Institutional inefficiency: small farms starve India’s economy

Publication Date21 August 2017
DOIhttps://doi.org/10.1108/JEPP-05-2016-0021
Pages206-223
AuthorTyler Watts,Molly Woodruff
SubjectStrategy,Entrepreneurship,Business climate/policy
Institutional inefficiency: small
farms starve Indias economy
Tyler Watts
Department of Business, East Texas Baptist University,
Marshall, Texas, USA, and
Molly Woodruff
Compassion International, Colorado Springs, Colorado, USA
Abstract
Purpose The purpose of this paper is to examine differences in property institutions in the USA and India
and their effects on agricultural productivity.
Design/methodology/approach This paper undertakes a case study of industrial organization of
agriculture, comparing agricultural development in the USA and India, with a focus on changes in farm size
over time.
Findings In the USA, unlimited individual land ownership has enabled the gradual,long-term development
of scale economies in agriculture through the application of capital and technology. In contrast, land reforms
in India, especially land ceilings that limit farm size, have stunted productivity growth in agriculture by
limiting achievement of scale economies and capital formation.
Practical implications The finding that Indias consistently meager agricultural productivity stems
largely from legal limitations on land ownership indicates that reforms that create a US-style open-ended land
ownership structure would greatly increase farm productivity and total crop output in India.
Originality/value This paper presents a side-by-side analysis of the USA and India and their radically
different paths of agricultural development over time, and connects these divergent outcomes directly to the
underlying institutional framework of property rights. Moreover, the paper analyzes the prospects for
pro-market reform in light of public choice political economy, specifically applying Tullocks insights
regarding the transitional gains trap.
Keywords Institutions, Development, Agriculture, Property rights, Land ownership
Paper type Case study
1. Introduction
India and the USA are the second and third most populous countries in the world, with
populations of 1.2 billion and 320 million. Each country thus has both large food
requirements, but also a large labor force and ample natural resources with which to feed its
people. However, a quick look at agricultural productivity data reveals radically different
situations in each nations agricultural economy. In 2012, 2.1 million farms in the USA each
produced $87,195 worth of output on average, while in 2010, Indias 137.8 million farms
averaged just $6,303 worth of crops. Yet despite the significantly larger per-farm output,
agriculture in the USA accounts for only 1.1 percent of GDP, compared to 17.4 percent in
India. In addition, the average farm size in the USA was 434 acres in 2012, while the average
in India was just 2.87 acres. These data are summarized in Table I.
Though a BRIC,[1] India remains very poor compared to the developed world, and thus
a pressing need for improvements in Indias agricultural productivity is widely recognized.
Observers have identified several factors underlying Indias meager per-farm output,
ranging from poor infrastructure, transportation, and storage facilities, to limited capital
and energy resources, to unsustainable farming practices (Westhead, 2011; Swain, 2014;
Malone, 2009). Many policies have been proposed with an aim of improving farm
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 2, 2017
pp. 206-223
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-05-2016-0021
Received 25 May 2016
Revised 10 February 2017
11 February 2017
Accepted 11 February 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The authors thank Levi Russell and two anonymous referees for helpful comments on earlier drafts of
this essay. Any errors or omissions remain entirely the responsibility of the authors.
206
JEPP
6,2
productivity in India. For example, in a (World Bank, 2012) report titled India: Issues and
Priorities for Agriculture,the World Bank lists as priorities for reform:
promoting new technologies and reforming agricultural research and extension;
improving water resources and irrigation/drainage management;
facilitating agricultural diversification to higher-value commodities;
promoting high growth commodities; and
developing markets, agricultural credit, and public expenditures.
All of these areas may well be ripe for improvement, but these policy prescriptions tend to
focus on superficial problems. While India lacks good infrastructure and capital especially
in comparison to the USA and Indian farming practices could potentially be improved,
these are symptoms of an underlying problem. After all, the USA itself was once poor,
lacking both capital, and infrastructure. The deeper question is thus why has India not been
able to develop infrastructure, accumulate capital, and improve farming practices, as the
USA has, such that would lead to the scale economies and large increases in overall
agricultural productivity that the USA has enjoyed. As journalist David Malone (2009)
points out, India is not short of agricultural land [] It is not short of water [] India
abounds in admirable human capital.In other words, India, like the USA, has the potential
for its basic human and natural resources to grow into a healthy, highly productive farm
economy. Unlike the USA, however, India lacks a framework of economic institutions that
allows market processes to make the most of these latent resources.
This paper aims to establish that the core problem in Indian agricultural productivity is
institutional in nature; outline what an alternate development path would look like by
comparing historical trends in industrial organization, capital, and technology use in
agriculture between India and the USA[2]; and discuss the prospects or lack thereof for
institutional reform in India that would enable the development of American-style farming
methods and therefore much higher overall farm output and per-farm productivity.
Existing literature has established the productivity-crippling nature of small farm size
with attendant undercapitalization (Niroula and Thapa, 2005; Foster and Rosenzweig, 2011;
Manjunatha et al., 2013), and linked undersized farms in developing countries to
post-colonial land reforms aimed at distributing large estates among rural peasants
(Adamopoulos and Restuccia, 2014). This paper builds on this research and extends it by
applying it to a case study of India and the USA. Furthermore, this paper contributes to the
literature on institutions and development by examining both the rationale for Indias land
reforms and the current prospects for growth-enhancing policy changes, in the political
economy context of the transitional gains trap(Tullock, 1975). Gordon Tullock argues that
changing government policy, even when doing so brings obvious efficiency gains, is very
difficult due to the resistance of parties who stand to lose the up-front benefits the original
policy regime bestowed on them. In the case of India in particular, a transition away from
legislatively-imposed undersized farms is bound to generate significant economic upheaval.
In an economy where agriculture still dominates as the largest industry and employer[3],
India USA
Output per farm $6,303 $87,195
Value added, agriculture (% of GDP) 17.4 1.1
Average farm size 2.87 acres 434 acres
Sources: CIA Factbook, US Census, India Census
Table I.
Selected data
for India, US
agriculture sectors
207
Institutional
inefficiency

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