We're Live Bangla Tuesday, May 30, 2023

Economic Affairs: India's farm reforms: A '1991 moment'?

Screenshot 2020-10-01 073916
A revitalised farm sector could boost India's economy

Amid a spiralling Covid-19 crisis, India's government passed three laws earlier this month to deregulate the country's farm sector that some economists reckon could be a game changer not only for agriculture, but for the economy as a whole.

This could be a "1991 moment", they suggest, referring to the year in which Indian industry was unshackled from a decades-long "Licence Raj" - a raft of restrictions on production, competition and imports. It set the stage for an economic boom that lasted for the better part of 20 years.

But that boom, which has now stalled, did not extend to India's farms, where about 60 per cent of the country's population live. Political parties have repeatedly promised ambitious agricultural reforms, but never delivered on them, because they turned out to be too politically sensitive.

As a result, India's farmers remained shackled by controls on where they could sell their produce and what prices they could get, which left them vulnerable to price fluctuations, held back the modernisation and growth of India's rural economy and magnified the inequality between rural and urban India.

Unshackling farmers 

That could now start to change after the three reforms take effect.

One of them is an amendment of the so-called Essential Commodities Act (ECA), which has been in force since 1955.

Under this Act, an earlier version of which was put in place by the British during World War II, the government could impose limits on stockpiling key agricultural commodities at any time, in the name of preventing hoarding and price increases.

While this might be justified in emergencies such as wars and famines (for which the ECA was originally designed), it was continued in normal times.

The effects were perverse, hurting both farmers and consumers.

With quantitative limits on stocking farm products liable to be imposed abruptly with little notice, there was no incentive for the private sector to build storage facilities. Without enough storage, there could never be enough buffer stocks of commodities to stabilise prices.

So, for example, during bumper harvests, prices would collapse because all of the supply would come onto the market instead of some of it being stored.

Conversely, during droughts or floods that disrupted production, food prices would shoot up because there were not enough buffer stocks in storage that could be released into the market to make up the shortfall in supply.

So farmers were subjected to repeated boom and bust cycles and could never earn stable incomes, leading to widespread and chronic rural distress.

The lack of cold storage also meant that vast amounts of perishable farm goods, such as fruits and vegetables, simply rotted away.

Under the new law, the government will invoke the ECA more sparingly, only in response to extraordinary price increases. This will lead to more storage facilities, more stable prices - therefore more stable incomes for farmers - and less food wastage.

The second reform addresses a bizarre and archaic marketing regime that restricts farmers' freedom to sell their produce.

In most states of India, farmers can sell their grains or vegetables only to licensed agents at designated wholesale markets - known as "mandis" - in the districts where they operate. They are forbidden to sell to other buyers anywhere else, not even in neighbouring districts.

In other words, the mandis have a monopsony (a buying monopoly), which gives them the power to dictate what prices they will pay.

They subsequently sell the produce at a typically fat profit to traders, and for good measure also charge a commission and tax on sales, some of which is collected by state governments.

The farmer ends up getting a raw deal - usually barely 30 per cent of what the final consumer pays for his produce. Much of the rest is swallowed by the mandi agents and other middlemen.

Some of these agents double as moneylenders, charging usurious rates of interest to farmers they have ripped off.

Under the new law, farmers will be free to sell their goods to whoever they want, even without middlemen, and to anywhere in the country.

The mandis can continue to operate, but they would face competition from other buyers.

The third reform seeks to create a framework for contract farming, to enable farmers to engage directly with retailers, wholesalers, exporters and food processors to provide goods at pre-agreed prices.

This would give farmers greater certainty on future prices and enable them to more accurately estimate how much planting they need to do - a decision which, up to now, has been determined by past prices that may not prevail in the future.

A virtuous circle

The supporters of these reforms include not only the ruling Bharatiya Janata Party (BJP), but also distinguished independent agricultural economists such as Dr Ashok Gulati of the Indian Council for Research on International Economic Relations and Dr Ila Patnaik of New Delhi's National Institute of Public Finance and Policy.

They point out that collectively, the reforms would have a huge impact, especially on farmers, but also the economy.

