For nearly three weeks, India has been witnessing massive protests from farmer organisations across the country. The protests are in response to three farm bills that the Narendra Modi government enacted as laws without much consultation with the stakeholders. Even the upper house of Indian parliament, Rajya Sabha, was left short-changed when these three bills were passed via voice vote, ignoring opposition demands for wider consultation and deliberation. After months of discontent, and almost no attempt by the central government to allay fears, farmer organisations finally started marching to New Delhi to force the government to take their angst seriously. What has ensued since then is a stand-off. The government had underestimated the anxiety amongst farmers who called for a complete rollback of these laws. However, given Mr. Modi’s image of a strongman, no-nonsense leader, a full rollback would be extremely detrimental to his image.
So what exactly are these laws that have riled up farmers so bad? The issue is complicated. Agriculture is a heavily regulated industry and, importantly, within the ambit of the state governments in India. Thus, agricultural laws were always state-specific, and countrywide reforms were always difficult and required consensus building.
Consensus building, however, was never really one of Mr. Modi’s strong suits. Under the advice of a few experts, and under pressure to appear to rescue a crippled economy, Mr. Modi brought three laws that massively overhaul the existing rules regarding how farmers sell their produce. These new laws overhaul the existing agricultural markets of every state in India as the central law weakens the states’ own laws on agriculture. The lack of any consultation with state governments, farmer organisations, and even parliamentarians (whose job it is to discuss and enact laws) makes farmers view these laws with suspicion. After all, whenever Mr. Modi has embarked on grand policy announcements, the outcome has generally been disastrous. Lack of consultation was central to those policy disasters (prominent among them being demonetisation).
The details of these laws are complicated but essentially there are two pain points for farmers. The first is allowing the entry of unregulated entities (e.g. major corporations) to directly contract with farmers, buy agri-products and stockpile them at their whims. The second, although not mentioned in these laws, is the fear that the government will scale down its procurement of grains, and as a result, lakhs of farmers who sell their produce to the government will be left at the mercy of large corporations. Government procurement occurs at decently remunerative prices called Minimum Support Prices (MSPs). Farmers fear that the prices they will get as a result of these new laws will be exploitative and far below MSPs.
In the past, farmers could only sell their produce at designated markets called APMCs (the laws, however, were different in different states). APMCs, short for Agricultural Produce Market Committees, are regulated and state-controlled markets where traders need to register before they can purchase products from farmers. APMCs have regular auctions to facilitate price discovery and generally levy a fee on transactions that happen inside their wholesale markets or mandis. The new farm laws now allow buyers and traders to bypass mandis and buy directly from farmers. Anyone with an Indian PAN card can now buy from farmers directly. One might ask, what is so troubling with this? After all, this is providing the farmers with a “choice”—they can always choose to sell at the APMC market if they wish. More choices should naturally lead to higher farmer incomes.
The trouble is, this theoretical argument ignores a lot of market frictions which could lead to undesirable outcomes for the farmers. For example, one feature that best characterises farmers in India is that most of them are small and marginal. More than 86 percent of farmers have a landholding of less than 1 hectare. Hence, most farmers have limited or no bargaining power. The new laws incentivise traders and buyers to do their trade outside APMC mandis, by not charging any taxes and fees which are usually levied on transactions inside the mandis. Therefore, any rational buyer/trader will move away from the APMC markets and will want to purchase directly from the farmer (the APMC markets will, therefore, collapse).
The question is what such a market outside the APMCs will look like. Proponents of these laws argue that this will create larger private markets which will lead to better price realisations for farmers. The concern is that such would be the case only if the entry barrier for new buyers was indeed a major issue. On the other hand, if allowing anyone to buy brings few new buyers and existing buyers simply move outside the regulated APMC framework, then the resulting markets will be opaque where farmers can easily be exploited. Since these will be private transactions with no reporting framework, the government will lose oversight of the price discovery mechanism, leaving farmers in a free-for-all market. Farmers fear that such a “free market” where they have little or no bargaining power would be undeniably exploitative.
Proponents also argue that the entry of corporates will bring bigger players to the market and this will raise the price at which a farmer can sell. But again, in a setting where there are millions of small farmers, would corporates see value in investing in private infrastructure, or would they employ the same middlemen to purchase on their behalf leaving the farmer with a raw deal? The experience in the state of Bihar, which abolished its own APMC markets in 2006, was that it neither brought private investments nor led to any substantial increase in farmer incomes.
The second major concern is that the government will scale down its public procurement. Many economists argue that the government of India over-purchases grains, primarily to support farmers, which ultimately rot in government go-downs. This is a waste of tax payers’ money. These massive purchases of grains create incentives for farmers to stick to crops which are likely to be purchased by the government. Thus there is excess supply. There is a hint (although the government at the moment denies this) that it will scale down these purchases, thus forcing farmers to shift away from these water-guzzling crops. The trouble here is that the overhauling of the procurement systems passes the burden of switching costs entirely onto the farmers. Farmers need better incentives to diversify to other crops, not threats of closure of public procurement. Any equitable reform would first create incentives for farmers to switch before scaling down procurement. Such “reforms” where farmers bear the costs are grossly unfair.
Any student of economics would argue that “free markets” with more competition are surely better for sellers. Thus those in favour of liberalisation have, by and large, cheered these laws. However, one needs to ponder how “free” these markets will really be. For example, whenever there is a whiff of onion prices going high, the Indian government swiftly bans exports, thereby denying the farmers the benefit of higher prices. Is that reflective of a free market? Secondly, the government appears beholden to corporates, and that too a select few. Corporates in India can now legally and discreetly channel massive amounts of funding to political parties via obscure Electoral Bonds. The people of India have no recourse to knowing how much corporates are donating and under what quid-pro-quo arrangements. Thus, to trust a government to come on the side of farmers is difficult. In fact, some of the clauses in these new laws explicitly forbid farmers from dragging corporates to courts! Therefore, it is difficult to place trust in free market forces to ensure the welfare of farmers in such crony capitalist settings. “Free market” then becomes a guise for exploitation which ultimately begets social inequality. Farmers in India have sensed this better than many economists.
Dr Asad Rauf is an assistant professor of economics at the University of Groningen, the Netherlands.