Last week, the President of India promoted the three agricultural bills, namely the Agricultural Products Trade and Trade (Promotion and Facilitation) Bill, 2020 (FPTC), the Assurance Agreement of Farmer Prices (Empowerment and Protection) Services Bill, 2020 (FAPAFS), and Essential Products Bill (Amendment), 2020. The opposition and farmer organizations continue to protest against these laws. While politics will run its own course, it is useful to examine the economic logic of the arguments given to justify these bills. The arguments, generally speaking, are twofold.
One, the bills give farmers greater freedom to sell their produce. They will eliminate middlemen, or at least some levels of middlemen between farmers and buyers. This will ensure that the farmer gets a larger share of the price paid by the consumer and thus improves farm income.
Second, the clamor to incorporate Minimum Support Prices (MSP) into the law is a pursuit of vested interests, as only a handful of farmers enjoy the benefits of MSP-based acquisitions in the country today. Agricultural practices in the Green Revolution regions of Punjab, Haryana and Western Uttar Pradesh, where MSP was the cornerstone, have impeded reforms and these changes will lead to creative destruction in agriculture.
Unfair trade is not the basic reason for the plight of Indian farmers
The argument that these bills will cut out the middlemen, and therefore benefit farmers, assumes that unfair trade is the biggest problem facing Indian farmers. But inflation data shows that the retail and wholesale prices of important foods, grains, legumes, vegetables and fruits move in tandem. This means that producer prices are not completely divorced from prices prevailing in retail markets, and intermediaries pass on gains or losses in food markets to farmers.
What could be a bigger problem for farmers is the great volatility of the prices of crops such as legumes and vegetables. Cereals, where the MSP regime is applied for rice and wheat (more than a third of total rice and wheat production is purchased by the government), face the lowest price volatility. This is exactly why farmers continue to demand MSP-based procurement for all crops.
The main reason for the agrarian crisis is that agriculture employs too many people to be profitable. At least 40% of India’s workforce is employed in agriculture, although it generates less than 15% of the country’s GDP. The current set of reforms does nothing to address this basic asymmetry between income and employment in agriculture.
It is well known that Indian agriculture, including the green revolution states, has many inefficiencies. Some of these inefficiencies, such as the over-exploitation of groundwater, have become a serious threat to the sustainability of agriculture itself. PEM-based rice purchasing in states like Punjab has contributed to the agriculture sustainability crisis. But there is more to this.
Farming is essentially an unviable exercise in India
Farming, even at MSP prices, has not always been viable in India. The government claims that MSPs provide a guaranteed return of at least 50% of the cost of production for farmers. The cost measure used by the government to calculate this margin is A2 + FL. Includes the cost incurred in hired labor, imputed family labor, seeds, fertilizers, insecticides, irrigation charges, interest on working capital, land income, depreciation of buildings and farm implements, and rent paid for leased land . Farmer organizations have long been demanding that MSPs provide a 50% return on cost measure C2, which includes the rental value of own land and interest on fixed capital in addition. Logically speaking, C2 includes the opportunity cost of being in agriculture. A farmer could choose to rent his land and use his fixed capital for other income instead of using it for agriculture. A comparison of the PMS for rice and wheat with these two cost measures shows that they do not cover all of C2. Since cost measures are published with a time lag, this comparison cannot be made for recent years.
The natural question is to ask why farmers continue to farm even if the best case scenario, the acquisition rather than the MSP, is not remunerative enough. This otherwise counterintuitive question of why seemingly unviable economic activities continue is a recurring theme in political economy.
It is not necessary for the farmer to actually pay the cost of imputed family labor or the rental value of the land during the production process. While such a restriction could make agriculture economically viable in terms of actual accounts payable and receivable, it implies that the farmer embraces a kind of poverty. While most people associate poverty lines with predefined income levels, like the World Bank’s popular $ 1 / day poverty line, classical political economists have other opinions. A 2011 World Bank blog by Martin Ravallion cites Adam Smith’s concept of relative poverty from The Wealth of Nations.
“A linen shirt… is, strictly speaking, a necessity of life. The Greeks and the Romans lived, I suppose, very comfortably even though they had no white clothes. But in present times, in most of Europe, a credible day laborer would be ashamed to appear in public without a linen shirt, the lack of which is supposed to denote that shameful degree of poverty which, it is presumed, no one can fall without extreme misconduct, ”Smith wrote. It is not very difficult to imagine that farmers cannot afford the goods and services, which are considered essential to lead a decent life in the present age.
Government policy has not helped
There are two ways to improve farm income: increase yields or increase prices. Both face political apathy. India lags behind countries like the United States and China in terms of performance even for grains. This gap has been increasing over time.
However, India spends much less on agricultural research and development than China. According to data from the Food and Agriculture Organization of the United Nations (FAO), spending on agricultural research in China was 0.62% of its value added in agriculture, while this figure was only 0.3 % for India. These figures are for 2013, the latest period for which data is available in the FAO database. The figures are unlikely to have changed for India. Total expenditure (revised estimates) of the Department of Research and Education of the Ministry of Agriculture was 0.24% of the value added in agriculture.
Political intervention on prices often takes the form of depriving farmers of windfall gains from higher prices, while no support is available when prices plummet. Even the MSPs for rice and wheat have grown at a slower rate in recent years.
The way to follow
The future of Indian agriculture cannot be saved simply by allowing farmers greater freedom. Agriculture can have a better future only when excess labor employed in agriculture is shifted to the non-farm sector and there is a greater demand for agricultural products as incomes increase. Because most Indians cannot even afford a decent food basket, many commentators have mistakenly concluded that Indian agriculture faces a problem of abundance.
Furthermore, Indian policy makers must realize that agriculture has strong support from governments in most countries. As Ashok Gulati pointed out in an Indian Express article published on September 28, producer support for agriculture in India as a percentage of total farm income is negative, which runs counter to the stereotype that agriculture is heavily subsidized. Promises of future benefits from deregulation can hardly substitute for budget support from Indian farmers.
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