Chapter 1 The Story Of Village Palampur

This chapter introduces basic economic concepts related to production through the narrative of an imaginary village named **Palampur**. While farming is the principal economic activity, Palampur also features other activities carried out on a limited scale, such as small-scale manufacturing, dairy farming, and transport.

These diverse production activities rely on various types of resources, including natural resources like land and water, man-made items like tools and machinery, human effort (labour), and money (capital). By exploring the story of Palampur, we learn how different resources are combined to produce the goods and services required within the village. The village is depicted as having a relatively well-developed infrastructure, including roads, transport, electricity, irrigation, schools, and a health centre, which supports these activities.

Organisation Of Production

The fundamental goal of production is to create the goods and services that people need or want. To achieve this, production activities require four essential components, often referred to as the **factors of production**.

These four requirements are:

1. **Land:** This includes the physical space for production and other natural resources such as water, forests, and minerals.

2. **Labour:** This refers to the human effort involved, i.e., the people who do the work. Depending on the activity, this can range from highly educated workers needed for complex tasks to those performing manual labour. Each worker contributes the necessary labour for production.

3. **Physical Capital:** This encompasses the variety of inputs required at every stage of production. Physical capital is further divided into two categories:

• **Fixed Capital:** Tools, machines, and buildings that can be used in production over many years. Examples range from simple tools like a farmer's plough to sophisticated machinery like generators, turbines, and computers.
• **Working Capital:** Raw materials and money readily available for immediate use during production. Raw materials like yarn for a weaver or clay for a potter are used up in the process. Money is also needed for payments and necessary purchases. Unlike fixed capital, working capital is consumed during production.

4. **Human Capital:** This is the fourth requirement, which involves the **knowledge and enterprise** needed to effectively combine land, labour, and physical capital to produce an output. This output can be for personal consumption or for sale in the market. Human capital is the ability to bring together the other factors of production and make them work.

Every production activity is organised by combining these four factors: land, labour, physical capital, and human capital. In this chapter, for simplicity, physical capital will often be referred to simply as capital.

Picture 1.2 depicts a factory setting, where the various factors of production are evident. The building and machinery represent **fixed physical capital**. The raw materials being processed would be **working capital**. The people working are **labour**. The land the factory is built on and any natural resources used are **land**. The knowledge and management coordinating these are **human capital**.

Land Is Fixed

In Palampur, **farming** is the principal production activity, providing a livelihood for 75% of the working population, who are either farmers or farm labourers. Their well-being is directly linked to agricultural output.

However, a fundamental constraint in increasing farm production is that the **land area available for cultivation is practically fixed**. Since 1960 in Palampur, there has been no expansion in the total cultivated area. Any previously unused 'wastelands' in the village had already been converted to cultivable land by then. This means there is no further scope to increase agricultural output by simply bringing new land under cultivation.

The standard unit for measuring land is the **hectare**. In rural areas, local units like bigha or guintha are also used. A hectare is equivalent to the area of a square with sides measuring 100 metres ($100m \times 100m$).

Is There A Way One Can Grow More From The Same Land?

Given that the land area for cultivation is fixed, increasing production requires growing more crops from the same piece of land. There are two main ways to achieve this:

1. **Multiple Cropping:** This is the most common method of increasing production on a given piece of land. It involves growing **more than one crop on the same plot of land during a single year**. In Palampur, where all land is cultivated and none is left idle, farmers grow at least two main crops annually. Many have also started growing a third crop, like potato, in recent decades.

2. **Using Modern Farming Methods:** This approach focuses on increasing the **yield** (crop produced per unit area during a season) from the land. Until the mid-1960s, traditional seeds with lower yields were used, relying on natural manure and less irrigation. The advent of the **Green Revolution** in the late 1960s transformed agriculture, particularly for wheat and rice, by introducing **High Yielding Varieties (HYVs) of seeds**.

HYV seeds promise significantly higher grain production from a single plant compared to traditional seeds. This enables the same land area to produce much larger quantities of foodgrains. However, modern farming methods using HYV seeds require specific inputs:

• Plenty of **water** (requiring well-developed irrigation).
• **Chemical fertilisers** for nutrients.
• **Pesticides** to protect crops from pests.

