for
purchase of seeds fertilizers, manures, and pesticides etc., which
are consumables during the agricultural production process. The
working capital is required for various agricultural operations during
a production season like, preparations for sowing, weeding,
spraying and dusting, harvesting, threshing and transporting etc.
The working capital is also required for family consumption during
the process of production and marketing. The family consumption
needs consists purchase of cloth, utensils, medical and educational
expenses, litigation, birth, death and marriage ceremonies etc. It is
required for the repayment of interests.
2) Production loans and Consumption loans.
I) Production loans :
Production loans are associated with different agricultural
operations varying from purchase of inputs to marketing of produce.
Production loans are required for agricultural inputs like seeds,
88
manure, fertilizers, fodder etc. It is required for payment of changes
like wages, revenue, less etc. There loans are required for irrigate
the crops, payment of current farm expenses, purchase of
livestock, banding the land and other improvements. Production
loans are required for repair of agricultural implements, machinery,
farm houses grain goals and cattle sheds, repair of wells, laying of
new wells, orchards, purchase and reclaim of land, developing new
irrigation sources, purchase of machinery and equipments and
other capital expenditure on agriculture. This expenditure is related
to production. These activities increase the income of the farmer.
II) Consumption loans :
Apart from borrowing for production, the farmer has also
borrow for his consumption expenditure. The purposes of
consumption expenditure are purchase of domestic good like
clothing, utensils, medical and educational expenses, construction
and repair the house, expenses related to death, marriage and
other ceremonies, purchase of ornaments, litigation expenses etc.
This consumption expenditure do not earn any income to the
farmer, so the burden of debt increase gradually.
3) Time period of loans :
Agricultural credit needs of the farmers can be classified into
three categories on the basis of time.
i) Short term loans :
The period for such loans is less than 15 months. Short term
loans are required for seasonal inputs like seeds fertilizers; feeds
and folder, internal agricultural operations during season, payment
of wages of hired labour, litigation and consumption needs and
unproductive purposes during the season. Main agencies for
providing short term loans are money lenders and co-operative
societies.
ii) Medium term loans :
The period of medium term loans is 15 months to 5 years.
the amount of medium term loans remains greater than short term
loan, which farmer can return gradually in yearly installments during
the five years. Medium term loans are generally obtained for the
purchase of cattle, small agricultural implements, repair and
construction of wells etc. Such loans are generally provided by
89
money lenders, relatives of farmers, co-operative societies and
commercial banks.
iii) Long term loans :
Long term loans required to introduce some permanent
improvements on land, the purchase of some machinery and
expensive equipment, the purchase of additional land, digging tube
wells, repayment of old debts. Obviously the amount involved in
such loans is very large. This could be paid back over a number of
years only. The number of years of a long term loan exceeds 5
years. The maximum limit is not laid down normally. It is ranging
between 15 and 20 years. These loans are normally taken from
primary co-operative Agricultural and Rural Development Banks
and Commercial banks.
Sources of Agricultural Finance :
The sources of agricultural finance can be divided into two
categories 1) Non-institutional sources 2) Institutional sources.
1) Non-Institutional Sources - Unorganised Sector :
Non-Institutional sources of agricultural finance is a
unorganized segment of the rural money market. Non-institutional
or private sources include money lenders, traders, commission
agents, relatives and landlords. These sources are not come under
purview of the Indian banking Company act. The accounts of these
agencies are not assessed by the Government. There is not any
control of the Government on these agencies. These agencies
have informal relationship with their borrowers. There is elasticity
about rate of interest, rules and guarantor. The non-institutional
sources are the following i) moneylenders ii) relatives iii) traders iv)
commission agents v) landlords.
90
Table 5.1
Share of Non-Institutional Sources in Rural Credit
Source Percentage Share In total Credit
1951-52 1961-62 1971 1981
1 Institutional Credit
I. Government 3.3 2.6 7.0 4.1
II. Co-op societies 3.1 15.5 20.0 29.0
III. Commercial Banks 0.9 0.6 2.0 28.0
Sub - total 7.3 18.7 29.0 61.0
2 Non Institutional Credit
I. Relatives 14.2 14.0 9.0
II. Money lenders 69.7
67.4
37.0 17.0
III. Others 8.8 13.9 20.0 13.0
92.7 81.3 71.0 39.0
Source - Indian Journal of Agriculture Economics 1988.
The above data indicates that at the time of independence
the share of Non-Institutional credit in total finance was 92.7% and
the institutional credit was very weak. With the development of two
tire and three tire credit structure of co-operative credit and with the
Nationalisation of commercial Banks the institutional finance was
increase In 1981 the share of Institutional finance was increased
upto 61%, but still the importance of Non-Institutional credit in rural
credit was 39.0%.
The All India Debt and investment survey (1981) estimated
that the share of non-institutional sources had slumped to about
37% in 1981, moneylenders accounting for barely 17%,
A) Money lenders :
At the time of independence, the most important source of
agricultural credit was money lender. At that time share of money
lender was 69.7%. There are two types of money lenders in rural
areas; professional money lenders and Non-professional money
lenders. The professional money - lenders whose only occupation
is money lending. The non professional money - lenders were rich
farmers, traders and commission agents. They combine their
91
traditional occupation with money lending. With the development of
institutional credit the importance of money-lender has declined
rapidly. However, there are many reasons for the importance of
money lenders even now.
a) The moneylenders dont ask reason of credit, he freely supplies
credit for productive and non-productive purpose.
b) He is easily accessible and closely in the contact of borrower.
He keeps the transaction confidential.
c) His methods are simple and elastic.
d) He is well known to local people psychology and therefore, he
knows how to realize the given amount.
Weaknesses of money lending by money lenders :
a) The rates of interests are very high which money lender charge.
b) The burden of unproductive loans goes on increasing.
c) Because of illiteracy, farmers give their thumb on blank paper,
so moneylenders under manipulates the accounts.
d) There was an obligation on borrower to sell their crops to the
creditor at unfavorable prices.
B) Relatives, landlords and others :
The other non institutional sources consists relatives,
landlords traders, commission agents and landlords. The traders
and commission agents supply funds to the farmer on the mortgage
of potential crop. They force the farmers to sell their crops at low
price to them. This source is important in case of cash crops like
cotton, tobacco, fruits etc. This finance is based on exploitations.
Apart from this farmers borrow from their relatives. These loans are
contracted in an informal manner. The rate of interest remains low
and returned immediately after harvest. These sources has also all
the defects associated money lenders. The interest rates remain
exorbitant. The small farmers are cheated and their lands are
appropriated. With the development of institutional finance the
importance of Non-institutional finance has decreased.
2) Institutional Sources - Organised Sector :
Need for institutional finance :
The need for institutional finance arised from defects and
inadequacy of Non-institutional finance. These defects are as
follow:
92
i) It was based on exploitation and profit motive.
ii) It was not related to productivity of land, so they were
expensive.
iii) These loans were given to most needy persons but
does not flow through desirable channels.
iv) These loans were not available for long periods so it
was not utilised for agricultural improvements.
v) These loans were not properly linked with agricultural
operations.
93
Government
of India
RBI
NABARD
State Land Development
Banks (SLDB)
SLDB
Branches
(Co-op.
Primary Land
Devt. Banks
(PLDB) (Co-op.
Institutions)
Other
Co-op.
PLDB
Member
Farmers
SLDB
Member
Farmers
Source - Morris :17 World Bank 26598
Commercial
Bank (CB)
CB
Branches
Regional
Rural Bank
(RBI)
RBI
Branches
Individual Farmers and
Primary
Agricultural Credit
Societies (PACS)
District Central
Co-op. Banks
(DCCB)
State Co-op.
Banks
Members
PACS
NCDC
(Co-op. Institution)
AGRICULTURAL FINANCE
Short Term
Long Term
94
5.2 INSTITUTIONAL FINANCE AND IMPERFECTIONS
IN RURAL CREDIT MARKETS IN INDIA :
5.2.1 Evolution of Multi-agency Approach :
Institutional credit is not exploitative. This credit always
helps farmers to raise productivity. Its rate of interest remains low
and different for different groups of farmers. It makes clear
difference between short term, medium term and long term credit.
It is integrated with needs of the agriculture. Since independence
multi agency approach comprises co-operative banks, commercial
banks and regional rural banks. The objectives of the multi agency
approach were, to ensure timely and adequate finance to
agriculture sector to reduce and gradually eliminate the non-
institutional finance from rural sector, to make available credit
facilities to all the regions of the country to provide larger financial
support to areas covered by special programmes in agriculture.
Institutional credit refers funds made available by co-op.
Societies, Commercial Banks and Regional Rural Banks.
Previously there was a dominance of money lenders. To reduce the
dominance Government set up Co-op. Credit Societies and Land
Mortgage Banks. According to a Survey of rural credit in 1950-51
showed that, cooperative could meet nearly 3.3% of total credit
requirements of farmers and the money lenders accounted for 93%
of the credit needs of the farmers. The All India Rural Survey
Credit Samittee 1954 Stated Co-operation has failed but co-
operation must succeed. The All India Rural Credit Survey
Committee 1969 recommended the adoption of multi agency
approach to finance the rural sector. According to the
recommendation of this Committee, RBI took a serious measures
to strong then the cooperative movement. The State Bank of India
set up in 1955 by the nationalization of the Imperial Bank. In 1969,
14 leading Commercial Bank were nationalized. After
nationalization Govt. has taken a step of setting up of Regional
Rural Banks (RRBs) in 1975. Thus, the multi agency approach of
institutional credit to agriculture evolved over a number of years.
While the Reserve Bank of India was helping the cooperative
sector directly. For this purpose National Cooperative Development
Corporation (NCDC) was set up at national level. After that, it was
95
felt that, multi agency approach required a special banking
institution to coordinate and help all the institution in rural finance.
For this purpose NABARD was set up as a Apex Bank in rural
finance in 1982.
5.2.2 Institutional Credit to Agriculture :
Table No. : 4.2
(Amt. in Rs.Crores)
Year
Co-op.
Bank
%
Commercial
Banks Amt.
%
RRBs
Amt.
%
Total
Institutional
Credit Amt.
%
1984-85 3,440 55 2,790 45 - - 6,230 100
1997-98 14,090 44 15,380 50 2,040 6 31,960 100
2002-03 24,300 34 41,050 58 5,470 8 70,810 100
2005-06 39,400 22 1,25,860 70 15,220 8 1,80,480 100
Source : Economic Survey 2006-07 Page No.171
It is revealed from Table no.4.2 that, total agriculture credit
from institutional sources as steadily increased from Rs.6,230/-
crores in 1984-85 to Rs.1,80,480/- crores in 2005-06. The share of
co-operatives was 55% in total institutional credit 1984-85 but
decline upto 22% in 2005-06. At the same time the share of
Commercial Bank including RRBs raised from 45% to 70% during
this period. The table no.4.2 however shows that, during the first
three years of X
th
plan (2002-03 to 2005-06) there was substantial
increase in institutional credit flow and the average annual credit
flow was above one lakh crores. The table no.4.2 shows that, even
though the total institutional credit in agriculture has been steadily
rising. There has been steady decline in the contribution of co-
operative banks in rural credit from 55% in 1984 to 22% in 2005-06.
The share of RRBs has increased nearly from 6% to 8%. The
share of commercial Banks has steadily rising from 45% to 70%. It
is an good idea that, RRBs are made subsidiaries of Commercial
Banks.
96
5.2.3 Present Credit System in India :
1. State Co-operative Banks :
Presently, there are 30 State Co-op. Banks in the country.
They are apex of the coop. credit structure in each state.
Agriculture sector requires short term and long term finance. The
three tire structure has developed for short and medium term
finance. In the three tire structure the State coop. Banks are at
apex level means at state level. The SCB finances and control the
working of the District central coop Bank in the state. The SBS are
financed by NCDC and NABARD. NCDC provides long term
Government
of India
NCDC
Cooperative
RBI
NABARD
SLDB
SLDB
Branches
PLDB
State Co-op.
Banks (SCB)
District Central
Co-op. Banks
Primary
Agricultural Credit
Societies (PACS)
Members PACS
Other
Co-op.
Societies
PLDB
Member
Farmers
SLDB
Member
Farmers
Source - Morris :17 World Bank 26598
97
finance to SCBs and NABARD provides long term finance to SCBs.
The SCBs are link between NABARD and DCCBs. The State coop.
banks obtain its working funds from its own share capital and
reserves, deposits from the general public and an advance from
NABARD and NCDC. The NABARD constitutes between 50 and
90% of the working capital of state coop bank in the country. The
SCB not only interested in rural credit movement but also
promoting other cooperative ventures. In 2001-02 the 30 SCBs had
lent about Rs. 34220 crores to DCCBs and PACSs.
2) District Central Cooperative Banks (DCCBs) :
In 2001-02 the number of DCCBs was 369 in India. Their
loans outstanding amount was Rs. 56650 crores. The DCCB is a
apex bank of PACS. These banks have few private individuals as
share holders, who provide both finance and management. the
DCCB lent to village level primary credit societies. At the same time
it was expected that, to attract deposits from general public. But,
this expedition has not been fulfilled and the most of the DCCBS
act as a intermediaries between SCBs and PSCs. Recently, the
NABARD has formulated a scheme for rehabilitation for week
DCCBS
3) Primary Agricultural Credit Society (PACS) :
The Primary Agricultural Credit Society an be started with a
10 or more persons normally belonging to a village. Primary
Agricultural Societies are the grass root level agency of short term
coop. credit structure. PACSs directly gives finance to their member
borrowers. PACSs given short and medium term loan for
agriculture and allied purpose in the village. The importance of
PACSs rising steadily. In 1950-51 it advanced loans of Rs. 23
crores, this rose upto Rs. 200 crores in 1960-61 and Rs. 34520
crores in 2001-01. the PACS advances to the weaker section.
Particularly to the small and marginal farmers. But as compare to
demand for finance the work of PACS is not adequate. The most of
the PACSs are dependent on the finance provided by DCCBs.
Where there DCCBs are week the PACS are starved of finance
which affects on the credit function of PACS. At the end of March
2002 the loans outstanding for PACS were over Rs. 32520 crores.
98
4) Long Term Rural Credit - Cooperative Agriculture and
Rural Development Banks (CARDBS) :
There was a great need in India for an institution specially
designed to cutter to the long term credit needs of agriculture and
allied activities in the rural area. The CARDBs initially land
mortgage Banks. After words they were called Land Development
Banks. In recent years they have been renamed as a cooperative
Agricultural and Rural Development Banks (CARDBS). The first
SLDB has started in Madras in 1929. The progress of Land
Development Banking has been very slow and also uneven. After
independence, Land Development Banks has developed. The
present progress is concentrated only in Few States Viz. Andhra,
Tamilnadu, Karnatak, Maharashtra and Gujrath. The number of
PCARDBs and their branches increased from 86 in 1950-51 to 739
in 2001-02. While the number of SCARDBS increased from 5 to 20
during the same period. The loans advanced by PCARDBs during
2001-02 were Rs. 1930 crores and the loans outstanding was of
Rs. 8960 crores and the same time SCARDBs sanctioned loan of
Rs. 2690 crores in 2001-02 and amount of loans outstanding was
12,380 crores. SCARDBs provides loans on fixed interest and for
fixed period generally upto 20 years. The CARDBs is to grand
loans on the security of agricultural properties.
5) Commercial Banks & Rural Credit :
Before nationalization the commercial Banks largely
indifferent to credit needs of agriculture sector. To overcome this
problem 14 Commercial Banks has nationalized in 1969. At that
time the total numbers of branches were 1860 and now increased
over 47190 by March 2002. Presently 16 million agricultural
borrowing accounts with Commercial Banks amounting Rs. 63080
crores in 2005-06. Commercial Banks has given Rs. 125860 crores
to agriculture sector in the total institutional credit. The contribution
of Commercial Banks was 70%. At present short term crop loans
account for nearly 42 to 45% of the total loans disbursed by
Commercial Banks to farmers. The percentage of term loans
accounts for 35 to 37% of total loans disbursed by Commercial
Banks. The loans disbursed to allied activities like dairying, poultry
farming, piggery, bee-keeping, fisheries, are accounts for 15 to
16%. Since, October 1980 the Govt. of India has started Integrated
Rural Development Programme for weaker section. The
Commercial Bans has fulfilled their targets of disbursing loans to
99
weaker section. The Commercial Banks indirectly financing to the
Cooperative Societies.
6) Regional Rural Banks (RRBs) :
According to the 20 point economic programme initially 5
Regional Rural Banks were set up on October, 2 1975. The each
Regional Rural Bank had an authorized capital Rs. 25 lakhs. The
share capital of Regional Rural Bank was subscribed by the Central
Govt. (50%). The State Govt. concerned 15%, and the sponsoring
Commercial Bank (35%). The area of Regional Rural Bank is
limited to specific region that is one or more districts. The Regional
Rural Bank grant direct loans and advances only to small and
marginal farmers, rural artisans and agricultural labours. The RRBs
received many concessions such as lower rate of interest on
borrowings, cost of staff deputed to RRBs. The Reserve Bank has
allows RRBs to maintain Cash Reserve Ratio at 3% and Statutory
Liquidity Ratio at 25%. NABARD has provided refinance facility to
RRBs. Presently, there are 196 RRBs in 23 states having 14500
branches. The aggregate deposits of RRBs are of Rs. 43220 crores
and RRBs has advanced Rs. 18370 crores during 2001-02. In
2005-06 RRBs has given credit to agriculture of Rs. 15220 crores.
