Economic Liberalization and Agricultural Deceleration (1991-2004)

India opened up its economy in 1991 with sweeping reforms in trade, industry, and finance. Yet agriculture, the sector employing the largest share of the workforce, was barely touched directly by the new policy framework. What followed over the next decade was puzzling: instead of accelerating, farm output growth slowed down sharply. Understanding why liberalization coincided with agricultural deceleration tells you a lot about how interconnected India’s economy really is.

Agriculture was reformed by neglect, not by design 🔗

The 1991 reforms centered on industrial delicensing, trade liberalization, and a more open exchange rate regime. Agriculture was not the primary target of these changes. Since the sector provides the livelihood for a majority of India’s rural population, one common criticism of the reform era is that it stayed excessively focused on industrial and trade policy while neglecting agriculture, leaving the sector to absorb changes it had little say in shaping.

This indirect exposure mattered. Farmers who had operated in a protected, subsidy-heavy environment suddenly faced a market shaped by falling industrial protection, a more competitive rupee, and eventually, commitments under the World Trade Organization from 1995 onward. Some of these changes helped agricultural exports. But the sector as a whole did not get the same institutional attention that industry received during the reform push.

How much did growth actually slow down? 🔗

The slowdown is visible across almost every dataset that tracks the period. Agricultural growth touched a peak around 1996-97, and the deceleration that followed lasted well into the mid-2000s. Government data confirms that the deceleration of growth started from 1997-98 onwards, and a clear sign of the sector slumping was visible right up to 2005-06.

Some estimates put annual output growth during parts of this stretch as low as 1.18 percent, a stark drop from the growth rates farmers and planners had grown used to during the peak years of the green revolution. Other academic estimates back this up. One study found that growth in the first half of the 1990s was actually decent, but after the WTO agreement came into force, growth had come down to less than 2 percent, a sharp contrast to the 3.62 percent recorded between 1990-91 and 1996-97.

Why did the slowdown happen? 🔗

No single factor explains the deceleration. It was the combined effect of fiscal choices, weakening institutional support, and policy spillovers from the broader reform agenda. Land and water constraints made things worse. Net sown area, the total land actually cultivated, had little room to expand, and gross cropped area even declined in parts of this period as farmers found it harder to squeeze a second or third crop out of the same plot. With the physical base for growth already tight, the sector needed stronger investment and institutional support to keep output rising. Instead, it got less of both.

Falling public investment in agriculture 🔗

One of the clearest culprits was the government’s own spending pattern. As fiscal deficit reduction became a policy priority through the 1990s, capital spending on agriculture was among the first casualties. Plan outlay for agriculture as a share of total outlay fell from 20.4 percent in 1991-92 to just 9.9 percent by 1997-98, a decline that directly hit capital formation in the sector.

This was not a one-off dip. Public investment in agriculture as a percentage of GDP had already been declining before the reforms, and the trend continued: investment stood at 1.92 percent of GDP in 1990-91 but had fallen to 1.37 percent by 1999. Irrigation, rural infrastructure, and land development, all of which depend heavily on public spending, slowed down as a result.

Weak research and extension services 🔗

The green revolution of the 1960s and 70s had been powered by strong public investment in agricultural research, high-yield seed varieties, and extension networks that carried new techniques to farmers. During the 1990s, this system was starved of resources even as the challenges facing agriculture, from soil degradation to water stress, became more complex. Reduced funding for research meant that productivity gains from new technology slowed at precisely the moment when farmers needed better tools to compete in a more open economy.

Extension services, the network of agricultural officers and demonstration programs that translate research into field-level practice, suffered a similar fate. Many state agriculture departments ran extension programs on shoestring budgets, so information about better seed varieties, pest management, or soil health reached farmers slowly, if at all. Small and marginal farmers, who make up the majority of India’s cultivators, were the worst affected, since they rely most heavily on public extension rather than private agri-input dealers for advice.

The rural credit squeeze 🔗

Financial sector reforms following the Narasimham Committee recommendations reshaped how banks operated, pushing them toward profitability and prudential norms. This was good for bank balance sheets but not necessarily for small farmers. Financial liberalization after 1991 damaged the formal system of institutional credit in rural India severely, reversing decades of social and development banking that had followed bank nationalisation.