Farmers in Punjab, Haryana, and Western Uttar Pradesh were early adopters of modern farming methods in India, setting up tubewells and using HYV seeds and chemicals, which led to high yields of wheat and increased marketable surplus.

In Palampur, the availability of a well-developed **irrigation system** is crucial for multiple cropping and using HYVs. Electricity came to Palampur early and significantly improved irrigation. Traditional Persian wheels used for drawing water from wells were replaced by electric-run **tubewells**, which could irrigate much larger land areas more effectively. By the mid-1970s, the entire cultivated area of 200 hectares in Palampur was irrigated.

However, high levels of irrigation like in Palampur are not universal across India. Riverine plains and coastal regions are generally well-irrigated, but plateau regions like the Deccan plateau have lower irrigation coverage. Even today, less than 40% of the total cultivated area in India is irrigated, with farming in the remaining areas still dependent on rainfall.

Picture 1.3 shows illustrations of different crops, representing the variety of agricultural produce from cultivated land.

Picture 1.4 illustrates modern farming methods by showing elements like HYV seeds, bags of chemical fertiliser, and pesticide sprays, highlighting the key inputs required for achieving higher yields compared to traditional methods.

Using modern farming methods requires significant upfront capital investment compared to traditional methods, as farmers need to purchase inputs like HYV seeds, chemical fertilisers, pesticides, and often invest in machinery and irrigation facilities.

Table 1.1 shows the cultivated area in India over the years:

Format 1 (Vertical)

(P) - Provisional Data. Source: Pocket Book of Agriculture Statistics 2020.

Table 1.2 shows the production of pulses and wheat in India (in Million Tonnes) after the Green Revolution:

Format 1 (Vertical)

Source: Pocket book of agricultural Statistics 2022.

Based on Table 1.2, the Green Revolution was much more successful in increasing **wheat production** compared to pulses. Wheat production saw a dramatic increase from 10 million tonnes in 1965-66 to 110 million tonnes in 2020-21. Pulses production also increased, but at a much slower pace, with fluctuations, going from 10 million tonnes to 28 million tonnes in the same period. The major gains of the Green Revolution were concentrated in select crops like wheat and rice, not universally across all crops.

The working capital required by a farmer using modern farming methods is significantly higher than in traditional farming. It includes the cost of purchasing HYV seeds, chemical fertilisers, pesticides, fuel for machinery or irrigation pumps, and money for hiring additional labour if needed.

Will The Land Sustain?

Land is a natural resource, and its sustainable use is crucial. Scientific evidence suggests that **modern farming methods** have, in many areas, **overused the natural resource base**.

The Green Revolution, while increasing food production, has been associated with negative environmental consequences:

• Increased use of **chemical fertilisers** has led to the **loss of soil fertility** in many areas. Chemical fertilisers provide immediate nutrients but may not be retained in the soil long-term and can pollute groundwater, rivers, and lakes. They can also harm beneficial bacteria and micro-organisms in the soil, reducing its natural fertility over time.
• Continuous use of **groundwater** for irrigation, particularly through tubewells, has resulted in the **depletion of the water table** in many regions.

Environmental resources like soil fertility and groundwater are built up over many years. Once degraded or destroyed, they are very difficult to restore. Therefore, careful management of the environment is essential to ensure the future sustainability of agriculture.

How Is Land Distributed Between The Farmers Of Palampur?

Despite the critical importance of land for farming, not everyone engaged in agriculture in Palampur has sufficient land. The distribution of cultivated land in the village is highly **unequal**.

Out of the 450 families in Palampur:

• About one-third are **landless** (150 families). Most of these families are Dalits and have no land to cultivate.
• Among the remaining families who own land, 240 families cultivate **small plots of land, less than 2 hectares** in size. Cultivating such small plots typically does not generate enough income to support the farmer's family adequately.

The story of Gobind illustrates this: He farmed 2.25 hectares with his three sons. After his death, the land was divided, leaving each son with only 0.75 hectares. Even with improved irrigation and modern methods, this small plot is insufficient for their livelihood, forcing them to seek additional work.

Picture 1.5 provides a visual representation of land distribution, showing a large number of small plots scattered around the village, contrasting with larger plots covering more than half the village area. These small plots are cultivated by small farmers.