The contribution of RRBs in total agricultural credit is 8%. RRBS
has eliminated the importance of money lender in rural area.
7) The National Bank for Agricultural and Rural
Development (NABARD) :
With the widening of the role of bank credit from agriculture
development to rural development the Govt. proposed to have a
more broad based organisation at apex level to extent support and
give guidance to credit institutions. A National Bank for Agriculture
and Rural Development (NABARD) was set up in July 1982. The
aurhorised share capital of NABARD was Rs. 500 crores and its
paid up capital was Rs. 100 crores which is equally contributed by
Central Govt. and Reserve Bank. The paid up capital of NABARD
raised upto 2000 crores in 1999-2000. The resources of National
Agricultural Funds were transferred to NABARD. The World Bank
and IDA are also providing Fund to NABARD. The most important
funds of NABARD are now rural infrastructure development,
deposits. NABAR is highly dependent on general line of credit from
the Reserve Bank of India. Presently NABARD is apex refinancing
agency of all institutional credit which provides short term and long
term credit. NABARD sanctioned short term credit worth Rs. 8820
100
crores during 2003-04 for financing seasonal agricultural operation
at the concessional rate of 3% below the bank rate. The NABARD
has made obligatory to Commercial Banks to disburse a specific
percentage of short term loans to small and marginal farmers.
NABARD provides short term, medium term and long term credit to
credit institutions. The NABARD has given 6590 crores to SCBs
and RRBs in 2002. The NABARD has refinanced upto 7080 crores
to State Govt. by the end of 2002. The aggregate refinance from
NABARD for short term agriculture finance was of Rs. 12,000
crores in 2001-02. Overall NABARD is a very strong refinance
agency at national level.
8) Micro Finance :
Micro Finance is a concept of banking with the poor. In this
concept the credit is provided the poor through Self Help Groups
(SHGs). Micro credit attempt to lower transaction costs and higher
degree of repayments. This SHGs - bank linking programme was
introduced and encouraged by NABARD. There are 30,000
branches of Commercial Banks, RRBs, and Cooperative Banks in
over 520 districts in 30
th
states and union territories. In 2003-04 the
total number of SHGs was 10,79,090 out of which 3,61,730 were
financed by banks. The banks has disbursed loans was 3900
crores in 2003-04. the micro credit has shown that the banking with
poor. The micro credit is a best method of creating additional
employment and removing poverty. The NABARD has given
refinance support of Rs. 2120 crores.
5.4.4 Imperfections in Rural Credit Markets in India :
1) Pitiable financial conditions of small and marginal
farmers :
Out of the total land under cultivation, 62% land is dependent on
monsoon and out of the total cultivators 80% cultivators are small
and marginal farmers. They had very poor assets to mortgage due
to frequent crop failure and due to deficit budget the borrowing
capacity of this section of the society is very poor. Because of that,
they are compelled to borrow at high rates from money lenders.
There were a series of suicides among farmers in Andhra Pradesh
Maharashtra and Punjab.
101
2) The problem of overdues of Cooperatives :
There is highest overdue problem of coop. credit institutions.
The estimation of overdue is between 9000 crores to 10,000 crores.
According to RBI study group there is lack of will and discipline
among the cultivators to repay loans was the principle factor to
responsible for the existence of overdues in cooperatives. The
reasons are the defective lending policy, lack of quick actions
against reluctant members and absence of favourable climate are
the main factors. apart from these intervention of external forces
such as loan waivers, concession in various forms towards
repayments affects the recovery performance of credit. It is
disappointing that, 45% outstanding is in overdue in case of
cooperatives.
3) The problem of uneven distribution :
The weaker section of the rural community consists tenants,
share croppers, landless agricultural labours and rural artisans.
This section is poorest and most needy. Their share in coop. credit
is 3 to 5%. The % of small and marginal farmers in the total
cultivators is more that 80% but their share in coop. credit is 35%.
This is quiet inadequate to meet production needs. There is also
the problem of uneven distribution of co. op. credit between
different states. The cooperative credit advances are better in
Gujarat, Punjab, Haryana and Tamilnadu. The cooperative
advances are poor in Orissa, Bihar, U. P. and West Bengal. The
situation of Co. op. credit in tribal and hill areas is also very poor.
The weaker sections of the rural community still out of the Co.
operative membership.
4) Problems of Long Term Rural Credit :
Increasing overdues in most of the Cooperative agriculture
and rural development banks is a serious problem. The overdues of
PCARDBs is between 42 to 44%. Such higher percentage limits the
lending capacity of the banks. CARDBs have grown over the years
but the manpower is not capable of shouldering the increasing
business and to face the emerging challenges. To bring quantitative
change in lending of CARDBs should have adequate technical
personnel. The CARDBs diversity their loans to dairy, poultry
farming, inland and marine fisheries, sheep rearing, sericulture etc.
There is good scope for financing to agro-processing industries.
The CARDBs have to explore the possibilities of financing various
diversified activities.
102
5) Problems of Commercial Banks in Rural Finance :
The Financing of agriculture is not only quantitative problem
but also of coverage in rural area. The problem is concerned with
orgnisation and the personal available to the national banks. The
majority rural population consist small farmers. These farmers are
spread in 5.5 lakhs villages throughout the country. The reach all of
the farmers with only about 47000 banking offices is a difficult task
even after completion of branch expansion programmes
commercial banks may not be in a position to cover many of the
villages. The all Commercial Banks and all RRBs are experience in
severe financial strength on account of higher transaction costs
involved in handling of large number of small size loan accounts.
There is also another problem of concessional rate of interest on
small size loan. The presence of overdues particularly after the
implementation of agricultural and Rural Debt Credit Scheme 1990
and 2008-09 adversely affected the economic viability of rural
branches of Commercial Banks.
6) Weaknesses of Lead Bank Scheme :
The Banking Commission 1972 found that, lead banks were
not properly equipped to conduct the techno economic survey
districts allotted to them. The banking Commission opinioned that,
such survey should be conducted by state Govt. as they were said
to be useful for point of comprehensive planning. It should be the
responsibility of the State Govt. and not the lead bank to plan in the
development of the district. The lead bank was expect to be a
coordinating agency for commercial and cooperative banks and
financial institutions and the district authorities in the state. The
commission pointed out that, the lead bank has no authority to
others and nor was it necessary for others to approach the lead
bank for any specific purpose. Besides in a far of district
comparatively junior officers lead bank might be posted and they
find it difficult to get necessary cooperation from other banks if the
latter happened to be seniors. If other infrastructural facilities such
as transport, communication, storage processing and marketing are
not developed in such situation the lead bank could have only
limited success.
7) Problems faced in service Area Approach Strategy :
In 1988 new strategy for rural lending has adopted named as
a service area approach. Under this approach each semi urban and
rural branch of commercial bank was assigned a specific area
103
comprising a cluster of villages within which it would operate,
adopting a planned approach for its economic growth. The
justification behind this approach was to avoid duplication of efforts
and scattered lending over wider areas. The compactness in the
area operating will make it easy for the lending to a small farmer.
But, the service area approach has encountered various problems
such as allocation of villages was not always expectable to all
branches, there was under utilization of bank. Under the new
strategy of service area approach new bank branches was
curtailed. This naturally made much of specialized staff under
utilised and redundent. This staff posted to rural areas were
generally reluctant to move and leave in rural areas because of the
absence of facility for their housing, education and on. The tribal
and hill areas of North-Eastern states, Orissa, South Bihar are
under developed. Under the system of service area approach 52
villages were allowed to a single bank branch. Such allocation does
serve to useful purpose.
8) Problems of Regional Rural Banks (RRBs) :
According to Reserve Bank of India the recovery position of
RRBs on the whole is not satisfactory. According to Narshimaham
Committee, there was the basic problem that, many restrictions
placed on the basis of RRBs and due to that RRBs has low earning
capacity. This sponsoring bank were also running there own rural
branches in the varying area of operation of the RRB. This has
given rise to avoidable expenditure to control and administration.
On the other side the wage and salary side of RRBs have been
rising, so, the expenditure side of RRBs remaining very high.
9) Weaknesses of Micro-Finance :
Out of an estimated 56 million poor families at the end of
March 2004, only 17 million poor families (30%) have been covered
by micro finance scheme, nearly 70% of poor families are yet to be
covered. In most of the state in the country have not yet
encouraged organisation and promotion of SHG bank credit link.
The success of SHGs is in both urban and rural area will have a
positive effect on poverty alleviation.
One another notable development is a introduction of Kisan
Credit Card in 1998-99 (KCC). The purpose of KCC scheme is to
facilitate short term credit to farmers. This scheme has been
implemented by 27 commercial banks and 187 RRBs and 334
central cooperative Banks. Upto March 2004 more than 41 million
104
KCCs have been issue. The KCC scheme has become very
popular in farmers. The KCC holder has also another benefit of
personal accident insurance cover of Rs. 50,000 for a death and
Rs. 25000 for disability.
5.3 QUESTIONS
1. Explain various Institutional and Non- Institutional sources of
agricultural finance.
2. Discuss the classification of demand for credit in rural money
market.
3. Describe the evolution of credit systems in India.

105
6
Module 5
LABOUR MARKETS
Unit Structure :
6.0 Objectives
6.1 Concept of work, skill & productivity
6.2 Methods of measurement of employment and unemployment
6.3 Concepts and data sources of employment and
unemployment
6.4 Free & unfree labour
6.5 Questions
6.0 OBJECTIVES
- To study the Concept of work, skill & productivity
- To understand the Methods of measurement of employment
and unemployment
- To study the Concepts and data sources of employment and
unemployment
- To study the meaning of FREE & UNFREE labour
6.1 CONCEPT OF WORK, SKILL & PRODUCTIVITY
Work is defined as engagement in economic activity i.e. any
activity resulting in production of goods and services that add value
to the National Product. As per United Nations System of National
Accounts (UNSNA) 1993, all production of goods irrespective of
whether it is used entirely for self consumption, by the producer,
household or it is partly or fully sold in the market and irrespective
of its production and distribution is legal or illegal fall within the
production boundary.
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However, in case of services, only those services that are at
least partly marketed; fall within production boundary. Consistent
with the India system of National Accounts (INSNA), engagement in
production of goods entirely for market by the producer / household
is considered in primary sector. Further, processing of primary
products entirely for self consumption is also not covered in the
ambit of economic activity. However, own account construction
(building of house for ones own use) is included in economic
activity for employment and unemployment surveys. Thus, we
understand that by now, definition of work in NSS (National Sample
Survey Employment & Unemployment surveys) is not fully
synchronized with the 1993 UNSNA.
It may be noted that speed of work controls the quantity of
labour. One labour who works at a double speed completes the
supply of other labour. This speed depends upon various factors
such as education, health, climate and skill having impact on
tendency of work.
Skill of work is related to the proficiency of the labourer. Skill
is related with the kind of work that how much wastage is done,
how many accidents are committed and many other factors are
considered to know the efficiency of work. Augmenting the skill
endowments of labour force is essential for improving productivity
and output. Traditionally, the skills are obtained or skills come from,
Learning by doing or practice makes man perfect. However, recent
trend prices that focused training improve the capabilities of labour.
Much of workforce is illiterate, which fails to understand the
processes, system and standards and therefore basic education
upto secondary schooling is at least must in improving skills. The
skilled labour force improves the quality of employment and the
productivity of labour.
Productivity may be defined as the ratio of the output of
goods and services to the in parts human as well as others used in
production process.
i) Labour productivity, the best known measure of factor
productivity reflects the influence of various factors (such as capital
quality of labour technological change and organisation of
production) that affect the productivity.
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Based on inputs to production, labour productivity can be
decomposed into two components :
a) Productivity due to capital deepening (i.e. improvements in
physical capital available per labour unit, and ;
b) Multi factor productivity (TFP) or Total Factor Productivity
(TFP) : It is the contribution other than that emanating from
the increased use of inputs (capital and labour). TFP than
measures the increase in efficiency with which resources are
being used through innovations and improved management
techniques to increase the output from a given contribution
of capital and labour.
Following are seven determinants of productivity growth :
1) The rate of technological progress.
2) Investment in physical capital such as machinery, equipment
and structures.
3) The Quality of the workforce.
4) Size and quality of the natural resource base.
5) Industrial structure and intersectoral shifts.
6) The macro economic environment or aggregate demand
conditions.
7) The micro-economic policy environment.
Harris had identified three proximate drivers (The Big Three)
of productivity growth.
1) Investment in machinery and equipment
2) Education, training and human capital
3) Openness to trade and investment.
While the proximate drivers may not be exhaustive, they do
point to the critical elements of an enabling public policy for
enhancing productivity and employment.
The ICT can have a positive impact on growth not only
through a surge in ICT investment, strong productivity effects from
the ICT-producing industries but also through a more productive
use of the ICT in the rest of the economy. The ICT equipments
enable new organizational models and other innovations in the
production process as well as the production of new goods and
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services. Thus, even if the ICT investment goods are standard
products, they enable firms to innovate and accumulate firm-
specific capital with positive spillovers on production.
Most of the empirical studies on productivity in India have
focused on the growth in the TFP in the manufacturing sector.
These studies suggest a decline in the total factor productivity
growth (TFPG) till 1970s, with a turnaround taking place in mid
1980s persuent to the reoriented trade and industrial policies and
improved infrastructure performance.
The transition to high-growth phase occurred ground 1980 a
full decade before economic liberalization due to pro-business
policies that started being adopted during the 1980s. Various
incremental reforms in the industrial sector during the 1980s appear
to have had a positive impact on the productivity during the 1980s.
The trends in productivity in past reform period show significant
increases in productivity. At the sectoral level, there is evidence of
improved TFPG for the exporting sectors vis--vis the non
exporting ones. (Dholakia and Kapur, 2001; Unel, 2003). More
recently, Kato (2005) finds that the smaller the market share of a
firm, the higher is its productivity growth.
Recently Virmani has attempted to measure the TFPG for
the Indian economy as a whole. His estimates suggest that the
TFPG has followed a V-shaped pattern since independence, with
near flattening from the late 1980s. Growth in the TFP decelerated
since early 1950s, when it was about 2.5 percent till mid-1970s
when it fell to less than 0.5 percent. Subsequently the TFPG
recovered and peaked at about 2.6 percent in 1988-89 and has
broadly remained around these levels since then.
6.2 METHODS OF MEASUREMENT OF EMPLOYMENT
AND UNEMPLOYMENT
Accelerating growth and expanding employment
opportunities are the goals of economic policy. To provide
productive employment for the continuing increase in the labour
force is an integral part of our objective of inclusive growth. Higher
growth leads to enhanced employment. However, the question that
arises is at what rate? Employment elasticity with respect to output
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measures the percentage increase in employment due to the
percentage increase in output. The overall employment elasticity of
an economy is the combined effect of the sectoral employment
elasticities and the composition of output. It is also true that as an
economy grows, employment elasticity may fall which is in part a
reflection of the improved productivity of labour. Improved
productivity of labour is necessary in order to sustain high G.D.P.
A development programme aimed at expanding
opportunities must focus on three factors; growth productivity of
labour and relative price of labour and capital. The structural
changes that occur in the process of growth have also an impact on
employment trends. In India, we find two important features of
these trends.
1) Structural transformation in India followed the typical pattern of
agriculture yielding to industry and industry to services.
However, the share of services sector exceeding 60% of GDP
shows that, economic development has shown jump to the
third stage of development.
2) The structural change in India shows another significant
change. In the pattern of sectoral shares of employment. While
the share of agriculture in GDP has declined significantly from
52% in 1951 to 21% in 2001, the share of employment has
declined only marginally from 65% in 1951 to 57% in 2001.
Conversely, even though services sector account for nearly
51% of output in 2001, its share in employment was only 22%. The
pace of employment shift has lagged behind the pace of sectoral
shift in output. This is particularly striking because services sector
employment elasticity is higher than employment elasticity in
agriculture. V.K.R.V. Rao called this as Structural Retrogression of
economy.
6.3 CONCEPTS AND DATA SOURCES OF
EMPLOYMENT AND UNEMPLOYMENT
The major source of information on employment and
unemployment has been the National Sample surveys conducted
periodically by the Department of Statistics. (National sample
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survey Organisation). Besides, there are other sources such as
Employment Exchange Registers, the Decennial Population
Census and Economic Census by CSO. The NSSO conducts
quinquennial large sample annual surveys as also annual thin
sample surveys. Results of thin sample annual surveys have to be
examined with care as to their statistical significance. The National
Sample Surveys provide three different measures of employment
and unemployment :
1) Usual principle status (UPS) that indicates a status in terms of
major time over the 365 days before the date of interview.
