India’s angry farmers need a better deal

By Andy Mukherjee

Drones dropped tear-gas canisters, and the police fired rubber bullets as Punjab and Haryana farmers marched toward New Delhi last week, navigating nail pads strewn on heavily barricaded roads. Similar scenes played out three years ago. Back then, farmers had amassed at the border of the Indian capital to oppose three hastily passed laws that would have allowed a greater role for markets in what has historically been a state-dominated food supply chain.

But the protestors saw Prime Minister Narendra Modi’s promise to transform agriculture as a backdoor entry for large businesses and eventual abandonment of so-called minimum support prices, or MSPs. These government-administered rates are key to the agrarian economies of Punjab and a few other Indian states where the government purchases large quantities of wheat and rice in designated markets, known as “mandis.”

While the new laws aimed to make the mandis — and their notoriously extractive middlemen — irrelevant, the farmers read them as a sign that the six-decade-old price mechanism itself would be scrapped. As the protest dragged on, Modi was forced into a rare retreat. He withdrew the laws and, in 2022, set up an expert committee that would, among other things, “make MSP more effective and transparent.” Hearing nothing from the panel, farmers decided to force a second showdown. They're demanding that the support prices should be codified as a legal right.

India’s national vote is due by May. A farmers’ revolt in an election year is a challenge to the political establishment not just in New Delhi, but also in France, Germany, Italy, Spain, Poland, Romania and the US. The difference between tractors blocking roads to Paris and government bulldozers trying to keep marchers out of the Indian capital is scale: About 44% of the country’s workforce is in agriculture, compared with 3% in high-income countries. As David Fickling and I wrote during the 2021 protest, the Indian figure is even higher than in 18th-century England.

The surplus farmhands need to move out to higher-productivity occupations, and not get stranded at a brick kiln. There has to be enough formal employment to absorb excess rural labour. That’s the broken link. Without the income from better-paying jobs, feeding the poor will keep draining state resources. The pandemic is long over, but some 800 million Indians are still on a plan that gives them five kilos of free wheat or rice a month, at a cost of $142 billion for the next five years.

Farmers are at the other end of this supply chain. It has to be a closed loop because the global market can’t be relied upon to feed 1.4 billion people. To induce local farmers to produce the nutrition required by a growing population, the whole apparatus of minimum support prices came into existence in the mid-1960s. Twice a year, MSPs are announced for 22 crops. Between September and October, the government procures roughly 40% of annual rice production and, in March, sweeps up a quarter of the wheat output. It buys small quantities of lentils and coarse grains, but for other commodities the support prices are just signals to the market. Private buyers don’t have to pay the MSP.

For the two staple cereals, however, the support prices are a crucial element of economic and political calculations. Can they be given a legal status? The answer depends on who will be covered by that law. To disallow private purchases below MSP would be a mistake. Capital will flee agriculture in the face of price controls. Any ironclad guarantee, as Sukhpal Singh, a professor at the Indian Institute of Management in Ahmedabad, has argued, should only mandate the government “to be responsible for delivering this right and not tie the private sector into it since the latter never promised any minimum price to farmers.”

In other words, leave the markets alone and yet do something about the 40 US cents a day that an average Indian cultivator was earning before the pandemic. Let authorities work out the cost of crop inputs, put a price on family labour, throw in a profit margin, and set a support price.

When the harvest is sold to private parties below the MSP, the state would have a legal duty to pay the farmer the difference as cash, directly into their bank accounts. Sure, the presence of a floor price can lead to overproduction. Taking a leaf from a pilot program in central India, the government will have to design the price signals to meet its policy objectives — boosting oilseed output, for instance, or discouraging water-guzzling crops in low-rainfall areas. It’s also possible that traders would band together to underpay farmers who would bargain less because New Delhi would pick up a part of the tab. Large farm producers’ organizations acting as buyers of last resort could check the collusion problem.

Paying only for price deficiency will cost a fraction of the 10 trillion rupee ($120 billion) the government would have to shell out if, in theory, it ended up acquiring all produce covered by MSPs. Still, even a top-up won’t exactly be free. Before the 2019 elections, Modi announced a 6,000-rupee annual handout for smallholders, as a counter to the opposition Congress Party’s promise of a universal basic income. Then there are subsidies on fertilizer and the power used to pump groundwater, frequent loan bailouts and a rural job guarantee that acts as an important safety net for the landless poor.

Adding one more commitment would make sense only if set off a virtuous cycle. Rural demand has been in a multiyear funk, and the threat to crops from climate change is very real. Slightly more prosperous farmers may help create better-paying jobs in cities, allowing for the emergence of a permanent urban working class that can graduate to paying market rates for food.

That’s when the government can slowly start to reduce its own role. India banned overseas sales of wheat after promising to feed the world in the aftermath of the start of the war in Ukraine. Rice exports are being throttled with restrictions including a 20% levy. Letting farmers keep the upside in good years — with downside protection in bad ones — must be a part of the new bargain.