Commercial banks found small agricultural loans less profitable and harder to recover, so formal credit flow to farmers, especially small and marginal ones, weakened through much of the decade. Agricultural credit as a share of GDP had risen through the 1980s but declined during the 1990s before recovering later. Researchers studying the history of rural banking note that the decline in agricultural credit was sharpest in the 1990s, and link it directly to the precipitous fall in public investment in agriculture during the same period. Into this gap stepped moneylenders, and with them, higher interest rates and less flexible repayment terms.

Trade and industrial policy spillovers 🔗

Even though agricultural policy was not directly overhauled, changes in trade and industrial policy reached farmers indirectly. The reduction in industrial protection changed relative prices across the economy, and India’s WTO commitments from 1995 gradually exposed domestic crops to global price swings. For cash crops like cotton, this meant new opportunities but also new risks, since global commodity prices are far more volatile than the administered prices farmers had grown used to. Terms of trade for agriculture, a measure of how farm prices moved relative to non-farm prices, also worked against the sector through much of this period, with some estimates showing an annual decline of over 1.5 percent after the mid-1990s.

Deregulation also touched the input side of farming. Fertiliser subsidies came under fiscal pressure, and price controls on several inputs were gradually eased. For farmers already dealing with weaker credit access and thinner extension support, rising or unpredictable input costs added one more layer of risk to a business that was already at the mercy of the monsoon.

The human cost: rural distress and farmer suicides 🔗

The statistics on growth rates only tell part of the story. Behind the deceleration was a real and painful rise in rural distress, most visibly captured in the tragic rise of farmer suicides through the late 1990s and 2000s.

National Crime Records Bureau data shows the scale of the crisis. A 28-year analysis of NCRB records found that more than 3.9 lakh farmers and agricultural labourers died by suicide between 1995 and 2023, with the crisis peaking in the early 2000s, precisely the years when agricultural growth had slowed to a crawl.

The reasons behind this crisis were layered. Falling institutional credit pushed many farmers toward informal moneylenders and high-interest debt. Volatile output prices, driven partly by trade exposure, made farm incomes unpredictable. The spread of commercial, capital-intensive crops like Bt cotton in rain-fed regions raised input costs sharply, while yields remained hostage to the monsoon. When crops failed, farmers already carrying debt had few cushions left. Maharashtra and Karnataka, both major cotton and commercial crop growing states, have recorded suicide rates roughly 2.5 times the national average since the mid-1990s, a pattern researchers link to this combination of rain-fed farming, market-linked crops, and thin credit access.

It would be inaccurate to say liberalization alone caused this crisis. Weather, cropping patterns, state-level policy choices, and pre-existing rural inequalities all played a role. But the timing is hard to ignore. The years of sharpest agricultural deceleration overlap closely with the years of highest farmer distress, suggesting that the retreat of public investment, credit, and extension support left many farming households without a safety net exactly when market risks were rising.

What changed after 2004-05 🔗

Policymakers eventually took note. The mid-term appraisal of the plan period that followed this phase of deceleration led to a renewed push on agricultural research, extension reform, and horticulture, alongside a sharp increase in procurement prices from 2005-06 onward. This shift, which improved the terms of trade for agriculture, helped growth recover in the years after 2004-05, though the scars of the earlier slowdown, particularly rural indebtedness, took much longer to heal.

What do you think? If agriculture is largely left out of major economic reforms, does that protect the sector or leave it exposed to changes happening everywhere else in the economy? And what would it take today to make sure public investment and rural credit keep pace with a more open, market-linked farm economy?

References

1. https://www.researchgate.net/publication/343306960_Indian_Agriculture_Before_and_After_Economic_Reforms
2. https://www.mospi.gov.in/sites/default/files/Statistical_year_book_india_chapters/ch8.pdf
3. https://www.researchgate.net/publication/332978487_Agricultural_Growth_Deceleration_in_India_A_Review_of_Explanations
4. https://www.ijcrt.org/papers/IJCRT1134498.pdf
5. https://fas.org.in/publications/agrarian-studies-series/financial-liberalisation-and-rural-credit-in-india/
6. https://www.researchgate.net/publication/227365313_Institutional_Credit_to_Agriculture_Sector_in_India_Status_Performance_and_Determinants
7. http://sibresearch.org/uploads/2/7/9/9/2799227/rural_credit_-_devaraja.pdf
8. https://www.downtoearth.org.in/agriculture/farmer-suicides-in-india-what-28-years-of-data-shows