2) Current weekly status (CWS) where the reference period is the
week i.e. the seven days preceding the interview and
3) Current daily status (CDS) that reflects labour time disposition
during each day o the week in terms of two half days.
For each UPS status person (employed, unemployed, out of
labour force), a subsidiary status (SS) is also recorded. There is no
agreement among analysts on which of these measures provides a
more accurate insight into the employment and unemployment
situation. The Task Force on employment Opportunities used the
usual principal ad subsidiary status for analyzing employment and
unemployment whereas the Special Group on Targeting Ten Million
Employment Opportunities per year used the current daily status
data. Given the availability of different sets of data, it will be a good
practice to compare the conclusions drawn from one set of data
with conclusions from another set just for a reality check.
In the NSS-Employment-Unemployment Surveys, an activity
classification of the population on the Usual Principal Status is
followed up with a set of probing questions to find out whether and
how many of the surveyed population at all sought work or were
available for work in the preceding 365 days and if yes, the period
for which they sought or were available for work. And, tabulations
based on the set of probing questions are available in the published
reports.
A fair proportion of those who reported Zero days of
unemployment during the reference work are those who did report
themselves to be seeking / available for work at least on some
days, on some months in the preceding 365 days and this
proportion is sizable for the rural casual labourers on the Usual
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Principal Status. At the very leas, this would suggest that the claim,
that the estimate of unemployment on the current Daily Status fully
captures the non-utilisation of available labour time is open to some
doubt.
It needs to be stressed that, in terms of individuals, the two
types of problems discussed above a proportion of those reporting
unemployment on all 7 days of the reference week being workers
on the Usual Principal Status and of those reporting Zero days of
unemployment during the reference week but reporting seeking /
available for work in the preceding 365 days cannot be treated as
off setting one another.
In matching the demand for and the supply of labour, on the
supply side, the estimates of labour force person-days are derived
as the product of the labour force participation rates on the current
Daily Status in a given population segment and an estimated /
projected total population in that segment and summed across the
population segments.
The Central question here is : can the product of the
estimated population in the given population segment and the
estimated proportion unemployed on Current Daily Status be
treated as the number of persons unemployed or even as person
years of unemployment? Such an inference carries with it the
implicit assumption that each individual in the labour force on the
Current Daily Status is or should be in the labour force on all 365
days in the year!
In striking a demand supply balance, this distinction between
persons in the labour force / work force and person years of work /
unemployment is important because, on the employment
generation side, person days of employment is an appropriate
unit. Of account only in a limited number of activities such as
NREGP or other public works. In respect of all regular wage /
salaried employment and in respect of all employment in the
organised sector, the appropriate unit of account is number of
persons employed.
In arguing for the use of UPSS based estimates in our
employment planning exercises, there is no presumption either that
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those in the workforce on UPSS are at work throughout the year or
that the unemployed on UPSS are unemployed throughout the
year.
6.4 FREE & UNFREE LABOUR
Free labour implies voluntary entry of a labourer into
employer employee relationship as per his choices at the selected
and accepted terms and conditions of payment and work. On the
other hand, unfree labour denotes the conditions of involuntary
entry by compulsion; may be f economic or social condition learning
no choice to the labour for term and conditions of work and place.
Unfree labour is also called as Forced labour. The conditions of
unfree labour are precisian and the living is quite vulnerable. Often
the unforced labour results into situation like Bonded system or
Slavery system and it is a bane on humanity.
Unfree labour has received an unusual amount of official
attention during the last few years. the continued existence of
slavery and slavery-like practices has also received renewed official
attention, including that of the UN Commission for Human Rights
and its Working Group on contemporary Forms of Slavery. Most
notable among UN Organisations is, however, the International
Labour Organisation (ILO), which has launched a campaign against
Forced labour, and , as part of this, has ventured an estimate of
the extent of forced labour world-wide.
The recent ILO report A global alliance against forced
labour (ILO 2005a) represents the most coherent and most
empirically informative international report on forced labour.
The International Labour Organisation is the UN agency
responsible for international labour standards, and is the only
international organisation pursuing labour rights issues at the
international level. Its approach to labour issues is, by definition,
consensual. Not only is it a UN organisation, it also has a tripartite
set up, encompassing governments, employees and labourers; a
set up which is unique within the UN system.
The ILO fight back took place through a reformulation and
refocusing of its efforts, centered on the 1998 ILO Declaration on
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Fundamental Principles and Rights at work, following which the
main ILO objective become decent work for all. This has been
pursued through a campaign for a fair globalisation, internationally,
regionally, sector specifically. Central to this were four core labour
standards, namely : freedom of association and the right to
collective bargaining; elimination of all forms of forced or
compulsory labour; effective abolition of child labour and the
elimination of discrimination in respect to employment and
occupation. An ILO special Action Programme to combat Force
Labour exists, and has published several survey-based reports
within the field of forced labour.
The ILO defines forced labour as work or service extracted
from any person under the menace of any penalty and for which the
said person has not offered himself Voluntarily.
In other words, forced labour involves involuntary entry to
the labour relation, and coercion to remain within it, this is the
internationally, legally accepted definition of forced labour types of
forced labour, including slavery, serfdom and debt bondage. 2005
report A Global Alliance Against Forced Labour (ILO 2005a) seeks
to create public awareness about the phenomenon of forced labour,
through quantifying it.
The 2005 report calculated that a minimum of 12.3 million
people in the world work as forced labour. This is the first official
estimate of the magnitude of forced labour world wide, and it is
emphasized that this is a minimum estimate. The main region for
forced labour by far is Asia and the Pacific, with more than three
quarters of all forced labourers and with the highest incidence of
forced.
Following are the different forms of forced labour.
1) Private Economic Exploitation : It is most commonly found and
nearly rd of all forced labour belongs to this type. This
includes unfree labour of bonded labour type, forced domestic
work or forced labour in agriculture and remote rural areas.
2) Forced Labour Imposed by the state : This includes compulsory
recruitment of citimen in defense or any other government led
activities learning little freedom of choice of acceptance to them.
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3) Forced labour for Commercial, sexual exploitation : Regional
patterns are observed all over the world about these types of
unfree labour.
It is very difficult to quantify the unfree labour. According to
Bales (1999) the estimate of forced labour globally is more than
twice the size of that of ILO minimum estimate (27.9 million against
12.3 million). Within the unfree labour category debt bonded labour
dominates in many regions of South Asia and Latin America. In
Sub-Saharan Africa, previous Master-slave relations have been
modernized but not been replaced with free labour relations in
some regions, whilst in conflict and post. Conflict areas,
abductions followed by slave-like relations or enrolment as child
soldiers are the main forms of forced labour.
The ILO analysis of forced labour is however restricted.
Trafficking of unfree labour is labelled as, the underside of
globalization. Commodity chain links between global retailers,
suppliers and labour contractors, leading to employment of forced
labour at the end of global chains so as to compete on cheap and
stable production are noted. It is stated that, in order to compete on
the world market, employees in transition countries may make use
of unfree labour : and it is pointed out that deregulation of labour
markets, downsizing of labour inspection.
In the main ILO report on unfree labour, little is done to link
unfree labour to present day capitalist development and to the
general ILO strategy for decent work in this context. The strategy of
the ILO is to isolate the worst forms of un-decent labour, so that
these incidents can be dealt with in isolation, without challenging
the overall system that created the conditions for their occurrence
in the first place. The focus is on dealing with what is seen as
exploitation, namely unfree labour, child labour etc. standard free
labour relations on the other hand, are not seen as exploitative.
This means that the ILO Report depoliticizes unfree labour issues,
isolates them as an unnatural element of capitalism.
THEORETICAL DEBATE ABOUT UNFREE / FORCED LABOUR
The discussion regarding forced labour and capitalism is
observed around existing debates between Tom and Jairus Banaji.
There are important similarities between Brass, Rao and Banaji.
They all locate their work in relation to that of Marx, and distance
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themselves from liberal views that argue that labour relations such
as bonded labour are free and equal, since they are freely entered,
contractual relations. They all share the basic Marxist
understanding that the sheen of equality provided by contracts
covers the fact that all labourers are exploited through their
production of surplus value. Exploitation is not something reserved
for forced labour, and free labour does not exchange equal values
through the exchange of their surplus value producing labour power
for wages as liberal economists and the ILO among others would
have it.
Regarding the relationship between forced labour and
capitalism, for Marx, commodification of labour power and thus,
free labour were essential to capitalism. The commodification is
based on labour being doubly free: freed, or dispossessed, from the
means of production, and free to sell his / her labour power to any
capitalist who wishes to buy it. It is axiomatic for Marx that labour
will be commodified and hence doubly free, in the above sense
under capitalism.
In the debate on Free/ unfree labour, Brass proposes that
unfree labour and capitalism are compatible. He argues that the
creation of unfree labour is an essential part of modern capitalism.
It represents class struggle from above, as labour is displined
through being robbed of / losing the control of the sale of its own
labour power, and labour power is thus cheapened.
Brass theory provides a general and seemingly progressive
framework for understanding present day unfree labour relations.
Empirically, he focuses mainly on debt bondage relations, where
the labourer mortgages his / her future labour power against a loan
from a creditor employer. It enables him to argue that debt based
labour relations are unfree, irrespective of duration and ideological
dressing. This enables him to conceptualize new forms of seasonal
labour relations in capitalist agriculture in India as being unfree, as
the relations involve the mortgaging of future labour power against
loans. This is discussed in detail in the next section employer
employee relationship.
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6.5 QUESTIONS
1. Define and explain the concepts of work, skill and productivity.
2. Explain how employment and unemployment can be measured.
3. Differentiate between Free and Unfree Labour.
4. What are the various sources to find data for employment and
unemployment.

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7
TYPES OF EMPLOYER- EMPLOYEE
RELATIONSHIPS
Unit Structure :
7.0 Objectives
7.1 Employer Employee relationship
7.2 Determinants of wage rates
7.3 Labour Market segmentation
7.4 Questions
7.0 OBJECTIVES
- To study the types of Employer employee relationship
- To study the Determinants of wage rates
- To study the Labour market segmentation
7.1 EMPLOYER EMPLOYEE RELATIONSHIP
The employer-employee relationships have undergone
changes over a period of time. Many factors determine this
relationship. Production methods, land reforms, alternate
occupation increased political power of lower castes are some
other factors.
1) During colonial times, bonded labour shed the vertiges of patron
client relations which used to include certain modest benefits
for the labouers.
2) In the later part of colonial period it was replaced by hand nosed
modern economic relations more exploitative than those
previously existed.
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3) After independence most classical bonded labour relations
ceased to exist, rural employers turned to new, more effective
labour relations often involving migrant labour instead of
employing the ex-bonded laboure as free labour.
4) In many parts of rural India, more or less free labour relations
have been developed within agricultural. As methods of
production have moved away from labour intensive economic
activities bondage have been modernized into a relation called
as, neobondage.
1) Neobondage involves the tying in of prospective labourers
through loans / advances given during the lean season before the
start of seasonal employment relation. Labour here is seasonal
migrant. The migrant labour force tends to be more effectively
exploited through longer working hours, lower wages and less
labour unrest. During employment period, he may only be paid a
minimum allowance while the overall payment is settled at the end
of the seasonal employment. This compels the labourers to stay in
employment after advance has been paid off. This kind of
relationship is identified in agriculture especially in sugarcane, rice
mills, construction, family bondage is also common, caste relations
are also an issue. The vast majority of bonded labourers continue
to belong to the lowest, ex-touchables caste groups and tribes. Due
to economic compulsions, men enter into neobondage female
bonded labourers and children may or may not enter the
relationship voluntarily.
However, it needs to be understood that advances are
common place even if free employment relations, due to poor
economic position and also because such advances provide an
incentive for employer to keep the labourers in employment. In the
recent research it is found that labourers viewed an advance from
an employer as the preferred option, compared to other types of
loans as such, relation offered a chance to pay off the debt.
2) Jobber / Contractor labour relation : Many a times, a
bonded labour relation is organised through jobbers/contractors,
who will provide the advance, organize the migration and be the
manager at the work place. The jobbers would be working for one
ore more employers or for a main jobber, who would provide the
advances and rely on them to deliver the labour. The labourers are
in the long term debt relationship with the jobbler & not with the end
destination employer. As the poor labourers have debt bondage.
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3) Contract labour : The official classification of work under
taken through jobbers or labour contractors is contract labour.
Contract labour is wide spread. An estimated 10.7 million labourers
in construction alone are contract workers, comprising 83% of all
construction workers. Contract work is widespread in unorganized
sector activities such as stone quarrying, beedi rolling, rice shelling
and construction.
4) Long term debts and Casual labour relations : The
poorer the labourer is less alternative opportunities of employment,
he will have. This condition makes him enter into long term debt
bondge. Recently, if has been found that labourers manage to
avoid the long term debt bondge with more alternative job
opportunities. The long term debts and casual labour relations are
seen in Tamilnadu and they also are seen alternate over time even
in Andhra Pradesh. Here, the jobbers tend to be from the area of
the origin of the migrant labour and form part of power relations
built into the local social order. This enables them to enforce loan or
advance based labour relations over several years. Long term debt
bonded labourers compare themselves to the traditional bonded
farm servants and they are free to change the jobber fairly and
regularly.
5) Debt bondage without jobber : There are causes of debt
bondage which do not involve debt jobbers. This is particularly the
case where no migration is involved, i.e. where employers are in a
position to enforce debt related employment pledges through local
power relations. The old style debt bonded yearly relationship in
agriculture is of this kind.
6) Other forms : Milder forms of unfree relations are also
found, such as share cropper conditioned on the acceptance by the
share cropper of labour service duties, performance of some
unpaid labour throughout year in order to be given work during the
harvest season, free labour service in exchange of grazing land etc.
Some involve the actual confinement of the labourers in the work
location or sometimes under the armed guard.
The above description about the various types of relationship
between labour and employer points towards the degree of
freedom or unfreedom and inequality over and above what normally
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called as standard free labour relation. The distinction between
milder and harsher forms of bonded labour points towards a
continuum from more or less free relations to fully unfree relations
i.e. the degrees of unfreedom and / or inequality unlying the labour
relation. The catagorisation of such type reflects the character of
labour relations.
It is difficult to say if the low route of development in India
has involved an increase or decrease in bonded labour relations.
What is certain is that while the old style, year round,
intergenerational bondage relations have lost their overall
importance, the development of new bonded labour relations, and
other labour relations involving degree of unfreedom, compatible
with capitalism has been facilitated.
7.2 DETERMINANTS OF WAGE RATES
Determination of wage rate is a basic problem of an
organisation. The central point of all the labour problems in an
organisation is the wages and salaries. This question determines
the capacity of the production, the rate of productivity, efficiency of
labour cost of production, sale price of commodity, profits of the
organisation, and industrial peace in the country. Wages can
broadly be divided into three categories Living Wages, Minimum
Wages and fair wages.
1) Living Wages :
Living wages means the wages that may be sufficient to
provide for the bare necessities as well as certain amenities for the
employees. It means the level of wages that may be sufficient to
provide for the bare necessities and such amenities that are
considered necessary for the well-being of the employee and his
family members in accordance with his social status
Article 43 of the constitution of India states that. The state
shall endevour to secure by suitable legislation or economic
organisation or in any other way to all workers, agricultural,
industrial or otherwise work, a living wage, conditions of work
ensuring decent standard of life and full enjoyment of leisure and
social and cultural opportunities.
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The term Living Wages has been defined as under : The Fair
Wage Committee Report, The living wage should enable the male
earner to provide himself and his family not merely the base
essentials of food, clothing and shelter but a measure of frugal
comfort including education for the children, protection against ill
health, requirements of essential social needs and measures of
insurance against the more important misfortunes against old age.
Thus, Living Wage must provide not only for the bare
necessities, such as food, clothes and shelter, but also for some
conforts and amenities by current human standards such as
traveling, health, education of children, social needs, old age and
recreation etc.
2) Minimum wages :
According to Fair Wages Committee, Minimum Wages
should provide not only for the bare necessities of a worker. It
should also provide for the maintenance of efficiency of the worker.
From this point of view, minimum wages must be sufficient to
provide for all requirements of education, health and other essential
amenities.
Minimum Wages means the minimum payment to worker so
that he may be able in providing for basic needs for himself and his
family members and to maintain his working efficiency only some
other scholars are of the new that minimum wages should also
provide for minimum education, medical facilities and other
amenities. According to them, minimum wages should ensure a
minimum standard of living considering the health, efficiency and
well being of the worker.
Objectives of Minimum Wages :
1) To maintain the efficiency of workers, particularly in the
industries where the workers do not get fair wages.
2) To discourage the strikes, lock-outs and industrial
disturbances so that industrial peace maybe maintained.
3) To check the unhealthy competition among entrepreneurs.
