Indian Agriculture Needs Liberalisation-type Reforms
With the responsibility of feeding one-sixth of the global population residing within its borders, India faces an urgent need : the enhancement of farm productivity. The discourse on the economic dimensions of this challenge will offer varied perspectives, yet the central issue remains clear: comprehensive reforms spanning the breadth of agricultural concerns are essential. This necessitates a political resolve akin to the transformative reforms witnessed during the Indian economic liberalisation of 1991, for land is limited, and dealing with agrarian stakeholders needs much manoeuvring for a consensus building.
Moreover, agriculture has been experiencing a decline in labour availability, as successive generations within farming families increasingly shy away from pursuing agriculture as a livelihood. Addressing this socio-economic reality is paramount for ensuring that farming remains a meaningful source of productive labour. Neglecting this issue risks driving agriculturists towards alternative income-generating livelihoods or even abandoning their farms. But then, another way to solve for it is to professionalise agriculture as a sector for investments, as well as formal employment.
Farmers are demanding a legal guarantee of minimum support price (MSP) for all crops and the implementation of the recommendations of the MS Swaminathan committee on agriculture. One of the primary recommendations of the committee was to increase MSP to at least 50 per cent above the weighted average cost of production. The current Minimum Support Price (MSP) system fails to meet farmers' expectations due to its oversight of crucial factors such as the imputed value of farmers' family labor, land costs, and land interest. Instead, it predominantly focuses on inputs like fertilisers, seeds, and labor, thus inadequately reflecting the entire production cost. While serving as a benchmark for government crop procurement and offering farmers a guaranteed income for their produce, the MSP is vital for shielding them against market fluctuations and ensuring fair compensation, particularly during periods of price volatility or when market rates fall below the MSP. However, it presents economic challenges during bumper crop seasons and could exacerbate inflationary trends.
The discourse surrounding MSP is primarily concerned with the potential escalation of food inflation, which poses a risk to overall economic growth by limiting consumer spending. Agricultural support measures must ensure that they do not exacerbate wealth disparities among farmers, especially considering the existence of affluent farmers with lavish lifestyles who do not share the challenges faced by the majority of Indian farmers, particularly small or marginal farmers.
This underscores the need for comprehensive agricultural reform, including land reforms and income taxation targeting affluent farmers above a specified threshold. It is crucial to recognise the significant contributions of other economic sectors to nation-building efforts, thereby highlighting the importance of equitable policies across all sectors.
The social media narrative of “annadata” needing protection seems romanticised. The farmers deserve dignity, and viable livelihood. Farming is a profession like any other, but shouldn't be elevated to a pedestal. The farmers' agitation appears to be primarily driven by affluent farmers from few specific states. Farmers are in their livelihood sector, just as others in the country. There are millions of SME and MSME entrepreneurs, as well as gig workers, in India, many of whom are skilled and qualified but are either underemployed or unemployed. Farmers receive subsidies on fertilisers, free power, and water, and they aren't taxed on their income, unlike the rest of the nation. While it's understandable that agriculture needs support due to farmers often being at the mercy of nature and market forces, let's consider the plight of unskilled labourers, who are often even poorer. What guarantee of income and support do they receive from the government beyond MNREGA ?
Currently, the government establishes the Minimum Support Price (MSP) for nearly two dozen commodities twice a year based on recommendations from the Commission for Agricultural Costs and Prices. However, the existing MSP lacks legal enforceability, leaving the government with no obligation to procure farmers' produce and denying farmers judicial recourse in the absence of legal backing. As a result, the government holds sole authority over the quantity and quality of purchased crops.
It is noteworthy that while the MSP is officially announced for all crops, its effective implementation primarily benefits rice and wheat farmers, largely due to the government's extensive storage infrastructure tailored for these grains, which are pivotal in the public distribution system. However, this reliance on MSP assumes the government's logistical capacity at the state or district level to procure, store, and market significant quantities of produce in the event of a lack of buyers willing to pay the MSP. Yet, this logistical challenge presents formidable barriers and raises concerns about potential exploitation by intermediaries who may purchase crops from farmers below the MSP but above the prevailing market rate, subsequently selling them in regions with MSP infrastructure at a profit, thereby depriving farmers of their rightful benefits.
