IMA Analysis

Tuesday November 30, 2021

Farm Laws - November 2021

And the Winner – Vested Interests

Many have argued that the repealing of the three farm laws has been a political masterstroke. Analysts suggest that this should have a positive outcome for the BJP in state elections, specifically in Punjab and Uttar Pradesh. Whilst it is hard to say if this is indeed the case, what cannot be disputed is the fact that the Government’s submission to vested interests has undermined its standing and the credibility of the reform programme. Agriculture reforms were a necessity to prop economic output. This primary segment has been a drag for several decades, with rates of growth varying between 1.5% and 3% per annum. For one, it lacks productivity and more importantly, the support of the Services and Logistics sector to enhance delivery of farm produce. Many would concede that it took a brave politician to even consider them. The absence of investment in logistics weakens distribution and fair market prices. The absence of reforms will now undermine the investment necessary for this to happen. Sadly, the bulk of farmers will remain stuck in the clutches of subsistence farming, consequently dampening both investment and rural consumption. This will have spill overs on the industrial and services economy.

The blueprint of what was undertaken was actually drafted several years ago, but never considered seriously enough because of the expected political fallout. For the Government to have come so close to finally doing so and then buckling, perhaps suggests the susceptibility of policy in the face of vested interests. One may justifiably wonder if any future Government will ever muster the courage to try this again. Moreover, by giving in to a small brigade of vociferous opponents, the administration may have unwittingly set a precedent for future challengers to its decisions. In reality, the opposition to the farm laws was from a very tiny minority of vested interests that leveraged the system to their advantage. Undeniably, Arthiyas, or middlemen, played an important economic and social role within their community and consequently earned respect. Be that as it may, the monopoly they enjoyed over procurement created a situation where final prices paid to farmers for crop produce were often much lower than those offered by the Food Corporation of India and other Government agencies.

One important aspect of the farming supply chain is the need for a procurement and distribution network that could facilitate fair pricing and national supply chains. What was expected was investment in cold chains that would have ensured lesser wastage and in the longer term, better pricing and value addition. Whilst there is no hard evidence to prove this, as figures are frequently disguised, the general belief is that the wastage in Food Corporation storage facilities is anywhere between 20% and 30% per annum. With no one really accountable, together with an absence of the required investment, nothing can be done to change this. By freeing the agricultural market from the clutches of the APMC, bringing in contract farming and diluting the Government’s powers to influence food prices, the farm laws would have addressed many of these ills to a great extent. Many have shrugged-off the wider impact on the economy, as farming at 15% is a tiny fraction of overall output, but this argument is misplaced. As in manufacturing, where the actual production of a certain good is only a fraction of its total economic value addition – the bulk of it is in Services, through advertising, distribution, banking, etc – so too for farm produce. The real impact on the economy would have been through allied services.

With national debt now touching 90% of GDP, longer term growth will peter anyway. But on the positive side, India no longer need worry about being stuck in the middle-income trap, because it will now never get there, in the foreseeable future.