There is a video on this topic. Readers are encouraged to watch that as well.
India introduced three new farm laws in 2020 to liberalise its agricultural market, and if they were implemented, they could have brought more participation from private players. A section of the political system along with agricultural economists called it a ‘watershed moment’ of Indian agriculture whereas another section called it a sellout to big corporates at the cost of individual farmers.
The struggle continued for over a year and eventually the Indian government succumbed to the pressure and its political priorities. All three farm laws were repealed unconditionally. A section of farmers in Punjab, Haryana and western Uttar Pradesh, who were protesting around the borders of Delhi, perceived it as their victory. Some of them are even seeing it as an opportunity to pressurise the government more to have the MSP legalised.
Opposition is already perceiving this development as ebbing of Modi-magic and hoping for turning the tables in 2024 general elections.
But those agricultural economists who supported the laws and some of us, who, despite not being economist, try to keep economic viability ahead of populism and petty political compulsions, consider this repeal of the farm laws as a major loss for India.
The Apparent Flaws
No, I am not saying that the three laws were perfect. Because there were flaws. Any new act or law is likely to have flaws. It is the duty of the concerned stakeholders to rectify it, amend it without having to repeal it.
We have to make changes to move forward. Maintaining status quo is not an option. I could see three major lacunae in those repealed laws. Firstly, the laws were passed through ordinance without any parliamentary discussion. Why was there such a hurry? Why government could not wait just for few months for the next parliament session to begin? Was it audacity of complete majority in the parliament or was there something cooking inside? Such actions only ask for future trouble and that is what happened later.
Secondly, the laws in their initial form restricted farmers from going to a civil court. I am not sure if the group of experts who drafted the bills were out of their mind when they stated this in Article 8: “In case of any dispute arising out of a transaction between the farmer and a trader under section 4, the parties may seek a mutually acceptable solution through conciliation by filing an application to the Sub-Divisional Magistrate who shall refer such dispute to a Conciliation Board to be appointed by him for facilitating the binding settlement of the dispute.” Article 15 also mentions “no civil court shall have jurisdiction to entertain any suit or proceedings in respect of any matter, the cognisance of which can be taken and disposed of by any authority empowered by or under this Act or the rules made thereunder.”
I think that clause was disastrous. Why would you have such clause where farmers cannot go to a civil court? Third point is why the law mandated no tax for private mandis whereas government mandis in many states have various taxes? It certainly would have created disparity in competition. Fortunately, government agreed to rectify those mistakes. I do not know if it was Union Government’s strategy to have few weak items in the laws as negotiation points.
Productivity Issues
Now let us understand why India desperately needs farm reforms and what was the main argument of protesters against the laws. India is blessed with highly arable land. 52 percent or 1.75 million square-km of our land is arable. But very low farm productivity has been plaguing us since decades. We will look into the farm productivity of India vis-à-vis United States and China. Both the countries have heavy private investment in agriculture, and contract farming is a well-established practice in those countries. In fact, contract farming has grown rapidly in China since 1990s.
As we can see from the above chart, in 2018 the yield of cereal is 8.69 tonnes, 6.08 tonnes and 3.25 tonnes per hectare for USA, China and India respectively. Not only India’s productivity of cereals is much lower, its growth rate is also low. With such vast irrigable land, India’s cereal productivity even stands below world average.
There are many reasons behind it. But primary reasons are lack of support towards agricultural research which is leading our farmers to continually use low yield seeds and being vulnerable to pests/diseases and resorting to traditional farming methods (e.g. manual ploughing). Paucity of modern farming equipments and irrigation facilities (e.g. majority Indian farmers still depend on rain water), poor presence of organised credit facility (farmers in India still largely depend on mahajans of the villages who many a time charge an exorbitant interest rate) are other consequences of poor investment in agricultural research in India.
Inflow of private capital in India’s agriculture can significantly improve the situation in this regard.
Here is one more dataset with further details of productivity (tonnes/hectare) of different crops separately, in India, during 2018. As we can see, apart from few crops like sugarcane, banana and tea, India’s performance is not up to the mark and in some cases, it is very poor.
