Indian agricultural reform: What to make of the new farm Bills

Date:10-23-2020

India is facing massive twin crises in health and the economy. As in the past, the economic crisis has spurred the introduction of politically difficult reforms, this time in agriculture. Agriculture in India remains an important source of livelihoods, and farmers’ constituencies are politically significant. Constitutionally, agriculture is a state subject, which also makes coordinated national reforms more difficult. At the same time, various national policies designed to provide food security have played an important role in how agriculture is conducted in India.

The national government has introduced a set of agricultural reforms, in three separate bills, which were very quickly enacted as laws. The political rhetoric of the reforms has emphasised the goal of increasing farmers’ incomes. The means to this end that is supposed to be embedded in the new laws are various kinds of deregulation that will increase competition for agricultural output, thereby increasing farmers’ incomes. To the extent that the changes do not simply redistribute value across different parts of the supply chain (for example, benefiting farmers at the expense of middlemen), they must represent genuine efficiency increases such as reductions in transaction costs. Although, much of the attention has been on the trading of agricultural products, an even more important source of potential efficiencies is in production. The new laws contain some direct changes for the regulation of the production, and of course, changes in the regulation of agricultural marketing will also have implications for production.

The issues involved in the agricultural reforms are very complex (more so than a simple liberalisation), and much detailed analysis has already been produced. Here I will provide a more high-level take on where matters stand. First, there is the concern that the national government has acted without the cooperation of the states, and without a good understanding of the different situations of various states with respect to their existing policies towards agricultural production and marketing. There may have been a political case for acting quickly, and perhaps even for bypassing the states, but it seems fair to say that some of those gains will be illusory, as state governments and various farmer groups push back on some of the reforms, possibly delaying or even blocking implementation.

Second, the detailed comments on the three new laws by a range of analysts indicate some inconsistencies and ambiguities, which will also create challenges for implementation. What will happen to national food procurement, which is a central aspect of farming in Haryana and Punjab, or how contract farming will change, are two areas of note. But, there seem to be many other details at the heart of the potential reorganisation of trading of agricultural products that seem to have not been thought through. For example, issues of market power, interlinking of credit and intermediary services, and reorganisation of interstate trade do not seem to have been addressed very clearly.

Ambiguity and inconsistencies only heighten uncertainty with respect to the reforms. If this uncertainty is combined with another missing piece, namely, a clear analysis of how farmers’ income risks will be managed in a post-reform world, then the chances of acceptance and implementation go down dramatically. In other words, farmers are being asked to accept possibly significant new income risks, without any alternative risk management policies, in exchange for an untested promise of higher, but likely riskier, incomes. Existing regulations, however, poorly designed, are familiar and have relatively predictable consequences. There are also networks of relationships and institutional roles that has grown around existing laws, including the functions of intermediaries and state government agencies, and these may be destabilised. The new laws and the process of their introduction can only create anxiety. Indeed, the new laws could and should have been designed to address issues of risk and of institutional design in a manner that would reassure farmers.

It may also be reasonable to argue that agricultural marketing and trade reforms can only have second-order impacts on agricultural incomes. The new laws do contain new provisions with respect to commercial farming and the role of corporate entities, but the real issues lie in parts of agriculture that are more marginal. In that respect, the national government seems to have difficulty thinking clearly about how to improve the functioning of small producers, whether in industry, services or agriculture. For example, reform of agricultural marketing and trade could have been combined with strong new policies to improve credit access for small farmers, revitalise moribund agricultural extension services, targeted subsidies for adoption of technologies to improve the efficiency of water use or of access to water, crop insurance for small farmers, and so on. None of these require large sums of new money and would have provided reassurance and hope.

This preliminary assessment of the agricultural reform legislation reminds us of general themes. Indian economic policymaking in recent years seems to have shrunk in ways that hinder progress. For a large, heterogeneous country, the number of people and range of inputs in shaping laws and policies seems to be inefficiently low or narrow. Good design of laws and policies has a very high rate of return. India’s national government has won all its political battles and needs to focus on the struggling economy. The first steps in agricultural reform illustrate the strengths and the weaknesses of how the national government has been going about this task.

The author is Professor of Economics, University of California, Santa Cruz. Views are personal