4) To protect the interests of workers, particularly when the
workers are not organised.
5) To strengthen the labour unions.
6) To check the exploitation of workers by the entrepreneurs.
7) To increase the efficiency of workers.
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8) To help the workers in maintaining and increasing their
standard of living.
9) To provide economic and social justice to the workers.
10)To check the unhealthy competition among the workers.
11)To improve the management system.
12)To improved the productivity of workers.
Methods of minimum wages :
There are two methods to determine the Minimum Wages.
These methods are as under :
1) Indirect Method : The Government determines minimum
wages keeping in view the following provisions of Minimum Wages
Act.
a) Government determines minimum wages for the workers
working in government departments. Following the wages so
determined by the government, the minimum wages in the private
sector industries is also determined.
b) While working on contract, the government imposes a
condition of minimum wages in contract deed.
2) Direct Method : For the determination of Minimum Wags,
the Government may take following steps :
a) To Appoint Wages Boards : State government may also
appoint wage boards for the determination of minimum wages.
These boards may be of two types
i) Wages boards appointed for the purpose of advising
government on the issue of minimum wages. It is important to know
that these boards are responsible to give their advice only.
ii) Wages boards that are appointed to determine the minimum
wages after considering the circumstances of the industry.
Representatives of both the workers and employers take part in
these boards.
b) To Determine Minimum Wages : Under this method of
wages determination, the state Government may determine
minimum wages for the workers working in different industries.
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After determining such wages the Government issues orders to the
enterprise to pay these wages to the workers working in their
industries. This method is widely adopted in India.
Principles of Determination of Minimum Wages :
Following are the principles that should be followed while
determining minimum wages.
1) Principle of Paying Capacity of the Industry : While determining
the minimum wages for the workers, paying capacity of the
industry should also be considered because the wages to be
paid should not prove a burden upon the industry.
2) Principle of Equality : According to this principle, all the workers
doing same work and having equal ability and experience, must
be paid equal wages. This principle does not man equal wags
for all. It only means that all the workers in the same industry
having equal efficiency and experience should get equal wages.
3) Principle of Standard of Living : While determining minimum
wages, the principle of standard of living, should also be
followed. The wages should be enough to provide for the bare
necessities and essential amenities to the workers. From this
point of view, different wages may be determined for different
places and different industries. In addition to this, rates of wages
should be modified from time to time.
3) Fair Wages :
It is very difficult to give a precise definition of Fair Wages
because it varies from country to country and from time to time.
Therefore, it is possible that an amount of wages that is fair for one
country at one time may not be fair for another country or for next
time. Therefore, fair wages can be determined only after
considering the specific circumstances of the industry for which the
wages are to be determined. The term Fair Wages has been
defined as under.
Prof. Marshall, Rate of wages in a particular industry can be
regarded as fair wages only when it is almost equal to the wages
which is paid in other industries for the works which are of the same
caliber and equally difficult and require almost equal efficiency and
training.
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Prof. Pigou, Fair wages is the wages which is paid at the
rate which is being paid to the workers of same status in the
enterprises of the same type and of near-by areas.
On the basis of analytical study of above definitions, it can
be concluded that Fair Wages is the amount of wages that may
provide the basic needs and amenities to the workers according to
their social status.
Fair Wage is more than minimum wages. Fair Wage is
determined after considering several factors such as the wages
paid for similar work in other trades and industries requiring same
amount of ability and adjustment, productivity of the labour and
paying capacity of the industry. Fair Wage is determined between
the lower and upper limits. The lower limit of wage is the minimum
wage and the upper limit is the capacity of the industry to pay.
Determination of Fair Wages :
The rules and the problems in the process of determination
of Fair Wages are as follows :
Determination on the Basis of Paying Capacity of the
industry. According to this technique, fair wages should depend
upon the paying capacity of the industry. Generally, the paying
capacity of on industry estimated on the basis of net profits of the
enterprise but following are the difficulties in adopting this method
as the base of determination of fair wages.
i) The amount of profits may be substantially reduced by
increasing the provision for depreciation and other provisions and
reserves.
ii) Similarly, the amount of profits may be increased or
decreased by increasing or decreasing the expenses.
Considering these difficulties, Fair Wages Committee has
suggested that the paying capacity of an enterprise must be related
with the current rate of wages which depends upon,
i) Purchase Price ii) Quantity of Production iii) Profit of the
Enterprise iv) Unemployment.
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2) Difficulty in the Execution of Fair Wages :
i) As all the employees work with the same efficiency and ability
ii) It is necessary that the working conditions of all the workers
getting equal rate of wages must be similar.
3) Determination on the Basis of Productivity of the
industry :
Rate of Wages is closely related with the productivity of the
labour. Productivity of the labour does not depend upon the
efficiency of labour only. It depends upon many other factors also,
such as managerial capacity, financial management and technical
facilities etc. Therefore, these factors must also be considered
while determining the rate of wage on the basis of productivity and
labour.
7.3 LABOUR MARKET SEGMENTATION
Labour market segmentation is said to exist if
1) Jobs for individuals of a given skill level differ in terms of their
pay or other characteristics and
2) Access to the more attractive jobs is limited in that not all who
want the better jobs can get them.
The notion of labour market segmentation can be stylized
most simply by maintaining that there are two labour market
segments. A realistic assumption is that all who participate in the
labour market want the better jobs, but good jobs are available only
for a fraction of the labour force. Those who do not get the good
jobs must either take up a bad job or remain unemployed. Models
with two labour market segments prove to be both tactable and
insightful, and so are used here.
The labour market consists of quite distinct segments that
are linked with one another. When there are just two segments,
those models are called, dualistic labour market models.
126
Assumptions :
1) Firms, in these models are assumed to be maximizing profits.
This means that they hire workers, raise wages, and improve
worker quality if and only if it is in their profit. Maximizing
interest to do so.
2) Workers in these models are assumed to be maximizing utility.
Especially, in poor countries, in which large number of people
value additional goods greatly compared to leisure, the utility
maximization assumption may often be fruitfully replaced by an
income maximization assumption.
3) The notion of, Market equilibrium used here needs to be
clarified. Market equilibrium is the state toward which market
tends and once there, it tends to stay. Market clearing is a
state in which the quantity of a good or service supplied equals
the quantity demanded. Some of the equilibria we shall deal
with here are market clearing and other are not. And finally,
the objective of this paper is to make labour outcomes more
understandable; much of what is understandable is not pretty.
I) The Essence of Labour Market Dualism :
At the core of segmented labour market modeling is the
distinction between one part of the labour market and another. In
the literature, one sector is alternatively called formal, modern,
industrial, good jobs or urban, while the other is alternatively
called informal, traditional, agricultural, bad jobs or rural.
Labour market dualism is a useful stylization of what has
been called labour market segmentation or labour market
fragmentation.
The distinguishing feature used by Nobel laureates Arthur
Lewis (1954) and Simon Kuznets (1955) as well as other dual
economy modelers is the fact that workers earn different wages
depending on the sector of the economy in which they are able to
find work. Lewis wrote, Earnings in the subsistence sector set a
floor to wages in the capitalist sector, but in practice, wages have to
be higher than this, and there is usually a gap of 30 percent or
more between capitalist wages and subsistence earnings. Lewis
explained that although part of the gap is illusory because of the
higher cost of living in the capitalist sector, there remains a real
wage gap due to
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a) The psychological cost of transferring from the easy going way
of life of the subsistence sector to the more regimented and
urbanized environment of the capitalist sector,
b) The payoff to experience in the capitalist sector, and
c) workers in the capitalist sector acquiring tastes and a social
prestige which have conventionally to be recognized by higher
real wages.
Kuznets (1955) further developed the model of wage
dualism and intersectoral shifts by exploring how various measures
of income inequality (including the income share of the lowest
income quintile, the income share of the richest income quintile and
the range) would change as the high income sector comes to
employ on increasing share of the population. All of the inequality
measures used by Kuznets (he income share of the poorest
quintile, the income share of the richest quintile and the interquintile
range) exhibited an inverted U pattern, which later came to be
known as the Kuznets Curve.
Later writings on labour market dualism were grounded in
human capital theory as developed by Schultz (1961, 1962),
Becker (1962, 1964) and Mincer (1962, 1974) this later literature on
labour market dualism stressed that for dualism to exist, different
wages must be paid in different sectors to comparable workers.
Criticism :
1) Rosenzweig (1988)
2) An Inter-American Development Bank Report (IADB, 2003)
says, according to (the dualistic view of the labour market), the
formal and informal economics operated in segmented labour
markets and there is limited mobility between the two.
Labour markets are better characterized as being
segmented in the sense of cumulative advantage and low level
traps (Nelson, 1966; Merton, 1968; Doeringer and Piore, 1971;
Bouden, 1973; Meade, 1976) than as being unified in the sense
that the next best employer is essentially indistinguishable from the
current one.
The formal sector labour market, the informal sector labour
market and the interactions between them is explained below :
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II) The Formal Sector Labour Market :
This section presents four alternative models of wages and
employment in the formal sector; the market clearing labour
market model, models with wags set above market clearing levels
for institutional reasons, models with wages set above market-
clearing levels for efficiency wage reasons, and models with wages
set above market-clearing levels because of supply side
considerations.
A) The Market Clearing Labour Market Model :
First, The amount of labour demanded is taken as a
decreasing function of the wage, other things equal. The market
labour demand curve slopes downward because of diminishing
marginal revenue product of labour and the associated substitution
and scale effects of a wage change. Second, the amount of labour
supplied is taken as an increasing function of the wage, other
things equal. The market labour supply curve slopes upward
because a higher wage induces workers to enter this labour market
from other labour markets and induces non workers to enter the
labour force. And third, the wage is set by supply and demand in
order to clear the market.
According to the market-clearing model, three equilibrating
forces operate; behaviour of firms, behaviour of workers, and
behaviour of wages. In the model, firms are to hire workers or not
depending on what is in their profit maximizing interest to do. If
market conditions change, what is in their profit maximizing interest
to do will change accordingly; and firms are free to act on these
changes. Similarly, workers are free to supply their labour in any
given labour market or not depending on what is in their utility
maximizing interest to do. For them too, if market conditions
change, what is in their utility maximizing interest to do will change
accordingly, and they (workers) are free to act on these changes.
And finally, if supply and / or demand conditions change, real
wages are free to rise or fall accordingly.
B) Above Market Clearing Wages Set Institutionally :
An important class of models in the labour market literature
holds that wages in the formal sector are set by a set of forces
different from supply and demand. It is useful to distinguish five
institutional features that may be important in different settings (e.g.
129
Fields and Wan, 1989; Fields, 1999). They Are : minimum wages;
trade unions; public sector pay policies; multinational corporations;
and labour codes.
C) Above Market Clearing Wages set by Efficiency Wage
Consideration :
An old and well established idea that commands nearly
universal agreement not only in economics but in human resource
management is that a firm can raise its labour productivity by
paying a higher wage. Efficiency wage theory incorporates the
proposition that higher wages can result in higher productivity but
goes beyond it in a fundamentally important way. According to the
core micro-economic model of firms, firms are trying to achieve
higher profits, which may or may not be enhanced by higher
productivity. Thus, the basic postulate of efficiency wage theory is
that the profit maximizing firms will pay higher than market clearing
wages if and only if the gains in productivity from doing so outweigh
the costs, so that the profits are increased. In other words, it is not
enough simply to maintain that paying a higher wage generates
benefits. It must be that the benefits exceed the costs.
Efficiency wage theory has also contributed usefully to
analyzing the mechanisms by which productivity gains are realized.
Where the efficiency wage models come out then, is that wages
remain above the market clearing level because firms in the
labour market find it in their profit maximizing interest to keep the
wages above market clearing level. A firm that is paying efficiency
wages would hurt its profits if it lowered wages.
D) Above Market Clearing Wages set on the supply side :
According to the standard account of equilibrating forces in
labour markets, when the wage is higher than the market-clearing
level, unemployed workers would offer to work for lower wages
rather than remain unemployed.
If the demand for labour is inelastic, the total wage bill paid
to labour over a longer period such as a month or a year will be
higher the higher is the daily wage. Each of the unemployed knows
that he or she will earn more on average over the course of many
days if she / he do not under cut the established wage & therefore
130
will not do so. Wages remain above the market-clearing level as a
result
2) The Informal Sector Labour Market :
The crucial feature of labour market dualism described
above is that the formal sector offers relatively attractive wages and
other terms and conditions of employment while the informal sector
offers relatively unattractive ones. This leads to the first
characterization of the informal economy; workers pre formal sector
jobs and enter informal sector only as a last resort. More recently,
though a different view has been put forth; that the informal
economy is a desirable sector that the workers choose in
Preference to formal sector work. A third view is that the informal
economy has its own internal dualism, combining these two
characterisations.
A) The Informal Economy as a Free Entry Sector of Last
Resort :
The working poor are found disproportionately in the informal
sector. Ample empirical research has shown that labour earnings in
the informal sector are low, lower even than in the formal sector in
a large number of countries.
The existence of free entry employment opportunities in the
informal sector helps explain why open unemployment rates in
developing countries are comparable to those in developed
countries and often considerably lower.
A second approach is to regard a part of the informal sector
as facing, instead of zero marginal products, constant marginal
product. The dual economy model developed by Harris and Tadaro
(1970) was formulated to fit the East African case, which they and
others regarded as a land surplus economy at the time. Harris and
Tadaro assumed that anyone who wanted to work in agriculture
could find a plot of land cultivate it an earn the marginal product
from his or her efforts, Agricultural Wages were equated to
marginal product, not average product as in Lewis. If the marginal
worker and the marginal land are assumed to be as productive as
preceding inputs were a convenient simplifying assumption would
be to regard the marginal product of labour in agriculture as
constant.
131
A third approach is intermediate between the first two : a
positive diminishing marginal product.
A fourth approach is to model a full demand system for
agricultural and non-agricultural products and workers.
To conclude, the most common characterization of the
informal sector is that it is an easy-entry sector that workers can
enter to earn some cash in Preference to earning nothing. An
alternative view has been gaining popularity in recent years.
B) The Informal Economy as a Desirable Sector :
It is the idea that a large number of those working in the
informal sector are there voluntarily. The choice approach to the
informal sector has been developed more recently in a series of
papers by William Maloney. Maloney offers a number of reasons
why workers might want to be in the informal sector; some can earn
more (or at least hope to earn more) in informal self employment
than they could earn in formal sector employment; they value the
independence of self employment; they would rather use the
money that formal sector protections cost them for investing in their
own small informal enterprises; they do not value protections such
as health insurance which formal employment offers to them, in
some cases because they already have these protections, and they
do not trust the government to deliver on promises such as future
pension benefits. For any or all of these reasons, there may be a
sizable numbers of workers who prefer informal self employment to
formal wage employment.
C) The Informal Economy with Its Own Internal Dualism :
The preceding subsections put forward two polar views. One
is that informal sector employment is worse than formal sector
employment but superior to unemployment. The other is that
employment in the informal economy is preferred to formal sector
employment.
A way of combining these two polar views would be to
regard the informal sector as having its own internal duality. On this
synthesized approach, some informal activities are preferable to
formal sector jobs and some are not. Such a view is developed at
length in Fields (1990) where the two parts of the informal sector
are labeled, upper-tier informal activities and easy entry ones.
132
Another way of modeling the duality of the informal sector is
to specify two informal sectors that are geographically distinct.
Todaro (1969) had three employment sectors urban modern
employment, urban traditional employment and agricultural
employment but no unemployment. Harris and Todaro (1970) had
urban modern employment, agricultural employment and
unemployment but no urban informal sector. Fields (1975) had
three employment slates urban modern employment, on urban
informal sector, and rural agricultural employment plus
unemployment.
If these various sector distinctions are put together, we
should have four employment states-employment in the formal
sector, employment in the upper-tier informal sector, employment in
the easy entry sector and employment in rural agriculture plus
unemployment.
Adding in rural off farm employment what is sometimes
called Z-goods sector (Hymer and Resnick, 1969; Ranis and
Stewart, 1993) would introduce a fifth employment state.
IV) Formal Informal Linkages in the Labour Market :
It can be explained as follows
1) The integrated labour market model with full market clearing.
2) Models with wage dualism but no employment and
3) The Harris-Todaro model, both in its original form and as
extended, which features both wage dualism and
unemployment.
A) The Integrated Labour Market Model with Wage Equalisation
and No Unemployment :
The integrated labour market model, also called the unified
labour market model, has as its distinguishing features that
1) Each labour market clears and
2) Full inter market equilibrium is achieved through actual wage
equalization.
In the integrated labour market model, economic growth in
one sector benefits workers in all sectors. Three groups of workers
have been identified in this analysis:
133
1) Those who had been working in manufacturing and now earn
higher wages than before; 1) Those who are drawn by higher
wages into manufacturing and now earn higher wages than before;
2) Those who are drawn by higher wages into manufacturing from
agriculture and 3) Those who remain in agriculture and earn more
than they did previously. In this way, economic growth in a
countrys export sector reverberates through-out the labour market,
benefiting those who produce manufactured goods and those who
produce agricultural gods.
