India's Farm Economy Needs Liberalisation

As state governments from across the spectrum – Chhattisgarh, Madhya Pradesh, Uttar Pradesh, Rajasthan and Karnataka – unleash a fresh wave of farm loan waivers and talk of newer ways to expand government intervention, the year to recall is 1980.

Farm leader Sharad Joshi was right: India’s farm distress is a classic example of state-led socialism gone wrong.

In 1979, as onion prices plummeted, farm distress gripped the nation – not for the first time and not for the last. For four days in November 1980, tens of thousands of peasants blocked roads and railways in different parts of Maharashtra under the organised umbrella of a group called the Shetkari Sanghatana. Led by a former UN bureaucrat, Sharad Joshi, the farmers were venting fury against the government. Despite a costly subsidy system, they said, farmers had to spend as much as Rs 180 for every Rs 100 they earned. “We do not want alms,” they sloganeered, “[only] a return on our sweat and toil.”

In the years that followed, Joshi would take his fight against India’s agricultural policies to Parliament, vociferously opposing socialism and alleging that the government’s intervention had only made farmers poorer. Several economists joined the chorus: The subsidy system is misdirected, they all said, and protectionism only perpetuated poverty. Export barriers meant farmers were denied profits during a surplus and the lack of savings hurt them twice as hard when times were tough.

Yet, decades later, Joshi’s reformist message is all but dead in India’s political discourse on agriculture. In the aftermath of more protests and farmer suicides, election rhetoric remains driven by charity and populism – not reform and rejuvenation.

Farmers across the country are caught in a tight web of restriction and regulation, which has turned the farm economy into a weak charity institution, perennially dependent on the government. Take agricultural marketing, for instance – the vital link between the farmer and the consumer, which is still largely monopolised and dominated by government licensees.

In an attempt to prevent the exploitation of farmers by free-market traders through the 1960s, the government led by Jawaharlal Nehru instituted the Agricultural Produce Marketing Regulation (APMR) Act. Under the law, farmers were required to sell their bulk produce solely to licensed traders in government-run market yards, while exporters, processors and retailers purchased the crop in turn from the traders.

The monopoly raised several issues that survive to this day. Transportation costs were high, since processors and retailers could not source the crop directly from the farm without routing it through a market yard. Poor storage facilities at the yards meant that crops were regularly lost before they could make their way to the consumer (as per various estimates, anywhere around 5-7 per cent of food grains and 25-40 per cent of fruits and vegetables perish each year even today). Worse, in the absence of market competition, licensed traders began to form cartels in the market yards to drive down the price at which crops were bought from farmers.

The economics of the APMR Act is simple: a handful of traders buying crops from several desperate farmers are able to negotiate a low price through an artificial dearth of demand in the market yard, while the middlemen, in turn, take advantage of burgeoning consumer demand in the towns and cities to turn over a huge profit. As a result, farmers only earn a pitiful fraction of the price at which crops are sold to the end consumer, despite little to no value being added. For instance, as per some recent reports, onions were selling in Mumbai at over 20 times what the cultivating farmer in Nashik earned.

In a liberalised market, a farmer would be able to sell directly to the processor or retailer and garner a higher price by bypassing the cartel and cutting costs. Competition from these other buyers would also drive licensed traders in the market yards to offer farmers a higher price. With increased economic activity closer to the farms, investment would be made on better infrastructure overall to facilitate it.

In light of these arguments, efforts were made over the years to liberalise the farm market. In 2003, the Atal Bihari Vajpayee government sought to dilute the APMR Act’s provisions by introducing a new Model Act, which allowed market yards to be set up by other entities, including the private sector and farmer cooperatives. Vajpayee’s successor as Prime Minister, Manmohan Singh, sought to introduce foreign investment in retail, hoping thereby to increase competition in the farm market.

Yet, many of these measures have been scuttled repeatedly. According to one study by the NITI Aayog in 2016, a third of all states and union territories did not adopt Vajpayee’s reforms in any form, while half of those who did adopt them made no notification to put them into effect on the ground. There are still several restrictions on foreign investment in retail – particularly in the multi-brand variant. Private investment has also found the farm market difficult to penetrate, mired in a web of licenses and regulation. In result, the government-licensed market yards remain in effective monopoly and most of the crops across India continue to be sold through them.

If liberalisation makes sense, why is it so difficult to implement? The answer lies in part in India’s electoral politics itself. Throughout India’s agricultural history, the knee-jerk reaction to farm distress has been populism and charity: short-term relief policies that inherently depend on state control, whether through state-owned banks or market yards. A liberalised farm economy with limits to government control would make populist measures more difficult to roll out. State control, therefore, allows political parties to promise easy sops in exchange for quick votes, even if the benefits of populism are short-lived. Worse, the electoral success of populist relief measures makes sure that populism breeds more populism. The lobby of licensed traders has also proven hard to overcome.

The answer to ending India’s periodic bouts of farm distress lies not in populism but in liberalisation. Aside from short-term relief measures, India has to turn its farm economy from a charity institution to a vibrant, self-sustaining growth sector. India needs another round of Sharad Joshi’s grassroots farmer movements to put the spotlight back on economic reform.

(c) 2019, The Print