In its pursuit of economic prosperity, India tends to gloss over two vital facts. One, farm growth can cut poverty twice as fast as industrial growth. Two, a one per cent rise in agricultural output raises industrial output by 0.5% and national income by 0.7%. In other words, in nations where a large of number of people continue to rely on farming, the economy is structurally tied to the farm sector.
If one looks at the overall performance of Indian agriculture over the past six decades, it appears to have done reasonably well. Food production has increased by more than five times, from just 50 tonnes in 1950-51 to an estimated 295.67 million tonnes in 2019-20. This helped to overcome the scary Malthusian prospect of food output not keeping pace with population growth. But that’s about all India’s agriculture has been able to achieve.
The rate of investment in agriculture in the 1980s and 1990s was 8-12%. These years roughly coincide with the sixth and tenth five-year plans. With such low spending, farm growth hobbled at 2.4% or so. In contrast, public investments in other sectors were over 35%. This low-investment phase in agriculture was reversed only with the 10th and 11th five-year plans (2002-07 and 2007-12).
Indian farmers receive lower-than-international prices for their produce because of increasing costs of cultivation, dysfunctional markets and the government’s obsession with keeping food prices low. This has worsened agriculture’s terms of trade, measured as a ratio of prices of agri-products to prices of manufactured items. The crisis, therefore, is not one of low production, but of low prices.
The fading of the Green Revolution has triggered social consequences. Pastoral communities, such as Jats and Gujjars participated heavily in the 1857 War of Independence, resulting in the British co-opting them with a lot of quasi-ownership of land. They, therefore, benefited richly from the Green Revolution. Falling returns from farming have stoked violent agitation by these groups for a portion of India’s reservation pie.
The minimum support price (MSP) policy, which offers guaranteed prices mainly for rice and wheat through government procurement, benefits farmers only in a handful of states. The 70th round of National Sample Survey showed only 13.5% of paddy growers and 16.2% of wheat growers received MSPs.
While MSPs have incentivised foodgrains over other crops, they have given rise to serious imbalances of water and land resources, surplus stocks and shifted land away from crops, such as pulses and oilseeds, necessitating imports. Also, MSPs, administered prices, as they are, tend to distort market prices.
A new deal to fundamentally reshape agriculture was, therefore, imperative. The Narendra Modi government had few options but to liberalise the sector by enacting three farm laws in September.
The laws allow businesses to freely trade farm produce outside the so-called government-controlled mandi system, permit private traders to stockpile large quantities of essential commodities for future sales, and lay down new rules for contract farming.
Farmers fear the reforms would make them vulnerable to exploitation by corporations and pave the way for the government to stop buying staples at MSPs.
A law barring sale of all farm produce below MSP, a key demand of farmers, makes little economic sense. If it is not profitable for traders to buy at federally-fixed MSP, and it is made compulsory, then the private sector will simply exit the markets. On the other hand, the government cannot be a monopoly buyer of all produce.
So, the assumption behind the new changes is that free competition in agricultural markets will ultimately result in a market-clearing price, at which quantity supplied equals quantity demanded, resulting in an equilibrium.
Good economics needn’t mean bad politics. Farmers must realise there are limits to government procurement at support prices. To convince farmers, the government has to devise a mechanism that will sufficiently protect farm incomes when markets fail. There are many policy options available, which are outside the scope of this analysis. But that is the only way forward.
The views expressed are personal