The extension for the integrated labour market from two
sectors to N sectors is immediate.
B. Models with Wage Differentials and No Unemployment :
In contrast to the integrated labour market model, a number
of segmented labour market models are characterized by wages
differentials between segments. Models with wage differentials
between segmented and no unemployment include the unlimited
supply of labour model of Lewis (1954), the interseetoral shifts
model of Kuznets (1955), the crowding model of Bergmann (1971),
the minimum wage model with incomplete coverage of Welch
(1974), and the modern sector enlargement model of Fields
(1979b, 1980) are famous versions of this.
Within this class of models, the most heralded version is the
Nobel Prize-winning work of Lewis (1954), As discussed above, the
distinguishing feature of the Lewis model was that the modern
sector faces an unlimited supply of labour at wages only some what
higher than Subsistence levels. It is this that makes the Lewis
model, classical, in contrast to a, neoclassical model in which
labour is scarce and has to be bid a way from other uses. This
feature of the classical model was later elaborated on by Rains and
Fei (1961), Fei and Ranis (1964), and Jorgenson (1967).
In the Lewis model, when the formal sector wage is above
the informal sector wage, the potential quantity of labour supplied to
the formal is the entire labour force. However, because formal
sector employers do not wish to employ all the workers who would
like to work there at that wage they (the employers) face an
effectively unlimited supply of labour. Specifically this means that
no individual employer need raise the wage to attract additional
labour, nor must employers as a whole within a substantial range.
134
Indeed, there is a horizontal curve, but that curve is the wage as a
function of employment, not the amount of labour supplied as a
function of the wage.
C. Models with wage Differentials and Unemployment : The
Harris Todaro Model and Extensions of It.
John Harris and Michael Todaro (1970) formulated a model
characterized by wage dualism and unemployment. Wage dualism
arises is Harris and Todaro Model because employers in the formal
sector are compelled by unions, minimum wage laws, or other
institutional forces, to pay higher than market clearing wages, while
the wage clears the informal sector labour market. The Harris
Todaro model also featured a spatial distinction; to be hired for a
formal sector job, it was necessary for a worker to be physically
present in the urban areas, where the formal sector jobs are
assured to be located.
In the Harris-Todaro model, more workers search for formal
sector jobs than are hired, Employers hire some of the searchers
but not all of them. Those not hired end up unemployed ex-post.
The integrated labour market model maintains that the wage
that any worker receives reflects supply and demand for labour in
the labour market as a whole. Specifically, the wage is determined
by what the last employer is willing to pay in order to attract and
employ a worker and by what the last worker requires in order to be
attracted and employed.
One common misperception is that the wage should vary
directly with labour productivity, commonly measured as value
added per worker, in a given firm or sector. According to the
integrated labour market model, nothing could be further from the
truth.
The more general point of the integrated labour market
model is that a workers wage is set not just by that workers own
productivity nor by labour productivity just in that workers sector.
Rather, wages are set by supply and demand for that category of
labour in the labour Market as a whole.
135
7.4 QUESTIONS
1. Describe various types of employer-employee relationships.
2. What are the various categories of wages and discuss how they
can be determined.
3. Discuss in detail the concept of Labour Market Segmentation.
4. Explain the essence of Labour Market Dualism.
5. Differentiate between the Formal Sector Labour Market and
Informal Sector Labour Market.
References :
Economic Development in India Academic Foundation various
issues.
Economic and political weekly various issues.
Gary S. Fields, 2009 : Segmented Labour Market Models in
Developing Economy.
ILO Report 2005.
Genes Lerche, 2009, An Aliance Against Forced Labour in
India.
K. Sundaram, 2009 : Measurement of Unemployment and
Employment in India some issues.
M. S. Chauhan, 2010 : Labour Economics Issues and Policy.

136
8
Module 6
LAND AND LEASE MARKETS
Unit Structure :
8.1 Objectives
8.1 Introduction
8.2 Types of farming
8.3 Specialized and Diversified Farming
8.4 Merits of specialized farming
8.5 Demerits of Specialized Farming
8.6 Merits of Diversified Farming
8.7 Demerits of Diversified Farming
8.8 Single-crop farming and Multi-crop farming
8.9 Mixed Farming
8.10 Dry and irrigated farming
8.11 Ranching
8.12 Factors Determining the Types Of Farming
(A) Physical Factors
(B) Economic Factors
8.13 Lease Market
8.14 Land, Lease and Rental
8.15 Summary
8.16 Questions
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8.0 OBJECTIVES
- To know the types of farming
- To understand the specialized farming
- To understand the Diversified farming
- To study the merits and demerits of specialized farming
- To study the merits and demerits of Diversified farming
- To understand the Single-crop farming
- To understand the Multi-crop farming
- To understand the Mixed farming
- To understand the Dry and irrigated farming
- To understand Ranching
- To know the Factors Determining The Types Of Farming
8.1 INTRODUCTION
There are different type of farming. These refer to the
combination of products that a farmer may chose to produce during
a particular crop season or over a long time as a regular practice.
The type of farming also refer to the method of farming an to
different practices that are used in carrying out the farming
operations. Mention may be made of specialized farming and
diversified farming in this regard. Similarly, farming may be carried
out as a single crop enterprise or a multi-crop enterprise.
Many a times, the expression System Of Farming is also
used in such discussion .The distinction between the two terms, viz
;type and system of farming, is not very clear. In fact these two
terms have been used interchangeably in some studies though in
others ,a clear distinction has been sought to made out. The
expression, System Of Farming , is generally used to denote the
ownership of land, farm resource management and other
managerial decisions. The system of farming may be owner-
cultivator or peasant proprietorship : it may be co-operative
farming: it may even be tenant farming on a share-cropping basis.
The system of farming may ,therefore be treated as different from
the type of farming. In this chapter ,we are concerned with the type
of farming.
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8.2 TYPES OF FARMING
The main types of farming which are commonly practiced are listed
below :
1) Specialized and Diversified Farming.
2) Single-crop farming and Multi-crop farming.
3) Mixed farming.
4) Dry and irrigated farming.
5) Ranching.
8.3 SPECIALIZED AND DIVERSIFIED FARMING
In a general sense ,when only few enterprises are run by the
farmer in which he acquired special knowledge is known as
specialized farming .On the other hand when a farmer is engaged
in a multitude of farm enterprises, it is referred to as diversified
farming. Specifically ,specialized farming refers to only one kind of
farm business such as raising of food crop ,or rearing sheep or
raising a dairy cattle Against this ,if a large number of crop
enterprises, with or without a number of non-crop enterprises are
run by a single farmer it is referred as a diversified farming.
Extreme forms of specialization or diversification seldom exist.
These may be a few instances when only one crop is raised on a
plot of land repeatedly over a long period of time or only one form
of livestock is kept for along period of time.
But usually in the developing countries ,such situations are
few .A farmer may usually allocate his holding to raising of crops
,fodder and vegetables during the same crop season .He may hold
cows, buffaloes and sheeps simultaneously. In practice it may
therefore be difficult to draw a clear demarcation line between
specialized farming and diversified farming .Raising of two to three
crops may make it specialized and raising of five or six crops make
it diversified.
Two types of farming point to different motives. The motive
behind specialized farming is profit and the motive behind
diversified farming is self-sufficiency. The farmer wants to maximize
his profit by specializing in only a few enterprises and may choose
to buy his requirements from the market and in the latter case, the
farmer chooses to raise as many enterprises as are feasible and
139
thereby minimize his dependence on the market. Specialized
farming, thus, is run on known business principles, as in the case of
other enterprises .Again while having a close look at these type of
farming, we may observe that specialized farmers do not produce
for home consumption alone. The difference is always of degree. It
may also be noted that agriculturally advanced countries have more
of specialized farming compared to developing countries where
there in more of diversified farming. Again one may find evidence of
big farmers specializing in fewer enterprises compared to small
farmers who run a combination of heterogeneous farm enterprises.
Specialized farming may be treated as an index of the extent of
commercialized farming. Higher the degree of commercialization,
greater is the degree of specialization. Should a farmer opt for
specialized or diversified farming is a question to be investigated.
There is no criteria on the basis of which one would make an out-
right choice in favor of one and not the other. In order to examine
this question we shall have to discuss the merits and demerits of
each of these two types of farming.
8.4 MERITS OF SPECIALIZED FARMING
(i) Marketing Advantages :
Specialized farming always takes place on the larger scale,
giving rise to bulk production. This large scale production of a
homogeneous nature attracts wholesale trading activity at a single
place. This leads to better marketing and convenient buying and
selling of the agricultural produce.
(ii)Efficiency Advantages :
Specialization leads to formation of skills which makes work
less bothersome ,improve speed and spare drudgery to the farmer
.It leads to optimum utilization of farm resources and strengthens
the standard of efficiency.
(iii)Capital Advantages :
Specialised farming can be started with a smaller amount of
capital, a smaller amount of fixed charges and a smaller amount of
equipment. The farmer can afford better machines and equipment
and can naturally manage his enterprises more efficiently.
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(iv) Other Advantages :
Among other advantages that specialized farming enjoys are
a smaller requirement of labour and in some cases, a smaller
requirement of land as well. The management of the farm can be
more efficient and leakages can be kept at a minimum. The farmer
may also be left with more leisure and time for enjoyment.
8.5 DEMERITS OF SPECIALIZED FARMING
(i) Market Uncertainties :
As already stated, specialized farming leads to large-scale
production and greater dependence on the market. If the market
fails to clear the volume of production ,the farmer may suffer heavy
losses and may at times become bankrupt. Such situations have
occurred in the USA when specialized farmers suffered heavy
losses due to uncertainties of the market. The cotton-growers of
America have been facing problems owing to the market not
generating enough demand for their produce. As such ,specialized
farming may bring heavy losses and defeat the purpose of profit
maximization.
(ii) International Relations :
It has often been noted that the specialized farmers
,consciously or unconsciously get involve in international trade. He
does not provide for the national market alone but for international
market as well. During abnormal times international trade suffers a
set back and makes trading across the national frontiers more
difficult. In such situations the farmer is rendered helpless. In the
international market the term of trade may also not be always
favorable and the farmers bargaining position may become weak in
such situations. Very often ,restraints are put on international trade
due to political policies of governments which operate harshly on
the farmer whose trade receives a set-back under such condition.
(iii) Uncertain Crop Conditions and Irregular Investment
Flow ;
The successes of specialized farming depends upon the
crop conditions and if a crop fails, it brings disaster for the farmer.
He has nothing to fall back upon .At times of falling prices ,the
farmer is hit hard. Since the crops are harvested once or at least
twice a year the farmer gets his income at distant point of time and
can think of investment only at such times. This does not ensure
continuous flow of investment in farm enterprise.
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(iv) Other Disadvantages :
Specialized farming may not be conductive to the
maintenance of soil fertility. Raising the same crop repeatedly over
a long period of time reduces the soil fertility and this may resulting
soil losing its fertility irreparably. It has been seen that crop rotation
helps in replenishing soil fertility .Limited use of land ,labour and
machinery may leave a part of these previous resources unutilized
or under-utilized .This defeats the purpose of efficiency and
optimization. Specialized farming also makes the farmer
considerably dependent on the market for a large number of his
requirements and he often faces trade risk to meet his necessities
even when he might have been a bulk producer of a specialised
item.
Lets now consider the case of diversified Farming by
examining its merits and demerits :
8.6 MERITS OF DIVERSIFIED FARMING
(i) Better Resource Utilization :
Because of the very nature of farming spread over the crop
year ,the farmer can use his resources optimally and reduce the
extent of under-utilisation of his resources such as equipment ,land
and labour ,etc.. It ensures steady utilisation of farm labour
throughout the year. There is a regular flow of income as well. Land
can be used more economically and without loss of fertility.
Rotation of crops helps maintain the intrinsic properties of the soil
and keep it fit foe further use. Not only is soil fertility kept in tact,
soil of different qualities and varieties can be used efficiently under
different enterprises .Diversified cropping also reduces the
necessity for leaving the land fallow.
(ii) Better Product Utilisation :
Under diversified farming different enterprises can be run on
the same holding. For example, a farmer may raise crops and at
the same time, may also keep a dairy farm .Some of the crop by-
products can usefully be employed in feeding the dairy cattle and
hence waste can be avoided. In a similar fashion, several other
enterprises can be raise together and by-products used optimally
for the purpose. Further diversified farming ensures a regular flow
of returns as different enterprises mature at different time of the
agricultural year. This facilitates a regular flow of investment in
agriculture .Returns are also not subject to any serious fluctuations
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because risk of climatic hazards and market uncertainties can be
safeguarded by engaging in diversity of enterprises.
(iii) Other Advantages :
Those farmers who lack adequate training and experience in
agriculture can safely start diversified farming because such a
pursuit may not necessitate specialized training as required for
specialized farming. There is every chance that under diversified
farming, even a beginner ,an untrained and inexperienced farmer
may find some enterprises clicking and yield him a return to
stimulate his interest and generate confidence in him to stay in the
farming enterprises. The very fact that the farmer experimenting
with a large number of enterprises gains vast and varied
experience leads to the development of better management
qualities in him .Diversified farming may also help in absorbing a
larger volume of labour force and sustaining a larger population.
8.7 DEMERITS OF DIVERSIFIED FARMING
i) Ineffective Supervision :
The presence of a number of enterprises on the farm will
stand in the way of the farmer in bestowing effective supervision.
Effectiveness can be found when there a limit to the number of
enterprises. The diversified enterprises allow the scop for the
leakages in the farm business go unnoticed .This is likely to affect
the farm economy.
ii) Less Possibility For Maintaining a Variety Of Implement
and Machinery :
It becomes expensive to purchase and maintain the required
suitable implements and machinery for the various enterprises
taken up on the farm
iii) Probable Marketing Insufficiencies :
The growing of a variety of crops is likely to bring in
problems on marketing front. The farmers have to search for
markets.
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Check Your Progress :
1. Write notes on :
a) Specialized Farming.
b) Diversified Farming.
2. Explain the merits and demerits of Specialized Farming.
3. Explain the merits and demerits of Diversified Farming.
8.8 SINGLE-CROP FARMING AND MULTI-CROP
FARMING
Single crop farming is a form of specialized farming .If a
farmer specializes in crop enterprises it is left to him to produce a
single crop or a multiplicity of crops. Producing a large variety of
crops may not make a farmer a specialist in the strict sense of he
term, although he will acquire varied experience in crop
enterprises. In practice it may happen that a farmer seldom
produces a single-crop except in the case of cash crops such as
sugarcane etc. Even if a farmer wishes to specialize in crop
cultivation, he will often choose more than one crop to safeguard
against market uncertainties and also to ensure the optimum
utilization of his resources. By producing a single-crop he will be
incurring a great risk if the crop fails or the price fluctuates and at
the same time ,he may not be able to use his labour ,machinery
and land optimally.
A large multiplicity of crops is also not good .It creates
problems of management. The farmer may not be able to supervise
all the operations and some of these crop enterprises may suffer
from the farmers neglect. Multiplicity of crops would also imply the
distribution of farm inputs over a large number of uses which may
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result in small-scale production and pose marketing problems. In
the hope of getting a continuous and regular flow of income ,the
farmer may not be able to ensure proper return on his land .It may
,therefore, be observed that neither a single crop nor a multiplicity
of crops would be a desirable proposition .The farmer would play
safe if he produces a small number of crops that he can manage
effectively and in the production of which he can utilize his
resources to his best advantage.
8.9 MIXED FARMING
Mixed farming refers to the combination of two independent
agricultural enterprises on the same farm .A typical case of mixed
farming is the combination of crop enterprise with dairy farming or
in more general terms, crop cultivation with livestock farming. It
may be defined variously but the essence is of combining several
enterprises. Mixed Farming may treated as a special case of
diversified farming. As such ,it is more prevalent in the developing
countries. In a majority of cases mixed farming manifests itself in
the combination of crop and livestock and that is why this
combination is almost treated as synonymous with mixed farming.
This particular combination of enterprises is important in the sense
that support each other and add to the farmers profitability.
The farmer raises his livestock on the by products of crop
growth .He utilizes the existing manpower and equipment and has
not to incur any additional expenses .Similarly ,by raising livestock
,he draws a number of benefits from it for crop cultivation.
Crowding is used as manure, bullock power is used on the farm
and also for transport purposes and several other operations
connected with agriculture .The two enterprises ,therefore, sustain
each other with not much additional cost ; but on the other hand, it
arguments the income of the farmer and provides him more
economic soundness.
A few study conducted to compare the advantages of mixed
farming with single enterprises farming have shown that income per
unit of land is considerably higher in the case of the former than
the latter .Utilization of land and labour is better under mixed
farming as compared to single-enterprises farming. Mixed farming
is most suited to densely-populated countries, for it generates more
employment and income .Mixed farming also be justified on ground
of scarcity of land.
