These bills passed in late September, drew flak from farmer unions for not being consulted, thereby sparking nation-wide protests, as well as criticism from opposition parties for the undemocratic way they were passed in the Parliament, that has a majority of the governing political party: ‘Bhartiya Janta Party (BJP)’.
A free-market model is an economic system where there is no government interference in fixing the price, as it is determined by the market forces of demand and supply. Individuals are free to make independent decisions and engage in voluntary exchange of goods and services. While some economists state that a free-market model has the advantage of a supporting a strong financial market, others argue that the liberal nature of such a market may encourage lobbying and black-market behavior. The implementation of a free-market model has been avoided in India since the Green Revolution took place in the 1960s, and most of the farmers generally sell their produce at mandis (wholesale markets) at government-approved floor prices called Minimum Support Price (MSP). A floor price is the lowest legal price that goods can be sold at, and governments generally use it to avoid prices from falling too low.
The new bills propose to change this way of doing business at the mandis, by allowing farmers to directly sell to private players at the market-determined prices. The objective was to bring private investments into the agricultural sector, cut transportation costs and let the farmers benefit from competitive prices.
The question then becomes whether a developing country like India can successfully adopt the neoliberal models that are in place in the USA, UK and Europe. It is interesting to note that these models, which are based on the concept of a free market, have not been particularly successful in the US either (since the 1960s, farmer’s income in the US has witnessed a steep decline and farm debt in 2019 rose rapidly to $409 billion, with the agricultural sector surviving on subsidies that the government provides). The free-market mechanism has not been in full effect as the US government has either raised or reduced the market-determined prices whenever the economic conditions were extreme. This interference has led to the creation of surpluses and scarcities in the US agricultural sector over the years.
India can probably learn from another developing country that introduced radical farm laws to liberalize the sector – Kenya experienced a rise in profits earned by agribusinesses after implementing the laws, but farmer incomes dropped by an average of 6% due to inadequate wage protection. According to the World Bank, Kenyan households that are solely engaged in farming contribute about 31.4% to the reduction of rural poverty, with agriculture being the largest source of income for the poor. Thus, India can compare its status as a predominantly agricultural society to that of the Kenyan economy, where the agricultural sector contributed an average 21.9% of the Gross Domestic Product (GDP) in 2017, with at least 56% of its total labor force working in the sector.
India must create a mechanism that suits its unique situation of being an agriculturally based economy with nearly 55% of its population being employed as farmers (Forbes, Dec 2020). A possible solution would be to make the Minimum Support Price (MSP) legal both within and outside the mandis so that the farmers are cushioned from a steep fall in market prices or exploitation from the corporates. Secondly, it is time for the government to dedicate a higher percentage of the country’s Gross Domestic Product to the agricultural sector. An OECD Economic Survey in 2019 stated that farmer support schemes and government subsidies to the agricultural sector amount to only about 0.4% of the country’s gross domestic product. The Annual Report (2019-20) of the Reserve Bank of India (RBI) mentions that credit growth to agriculture and allied activities decelerated in 2019-20. Another recommendation would be that the contribution of a country to its agricultural sector should be measured with the help of the Food and Agriculture Organization (FAO)’s index: Agriculture Orientation Index (AOI). It compares the Central Government’s contribution to agriculture with the sector’s contribution to the country’s economy. An AOI less than 1 indicates a higher contribution of the government to the agriculture sector relative to the sector’s contribution to the economy. The AOI index is a currency-free one and considers a country’s economic size, agriculture’s contribution to the country’s GDP and the total amount of government expenditure. Therefore, it allows for the setting of a universal and achievable target. As of the latest data available by FAO, India’s AOI was 0.42 in 2017, which is significantly less than that of a developed country such as Canada (0.62). At the global level, the AOI declined consistently from 0.42 (2001) to 0.26 (2017).
Lastly, another policy recommendation would be that more active Farmer Production Organizations (FPOs) should be formed, pooling farmer groups and their produce to decide fair prices. These FPOs will require funding and educational support from the government. For example, the National Egg Coordination Committee (NECC) is an association of poultry farmers in India. It gives indicative prices for eggs that are profitable for the farmers, but are not too expensive for the consumers to afford. Along with the FPOs that would supply seeds, fertilizers and machinery, link markets, provide training and technical advice to the farmers, the National Bank for Agriculture and Rural Development (NABARD) must provide credit support for financial intervention, market interventions and capacity building in the form of grants or loans. Initial success stories of the FPOs strengthen the premise that their role must be leveraged in India – in Varanasi, Uttar Pradesh, an FPO by the name of ‘Rameshwar Farmer Producer Company Limited’ established a wholesale outlet to facilitate the sale of farmers’ vegetables, where it decided to charge 5% as the commission for selling vegetables and return 2% of the commission to the shareholder farmers as a loyalty bonus, at the end of every month. Thus, the farmers had to effectively pay a commission of just 3% as against 6% charged by wholesalers previously. Besides providing such a remunerative model to the farmers, the FPO also started using electronic weighing machines to weigh the produce as opposed to the traditional, manual weighing scales used by other wholesalers in the mandis. The report published by the SFAC states that the under-weighing of the produce by an extent of 2-5% was common with these manual weighing scales.
The author believes that a combination of all these policy recommendations along with peaceful discussions with the farmer unions would go a long way in making a liberal model like the Free Market one flourish in India. Since the protests began in September of 2020, there have been more than 60 farmer deaths reported due to road accidents and illness, as these protesters have been exposed to severe cold and COVID-19 infections. Farmer depression and suicide rates are on the rise too. It is clear that tempers are running high and the Government must come to a consensus with the most valuable voter of the Indian economy.