Picture 1.5 is a map showing the distribution of cultivated land in Palampur. It visually depicts the unequal distribution, with numerous small plots cultivated by small farmers contrasted with larger areas owned by medium and large farmers.

In Palampur, there are 60 families of **medium and large farmers** who cultivate **more than 2 hectares** of land. A few of the largest farmers own plots exceeding 10 hectares. This confirms the unequal distribution of cultivated land, with a majority of families owning small plots and a minority owning large areas.

Graph 1.1, showing land distribution in India, reflects a similar national pattern: a large number of farmers cultivate only a small proportion of the total cultivated area, while a smaller number of medium and large farmers cultivate a large share of the land. This indicates that the unequal distribution of land observed in Palampur is representative of the situation across India.

Who Will Provide The Labour?

After land, **labour** is the second crucial factor for production in farming, which is a labour-intensive activity. Small farmers typically provide the necessary labour themselves, cultivating their own fields with the help of their families.

**Medium and large farmers**, however, **hire farm labourers** to work on their fields. These labourers come from either landless families or families who own and cultivate only small plots of land insufficient for their livelihood.

Unlike farmers, farm labourers do **not have rights over the crops** grown on the land. They receive **wages** from the farmer employing them, which can be paid in cash or in kind (e.g., a portion of the crop). Sometimes, they also receive meals. The wages for farm labourers vary widely depending on the region, the specific crop, and the type of farm activity (like sowing or harvesting). The duration of employment also varies; a labourer might be hired daily, for a specific task, or for the entire year.

The conversation between Dala and Ramkali illustrates the difficult situation of many farm labourers in Palampur. Dala is a landless labourer working on daily wages. The government-set minimum wage for farm labour was $\textsf{₹}$300 per day (in March 2019), but Dala only receives $\textsf{₹}$160. This is significantly lower than the minimum wage because there is **heavy competition for work** among labourers in Palampur. This compels people to accept lower wages out of necessity. Both Dala and Ramkali are among the poorest residents of the village.

Picture 1.7 shows an illustration of Dala and Ramkali talking, representing the situation of poor farm labourers in Palampur who face low wages due to high competition for work.

Picture 1.6 shows various activities on wheat fields. These activities represent the different types of labour involved in farming: ploughing (by bullocks), sowing, spraying insecticides, traditional cultivation methods, modern cultivation methods, and cutting crops (harvesting). Arranged in sequence, these illustrate the steps from preparing the land to harvesting the yield.

Picture 1.6 depicts different stages of wheat cultivation, showcasing the manual and animal labour involved in activities like ploughing, sowing, spraying, and harvesting, which are performed by farmers and hired farm labourers.

Farm labourers like Dala and Ramkali are poor primarily due to the combination of **lack of land ownership** (meaning no share in the produce) and **low wages** resulting from intense competition for limited work opportunities. This forces them into a cycle of poverty.

Migration from villages like Gosaipur and Majauli in North Bihar to urban areas or agricultural hubs in Punjab and Haryana is common across India. People migrate because of the **limited employment opportunities and low wages** available in their native villages, seeking better work and income prospects elsewhere.

In summary, among the factors of production in Palampur, **labour** is the most abundant. Many people are willing to work as farm labourers, but work opportunities are limited. These labourers come from landless families or families with very small landholdings. They are paid low wages and lead difficult lives.

The Capital Needed In Farming

Modern farming methods, with their reliance on HYV seeds, chemical inputs, and machinery, require significantly **more capital** than traditional farming. Farmers need more money to purchase these inputs.

The need for capital varies depending on the size of the farm:

1. **Small Farmers:** Most small farmers in Palampur have to **borrow money** to arrange for the necessary capital. They typically borrow from large farmers in the village, village moneylenders, or traders who supply agricultural inputs. The interest rates on these loans are usually **very high**, putting small farmers under great distress to repay the debt.

Savita's story illustrates this: A small farmer with 1 hectare, she needs $\textsf{₹}$3,000 for working capital (seeds, fertilisers, pesticides, water, repairs). Unable to afford this, she borrows from Tejpal Singh, a large farmer. Tejpal charges a very high interest rate of 24% for four months. Additionally, Savita must agree to work on Tejpal's field during the busy harvest season for a low wage of $\textsf{₹}$100 per day (lower than the government minimum wage). Savita accepts these harsh terms because obtaining a loan is difficult for small farmers.