Prosperous Farmers
If we know that we stand so much behind in agriculture, then why is there so much resistance to its reform? When data shows that private enterprises and contract farming helped agricultural output why do we have such aversion towards it?
During the farmers’ protest, we are constantly fed with news that if corporates are allowed in farming, they will take away farmers’ land. There are unfounded allegations that they will exploit farmers and the Indian farmers’ low income will further decrease.
How true are these allegations? First of all, government already mentioned in the law that under no circumstances farm land can be mortgaged to the contracting company/ies. So, where does the question of land grabbing come into the picture? If we talk about Indian farmers’ income, we can consider many developed nations for comparison.
For example, the Netherlands, despite being a very small country, is the 2nd largest exporter of farm goods, after the US. It is a leader in agro innovation and production. Majority of the farms in the Netherlands are part of cooperatives. They work directly with large companies. The country is home to some 5300 agro-based companies, including 12 of the world’s largest food companies like Cargill, Kraft, Heinz, ConAgra and Mars.
In case of USA, median American household income is $68,703 whereas median American farming household income is $83,111. Since 1972, median income of farm households in the US has exceeded median income of all the US households in 67 percent of the years. Following chart shows this year-wise comparative data effectively.
Now, let us look at the other developed nations where corporates and other private enterprises have heavy presence in both industrial and farming sectors.
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Source: FarmHousehold Income (tcd.ie) |
In most of the cases, farmers’ income is either higher or very close to median income of other households. So, the speculation or the allegation that private investment in agriculture and corporate farming will exploit farmers is unfounded. At least, the statistics contradicts such claims.
China Model
There is an argument that we cannot compare our agriculture with that of the developed nations’ agriculture and we should not pursue their model as in developed nations very small percentage of population is in farming (less than 2 percent in the US as compared to 43 percent in India) and landholding in India is very small (1.15 hectare in India, on an average, against 190 hectares in USA) as well.
Hence, the argument goes that corporate farming and large private capital in agriculture is not practical and beneficial for India. But is that a fair argument? Doesn’t seem so, because there is a comparable nation. It is China. China has only 10 percent arable land compared to India’s 52 percent.
China has total arable land of 1.4 million square-km as compared to India’s 1.75million square-km. Average landholding of farmers in China (0.66 hectare) is even smaller than India’s 1.15 hectare. Yet their farm produce surpasses India and not just by few percentage points. We have already seen that cereal productivity in China is 6.08 tonnes per hectare as compared to India’s 3.25. Chart below shows value added agricultural output of India and China. Value added is the net output of the sector after adding up all outputs and subtracting intermediate inputs.
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| Source: Worldbank |
China moved away from collectivised agriculture to individual profit-driven farming and other host of reform measures in 1978. This not only helped to increase farm productivity in China because of higher quality research support and use of machineries, but wages of Chinese farmers also increased steadily.
Above chart shows how income of Chinese farmers increased manifolds since 1978 when China adopted open market-based economy. Let us look at the next chart that shows the reduction of rural poverty ratio as a percentage of total rural population in China. China’s rural poverty ratio came down from 30.7 percent in 1978 to 2.5 percent in 2005, whereas as per RBI report in 2019, India’s rural poverty ratio is still at 25.7 percent.
China has not stopped its reform process. Rather they are continuing with reform in this time as well. China also had minimum price support (introduced for rice in 2004 and for wheat in 2006) for some time that made China’s farm produce uncompetitive in international market.
In 2016, domestic maize price in China climbed 50 percent higher as compared to international price. Starting 2013, Chinese government has started reducing price support and completely phased it out for multiple crops. Government also used to provide input subsidy in the form of seeds, machinery etc. In 2016, China has moved away from such subsidies and entered into direct income support program.
State Support for Agriculture
There is one more argument that many opponents of open market-based farming have put forward. Their argument is that the rich nations where large private capital is invested in agri-business and which have extensive contract farming, also require increased amount of government support in agriculture. How true is that? Let us look at the charts of India (blue line), China (red line), USA (purple line), and OECD countries as a whole (black line).
