The recent farm laws passed by Parliament have generated a furore and concern amongst farmers. Good economic reasoning will point out that they are much needed reforms. The farmers involved in the protest are majorly concerned about the removal of Minimum Support Price (MSP) mechanism and the sentiment of being ‘sold to corporates’ is being echoed by farmers and the commentariat.
However, the reforms, in more ways than one, give greater economic freedom and agency to farmers, which will eventually result in greater efficiency and prosperity. While many parties, ranging from farmers’ unions to scholars, have voiced their opposition to the laws and support to the farmers, this piece emphasises that the two positions are not antagonistic – agricultural reforms increase farmer’s welfare.
The case against MSP
The MSP system is a relic of an era where India had perpetual food shortages and thus the government had to ensure quantity and give price guarantees in order to incentivise farmers. This was largely carried out through the state run agricultural mandis. Though the new laws do not mention MSP explicitly, the protesting farmers fear that the removal of the mandis will also result in the disappearance of MSP.
It is no wonder that states that have disproportionately benefited from the MSP regime, such as Punjab and Haryana, are in the forefront of the protests. Yet, what is surprising is that even in these states, awareness of MSP is limited. Only 51 per cent of the farmers in Punjab and 31 percent in Haryana were aware of the existence of MSP as per NSSO data from 2013.
The countrywide statistic is dismal – 71 per cent and 79 per cent of farmers were not aware of MSP for paddy and wheat respectively. It is much higher for other crops. Another telling statistic is that only six per cent of farmers in India take advantage of MSP, according to a Union government committee report. Therefore, the effect of the existence or disappearance of MSP is likely to be limited.
Second, MSP has led to excessive stocking of wheat and paddy, which has exceeded buffer norms by around 2.5 times. This automatically translates into higher economic cost to the Food Corporation of India and thus, a higher debt burden which has crossed Rs. 3 lakh crore (the railway budget itself is around Rs. 1.7 lakh crore). As mentioned, MSP was established when the agri management context was that of shortages. Now that we are a grain-surplus economy, we need to transit toward a market-driven price mechanism, which can either prevent such surpluses by allocating resources better or absorb them when they occur.
Lastly, and most importantly, MSP distorts price realisation by setting a floor price. Greater control of prices by the government, especially in times of surpluses is unwarranted. By removing barriers in the functioning of the market especially with regards to middlemen in the mandis, farmers gain by better competition between buyers.
Why more reforms are needed
While the current set of reforms are proving to be difficult politically, this article argues that this is just a start and more needs to be done, especially in the domain of land reforms. Land holdings in India are small and fragmented, which leads to the dismal productivity of agricultural labour.
Over the years, the average land holding size in India has been falling and stood at 1.08 hectares in 2015-16, down by 8 per cent from the 9th Agricultural Census (2010-11). In addition, the share of small and marginal land holdings in the country stand at 86.21 per cent of the total operational holding while the share of medium and large operational holdings has decreased in the recent years. Larger landholdings can lead to economies of scale and higher productivity. Consider a situation where land remains fragmented and two farmers separately employ a tractor to till their land of two hectares each. However, since the tractor has the capacity to till both the lands with negligible marginal cost, there is loss of efficiency and unnecessary additional capital costs.
It is a well-known fact that agriculture contributes to about 16 per cent of the GDP while it employs about 43 per cent of the labour force. A broad interpretation of this figure is that additional people employed in agriculture are not contributing much to what is being produced. Inefficiency is inevitable.
Couple this with another statistic. As per NSSO data from 2011-12, Shifting a person from agriculture to a relatively low-skilled job in a sector like construction raises his productivity by over 60 per cent and wages by about 70-80 percent (talk about doubling farmers’ income!). Moving him to manufacturing raises his productivity by 313 percent. All these facts highlight that agriculture has been severely underperforming and there is a need to either make agriculture productive or shift away employment from agriculture.
Enhanced role of markets and the private sector will, at least in expectation, begin to consolidate land holdings. Labour productivity will not automatically improve with the removal of the monopoly of APMCs, but should be coupled with land reforms, as undertaken by a few states in the recent months. An ideal land policy will allow less productive farmers to exit the market by selling their land and investing the capital elsewhere and for productive farmers to buy and consolidate their land holdings.
Mitigating spillover effects
While the new laws have heralded much needed reforms, there will be some spillover effects that need to be addressed. If these bills, coupled with potential land reforms, lead to migration of the unproductive labour from agriculture, which sectors are going to absorb this surplus labour? Are other sectors prepared for it? How can we ensure upskilling of this migrating labour force? How can these laborers be brought under a social safety net?
These questions beg forward thinking and a massive mobilisation of resources in other productive sectors. A successful example is the High School Movement in the US that helped capture a quarter of the workforce that moved out of agriculture over the course of one working lifetime. Students, in schools itself, were trained for careers in factories and offices. Something radical of that magnitude may be needed.
(Vedant Monger is an economic analyst at Arthashastra Intelligence)
The views expressed above are the author’s own. They do not necessarily reflect the views of DH.