2. **Medium and Large Farmers:** In contrast, medium and large farmers have **their own savings from farming activities**. These savings enable them to arrange for the capital needed for the next season. They do not typically need to borrow from external sources for routine farming expenses.

The ability of medium and large farmers to finance their farming from their own savings highlights a difference in their economic situation compared to small farmers. Their larger production allows for a surplus that can be saved and reinvested, contributing to their capital accumulation.

Reflecting on the factors of production, **labour** is the most abundant factor in Palampur. In contrast, **land** is a scarce factor; cultivated land area is fixed. Furthermore, the existing land is distributed **unequally** among the farming population. **Capital** is also a scarce factor, especially for small farmers who must borrow at high interest rates.

Though both land and capital are scarce, they differ in a basic way: **Land** is a natural resource, while **Capital** is man-made. Capital can potentially be increased (e.g., buying more machinery), but the total land area is fixed. This underscores the importance of conserving land and other natural resources used in farming.

Sale Of Surplus Farm Products

After cultivating and harvesting crops, farmers decide what to do with their produce. They keep a portion for their family's consumption and sell the remaining **surplus**. The amount of surplus varies greatly depending on the size of the farmer's landholding.

**Small farmers**, like Savita or Gobind's sons, have **little surplus** wheat (or other crops). Their total production from their small plots is limited, and a substantial part is needed to feed their families. Consequently, they have very little to sell in the market.

It is the **medium and large farmers** who have significant surplus production. They sell this surplus wheat (or other crops) in the market. For example, Tejpal Singh, a large farmer, has a surplus of 350 quintals of wheat from his land, generating substantial earnings.

Medium and large farmers use their earnings from selling surplus produce in several ways. A significant portion is **saved**, often deposited in bank accounts. These savings are then used to arrange for the **capital needed for farming in the next season**, such as purchasing inputs or maintaining machinery. Sometimes, these savings are also used for lending money to small farmers at interest (as Tejpal Singh did with Savita).

Medium and large farmers can also use their savings to invest in increasing their **fixed capital**, like buying another tractor (as Tejpal Singh plans). Beyond farming, they might invest their savings in purchasing assets like cattle or trucks, or setting up shops, which serve as capital for **non-farm activities**.

This ability to generate a surplus, save, and reinvest is what enables medium and large farmers to finance their farming activities and expand their assets, contrasting with the capital difficulties faced by small farmers.

Let's consider three hypothetical farmers to understand the relationship between production, consumption, surplus, and capital investment over the years. Assume consumption is fixed at 40 units per year, and production in a year is twice the capital invested in that year (Production $= 2 \times \text{Capital}$). The surplus from one year becomes the capital for the next year.

Format 1 (Vertical)

Farmer 1, starting with enough capital to produce a surplus in Year 1, is able to increase their capital and production in subsequent years, showing growth.

Format 1 (Vertical)

Farmer 2 produces just enough to cover consumption and maintain the same level of capital, resulting in stable but limited production.

Format 1 (Vertical)

Farmer 3 starts with low capital, produces a small surplus in Year 1, but the reduced capital for Year 2 leads to just enough production for consumption (zero surplus). For Year 3, with zero capital, production is zero. Farmer 3 cannot continue production without obtaining capital from elsewhere.

Comparing the production over the years, Farmer 1 shows increasing production, Farmer 2 shows stable production, and Farmer 3 shows declining production leading to a halt. Farmer 3 cannot continue production in Year 3 because they ran out of capital. To continue, Farmer 3 would have to borrow capital or find other means to invest, highlighting the vulnerability of those with insufficient starting capital or low productivity.

Dairy — The Other Common Activity

Apart from farming, **dairy** is another common production activity in Palampur. Many families engage in dairy farming, feeding their buffalos various grasses and crops like jowar and bajra grown during the rainy season.

The milk produced is sold in the nearby large village of Raiganj. To facilitate trade with more distant locations, two traders from the town of Shahpur have established **collection-cum-chilling centres** at Raiganj. From these centres, the milk is transported to towns and cities further away, connecting Palampur's dairy producers to a wider market.