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| Source: OECD |
The total support estimate (TSE) is an indicator of the annual monetary value of all gross transfers from taxpayers and consumers arising from policy measures that support agriculture, net of the associated budgetary receipts, regardless of their objectives and impacts on farm production and income, or consumption of farm products. The TSE can be expressed in monetary terms or as a percentage of the gross domestic product.
As it is shown in the chart, government’s Total Support Estimate (TSE) as a percentage of GDP has been constantly falling in USA, and OECD nations in general. For USA, it was 1.07 percent in 1986, 0.70 percent in 2000 and 0.47 percent in 2019. Hence, this argument is not right.
This data is negative for India during the duration of 2004 to 2014 because OECD estimate considers the direct input subsidies that Government of India provided in terms of fertiliser, electricity and some other measures. But it did not cover expenses incurred due to Minimum Support Price (MSP) benefit provided to the farmers.
Moreover, price support of a product is calculated by multiplying total production with the gap between the domestic price and international prices in a relevant year. Hence, even if government continues increasing budgetary support to agriculture, support for a product may remain negative if there is higher gap between domestic and international price of the product (domestic price being cheaper).It is to be noted that support by Indian government increased from ₹1.61-lakh crore to ₹3-lakh crore, between 2015 to 2019, registering 85 percent growth. So, it is not true that Indian government does not support farmers as much as Western nations.
Rather to keep domestic consumer prices low, we are throttling growth of the farm sector and negatively impacting farmers’ income. According to a government report, a three-year ban on non-basmati rice exports during 2008-11 amid a rice glut led to a “notional loss of $5.6 billion”. We the urban middle-class, some of whom shed tears for farmers at Singhu border, scream when onion prices go up at the end of the season. Then we along with media force government to stop export of onions and start importing onions. After that when new harvest comes, it crashes the onion price. We forget that it is the time for farmers to earn some money from their produce.
Moreover, free electricity, free water and subsidised fertilizer are causing enormous damage to the environment. Excessive use of urea due to subsidy is causing severe soil pollution. Use of urea increased from 24.9 kg/hectare in 1977 to 137.6 kg/hectare in 2019.
We all know how stubble burning has become primary source of pollution in northern parts of India during winters each year. Due to free electricity and free water, farmers in Punjab are going deeper with tube wells. Water level in Punjab has gone down from 20 ft. in 1977 to 350 ft.in 2020.
Punjab faces risk of desertification in a few decades. Solution is to move paddy and wheat cultivation from Punjab and Haryana to the Gangetic plain of UP and Bihar. Moreover, government should stop providing various subsidies and switch to direct income support to needy farmers.
Today most of the subsidies, including MSP, are cornered by large farmers (bigger the land, bigger the produce and hence bigger share in MSP and other subsidies) who actually do not need government support whereas marginal farmers are left behind.
Bihar’s Growth Story
Many supporters of the existing APMC system and opponents of new farm laws have provided example of Bihar. This state of India abolished APMC in 2006. The argument is that since then Bihar’s farmers are not getting MSP and they are selling their produce at much lower price. Hence, Bihar model is a disaster.
This is what happens when politicians and politically aligned economists start providing half of the story and omit rest half to suit their narration. Now rest of the story is that after APMC was abolished in 2006 (Nitish Kumar was elected as the CM in 2005), Bihar’s GDP growth and specifically agricultural growth superseded India’s growth rate. Bihar is now one of the top states in production of fruits and vegetables that fetch more money. Bihar’s agriculture growth from 2005-06 to 2014-15 has been 4.7 percent as compared to all-India rate of 3.6 percent. In the last five years, Bihar’s agriculture growth climbed to 7 percent whereas India’s agricultural growth slipped to 2 percent.
It is true that farmers in Bihar get less than MSP in paddy and wheat. But it is also true that they have moved to other different crops and Bihar did well in agriculture during the last 15 years. As a side-effect of the skewed agriculture system that exists today in India, illegal trade is flourishing. Paddy is being bought from farmers in Bihar at Rs. 900-1200 per quintal by the middlemen and sold at Punjab mandis at government mandated MSP at around Rs. 1888 per quintal. Traders sitting in Delhi are controlling the markets of UP and Bihar and facilitating the millers of Punjab.