Despite the apparent simplicity of guaranteeing MSP, it conceals the potential to disrupt the financial integrity of the Indian economy. The projected cost of implementing the MSP guarantee ranges from Rs 10 lakh crores to Rs 17 lakh crores annually. To contextualise, this expenditure bracket could cover the entire year's capital expenditure on infrastructure projects in India, accounting for approximately 50% of the annual Union budget expenditure. Any legislative guarantee of farmer MSP would thus necessitate diverting resources from building new physical infrastructure across the country.
Notably, a CRISIL analysis indicates that the government would require a working capital of around Rs 6 lakh crore in the current marketing season if it procures only crops trading in mandis below the MSP. While MSP ideally serves as a support price and should be the last resort, it has increasingly become the first choice over time as MSP increases annually. Reflecting on past government data, paddy and wheat farmers have received nearly Rs 18 lakh crore over the past decade through MSP schemes, marking a significant 2.5-fold increase compared to the preceding decade before 2014. Additionally, farmers engaged in oilseed and pulse production have collectively received over Rs 1.25 lakh crore in MSP payments during the last decade under the current government.
The challenge of making an economic argument for the concept of Free Markets does not seem to apply to the politically sensitive topic of agriculture. Farmers are a part of the chain in a buyer’s market, leading to sudden supply increases relative to demand, putting downward pressure on prices. Lacking the market power to influence the prices of their produce, they sell at prevailing supply-and-demand-determined rates. Additionally, while some farmers, particularly those in more affluent segments of society, enjoy substantial wealth and exemption from income tax, marginalised farmers with fragmented land holdings continue to grapple with economic vulnerability. The fact that approximately 60 crore Indians are engaged in farming underscores the concerning levels of agricultural productivity. That is where the real challenge lies. Will the broader discourse encompass agricultural reforms to permit individuals and corporations to acquire extensive tracts of farmland? The current trend of farm holding fragmentation, from micro to mini plots, with each successive land division across generations, raises concerns.
As a Niti Aayog paper mooted last year, we need liberalisation and opening of the agriculture sector and drastic changes in the old regulations governing it to ensure a significant and sustained increase in farmers’ income. Advancement in science-led technology, an enhanced role for the private sector in both pre and post-harvest phases, liberalised output markets, an active land lease or ownership market, and emphasis on efficiency will equip agriculture to address the challenges of feeding its citizens. This will enable the introduction and promotion of knowledge and skill-intensive practices within agriculture, private and corporate sector investments in agriculture, new institutions of producers, integrated food system-based mechanisms, and new types of linkages between producers and end users, which in turn will lead to the modernisation of the sector.
However, unlike other commodities in the manufacturing or service sectors, the lack of self-sufficiency in food has far-reaching economic implications, spanning from sovereign concerns to social welfare, inflation, and forex depletion, among others. To be equitable to farmers, it's untenable to assert that we are a nation adhering strictly to free-market principles in agriculture. Instead, we have erected a national bulwark around domestic agricultural markets. Farmers lack the liberty to export their produce anywhere, particularly abroad. The notion of free markets also has a dangerous sign for agriculture, given the presence of traditional rent seekers in domestic markets. Even now, hardworking farmers scarcely receive a fraction of the final retail selling price of their produce.
Policies and reforms must be designed to prevent the creation of perverse crop cycles merely to exploit governmental schemes, which could ultimately jeopardise crop diversity and degrade farmlands. Enhanced access to credit is essential to empower farmers to make informed decisions about crop selection based on market demand and ecological considerations, rather than solely on eligibility for subsidies or support schemes. Furthermore, it is imperative to ensure that marginal farmers are adequately protected and receive fair prices for their produce. This includes implementing mechanisms to mitigate the risks associated with market fluctuations and ensuring that farmers have access to transparent pricing mechanisms.
Regardless of the economic costs to the exchequer, sustainable farming practices and pricing of farm produce must be ensured. While economic theories offer perspectives, agriculture is inherently a political topic, as it intertwines people, produce, and payment. After all, in a largely agrarian population, India needs firm political will before it can afford to tinker with agri-economics. Without agricultural liberalisation, such a balance of politics and economics would be a tightrope.