An Example Of Small-Scale Manufacturing In Palampur

Manufacturing activities in Palampur involve a small number of people, currently fewer than fifty. Unlike manufacturing in large urban factories, manufacturing in Palampur uses **very simple production methods** and is carried out on a **small scale**. Work is often done **at home or in the fields**, primarily with the help of **family labour**. Hiring external labourers is rare.

Mishrilal's jaggery manufacturing unit provides an example of small-scale manufacturing. He bought a **mechanical sugarcane crushing machine** run on electricity and set it up on his field. He uses the machine to crush sugarcane (both from his own fields and bought from other farmers) and processes it into **jaggery**. The jaggery is then sold to traders in Shahpur town. Through this process, Mishrilal earns a small profit.

In Mishrilal's case, his fixed capital would be the mechanical sugarcane crushing machine and potentially the space where it is set up. His working capital includes the money used to buy sugarcane from other farmers. Labour is likely provided by Mishrilal and his family.

Possible reasons Mishrilal might not be able to significantly increase his profit could include limited scale of operation, high cost of buying sugarcane from others, competition from other jaggery producers, or dependence on traders in Shahpur who might offer lower prices. He might face a loss if the cost of sugarcane or electricity increases significantly, or if the market price of jaggery falls, or if the machine breaks down. Mishrilal sells his jaggery to traders in Shahpur because Shahpur, being a town, likely offers a larger market and potentially better prices than selling only within his small village.

The Shopkeepers Of Palampur

Trading activities in Palampur are not extensive, involving only a few people who act as **shopkeepers**. These shopkeepers purchase a variety of goods from wholesale markets in cities and sell them in the village. The small general stores sell a range of items for daily needs, such as rice, wheat, sugar, tea, oil, biscuits, soap, toothpaste, batteries, candles, stationery (notebooks, pens, pencils), and even some cloth.

Some families with houses conveniently located near the bus stand have utilised part of their living space to open small shops specifically selling eatables to travellers and villagers.

Kareem's computer class centre is an example of a new non-farm activity responding to changing demand. Seeing that students from Palampur were travelling to Shahpur town for computer classes, and knowing there were educated women in the village with computer application degrees, Kareem decided to open a centre. He invested capital in buying computers and set up classes in his house. He employed the two women with degrees, utilising local skilled labour. This initiative has attracted high school students in good numbers.

Comparing Kareem's capital and labour with Mishrilal's: Kareem's capital involves computers and potentially furniture and building space; Mishrilal's is primarily the crushing machine and building space. Kareem's labour is skilled (trained women), while Mishrilal's is physical (crushing, processing). Kareem sells a service (education), Mishrilal sells a processed good (jaggery).

A computer centre might not have started earlier due to lack of awareness of the demand, lack of individuals with the necessary skills (computer application degrees), lack of capital to invest in computers, or limited access to electricity to run the equipment.

Transport: A Fast Developing Sector

**Transport** is a significant sector in Palampur, providing connectivity and services to move people and goods. The road linking Palampur to Raiganj is a busy route showcasing a variety of vehicles and transport service providers.

Types of transport available include rickshaws, tongas, jeeps, tractors, trucks, and traditional bullock carts and bogeys. People involved in these services (rickshaw-pullers, drivers, cart owners) ferry people and commodities between places and earn a living from the transport fees.

The number of people engaged in the transport sector has grown considerably in recent years, indicating it is a developing source of non-farm employment.

Kishora's story exemplifies diversification into transport. As a farm labourer, his income from wages was insufficient. He took a loan under a government scheme for poor landless households to buy a buffalo. He sells the buffalo's milk (dairy activity) and also attached a wooden cart to the buffalo to work in transport. He transports clay for the potter or carries jaggery and other commodities to Shahpur. This regular transport work supplements his income significantly, enabling him to earn more than before. Kishora's fixed capital would be the buffalo and the wooden cart. His working capital would be money for fodder for the buffalo and potentially for repairs. Kishora is involved in multiple production activities: dairy farming (selling milk) and transport (using the buffalo and cart).

Kishora would likely benefit from better roads in Palampur as good roads make transport easier, faster, and potentially more reliable, allowing him to take on more transport assignments and travel more efficiently to places like Shahpur or the river to collect clay.