Rather the faulty MSP system is causing oversupply of wheat and rice. Government is procuring 15 million tonnes of extra wheat and paddy than it needs to support Public Distribution System (PDS). India has 2.5 times of more wheat and paddy in storage than stipulated buffer stock norm. It costs 1.5 lakh crore rupees of taxpayer’s money that could have been utilised in a much more productive manner.
Success in Dairy
India’s dairy farming is a huge success story. India is the largest producer of milk since a few years. 85 percent of the dairy farmers in the country are small and marginal. Estimates suggest that 48 percent of the milk produced in India is consumed by dairy farmers themselves, and 52 percent is marketed. A study undertaken by a private agency has estimated that of the total milk surplus in the country, 20 percent is processed in the cooperative sector, 30 percent by branded private dairy companies, and the rest by the unorganised sector. Even though there are substantial private buyers that include multi-national companies like Nestle and large Indian private companies like HatsunAgro Products, it should be noted that there is no MSP in India’s dairy business. There is no government support in terms of subsidy either.
Still dairy sector in India has been growing at very fast rate. Even after so much private participation in the market, dairy farmers in India get almost 80 percent of the price that an end-consumer pays. New investments are also pouring in, in the sector. French multinational Lactails’ Indian subsidiary Tirumala Milk Products has purchased local Indian firm Prabhat Dairy’s dairy business for US$239mn. Another French multinational Danone has invested USD$25mn in 2019 in a local yogurt company. If dairy sector in India can thrive with corporates, what is wrong in India’s agriculture in doing so?
Reflections
I am not proposing that India should start blindly copying the west in agriculture. Definitely farmers of the rich nations have problems of their own. They get into debt trap with the contracting companies; contracts are sometime one-sided in favour of the buyer; contracting companies often puts pressure on the farmers to reduce the price with excuse of poor-quality produce.
There are also other issues such as some multinational corporates push proprietary dangerous chemicals through pesticides; fertilisers that make farmers dependent on them and sometime even damages soil quality and causes public health concern. But does that mean our farmers are doing better compared to the farmers in those nations where corporates are encouraged, and contract farming is allowed? No, absolutely not.
It is like saying high rate of insurance premiums on personal cars in American cities and not having option of public transport is benefitting insurance companies and automobile companies. One can cry hoarse that it is a nexus among insurance, automobile and gasoline companies to exploit common Americans. Hence, we Indians are in better shape because we all rely on dilapidated public transport system instead of falling prey on these greedy corporates! Come on, people! Everybody has problems and it is a different problem of rich people in America. First let most Indians have cars or at least have a choice between using a car against a high-quality public transport system, and then tackle the problem related to it. I guess I have made my point.
Unfortunately, what happened a few weeks earlier with the repeal of the farm laws is very similar situation of 2007-08 in West Bengal with protest against the Tata Nano factory in Singur. At that time also, Mamata’s TMC had no intention to come to a middle-ground and get more benefits/jobs for the farmers who lost their land. This lady then had only one goal; to heckle a gentleman Buddhadeb Bhattacharya to fulfil her political ambition. She knew very well that if Tatas had to return 400 acres (her steadfast demand) out of 1000 acres of land, factory could never come up there. Finally, that was what happened. Tata left for Gujrat. TMC won. Buddhadeb-babu lost, farmers did not win either. But that loss was nothing in comparison to what people of West Bengal lost.
This time also opposition may win, BJP’s loss will be temporary anyway, Indian farmers will be left at the exactly same lurching state. Real loser will be India, her economy, her ambition to become high-income nation one day.
Other References:
Paddy,tube wells and depleting groundwater: Why Punjab’s water resources are understrain - The Hindu
India'sfertiliser drain: Urea of darkness - The Financial Express
Theagricultural value chain, its challenges and opportunities in India | byGramworkX | Medium
Harvesting-golden-opportunities-in-Indian-agriculture.pdf(mckinsey.com)
(PDF)Cold Storage in India: Challenges and Prospects (researchgate.net)
USDAERS - Farming and Farm Income
Agriculturallaw in The Netherlands: overview | Practical Law (thomsonreuters.com)
Whythe World Should Admire the Netherlands' Approach to Agriculture(investinholland.com)
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