Agriculture and Farm Laws in the Lens of Economics

The Diplomat

The Farmers‘ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 and The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 were passed by Lok Sabha on 17th September 2020.  Even after five months of these bills being passed by both houses, a majority of the farmers and social activists have refused to see it as a law. The magnitude of the protest in Delhi has only grown since its inception, the matter is indeed political now. The big questions remain unanswered amidst this ideological battle; Is the entirety of the farming community really under threat with the new farm laws? Should the Government comply with the protestors and end this long-running feud between them? Let us get a factual understanding of the situation.

This article hopes to analyse the economic sentiments of the situation and in no way aligns itself with any political regime. We hope you, the reader understand the same and garner economic insights.

Problems with Agriculture and the APMC Mandis: 

Agriculture in India has a textbook problem of disguised unemployment, which means that an average worker in agriculture is being used sub-optimally and as a result even their wages are sub-optimal. i.e., agricultural incomes are much lower than what they should be. Another issue is low land productivity, the average farm landholding in India is a mere 1.08 hectares. About 86% of farmers hold less than 2 acres of land. Technological investments cannot be efficiently made on such small plots hence low productivity. 

The APMC Mandis are a Monopsony (Single Buyer Market) with one fixed price and farmers have to sell their produce to local Mandis only. Larger farmers have a lower cost of production due to economies of scale, however, the same isn’t true for small farmers which are the majority (86%). This means that if a farmer’s cost of production was higher than the fixed price by APMCs, then he would have to sell it for a loss. Hence, there were differential profit margins and no bargaining power with the farmers. The next alternative to them is the infamous middleman, which is bad for consumerism as well since it unnecessarily spikes the value of the final product Moreover, Mandis have formed cartels with traders in the past notoriously hiking onion prices, being the only official intermediary between farmers and the market, allows this sort of exploitation. There are several other problems with the Mandis such as an unjust high fee levied for their outdated services such as a lack of online facilities, a locally limited clientele, lack of availability of information for the farmer, highly skewed procurement of minimum support price (MSP) crops (mostly rice and wheat), overall it is a very inefficient organization.

The Farm Laws in Brief: 

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill allows private investment in agriculture and hence the farmer gets more freedom and bargaining power to sell his produce at any place and any price. 

The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill is a fair and effective contract enforcement law to help farmers from getting cheated or exploited by any private vendors.

The Essential Commodities (Amendment) Bill was passed much earlier on June 5th, which empowers the central govt. to regulate the supply of various essential commodities only under extraordinary circumstances such as war, famine, hyperinflation, etc.

Short Term Implications:

Farmers have the freedom to choose whom to sell to and at what price to sell by engaging in a contract with the private players. This contract shifts the risks of fluctuating market prices of the products to the sponsor of the produce, eliminating chances of a loss. This would just be the beginning. Since the motive of the private players is to maximize profit, the private players would also make investments in the farms to increase productivity and yield. The middlemen in the system would also be weeded out as farmers would much rather deal with contract-enforced vendors.

Long Term Implications:

In the long run, the first major change would be the increase in farm incomes. According to the Keynesian Theory of Income and Employment, disguised unemployment indicates over employment of Labour (L) per unit of Capital (K). This means that our total production is lesser right now compared to if we had employed lesser people in agriculture. To make a correction one needs to either decrease ‘L’ or increase ‘K’. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill by the inclusion of private players essentially implies an increase in capital (K). Hence, the farm laws will increase farmer income by increasing the total output of agriculture. 

Another major change would be a substantial increase in average farm productivity. As we saw, the laws encourage investments into the farms in the short run, in the long run, another process will take place; The counter-argument against the bill that “private businesses would prefer dealing with one large farm rather than 10 small ones” is a pro for this bill. What this does is, incentivize co-operative farming i.e., combining lands and cultivating crops on a larger farm. This would increase the average farm size from the current 1.08 hectares, making technological investments possible in smaller farms too! Meanwhile, The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill is taking care of this through the use of more than 10,000 FPOs (Farmer Producer Organizations).

The argument that the APMCs may not survive in the long run is not entirely a problem. The farmers would stop using APMC services only if they are getting a better deal from private enterprises. The MSP given by the Government would act as a shield against exploitation as the private firm would have to quote a better price to the farmer if they want to strike a deal. Hence, one could even say that the APMCs going bust is a good sign! Moreover, the increased competition from private firms could also make the APMCs efficient and further increase farmer welfare. 

The Protestor’s Demands

The protestors have the following major demands:

  1. To repeal all the farm laws
  2. To make MSP a legal right by introducing it as a bill
  3. To repeal the fine and the punishment applicable for stubble burning

Trying to make MSP a legal right shows that the farmers believe the APMC Mandis would shut down from the competition. Firstly, even though MSP is announced by the central govt., the channel through which it is done is via the state-run Mandis. Hence, differential infrastructure levels among state Mandis lead to a difference in procurements of MSP crops as well. According to a NITI Aayog report, only 6% of farmers benefit from MSP with Punjab, Haryana, and Uttar Pradesh accounting for more than 52% of the total procurements which happen to be the states with the highest farmer agitation. This high dependency on the government in these states has led to the growth of only crops covered under MSP which has led to a severe fall in groundwater levels and soil quality over the years.

Mr Mohinder Gulati (Former Chief Operating Officer, United Nations Sustainable Energy for All) states in a recent letter he addresses Greta Thunberg,

 “Normally, the market price is lower than the MSP. This is what creates a great opportunity for the broker-mafia. Brokers and politicians purchase wheat and rice from farmers in other states at a lower price (about 60% of MSP) and pay them in cash, bring it to government procurement stations in Punjab, Haryana, and UP, sell it at a higher price (MSP) and get paid by check. This is counted as their agriculture income which is tax-exempt. So these brokers, often politicians or campaign financiers, not only earn the huge arbitrage but also convert the cash (generally crime money) to legitimate tax-free income. New laws would bring in transparency and make it difficult to legitimize crime money.”

MSP has not served its purpose and has been misused in the past. Legalizing it in its current form will not solve any problem in the farming community. Despite these problems, the government has assured the farmers that MSP will not be withdrawn.

Stubble burning in India is a direct result of low agricultural incomes. Since agriculture in India currently lacks capital, investing in better harvesting technologies is not a go-to option for the majority of farmers in India. Hence, they tend to stick to stubble burning as an efficient way of clearing out the soil before the next seasonal sowing of crops. However, the trade-off is ecological damage, as the pollution levels in the NCR are severely affected. The farm laws solve this problem in the long run as these changes will increase capital in agriculture leading to investment and higher farm incomes. It is advisable that the Government withdraws or reduces the severity of the penalties on stubble burning in the short run. However, they must revert it, once agricultural income levels increase by a considerable amount.

After months of protest and multiple talks between the farmers and the government, there seems to be no sign of agreement.

While some say that the farmers should withdraw and some that the Government should repeal the laws, with neither party budging, no solution appears in sight.