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8.10 DRY AND IRRIGATED FARMING
Farming is those areas which are deficient in rainfall and
which have no assured source of artificial irrigation ,is referred to as
dry farming. On the other hand ,farming with assured water
supply from artificial irrigation is known as irrigated farming .
Dry farming is difficult in the sense that land starved of
water is hard and port in soil fertility. The yields are low whereas
the effort required is quite substantial .The possibility of introducing
new technology is limited and crop seasons are rigidly time-bound
corresponding to the distribution of rainfall .On the other hand
irrigated farming is easier and more remunerative .It is flexible and
adaptable to changing technology .
8.11 RANCHING
Ranching refers to the practice of grazing animals on the
public lands. Some public lands may also be used for raising
livestock .This practice is common in Australia and Tibet. In
our country ,ranching is prevalent in some measure in the hill
regions which are rich in pastures and gazing lands .But
ranching is slowly dying out in our country because of the
growing pressure on public lands .Those farmers who have
been all along subsisting on ranching are now seeking new
avenues of employment. Owing to the reckless decimation of
forests in the country over the decades, grazing lands and
pastures have been dwindling in size ,forcing the ranchers to
seek new avenues employment.
8.12 FACTORS DETERMINING THE TYPE OF
FARMING
There are a number of factors that determine the type of
farming. These may be Physical as well as economic. Among the
physical factors climate, soil fertility and topography influence a
great deal in the selection of the type of farming. Among economic
factors are the profitability ,marketing feasibility, capital and labour
availability .A brief discussion about these factors now follows :
(a) Physical Factors :
Physical factors caused by the type of farming to vary from
area to area and result in to a comparative advantage of a
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particular enterprise in one region over the other. As already
mentioned the important factors under this category are :
(i) Climate :
(ii) soil :
(iii) Topography :
(i) Climate :
Climate is one of the most important factors determining the
type of farming .The distribution of rainfall ,sun-shine, temperature
and other climatic conditions greatly determine which enterprise the
farmer should choose. Climatic conditions of the hill regions and
plain differ greatly and correspondingly ,the nature and the scope of
the different type of farming also differ significantly .The amount of
rainfall a particular area receives alone in an important factor
significantly affecting the type of farming .For example, most crops
can be grown in areas receiving about 60 cm rainfall and annually
is itself ,but paddy and sugarcane require 100 cm of rainfall and
pulses and small millets can be grown on areas which receive even
less than 60 cm of rainfall. Thus, the total rainfall and area receives
annually is itself an important factors determining the type of
farming .Whether a farmer specializes in one or a few crops ,or in
one or more than one enterprises shall greatly depend upon the
climatic conditions .Whether a farmer should choose mixed
farming ,single crop or multi crop farming depends solely upon the
climatic conditions.
(ii) Soil :
The quality of soil is also important for determining the type
of farming .All soil may not be suitable for crop cultivation or for
raising livestock or poultry or any other farm enterprises. Different
soil suit different enterprises, depending upon the different qualities
possessed by them. For example ,clayish soils and sandy soil
support different crop enterprises .Alluvial soil may be best suited to
the cultivation of crops such as wheat and rice and heavy black
soil may suit the cultivation of cotton and so on .Hill soil may be
suitable for growing fodder alone and may suit the raising of
livestock .It is due to variation in soil that different crops are
localized in different area in India.
147
(iii) Topography :
Topography is equally important in determining the type of
farming .Topography greatly tells upon the temperature and soil
fertility and hence it has a significant bearing upon the choice of
farming that is practiced. It is due to topography that the cropping
pattern generally followed in the plains differ from the cropping
pattern followed at higher attitudes.
(b) Economic Factors :
The physical factors discussed above ,demarcate the
feasibility of following various type of farming in a particular area
,but before making the final decision about the type of farming to be
adopted ,the farmers are mostly led by the consideration of
profitability. If for example, livestock is more profitable than crop
cultivation ,the farmer will certainly opt for the farmer .Similarly ,if it
is more profitable to raise an orchard than growing rice or wheat
,the farmer will obviously choose an orchard .In the Terai region of
Utter pradesh ,both paddy and maize can be successfully grown
that is ,as far as physical factors are concerned ,cultivation of both
the crops is feasible .But when along with the physical factors,
economic factors are also taken into account ,farmers usually
prefer to cultivation paddy as it is more paying .Some of the
important economic factors which influence the farmers decision
regarding the type of farming are discussed below
(i) Comparative Advantage :
Guided by economic considerations ,the farmer will produce
only those commodities in which ha has an advantage. These
advantages are of two types, comparative and absolute .While
making a decision regarding the types of crops to be raised on his
field ,the farmer is always guided by the consideration of
comparative cost rather than the economic cost. The law which
deals with such situations is known as the law of comparative
advantage which states, the producers in each locality tend to use
their resources in the production of goods which have a
comparative advantage in that area . With the proceeds from these
goods ,they purchase for their own use ,goods produced under
greater advantage elsewhere .
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(ii) Marketing Cost :
The cost of marketing the produce is an important
consideration in deciding the type of farming. If the nearby market
promotes a particular enterprise the farmer will prefer that than the
one for which the market may be distantly located and involve
heavy transport cost . Marketing considerations weigh heavily when
a choice has to be made between growing vegetables and other
crops .If the market is not readily available at a short distance ,it
may not be wise to go in for vegetable cultivation .
(iii) Location Of Processing Plants :
The cultivation particularly of cash crops in a particular area
is influenced by the presence or otherwise of processing plants .
For example ,most cotton mills in india are in Gujrat and
Maharashtra and most of the area around these mills continues to
be under the cotton crop .
(iv) Availability Of Capital and Labour :
The availability Of capital and labour is of vital importance
for determining the type of farming .The available capital and labour
may force a choice , keeping in view the tradition and training of
labour and the nature of the capital The adaptation of new
agricultural technology requires a huge amount of capital .The
availability of capital ,therefore ,would determine the type of
technology to be used by the farmer and also affects the selection
of enterprise and hence the type of farming . Similarly ,before
starting a particular type of farming ,the farmer will have to be sure
about the availability of labour trained to handle that particular
enterprise .
8.13 LEASE MARKET
Leasing activity is quite prevalent in farming. Normally
absentee landlords would like to lease out the lands by identifying
the tenants who have the reputation of being a loyal tenant. Also
those residing in the village, who are not interested in farming
because of their pre-occupation also involve in leasing out activity
.Some other farmers in view of the management problems also
lease out part of their operational holdings. Coming to the tenants
they may be landless labourers, small and marginal farmers who
have abilities of managing big farms. Leasing in activity when
examined will throw open the following merits.
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Merits :
1) A source of income Augmentation :
For any one who is engaged in leasing in activity, it helps to
augment their present income levels.
2) Increase in the size of Operational Holding :
For those who have some operational holding ,leased in land
add to the area of operation. Possibilities exist for better
management of land resources.
3) Crop Diversification :
Relatively larger acreage on account to leasing in activity
permits crop diversification. Apart from higher income, risk in
farming can be reduced
4) Flexibility Of Rent :
Rent normally is fixed by the owner-farmer based on the
prevailing rents for similar type of lands in the village. Yet
flexibility does exist based on understanding between the owner
and the tenants. Moreover during the times crop failures also
,owner is not rigid in collection of rent after all he is humane and
can understand the situation sympathetically.
Demerits :
1) Insecurity Of Tenure :
Normally in the leasing activities written agreements are seldom
made ,it is only through oral agreements Irrespective of the likes
and dislikes of the tenant, his tenure can be terminated as per
dictates of the owner-farmer.
2) Less Scope For Land Development :
A tenant more often than not ,is interested in deriving as much
as he can from the leased in land in the light of the insecurity of
tenure. His aim is to extract as much as he can from the
available soil nutrients. Hence, no efforts are made for land
development.
3) Poor Infrastructure Development :
Farmers are generally are not much concerned regarding
developing the necessary farm infrastructure like farm building
,fencing, etc for the lands leased out .They do not feel the need
to develop these facilities, since they are not owners of the land.
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8.14 LAND LEASE AND RENTAL
Under system of state ownership of land ,when the
customary land regimes no longer exist ,tenure security can be
provided by long-term ,transferrable leases as mentioned above
.When this approach is adopted ,the lease should be at least 25
years in duration ,preferably longer, in order to encourage
investment in the land ,and they should be automatically renewable
provided that the cultivator has met normal obligations in respect of
payment of lease fees and taxes. The list of requirements can
include putting into effect sound environmental practices for land
management .In order that efficiency criteria be satisfied , it is
necessary that the leases be transferrable (saleable)without
requiring government approval ,and that the parties to the
transaction be free to negotiate their own price .The only procedural
requirement would be that the new leaseholder be registered as
much within a certain period after the consummation of the
transaction is required , then the leasehold would lose much of its
value ,and banks could not use it as collateral in the event of
default.
To the contrary ,if long term ,transferrable leases are not
adopted ,then it will not be possible to meet the normal
requirements of tenure security for cultivator on state lands. In this
regard ,under modern(non-customary) land tenure systems, the
choice are not many: there are only two basic options for providing
tenure security and adequate incentives to improve the land :
private ownership and long term ,freely transferrable leases.
The rental of agricultural land ,and share tenancy system
have been prohibited in the agrarian codes of many countries .The
apparent reasoning ,more political than economic ,is that rental and
share cropping arrangements are perceived to represent the
exploitation of the tiller by the land owner .Under many of the
agrarian reforms laws and land codes ,from the South Koria and
Taiwan to Senegal ,Peru the land which was rented out in those
cases it usually was adjudicated to the person who was renting in
the land .
Land rental and sharecropping commonly occur because
they bring about four principlal benefits :
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- The practice eases rural poverty by providing a mechanism
through which low-income farming families can gain access to
additional land and acquire farming experience .
- Almost by definition ,rental or a share tenancy arrangement for
plot of land is likely to improve its productivity ,because it
transfers the use of the plot from a party who is less interested
in or capable of working it to one who is more interested or
capable .
- The option of temporarily renting out land reduces income risk
to landowners by providing a mechanism for obtaining at least
minimal flows of income from the land in years when for reasons
of health ,family finances or other factors ,the landowner is
incapable of cultivating the land .
- For large landowners , it has been shown that rental or
sharecropping contracts normally will be a more efficient way to
have the land worked than hiring wage labor, mainly because of
the reduced supervision cost.
Check Your Progress :
1. Write notes on :
a) Single-crop farming
b) Multi-crop farming
c) Dry and irrigated farming
d) Ranching
2. Write the Factors which Determines The Type Of Farming.
3. Write the merits and demerits of land lease market.
8.15 SUMMARY
1. The expression, System Of Farming , is generally used to
denote the ownership of land, farm resource management and
other managerial decisions.
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2. The type of farming also refer to the method of farming an to
different practices that are used in carrying out the farming
operations.
3. The main types of farming which are commonly practiced are
listed below :
1. Specialized and Diversified Farming.
2. Single-crop farming and Multi-crop farming.
3. Mixed farming.
4. Dry and irrigated farming.
5. Ranching.
4. when only few enterprises are run by the farmer ,in which he
acquired special knowledge is known as specialized farming.
5. when a farmer is engaged in a multitude of farm enterprises, it is
referred to as diversified farming.
6. Specifically ,specialized farming refers to only one kind of farm
business such as raising of food crop ,or rearing sheep or raising a
dairy cattle.
7. if a large number of crop enterprises, with or without a number
of non-crop enterprises are run by a single farmer it is referred as a
diversified farming.
8. Specialized farming always takes place on the larger scale.
9. Specialized farming can be started with a smaller amount of
capital
10. In specialized farming, If the market fails to clear the volume of
production the farmer may suffer heavy losses and may at times
become bankrupt.
11. Uncertain Crop Conditions and Irregular Investment Flow may
hit hard the farmer.
12. Under diversified farming different enterprises can be run on
the same holding .For example, a farmer may raise crops and at
the same time, may also keep a dairy farm .
13. Those farmers who lack adequate training and experience in
agriculture can safely start diversified farming
14. In Diversified farming the growing of a variety of crops is likely
to bring in problems on marketing front .The farmers have to search
for markets.
153
15. Single crop farming is a form of specialized farming .If a farmer
specializes in crop enterprises it is left to him to produce a single
crop or a multiplicity of crops.
16. Mixed farming refers to the combination of two independent
agricultural enterprises on the same farm.
17. Farming is those areas which are deficient in rainfall and which
have no assured source of artificial irrigation ,is referred to as dry
farming.
18. Dry farming is difficult in the sense that land starved of water is
hard and port in soil fertility.
19. Ranching refers to the practice of grazing animals on the public
lands .Some public lands may also be used for raising livestock.
20. There are a number of factors that determine the type of
farming. These may be,
A) Physical factors. :
The important factors under this category are :
(i) Climate :
(ii) soil :
(iii) Topography :
B) Economic factors. :
The important factors under this category are :
(i) Comparative Advantage :
(ii) Marketing Cost :
(iii) Location Of Processing Plants :
(iv) Availability Of Capital and Labour :
8.16 QUESTIONS
1) Write notes on the following :
a) Specialized Farming.
b) Diversified Farming.
c) Single-crop farming
154
d) Multi-crop farming
e) Dry and irrigated farming
f) Ranching
2) Answer the following questions
A) Explain the merits of Specialized Farming.
B) Explain the demerits of Specialized Farming.
C) Explain the merits of Diversified Farming.
D) Explain the demerits of Specialized Farming.
E) Explain the demerits of Diversified Farming.
F) Explain the Physical Factors which determines The types
of Farming
G) Explain the Economical Factors which determines. The
types of Farming

155
9
ECONOMICS OF SHARE TENANCY
Unit Structure :
9.0 Objectives
9.1 Introduction
9.2 Crop-sharing practice in India(share tenancy contracts)
9.3 Inequity In Distribution of Holding
9.4 Size of Holdings
9.5 Factors Determining Size of Economic Holding
9.6 Size of Holdings In India
9.7 Causes For Small Size of Land Holdings
9.8 Agrarian Structure
9.9 Broad Features of the Emerging Agrarian Structure
9.10 Suggestions for improvement
9.11 Agrarian relations
9.12 Market Interlocking And Interlink ages
9.13 Summary
9.14 Questions
9.0 OBJECTIVES
- To know the share tenancy
- To understand the Crop Sharing practice in India.
- To study the Inequity In Distribution of Holding .
- To understand the Size of Holdings.
- To study Factors Determining Size of Economic Holding
- To study the Causes For Small Size of Land Holdings
- To understand the Agrarian structure
- To study the Features of the Emerging Agrarian Structure
- To know the Agrarian Relations in India
- To understand the market interlocking and interlinkages
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9.1 INTRODUCTION
If dispanssionate discourses is the hallmark of science,the
writings of the political economists on share tenancy would have to
be treated as far cry from science. For reasons which find difficult to
comprehend, this subject seems to have touched to an emotional
chord in many , giving rise to both compassion and fury. John
Stuart Mill(1848) and Higgs(1894) wrote admiringly of the system.
On the other hand the Marquis ed Mirabeaus observed (quoted in
Higgs,1894) that share tenancy is a deplorable method of
cultivation, the daughter of necessity and mother of misery.
The early wisdom on share tenancy, based on the writings of
Smith (1776) and Marshall(1920),was that share tenancy, is an
inefficient system. A share tenancy or sharecropping contract is by
defination one in which the tenant promises to give the landlord a
fraction (r) of the total output. The fraction is decided in advance
and ,it has been empirically that it trends to be around 0.5.
Now assume, as is often the case ,that it is the tenant who
has to decide what input, like fertilizer, pesticides, etc. to be used
and he is one who incurs the input cost. Assuming that r is 0.5, note
that if through some new input the output increases by more than
the cost of the input, it may still not be in the interest of the tenant to
apply the input since under share tenancy, the tenant dose not get
the full additional output but only half of it. Hence, on land given to
share tenancy, the application of inputs-labour, fertilizer and other
things will tend to be sub-optimal. This was the essence of the
Marshalian critique.
The charge of inefficiency is however not the only one
against share tenancy. It has a corollary according to which it is
arrational for a landlord to lease out this land on share contracts
instead of fixed-rent contract or wage contract. The argument is this
.Suppose a landlord switches to a fixed-rent contracts, that is ,one
where the tenant pays a fixed amount of rent-this may be in cash or
kind. Now since the tenant will get the full benefits of additional
inputs used, he will apply more inputs. Hence under fixed rent the
total output from the same amount of land will be higher. If the
landlord sets the fixed rental a level such that the tenant earns
whatever he used to earn(on average) under share tenancy, clearly
the landlord will be better off. To sum up the argument: not that
under a fixed rental contract the total output is greater than under
sharecropping. If the tenants income is the same under both
157
systems, the landlords income, which is total output minus tenants
earning, must be greater under the fixed-rental arrangement.
