Brainstorm Think

Where are the Markets?

Indian agriculture suffers from an absence of free markets, both in terms of inputs and produce.

This is the third post in our Brainstorm discussion on ‘The Crisis in Indian Agriculture’. Earlier posts: Intro1, 2.

A market economy is characterised by voluntary exchange, where prices provide the information that buyers and sellers need to know if a trade is worth it. The exchange takes place only when both parties stand to gain from it. Thinking in terms of profit and loss is just a way of keeping score of whether the proceeds from the sale are higher or lower than the input costs.

Does such a market exist for Indian farmers? Let’s take a look.

The prices of almost all the inputs that go into agriculture – labour, water, seeds, fertiliser, electricity, credit – are distorted through subsidies and other government controls. The only thing that varies is the level of distortion, which may be different for different states. It is believed that in the absence of such subsidies and controls, farmers won’t be able to operate and thrive — as if they are thriving now.

What about the produce? Are farmers free to sell their product to whoever they want, at the best price they can negotiate? The procurement prices of major farm produce are never mutually agreed, but dictated to the farmers. The agriculture market almost has a single buyer, in the form of the government. This is what economists call a ‘monopsony’ — as opposed to a monopoly in which case there is a single seller. The price in such a market is not arrived at by bidding and haggling through ‘an invisible hand’, but through negotiations between politicians and farm union leaders. The negotiation power of the farm union leaders comes from whether the elections are near or far away. Such a price fixed by the government is called ‘minimum support price.’ It is believed that in the absence of such a support price, farmers won’t be able to find buyers for their produce, or get a ‘reasonable’ price.

Farmers have an assured buyer in the government for their produce even though the price may not be mutually agreed. On the face of it, this looks like a good idea as it help protect farmers against the vagaries of nature. The unseen effect of this is that a majority of farmers produce food grain in excess of the demand, and less of vegetables, milk and poultry,  which the consumers may well want more. This misallocation is not easily corrected as the price signal has been distorted.

When businesses fail, entrepreneurs have the option to shut it down or to sell it to someone else who can run the business better than she can. This helps protect them from incurring further losses. Farmers can’t afford such a luxury, for they are not allowed to sell their land for non-agricultural purposes. This restriction to do with their property as they choose severely depresses its value, thus tying them to their farm.

Clearly, India does not have a marketplace in agriculture. For farmers neither get a fair price for their produce, nor are their input costs determined in the market. They don’t even have the option of getting out without taking a definite big loss.

This was not always the case. How did we get here? Let’s take a look at how and where the foundations for this crisis were laid.

Historical foundations of the crisis

At the time of India’s independence, we were free to decide our own future — or so we thought. In the discovery process for the path that would lead India towards rapid development, Indian leaders settled for a centralised planning model.

The four stated goals of central planning in India were a) abolition of poverty, b) liquidation of unemployment, c) reduction of income inequalities, and d) industrialisation.

It should be noted that among the four goals, the last one, industrialisation, is inconspicuous by its presence in the list of goals as, at best, a ‘means’ and not an ‘end’. However, policymakers at the time thought that these objectives were best achieved by focusing on ‘industrialisation’. To get this centralised planning model in place, India relied on centralised allocation of limited investible resources.

The majority of the resources of the country were directed towards achieving these objectives. Whenever and wherever necessary, private enterprises in banking, insurance, transport, mining, etc were nationalised towards achieving these objectives. Heavy industry was reserved exclusively for government investment.

Now this necessarily led to an almost total neglect of agriculture.

Highlighting the importance of agriculture in achieving these goals, especially in tackling poverty and unemployment, Professor BR Shenoy, the lone dissenting voice among the panel of eminent Indian economists that was to submit a memorandum on the second five-year plan, said[i]:

Expert studies have shown that, in India, an investment of Rs 1 crore of capital in agriculture adds to output Rs 57 to Rs 69 lakhs annually, in iron and steel Rs 19 lakhs and in textiles Rs 36 lakhs. The inference is that Indian economic development would take place several times faster than has been the case, if only we reversed order of priorities in our investment policies; i.e. gave high preference to agriculture in place of a wholly uneconomic accent on industry, at the expense of agriculture.

He went on:

Nor is it a matter of production alone, Agriculture would liquidate unemployment at a much faster pace than the same investment anywhere else in the economy. It has been estimated that an investment of Rs 1 crore in heavy industry – i.e. industries producing machines – would provide employment for 500 persons; for 1150 persons in large-scale industries producing consumer goods; and for 4000 persons if invested in agriculture.

That India suffered low per capita income and high unemployment through the planning period is no surprise.

As a recently independent underdeveloped country with a large uneducated population and huge arable land, Indians clearly had a comparative advantage in agriculture. It should have been the focus of Indian policymakers, but wasn’t.

Economic historian Sudha Shenoy quotes Michael Lipton to help explain the paradox facing Indian agriculture in her research monograph studying Indian central planning[ii]:

…the share of total Plan resources devoted to agriculture has declined over all four plans, yet planners insist on its importance; they persist in setting high targets for it while providing insufficient inputs to attain them. The explanation of the paradox lies in the urban bias of Indian planning and of the Indian socio-economic system. The urban elite of industrial employers and unionised employees, together with their rural allies, the urban-oriented big farmers, exert a major influence on planners and policy makers, and policy is largely conducted in the interests of the ‘grand alliance’. The vast mass of unorganiseable and illiterate small farmers are unable to be heard.

But haven’t we dissolved the Planning Commission and abandoned the practice of five-year plans already? Yes, we have.

We may have dissolved the Planning Commission and abandoned five-year plans, but we have not abandoned central planning, at least not for agriculture, as evidenced by numerous controls facing it.

In an earlier essay in Brainstorm, my fellow participant Nitin Pai called for the setting up of National Agricultural Goals (NAGs) with associated timelines in the next national agricultural policy. I humbly disagree with Nitin.

Just as Indian IT or banking or finance or manufacturing doesn’t have any national goals, Indian agriculture doesn’t need one either. Just as participants in all other sectors can (and do) coordinate through the market mechanisms of prices and profit and loss, so could every farmer – if only we let them be.

There is no reason why agriculture should be treated differently. There is nothing about agriculture that necessitates so many interventions, except possibly that it involves a large number of adult Indians who are eligible to vote.

 

[i] Page 192, “Planned Progress or Planned Chaos: Selected Prophetic Writings of Prof. B. R. Shenoy”, Editors Prof. Mahesh P. Bhatt and Prof. S. B. Mehta, 1996

[ii] Page 58, “India: Progress or Poverty? A Review of the Outcome of Central Planning in India 1951-69”, Sudha R. Shenoy, Institute of Economic Affairs, 1971

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About the author

Kumar Anand

Kumar Anand leads the research team at Nayi Disha in Mumbai. His research interests are in Indian economic history, history of economic thought and public choice economics.