The most notable consequence of the continued use of the MSP price-guarantee system has been the excessive building up of cereal stocks.

By Manoj Pant

The government has rightly argued that the new farm laws simply codify existing agricultural practices; however, those arguing against the reforms feel that any change in status-quo would hurt small farmers in particular. Though the present disagreement is largely on minimum support price and mandis (which affect only a small number of farmers), it is clear that the negotiations are being extended to cover general areas of concern in the agricultural sector. Why do economic reforms in agriculture face so much resistance? This is an issue I will try to address in this article.

The reforms of 1991 excluded agriculture and were confined to industry (ending the system of industrial licensing), exchange rate liberalisation, trade (replacement of import quotas with import duties) and foreign investment.
To understand the current situation, note that the reform process since 1991 has been relatively smooth. The major impact was to open up the economy to external and internal competition and prepare for the emerging new era under the WTO.

Over the 1990s, removing quantitative restrictions and quotas hurt the small scale industries particularly, as these were protected from competition in the previous 40 years. The protective period from 1950 to 1990 had led to the development of a highly inefficient domestic industrial sector. This was most clearly manifest in labour-intensive sectors like textiles. Between 2000 and 2015, the share of textiles in Indian exports declined from close to 23% to only around 10-12%.

The Indian apparel and textile sector worked on old technology, was size inefficient and not part of the global supply chains, which have now developed in all products. Today, the apparel sector cannot even compete with some other countries like Bangladesh, Pakistan, and Sri Lanka, and is far behind countries like Vietnam. In general, this “structural adjustment” takes place in any economy facing global competition, and the Indian textile sector is no exception. Over time, this sector has had to modernise or shift to areas like Information Technology, electronics, toys, etc.

The current debate and disagreement on the three Acts—Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, and the Essential Commodities (Amendment) Act—affecting agriculture constitute an effort to bring the farm sector to the mainstream of reforms as broader developments and globalisation have made it difficult to segregate the economy neatly into agriculture, industry, services and trade.

The most notable consequence of the continued use of the MSP price-guarantee system has been the excessive building up of cereal stocks. This has not only created issues of unsold inventories but altered the production pattern against all environmental concerns. Punjab, which is environmentally ill-suited to rice production, is now the rice bowl of the country.

As consumption patterns have shifted away from basic cereals towards dairy products like meat, fish, eggs, etc, the share of income spent on cereals has also declined, and with it, the income of farmers concentrated on cereals production. In general, production patterns must have some relation to the change in consumption patterns. This is not possible in a strong price control regime.

A price control regime disturbs demand-supply balance over time.
All of this is well known, yet, farmers have been camped outside Delhi for over a month. It is clear the opposition is to reforms in the agricultural sector rather than micro issues like minimum support price, etc. The explanation lies in the nature of political liberalisation in an economy like India. Reforms in agriculture are considered the purview of the state governments. Hence, the central government’s sectoral reforms are blamed on “uncaring” central authority. It is not difficult to understand why political parties that have supported the agricultural reforms in the past now appear to be backing the current farmer agitation.

The solution to the current standoff is obvious. The central government can permit states to pass state-wise legislations to defray the provisions of the current Acts. The emerging imbalance in production and income patterns between the states will automatically lead to political consensus on a common path. This happened in the case of Goods and Service Tax, and there is no reason why it should not happen in the case of agriculture.

Globally too, there are strong emotions attached to the agricultural sector. This is probably why no country has been able to treat agriculture like any other sector, even in the international fora like the World Trade Organisation. India is no exception.

Professor of economics and director, IIFT, Delhi. Views are personal 

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