December 14, 2020 8:27:23 am
Farmers drive a cart loaded with sunflowers at the Dounan Flower Market in Kunming, Yunnan Province, China, on July 14, 2020 (Photographer: Qilai Shen / Bloomberg)
Dear readers,
the farmers protests in the national capital They refuse to weaken, and with each passing day, more and more people in the country seem curious to learn the wisdom behind the government’s new farm laws.
At The Indian Express, we have written several “explained” articles on what the new farm laws intend to do, what is the current status of Indian farmers, including those from Punjab and Haryana – the two states that have been most opposed to agricultural laws. By the way, these are also the two states that benefited the most from the previous policy regime.
Looking back, there are two aspects to the current stalemate.
One is the question whether these reforms will or will not benefit farmers. This is a question of economics. Broadly speaking, the government’s argument is that opening up the agricultural sector to market forces will not only reduce pressure on public finances, but will also help farmers by making farming more profitable. The protesting farmers, however, I do not agree. They argue that interaction with private actors will ruin them financially.
The second aspect is more political and relates to how the laws in question were legislated. The government believes it has gone through the required due diligence before turning its ideas into law. Farmers, on the other hand, are stridently criticizing the lack of debate before the enactment of the laws.
The first indicates a deep-seated mistrust in the functioning of a market economy. A market economy essentially refers to a system in which the prices and supply of goods and services are predominantly determined by the free and voluntary interaction of people and firms in the market.
The second reflects a deepening mistrust in the way this government works.
It turns out that both types of suspicions are intertwined and that is what makes the current stalemate a matter of political economy and not just economics. Whatever the final solution to get out of this stalemate, it will have both political and economic aspects.
The key question we must ask ourselves is: how did we get here? Why are farmers so suspicious of market forces and could things have been different?
Along these lines, a 2008 article published in Economic and Political Weekly, titled “The Dragon and the Elephant: Learning from Agricultural and Rural Reforms in China and India”, by Shenggen Fan and Ashok Gulati (both associated with the International Institute of Research on Food Policy at the time) is quite instructive.
Farmers on the Singh border on Saturday
Despite similar trends in growth rates, the two countries have taken different reform paths; China began with reforms in the agricultural sector and rural areas, while India began by liberalizing and reforming the manufacturing sector. These differences have led to different growth rates and, more importantly, different rates of poverty reduction, ”they state at the beginning of the document.
How?
By making agriculture the starting point for market-oriented reforms, a sector that provided most of the people their livelihoods, China could ensure widespread distribution of profits and build consensus and political support for the continuation of reforms. The incentive reform resulted in higher returns to farmers and more efficient resource allocation, which in turn strengthened the national production base and made it more competitive. Furthermore, prosperity in agriculture favored the development of a dynamic rural non-farm sector (RNA), considered to be one of the main causes of the rapid reduction of poverty in China, as it provided additional sources of income outside of agriculture ” they claim. 📣 Follow Express explained on Telegram
“The rapid development of the RNF sector also encouraged the government to broaden the scope of policy changes and put pressure on the urban economy to reform as well, as non-farm businesses in rural areas had become more competitive than businesses. state (State enterprises). The reforms of state-owned companies, in turn, unleashed macroeconomic reforms, further opening up the economy, ”they say.
Between 1978 and 2002, the growth rate of agriculture almost doubled during the period 1966 to 1977, and this was the main reason why poverty in China fell from 33% of the population in 1978 to 3% in 2001.
In stark contrast, they found that in India, the fastest reduction in poverty occurred since the late 1960s and late 1980s, but this was not due to reforms, but rather to strong political support for agriculture.
“India still continues with the state purchase and distribution of food, mainly because it is considered affirmative action for more than two-thirds of the population, including the poorest, who depend on agriculture and the rural economy for their livelihood,” they clarify.
So what was the most important differentiating factor between the two strategies?
Farmers gather in large numbers during their protest against the new agricultural laws, at the Singhu border in New Delhi, on Sunday, December 13, 2020 Express photo by Amit Mehra
“Chinese policymakers first created the incentives and institutions required by the market economy and then, in the mid-1980s, began to slowly open markets, withdrawing central planning and narrowing the scope of acquisitions while expanding. the role of private trade markets ”, they find.
Of course, no one is arguing that India could simply have replicated China’s model. It is crucial to note that China had more favorable starting conditions; even in 1970, China had a significant advantage over India, be it in health, education, more equal access to land, and growth in the energy sector. And that explains “why, despite the private and economic restrictions imposed on China’s rural population, the country was able to achieve sustained growth even before the reforms.”
Viewed from this perspective, the whole issue of minimum support prices is essentially about flawed incentives. Despite the economic rationale that an increased free market game will improve outcomes for farmers, it is not reasonable to expect farmers in Punjab and Haryana to give up the safety of MSPs overnight. Ideally, the government should have developed the case for markets from scratch and given farmers time to adapt to market forces.
But if you step away from agriculture for a moment and examine the essential nature of policies in other sectors, you will find that there, too, policies suffer from the same problem.
For example, production-related incentives to boost Indian manufacturing are essentially about protecting domestic companies from market competition. So are policies that justify import bans and higher import tariffs. Similarly, India’s decision to stay out of the RCEP is also based on the same notion: protecting domestic companies from market forces. The undermining of the Insolvency and Bankruptcy Code is again essentially a story of not allowing market forces to harm existing developers.
Data shows that most agricultural products were traded privately even before these laws came into force. India’s main concern should be to create incentives and institutions for a market economy to function, because therein lies the only sustainable solution to dispel deep-seated suspicions.
Beyond the farmers unrest, a heated discussion is likely this week over the most recent data from the National Family Health Survey (NFHS-5). It showed that in several states in India levels of child malnutrition increased between 2015 and 2019, basically during the first five years of Prime Minister Narendra Modi’s regime.
However, another debate that is brewing in the background concerns the appropriateness of the RBI’s inflation targeting framework. More on these next week.
Until then, stay safe.
Udit
© IE Online Media Services Pvt Ltd
.