Following this argument, the economists of the earlier part of
this century set out to urge landlords to be rational and to switch
over to the fixed-rental system. But by the seventies doubts began
to arise .Instead of being committed to the Marshllian Model of
tenancy or its varients and treating rural landlords as irrational,
perhaps we should rethink our model. Perhaps rural landlords are
not foolish or irrational but it is our model which is missing out on
some essential feature of reality and thereby wrongly showing up
the landlord who gives his land to a share tenant as irrational. This
is indeed the current view of share tenancy And from the mid-
seventies the focus of the share tenancy literature has shifted over
to showing why sharecropping may indeed be the dominant tenurial
arrangement where it occurs.
This has however turned out to be a hard area of research.
The economists ingenuity seems to have found its match in the
rural landlords alleged Low cunning.
9.2 CROP-SHARING PRACTICES IN INDIA : (SHARE
TENACY CONTRACTS)
To some, sharecropping caries connotations of exploitation,
but in fact it is the predominant form of land rental in developing
countries if some key features of reality are assumed away lack of
uncertainty ,perfect access to credit and insurance for the rural poor
It has been demonstrated theoretically that sharecropping is
always inefficient-It always result in lower output, and lower labour
input on the land ,than pure cash rental contracts. However, when
the analysis is made more realistic, With risk aversion and
uncertainty, a share contract provides the possibility of partly
insuring the tenant against fluctuations in output, and a limit of a
working capital available to the tenant because of imperfection in
credit market ,can lead to the adoption of a share contracts as the
optimal solution to the bargaining problem(between landlord and
tenant)
Empirical test have been made regarding the motivation for
sharecropping contracts, statistical test performed on a sample of
Tunisian farmers indicated that the credit constraint, rather than risk
aversion, was the major factor underlying the choice of a share
tenancy contracts.
158
Research in land rental market in Ethiopia found that the
negative efficiency effect of share tenancy is small and that rental
market as a whole improve the efficiency with which productive
resources are allocated in agriculture.
Research indicates that land rental markets have two
opposing effects on agricultural efficiency
1)Positive land reallocation effect.:- The positive reallocation
effect results from better matching between land ,labour and oxen
power.
2)Negative incentive effect :- The negative intensive effect arises
from the standard inefficiency argument according to which
sharecropping reduces labour effort.
In sharecropping(share tenancy) it is not necessary to make
policy intervention to avoid the danger of rental rates getting out of
date, since the payment is a share of the output. Prof. Binswanger
warn against attempting to regulate tenancy contracts :
Historically, land reform that resulted in establishment owner-
operated farms appears to have been a farmer successful way of
addressing the equity questions..On the other hand ,in some
cases of highly unequal distributions of landholdings and
prevalence of sharecropping arrangements, it appears that
legislating the division of the crop may improve both efficiency and
equity.
The results for an agricultural tenancy reform of this nature
in the Indian State of West Bengal were summarized as follows :
A primary goal of the reform was to change the division of
output between landlord and tenants in favour of tenants. As a
result. The division of output on many tenancies changed from an
even split to a 70 30 split in favour of tenants. By 1982 the
reforms had reached about half the states sharecroppers, and over
the next decade West Bengal achieved a breakthrough in
agricultural growth.
Banerjee and Ghatak(1996) estimate that more than a third
of West Bengals growth in agricultural production during 1981
1992 was due to the tenancy reforms. Thus the land tenancy
reform not only redistributed income to the poor, it also changed the
intensives of the poor to be productive by changing the tenancy
contracts under which they supplied labour. In this way
159
redistribution substantially increased the income generated by the
poor.
Share tenancy is increasingly recognized as a useful system
for access to land, in part because landowners often are a source
of creditor the sharecroppers. This kind of contract also reduces
risk to the landowners, in the face of possibilities of crop failure vis-
-vis the option of paying wage labour. In summary :
Sharecrop tenancy seems to offer a package of incentives,
insurance and interlinkage to other markets which is often best for
both parties when compared to the relevant alternatives..This
observation is consistent with the conclusion that cultivation under
share tenancy is not less efficient or less productive than other
forms of tenancyWe now have an abundance of research
which demonstrates, both in theory and practice, that while a
particular form of tenancy may not be efficient in an economically
perfect world, in many instances the type of contracts which
prevails is optimal in the real world.
9.3 INEQUITY IN DISTRIBUTION OF HOLDING .
Meaning of Agricultural Holding :
The term Agricultural Holding implies the total area of land
which is held for cultivation as a single unit by an individual , joint
family or more than one farmer on a joint basis. Such land may
either entirely be owned, taken on lease ,or may be partly owned
and partly rented,
An Operational Holding is one which includes all lands(
i.e., cultivated , fallow and even the land which is not under
cultivation ) used wholly or partially for agricultural production
operated as a single technical unit by a single household or a
number of households operating jointly. An individual may have a
single or a number of operational holdings if each of them
constitutes a separate unit of management .
On the other hand Ownership Holding includes all the area
owned by a cultivator or a number of cultivators jointly whether
under own cultivation or subject to others. The concept of this type
of holding is useful under feudal systems ,as it gives an idea
whether land ownership is concentrated in a few hands or is evenly
distributed .It may also be known if the tendency is towards
dispersal among a number of persons.
160
It also helps in finding out the level of income and living of
the farmer, employment, requirements of hired labour, and
utilisation of farming equipment. This type of information provides
the necessary background on which agrarian relations in a
socialistic society could be based .If there is a heavy concentration
of land in a few hands, it may be distributed among those without
land through legislative measures .
9.4 SIZE OF HOLDINGS
The size of an agricultural holding in any country depends on
geographical and climate conditions ,partly upon the laws and
social institutions ,partly upon the methods and technique of
cultivation .The ideal size of the holdings will vary likewise with the
nature of the crop, and the objective behind agricultural production
.Thus ,where grain and food are in demand ,the larger holdings
alone can be regarded as economic .Small farm on the other hand
,are best suited for dairy produce ,vegetable and fruit growing or for
vine orchards .According to Crver to be most profitable a farm
devoted to the cultivation of wheat must be at least 160 acres ,but
this is obviously an impossible ideal in the Punjab or in Tamilnadu
.The question where a holding is economic or uneconomic can not
be settled in a rigid manner. Various authorities have attempted to
define an economic holding for Indian conditions .
According to Keatinge , A holding which allows a man a
chance of producing sufficient to support himself and his family in
reasonable comfort after paying his necessary expenses may be
termed an economic holding. On the other hand Dr. Mann has
defination economic holding as one which will provide for an
average family at the minimum standard of life considered
satisfactory.
The summary of the limit of economic holdings ,as
prescribed by different authorities may be given below :
161
limit of economic holdings
Authority Economic Holdings
Keatinge ,W 40 to 50 acres of fair land in one block
with at least one good irrigation well.
Mann ,H 20 acres.
Baroda Economic
Enquiry Committee
30 to 50 bighas.
Lucas,C.D. More than 14 acres.
Darling ,M.L. 10 to 12 acres, when land is cultivated
on batai system.
Stanley Jevons 20 to 30 acres.
U.P.Congress Agrarian
Committee
It is movable and may be between 15
to 20 acres.
Floud Commission 2 acres in Tippera District but 10
acres in West Bengal .
Raghvacharya,T.V. 4 to 6 acres.
Prof. East has adopted 2 acres per capita as the minimum
needed to produce an adequate diet for one person. Keeping in
mind the fact that in many part of the country two crops are raised
during the year and the food requirements may be less in the East
than in the colder countries of the West ,we may safely assume that
5 acres in the minimum size of agricultural holding necessary for
the maintenance of a family of the 5 souls or 1 acre per capita,
although differences in soil ,productivity, water supply ,crop rotation
and agricultural practice may alter the size of the holding to some
extent. Dr.D.Stamp assumed that one acres of well-cultivated land
in the mid-latitude is sufficient to produce an adequate diet for one
person .
It may be said that an economic holding should be such
as may offer reasonable opportunities to the peasant and his family
to employ the factor units(i.e. a pair of bullocks) in the most efficient
manner .The return from such a holding will depend upon fertility of
soil ;intensity of cultivation ;crops raised ;method of cultivation ,and
the organisation of agriculture; cost and returns and living cost .
162
The agrarian reforms committee evolved an idea of three norms of
size of holdings
(a) Economic holding :
According to the Committee, an Economic holding is that :
(i) which must afford a reasonable standard of living to the
cultivators
(ii) Provide full employment to a family of normal size and at
least two pair of bullocks .
(iii) Have a bearing on other relevant factors peculiar to the
agrarian economy of the region
(b) Basic holding :
A basic holding is a holding smaller than the economic
holding which may be able to provide a reasonable standard of
living to the cultivator but not efficient for the purpose of the
agricultural operations .
(c) Optimum holding :
An optimum holding is the holding ,which keeping in view the
ceiling to the size, the managerial capacity and financial resources
of an average cultivator, refers to the size not exceeding three
times the size of an economic holding.
9.5 FACTORS DETERMINING SIZE OF ECONOMIC
HODING
If the term an Economic Holding is understood in the
above sense ,it should be at once obvious that an economic
holding can not be a fixed quantity of land at all places and under
all circumstances. It is obvious that size of an economic holding will
be different in the fertile land of Punjab compared to dry land in
Deccan and an economic holding in the case of plantation crops
like tea, coffee, and spices will be different from one in the case
where only jowar, maize and such other minor cereals can be
produced. The size of an economic holding in the case of
horticulture would be different from that of land producing tobacco,
or groundnut or one which can grow rice.
It is also obvious that size of an economic holding in the
case where primitive technique of production is yet employed would
be different from the one where mechanisation of agriculture has
taken place .
163
What then are the factors that determine the size of
economic holding in a country ?
Broadly following factors may be said to determine the size of
an economic holding in a country at any particular time :
(i) The quality of land ,degree of fertility, etc.;
(ii) Availability of adequate and steady supply of water , say
,from an irrigational project in the area making double or
even treble cropping possible .
(iii) Method of cultivation, namely whether the land is cultivated
extensively with conventional tools and implements or
whether modern methods of cultivation such as
mechanisation, use of chemical fertilisers, improved seeds
and pesticides, etc., are used.
(iv) Nature of crops grown on land whether it is tobacco, or
wheat ,or rice or tea or coffee or jowar and maize ,will
determine the size of an economic holding in the country
;and
(v) Organisational capability of a farmer is also an important
determinant .
It is thus clear that various factors such as quality of soil
,rainfall ,possibility of adequate and regular supply of water
,whether single or multiple cropping is adopted ,mode of cultivation
, distance from city markets , organisational capability of the
cultivator ,etc., determine the size of an economic holding. It should
be obvious that size of an economic holding will differ from region
to region and from one time to another depending upon the above
factors.
The concept of an Economic Holding comes to be
quantified in terms of Standard Acres which enable an average
family of a farmer to earn an income sufficient for at a minimum
level of civilized consumption or in simple terms a reasonable
standard of living prevailing at any particular time in the country.
9.6 SIZE OF HOLDINGS IN INDIA
At The time India bacame independent in 1947 ,the country had
about 5 million holdings. Projections indicate there are now some
140 million holdings in the country .Today even fourth farmer in the
world is an Indian .But what is the size of holding that he
cultivates ? Information about the size of holding in India available
164
in four rounds of the NSS, viz., the 8
th
round (1953 1954) , 16
th
round (1960-1961) , 17
th
round (1961-1962) and 26
th
round
(1970-1971) as also in all India agricultural censuses conducted at
periodical intervals : 1976-77 ,1980-81 ,1985-86 ,1990-91 ,1995-96
,2000-2001 and latest with 2005-2006 as the reference year. Land
holding pattern as per number and area classification is shown in
the table below.
Land holding pattern as per number (In Acres )
Classification Of Land .. Number(In Acres )
Marginal 61.6
Small (1-2 acres ) 18.7
Small-Medium (2-4 acres ) 12.7
Medium (4-10 acres ) 6.1
Large (10 hect.above ) 1.7
Land holding pattern classification as per Number(In Acres ) shown
in the Fig.9.1 below.
61.6 18.7
12.7
6.1 1.7
Maginal
Small(1-2 acres)
Small-Medium(2-4 acres)
Medium (4-10 acres)
Large (10 hec.above)
Fig.9.1 Land holding pattern in india
(by Number(In Acres )
Land holding pattern as per area classification is shown in the
table below.
165
The size distribution of holding by area
Classification Of Land .. Area(Percentage ..)
Marginal 17.2
Small (1-2 acres ) 18.8
Small-Medium (2-4 acres ) 23.8
Medium (4-10 acres ) 25.3
Large (10 hec.above ) 14.8
Land holding pattern as per area classification is shown in the Fig.
9.2. below.
17.2, 17%
18.8, 19%
23.8, 24%
25.3, 25%
14.8, 15%
Maginal
Small(1-2 acres)
Small-Medium(2-4
acres)
Medium (4-10 acres)
Large (10 hec.above)
Fig. 9.2. Land holding pattern in India
(Percentage Distribution )
An analysis of the available data brings out the following facts:
The average size of an operational holding in India has been
continuously falling 3.12 hectares in 1953-54 to 1.41 hectare in
2000-2001 .
The number as well as the proportion of marginal holdings (up
to 1 hect.)have significantly increased. Whereas ,in 1961-62
166
marginal holdings constituted 36.84 percent of the total holdings
,this proportion went up to 61.6 percent in 2000-01. This
phenomenon is referred to as marginalisation of holdings .This
has implication for the basic viability of agricultural production
as the market surplus from small scale farming is low leading to
a continuation of the low production low profits high poverty
low production cycle .In order to ensure the attainment of the
envisaged 4 percent growth in agriculture, it is important that
programmes aiming at high productivity, diversification,
cultivation of high value commodities and production of value
added products target this group of cultivators.
Area under marginal holdings that formed 5.58 percent of the
total area in 1953-54 progressively increased to 17.2 percent in
2000-2001.
The small landowners(between 1 hect . and 2 hect.)formed
35.11 percent of the total holdings in 1961-62 ; this proportion
declined to 18.7 percent in 2000-01.
Area under small holdings which was about 8.39 percent of the
total land area in 1953-54 progressively increased to 18.8
percent in 2000-01 .i,e.,it has shown an increasing trend.
Large holding (10 hect. and above ) formed 0.68 percent of the
total number of holdings in 1961-62 .This proportion went up
initially to 3.9 percent in 1970-71 , but subsequently has
declined to 1.2 percent in 2000-01 .Similarly ,the area under
large holdings has significantly declined from 36.62 percent in
1953-54 to 17.8 percent in 2000-01 .
In short ,over the period there has been significant structural shift in
land holding pattern ,indicating growing inequalities.
9.7 CAUSES FOR SMALL SIZE OF LAND HOLDINGS
Indian agriculture is characterised by the dominance of very
small size of holdings. As already seen ,more than half of the
operational holdings in India are either sub-marginal (below 0.5
hect.) or marginal (0.5 to 1.0 hect. ) .The following are the main
causes o smallness of holdings.
1) Growing population in the country :
Fast growing population in our country has placed heavy
pressure on the fixed supply of land .With every increase in
population, the land gets divided and sub-divided, leading to a
smaller size of holding .
167
2) The Law of Inheritance :
Another important factor giving rise to the small size of
holding is the operation of the law of inheritance. At the death of the
farmer ,his land gets divided among all his sons.
3) Decline Of Joint Family System :
Under the joint family system ,the land of the whole family
was held and cultivated jointly. With the breakdown of this system
,the number of small holdings has increased.
4) Decline Of Handicrafts And Village Industries :
It is a known fact that India was on world map of the finest
handicrafts in the past. The village economy was marked by a close
co-operation between industry and agriculture. Villagers were self-
contented economic units exchanging surpluses between industry
and agriculture. With the advent of Britishers on the Indian scene,
the situation progressively deteriorated and Indian handicraft faced
stiff competition from British manufactured goods.
The British occupation slowly changed the professional
system ,ruining the overtaxed peasant, developing exchange and
monetary economy, reducing millions of craftsmen to poverty
through competition from modern industrial goods. The decline in
village industries and handicrafts displaced the village artisans and
compelled them to take refuge in agriculture. This increased the
pressure on land and resulted in its sub-division into smaller
holdings on a large-scale.
5) Rural Indebtedness :
Indebtedness of the rural peasant has been a serious
problem .With too much of belief in superstitions ,rituals and social
ceremonies an too much of an authority of the priest ,the poor
peasant always cut their coat beyond the cloth and have to resort to
borrowing .With the absence of the organised credit institutions,
they have often to borrow from the village money lender who
always welcome them to fall in to his trap. With high rates of
interest , the amount of loan keep on compounding and renders it
difficult for the borrower to repay it in full. At one or the other stage
,therefore, the money lender would annex part of the land holding
of the borrower leaving only a small holding for him .Since millions
living in the village fall into this trap ,small holdings also multiply by
millions and in a large number of cases peasants become landless.
168
6) Attachment Of Landed Property :
The social structure in the country is such that people remain
greatly attached to landed property and this results in the family
holding being divided over and over again. There has been rigidity
in the occupational structure. Sufficient or not ,a family will remain
attached even to a small piece of land rather than look out for an
alternative employment.