They would free farmers from their dependence on mandis, enabling them to get better prices and earn more predictable incomes.

They would also lead to more stable food prices, which would enable inflation to be better controlled and also be good for consumers. They would boost food exports as farmers can deal directly with exporters.

And they would raise rural demand, leading to wider spin-offs for the rural economy, such as more ancillary services and the rise of industries such as food processing, warehousing, cold storage, packaging and transport.

New supply chains that more efficiently link farmers to consumers would proliferate. Rising rural incomes would not only raise the living standards of 60 per cent of India's population but also boost the country's manufacturing sector, which has struggled to take off.

Lessons from China

A similar virtuous circle developed in China after its government launched agricultural reforms in 1978 under then leader Deng Xiaoping.

Before that, farmers - who made up the majority of the population and largely operated in communes - could sell only to the government at fixed prices and were required to produce mostly grains.

But after the reforms, they could lease land for private farming and eventually sell part of their output wherever they wanted, at market-determined prices.

They could also decide what they wanted to produce, and many diversified away from grains into fruits, vegetables and livestock, which were more profitable.

Their incomes took off, and the rural economy became an engine of growth.

It spawned manufacturing operations in the form of "township and village enterprises" in the 1980s that became the foundation of the manufacturing boom that followed.

In 1978, hardly any economists foresaw the far-reaching consequences of China's farm reforms, which seemed just an incremental step. But they turned out to be the basis for China's economic transformation, a masterstroke that lifted the majority of the population out of poverty and propelled the economy into decades of high growth.

Unlike China, India's reforms began not with agriculture, but with industry. While they had positive results, their effects largely bypassed the majority of the population in rural India.

With its farm reforms, belated as they are, India is taking a leaf out of China's playbook.

Opponents push back

But these reforms have turned out to be controversial. Not all political parties support them, including some of the BJP's allies.

The reform Bills were rushed through Parliament on a "voice vote" - the winners being those who shouted the loudest - without a count, which triggered pandemonium in the Upper House.

Thousands of farmers have also objected, staging agitations and blocking highways and railway tracks.

The objections are manifold. Farmers fear that having given them new freedoms to market their produce, the government will rescind its minimum price support policy - a floor price, which the government is supposed to guarantee farmers, especially for grains.

This is not true - the minimum support price will remain - but fearmongers, including those with vested interests who stand to lose from the reforms, such as mandi operators and other middlemen, have spread this belief.

Some state governments, especially those of big farming states such as Punjab and Haryana, protest that the reforms are an assault on India's federalism.

Agriculture is supposed to be a state subject, they point out, which the government in New Delhi has ignored by pushing through these national-level reforms that would also deprive state governments of valuable taxes that they collect on sales of farm products.

Some farmers' associations allege that while small middlemen in the farm trade might disappear, they would be replaced by powerful ones in the form of agribusiness and retail giants like Monsanto, Cargill and Walmart, which would leave farmers at the mercy of corporate interests who would be rapacious when negotiating contracts.

The reforms' supporters counter, however, that farmers can also organise - and indeed, the reforms have a provision to create 10,000 "farmer producer organisations" that would act as trade unions to ensure farmers have collective bargaining clout.

Some left-leaning commentators have complained that the amendments to the ECA, which would dilute the government's powers to impose stocking limits, would legalise food hoarding.

The debates will rage on, but it's too late; the laws have been passed.

Never waste a crisis

It's plausible that India's ruling BJP has taken advantage of the Covid-19 pandemic and the associated social restrictions to rush through these reforms without adequate consultation, even with its allies.

But the same was true of the industrial reforms of 1991, which were summarily passed by a minority government led by then Prime Minister P.V. Narasimha Rao during a balance-of-payments crisis, without widespread debate.

Indian governments have learnt that crises should not be wasted and are, in fact, ideal moments to push through sensitive reforms which, during normal times, would run into all manner of political obstacles.

In 1991, such opportunism eventually paid off, after some initial resistance. Whether the same will be true of the new agricultural reforms remains to be seen.

But if China's experience is any guide, these reforms could, over time, be transformational for the majority of India's population and for its economy.