The economic arguments in favour of the three farm bills: All you need to know


Last week, the President of India gave his ascent to the three farm bills, namely, the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 (FPTC), the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 (FAPAFS), and the Essential Commodities (Amendment) Bill, 2020. The opposition and farmers’ organisations continue to protest against these laws. While politics will take its own course, it is useful to examine the economic rationale of the arguments being given to justify these bills. The arguments, broadly speaking, are twofold.

One, the bills give greater freedom to farmers to sell their produce. They will abolish intermediaries, or at least some levels of intermediaries between farmers and buyers. This will ensure that the farmer gets a bigger share of the price paid by the consumer and will, therefore, improve agricultural incomes.

Two, the clamour for incorporating Minimum Support Prices (MSPs) into the law is a pursuit of vested interests as only a handful of farmers enjoy the benefits of MSP-based procurement in the country today. The agricultural practices in Green Revolution regions of Punjab, Haryana and Western Uttar Pradesh, where MSP was the cornerstone, have prevented reforms and these changes will lead to a creative destruction in agriculture.

Unfair exchange is not the basic reason for predicament of Indian farmers

The argument that these bills will remove intermediaries, and therefore make farmers well-off, assumes that an unfair exchange is the biggest problem facing India’s farmers. But Inflation data shows that retail and wholesale prices for important food items, cereals, pulses, vegetables and fruits, move in tandem. This means farmgate prices are not completely divorced from the prices prevailing in retail markets, and intermediaries do pass on profits or losses in food markets to farmers.

What could be a bigger problem for farmers is the large volatility in prices of crops such as pulses and vegetables. Cereals, where the MSP regime is in place for rice and wheat (over one-third of the total rice and wheat production is procured by the government), face the lowest price volatility. This is exactly why farmers keep demanding MSP-based procurement for all crops.

The main reason for the agrarian crisis is that agriculture employs far too many people to be remunerative. At least 40% of India’s workforce is employed in agriculture, even though it generates less than 15% of the country’s GDP. The current set of reforms does nothing to address this basic income-employment asymmetry in agriculture.

That Indian agriculture, including the green revolution states, have a lot of inefficiencies is well known. Some of these inefficiencies, such as overexploitation of groundwater, have emerged as a serious threat to sustainability of farming itself. MSP-based procurement of rice in states like Punjab has contributed to the sustainability crisis of agriculture. But there is more to this.

Agriculture is essentially an unviable exercise in India

Farming, even at MSP prices has not been always viable in India. The government claims that MSPs provide a guaranteed return of at least 50% over the cost of production for farmers. The cost measure used by the government to calculate this mark-up is A2+FL. It includes the cost incurred on hired labour, imputed family labour, seeds, fertilizers, insecticides, irrigation charges, interest on working capital, land revenue, depreciation on farm buildings and implements and rent paid for leased-in land. Farmers’ organisations have been demanding for a long time that MSPs should provide a 50% return over the C2 measure of cost, which includes rental value of own land and interest on fixed capital in addition. Logically speaking, C2 includes the opportunity cost of being in farming. A farmer could choose to rent his land and utilise his fixed capital for other income instead of using it for farming. A comparison of MSPs for rice and wheat with these two cost measures shows that they do not cover the entire C2. Since cost measures are released with a time lag, this comparison cannot be made for recent years.

The natural question to ask his why do farmers still continue farming even if the best-case scenario—procurement over MSP—is not remunerative enough? This otherwise counter-intuitive question of why seemingly unviable economic activities continue is a recurring theme in political economy.

It is not necessary that the cost heads for imputed family labour or rental value of land are actually paid out by the farmer during the production process. While such a squeeze might keep farming economically viable in terms of actual payables and receivables, it does entail the farmer embracing poverty of sorts. While most people associate poverty lines with predefined income levels, such as the popular $1/day poverty line of the World Bank, classical political economists have other views. A 2011 World Bank blog by Martin Ravallion quotes Adam Smith’s concept of relative poverty from the Wealth of Nations.

“A linen shirt … is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.”, Smith wrote. It is not very difficult to envisage farmers not being able to afford goods and services, which are seen essential for leading a dignified life in today’s age and age.

Government policy has not helped

There are two ways to improve farm incomes—either increase yields, or prices. Both of these face policy apathy. India lags behind countries such as the US and China in terms of yields even for cereals. This gap has been increasing overtime.

Yet, India spends much less on agricultural research and development than China. According to data from the United Nation’s Food and Agriculture Organisation (FAO), spending on agricultural research in China was 0.62% of its value added in agriculture, while this number was just 0.3% for India. These numbers are for 2013, the latest period for which data is available in the FAO database. The numbers are unlikely to have changed for India. The total expenditure (revised estimates) of Department of Research and Education under Ministry of Agriculture was 0.24% of the value added in agriculture.

Policy intervention on prices often takes the shape of depriving farmers of any windfall gains from higher prices, while no support is available when prices crash. Even MSPs for rice and wheat have been growing at a slower pace in the past few years.

The way forward

The future of Indian agriculture cannot be salvaged by simply allowing greater freedom to farmers. Agriculture can have a better future only when the excess workforce employed in farming moves to the non-farm sector and there is a greater demand for agricultural products as incomes increase. Because the majority of Indians cannot even afford a decent food basket, many commentators have reached a wrong conclusion that Indian agriculture is facing a problem of plenty.

Also, India’s policymakers need to realise that agriculture is heavily supported by governments in most countries. As has been pointed out by Ashok Gulati in an Indian Express article published on September 28, producer support to farming in India as a share of total farm receipts is negative, something which goes against the stereotype of agriculture being heavily subsidised. Promises of future gains from deregulation can hardly be a substitute for budgetary support for Indian farmers.

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