Ckeck your progress :
a. What are the causes for small size of land holding in India.
b. Write a brief note on size of land holding in India
c. What are the various Factors which determines Size of
Economic Holding ?
4.Write short note on :
A) Agricultural Holding
B) Operational Holding
C) Economic holding
9.8 AGRARIAN STRUCTURE
The significance of land reforms anywhere arises from the
defects in the prevalent agrarian structure .In the context of India ,it
will be proper to have a look at the agrarian structure that obtained
on the eve of the overall strategy of agrarian reconstruction and
growth.
Agrarian Structure on the Eve of Independence :
Various interests in land on the eve of independence fell
into four classes:
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- Cultivating Holders :
These may be classified into two categories, (a) owners,
(b) tenants. If the owner cultivates the land himself, there is no
other person holding an interest in his land above or below him and
between him and the state. As against this, tenant-holders do not
have any ownership rights on land. They may more appropriately
be described as occupancy tenants to distinguish them from the
tenants-at-will. They have no direct relation with the state, but
there is a chain of intermediaries.
- Intermediaries :
These are either non-cultivating owners of land or non-
cultivating occupancy tenants.
- Tenant-at-will :
He cultivates the land and bears its cost of cultivation. He may
or may not have any security of tenure. Invariably his interest is not
permanent and heritable.
- Agricultural Labourers :
These constitute the mass of unemployed landless population in
village; very few of them are at the bottom of the socio-economic
ladder of the rural community.
The agrarian structure in pre-Independence period was
woven around these varied interest. It presented decadent semi-
feudal order with wide inequalities and multifarious exploitation of
the mass of cultivators. There was a high degree of concentration
of land ownership at the top.
This type of agrarian structure, acts as a powerful 0bstacle to
economics development in four ways :
- The tenant has little incentive to increase his output since a
large share accrues to the landowner who incurs no cot.
- A very small margin is left with actual cultivator; and this may
be quite insufficient to provide for capital in vestment on the
land.
- Tenants secure no benefits of working with better equipment or
with better seeds. In short, under this type of agrarian structure
landlords and intermediaries grow rich and continue to flourish,
the state is revenue and the cultivator-tenants live a hand-to-
mouth existence.
- It is in this backdrop that we have to examine the major
objectives of land reforms policy in India, the progress achieved
structure. This type of analysis will help us make suggestions for
an improved land relations system in future
170
9.9 BROAD FEATURES OF THE EMERGING
AGRARIAN STRUCTURE
The emerging agrarian structure reveals the existence of three
distinct sectors of Indian agriculture, coexisting but also contending
with one another.
- The first sector is the developed sector of modern entrepreneur
farming by rich peasants.
- The second sector comprises the area under self-cultivation by
medium, small and marginal farmers.
- The third sector is composed of the vast area of land under
cultivation by share-croppers and various kinds of tenants and
sub-tenants having no proprietary rights in land, no security of
tenure, no share in the various aids, no security of tenure, no
share in the various aids and inputs distributed by the State or
institutional agencies.
It is this third sector which is the worst placed in the agrarian
economy and is still subject to various forms of semi-feudal
exploitation such as rack-renting, usury, economic bondage and
caste.
This makes it necessary for us to suggest as to what the
agrarian structure in future should be. Before we should know the
causes that have been responsible for the relatively poor
performance of land reforms in India.
Cause for poor performance :
- Lack of political will : Enactment of progressive measures of
land reforms and their efficient implementation call for hard
political decisions and an effective political support, direction
and control. considering the character of the political power
structure obtaining in the country it was only natural that the
required political will was not forthcoming the political bosses
and the powers that-be resorted to what can be called land
grabbing. The political will assured that land reforms failed.
- Absence of pressure from Below : The beneficiaries of land
reforms, particularly share-croppers and agricultural labourers,
are weighed down by crippling social and economic disabilities.
Except in a few scattered and localized pockets, practically all
over the country the poor peasants and agricultural workers are
passive, unorganized and inarticulate. In the circumstances, it is
171
small wonder the there has been no insistent pressure from
below, a prerequisite for the effective implementation of land
reform laws.
- Administrative Organisation-Inadequate : Policy Instrument
In all the States, the responsibility for the implementation of
measures of land freeform rests with the revenue
administration. The implementation of land reforms is only one
among its many function. Traditionally, high priority is given to
the maintenance of land reforms is only one among its many
function. Traditionally, high priority is given to the maintenance
of public order, collection of land revenue and other regulatory
functions. Land reforms do not, therefore, get the required
attention.
- Legal Hurdles : The land reform laws were defective in many
ways. Legislations relating to the land reform were so full of
loopholes that a commentator was led to say that an elephant
could easily walk through them. Some loopholes were
deliberately built in, while others were the result of poor drafting.
Practically, in every State protracted litigation has delayed and
often frustrated the implementation of land reform laws.
- Absence of Correct Updated Land Records : A programme
that aims at the redistribution of income and wealth in the rural
areas cannot succeed unless the beneficiaries can produce
evidence of their rights. The position regarding records of
tenancies, particularly in the matter of entries relating to the
rights of share-croppers, is not satisfactory anywhere in the
country, and no records exist in some areas. The main reasons
for this unsatisfactory state of affairs are the following.
In some areas, where cadastral surveys have been out-of-
date for a long time, resurveys have not taken place;
Some areas have never been cadastrally surveyed ;
In some cases no machinery of any kind has existed for
maintaining village records;
In some areas(such as the zamindari areas,) The machinery
which keeps records is private;
Even where records are kept by Government revenue
officials there is no uniform system;
Even official records may not be correct.
172
The errors would be of two kinds with reference to their
origin;(a) Bona fide errors arising out of law on the part of the
recorder; (b) Deliberate wrong recording from mala fide motives.
The problem is largely administrative.
- Some Weak Spots in the Programme : The programme of
land reforms has been viewed so fat in isolation form the
mainstream of economic development. The main ingredients
of the programme like the abolition of intermediary tenures,
tenancy reform and ceilings on agricultural holdings were
treated as disjointed programmes and sought to be
implemented as such .
The lack of financial support has been the weakness of land
reforms right from the beginning. No separate allocation of funds
was made in the Five-Years Plant for financing land reforms.
9.10 SUGGESTIONS FOR IMPROVEMENT
Review of Tenancy Legislation: The existing legislation was
enacted in background of the traditional agricultural technology.
With the new agricultural technology coming in, things have
changed radically. Owner cultivation of a minimum size of land has
become viable and it no longer needs legislative support. Moreover,
in some areas the ground-level picture has changed as small
farmers are facing difficulties in coping with the new expensive
agricultural technologies. Under the compelling to give their land to
a bigger farmer who has enough resources including tractors and
other implements of cultivate more land. This rich tenant in some
cases has used the protective, well-intentioned legislation to cheat
the poor owner.
No social purpose is served in giving the big tenant security
at the expense of the small landlord. There is, therefore, need to
liberalise tenancy laws.
Effective Implementation of Ceiling legislation : Firm measure
are required against fictitious and benami transfers deliberately
effected by big landowners to circumvent ceiling laws. The State
Government should hold a proper enquiry into such transfers. If on
enquiry it is found that the transfers wee made to evade the
provisions of ceiling laws, the land so transferred should be vested
in the State after the imposition of a suitable penalty on the
transferor.
173
Ceiling may be relaxed in case of uncultivated waste land
where large and long gestating investment may be needed,
provided it can be ensured that the land will be used for agricultural
purposes and that it will not be used as a tax shelter.
Surplus Land and Its Distribution : The surplus land should be
allotted to the beneficiaries on the specific condition that they would
not be permitted to sell or mortgage these lands to private
individuals. If at any time a beneficiary wants to leave the
profession of cultivation the land held by him would revert to the
State
Simplifying Legal Procedures and Administrative Machinery :
The establishment of special courts to dispose of cases in villages
of their origin or in the close- by township would expedite work as
they would be in the know of relationship and happenings in the
field and thereby serve the ends of justice better.
Land reform cannot be properly enforced without popular co-
operation and support at all levels. Popular co-operation and
support at all levels. Popular supervisory committees should,
therefore, be constituted at all levels, consisting of peoples
representatives, including the beneficiaries, officials and experts to
exercise vigilance on implementation. These committees should be
vested with certain statutory powers like the inspection of records
and sites, collection of evidence, etc., weight age.
Generation of Awareness among Potential Beneficiaries : The
requires the support of educational campaigns and political
mobilization on the principles of land reform, Further, the existing
socio-economic order in which the power base lies with the rural
rich should be radically reconstructed to form a new order in which
the power balance will favour the rural poor. There are three
developments in recent times that may have favourable impact on
this type of change:
- Emergence of biological, technology in agriculture which has
made the small-peasant agriculture potentially viable;
- Political dependence of the power elite of all types of
ideological and political persuasions on peasant support; and
- Emergence outside the agricultural system of State-sponsored
institutional framework of State-sponsored institutional
framework of scientific research, technological innovation and
174
diffusion, water control, input and credit supply and price
support for agricultural development.
9.11 AGRARIAN RELATIONS
The British rule had brought about far-reaching changes in
Indias land system primarily with a view to safeguarding the
governments command over land revenue. In the process, private
property in land had come to be formally recognized by law.
Ownership of land, at the time of independence, was highly
unequal; while the vast majority of cultivators were peasant
proprietors engaged in personal cultivation of their land, a large
proportion of cultivable land was in the hands of relatively large
landowners- including especially the zamindars of UP, Bihar, and
Bengal who held vast estates which were cultivated either with the
held of tenants or wage labourers. This agrarian structure has long
been recognized to be both iniquitous and inimical to progress.
Some limited efforts at land reform even during the British period
(especially tenancy reform ) were made.
A section of the Congress party advocate the necessity for
radical land reform to ensure land to the tillers and there was
indeed a spurt of land reform legislation in the wake of
independence. These reform had three main components: (1)
abolition of the zamindari estates; (2) tenancy reform; (3) imposition
of ceilings on land ownership.
Zamindari abolition and tenancy reform were expected to
correct the gross inequalities in land ownership, and
simultaneously- by giving the actual cultivators ownership or at
least more favourable and secure long-term rights in land cultivated
by them create conditions for in creasing land productivity. The
intention behind land ceiling was primarily to take over land from
those who had more than a specified size and distribute the surplus
among those who did not have any land, or had very little, thereby
achieving a more egalitarian land distribution.
Zamindari abolition was perhaps the most successful: it led
to the braking up of large feudal estates and conferring ownership
rights on the cultivators. Tenancy reform did not make much
headway expect in a few states like Kerala and West Bengal. It is
well known that the ceiling legislations did not yield much surplus
175
land for redistribution to the landless or to those with holdings of a
non-viable size.
Data from the National Sample Survey(NSS) do not show
any significant change in either the degree of landlessness or the
extent of inequality in land ownership anywhere since 1960 What it
suggests is a progressive decline in the average size of holding
and near stable distribution around the mean. This suggests that
increase in demographic pressure has been the dominant
influence. While there is no marked change in the degree of
inequality in land ownership, there is ample evidence of significant
shifts in the distribution of land between castes, at least in some
regions. In Tamil Nadu, for instance, the locus of land control has
shifted dramatically from upper castes, to lower castes, including
Harijans, partly due to tenancy laws and partly because the upper
castes have tended to more out of such areas into urban
occupations
The NSS also shows a more or less universal trend for the
reported area under tenancy to decline. How far this reflects a
genuine reduction and how far it is due to increasing concealment
id difficult to establish. There is no doubt that the decline in some
regions is real . In Punjab- Haryana, the advent of the HYV-private
tube wells combination has made personal cultivation so much
more profitable that those who had leased-out land have resumed
self-cultivation; and increasingly those with small bits of land are
seen to be leasing it out to larger farmers to take advantage of the
benefits of new technology. In Kerala and West Bengal, tenancy
reform is known to have been quite effective but is should not be
assumed that the resulting redistribution of owenership rights
necessarily benefited the small tenants. In Kerala, the bulk of
tenancy was with farmers with medium size holdings
The disadvantage of small and marginal farmers in terms of
access to technology and resources needed to exploit the potential
for raising yields as well as the implication for the distribution of
gains from technological improvement (especially of high yield
varieties) has been the subject of much debate.
Large farmers may have an initial advantage, the use of
HYVs and fertilizers has, over a period of time, spread to all classes
of farmers; and that where HYVs have produced rapid growth,
employment and rural wage rates have risen. However, large and
medium farms are better placed to exploit groundwater; HYV
176
technology is available for only a few crops and that too under
irrigated conditions and in the high growth tracts of north-west
India, there has been a significant displacement of a bearing on the
tenants and a corresponding increase of wage labour.
9.12 MARKET INTERLOKING AND INTERLINKAGES
The literature on agrarian contracts in less developed
countries(LDCs) highlights the presence of Interlinked Markets.
Transaction in any one market are invariably linked with the nature
of transactions in the other markets. While theoretically
,interlinkages may be of various kinds , the most commonly
observed one sare those involving the informal (agrarian) credit
market , the labour market and the market for gain.
What makes the problem of interlinkage interesting is the
diversity of relations among the various markets in LDC agriculture
. Agrarian contracts have been variously interpreted by political
economists as examples of exploitation and power or , alternatively
as necessary internalization for efficiency of external market forces.
To be able to resolve the debate, it is essential to know the major
empirical facts in agrarian economies.
FIRST ,how do we identify interlinkages ? Consider two
markets dealing in two commodities A and B .There are agents
operating on both sides (i.e. as buyers and sellers) of the two
markets. Suppose there are some agents who are common to both
the markets. If it is observed that some common agents transact at
prices different from those operating in one of the market only ,we
will say that there is interlinking of markets by the common
agent(s).
The SECOND observation deals with the credit market per
se Agrarian credit markets in India are characterized by (i) the high
variability of interest rates and (ii) the existence of very low interest
rates. For an understanding of (ii)b we will have to explain what is
meant by low interest rates. Suppose the opportunity cost of the
borrower for loans is r if a particular lender is willing to offer this
borrower a loan at interest rates less than r ,we will say that a low
interest has been charged .This is clearly a significant and the
difficulty of small farmers and landless labourers i.e those without
much collateral , to obtain loans even from nationalized banks.
177
While (i) has been partially explained by the term structure of
different loans ,the difference in interest rates for loans of similar
duration still have to be explained .High interest rates have been
interpreted by many authors to reflect the imperfection of credit
markets either through the monopoly of the lenders. This has led to
an intense debate between those writing about the power structure
in agriculture lending to exploitation through usurious interest
rates , and the others highlighting the importance of government
policies to correct market imperfections.
THIRD We come to the related issue of collateral and what
has been termed , In particular instances ,as bonded labour. The
borrower has often been found to transfer asset to the lender as
part ,or full ,repayment for a contracted loan. This ,in itself ,is not
surprising ; however, it has been noted that these collaterals are
undervalued during the transfer .When future labour had been
contracted as the collateral and underpriced ,this has obviously led
to politically sensitive issue .
9.13 SUMMARY
1) Research indicates that land rental markets have two opposing
effects on agricultural efficiency
a)Positive land reallocation effect. b)Negative incentive effect.
2) The term Agricultural Holding implies the total area of land
which is held for cultivation as a single unit by an individual , joint
family or more than one farmer on a joint basis.
3) An Operational Holding is one which includes all lands used
wholly or partially for agricultural production operated as a single
technical unit by a single household or a number of households
operating jointly.
4) Ownership Holding includes all the area owned by a cultivator
or a number of cultivators jointly whether under own cultivation or
subject to others.
5) A holding which allows a man a chance of producing sufficient
to support himself and his family in reasonable comfort after paying
his necessary expenses may be termed an economic holding.
6) Economic holding means one which will provide for an average
family at the minimum standard of life considered satisfactory.
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7) Broadly following factors may be said to determine the size of
an economic holding :
(vi) The quality of land ,degree of fertility, etc.;
(vii) Availability of adequate and steady supply of water.
(viii) Method of cultivation.
(ix) Nature of crops grown on land.
(x) Organisational capability of a farmer.
8) The emerging agrarian structure reveals the existence of three
distinct sectors of Indian agriculture
- The first sector is the developed sector of modern entrepreneur
farming by rich peasants.
- The second sector comprises the area under self-cultivation by
medium, small and marginal farmers.
- The third sector is composed of the vast area of land under
cultivation by share-croppers.
9.12 QUESTIONS
1. Explain the Factors Which Determining Size of Economic
Hoding
2. Explain the Size Of Holdings In India
3. Explain The Causes For Small Size Of Land Holdings
4. Explain The Features of the Emerging Agrarian Structure
5. Write short note
A) Agricultural Holding
B) Operational Holding
C) Economic holding
D) Basic holding
E) Optimum holding
6. Define the term : Market Interlocking And Interlink ages
7. Explain the Broad Features of the Emerging Agrarian Structure
8. Write short note on Agrarian Relations in India.