Farmers and labourers over a privileged few – India is finally going the right way

While the coronavirus pandemic is wreaking social, economic and political havoc across the world, the Narendra Modi-led NDA government has introduced bold structural reforms in the agricultural and labour sectors. Even though these reforms have been debated and discussed for a long time, it has taken unusual political courage to implement them, particularly when India is going through a difficult economic time. However, discussion on the pros and cons of these reforms has, by and large, either focused on their impact on growth and development, or affirmative-versus-negative government – deregulation, privatisation. This, in my opinion, is narrow and simplistic.

We need to have a broader discussion on whether these reforms respect, strengthen, and protect individual rights. Before we proceed, we must agree that the government, even in a democracy, consists of men (or women) whose primary objective is acquisition and retention of power.

As James Madison aptly reminds us: “If men were angels, no government would be necessary…In framing a government which is to be administered by men over men, the great difficulty lies in this, you must first enable the government to control the governed; and the next place, oblige it to control itself.”

Opening markets to farmers

First, the Agricultural Produce Market Committees (APMCs) were set up by state governments with an intention to provide farmers with easy access to markets. Farmers were considered to be small, simple-minded, and prone to exploitation. Therefore, to protect and safeguard their interests, the government regulated that all buying and selling of agricultural produce would happen in notified areas called “mandis” via licensed brokers. Furthermore, it was believed that self-regulated agricultural markets had a natural tendency towards underemployment, and purposeful action by the government was necessary to keep the agricultural economy at full employment.

In a nutshell, every aspect of the agricultural market – who could sell (buy), where to sell (buy), and for some commodities, the price – were to be regulated by the government. Unfortunately, over time, such a system was dominated and exploited by large farmers and brokers who had privileged access to the government at the expense of small and medium farmers. For example, it is estimated that only 6 per cent of the farmers of paddy and wheat have benefitted from minimum support price, according to the Shanta Kumar Committee on FCI Restructuring, 2015.

Will the Modi government’s new farm Acts benefit the farmers? First, it is a common fallacy to believe that the invisible hand of the market does not require the visible arm of the government. On the contrary, a well-functioning market requires the government to enforce contracts, settle disputes, and administer justice. And, in some instances, as Keynes had argued, purposeful government action is required when aggregate demand and supply is below the full employment level. Having said that, the new act does expand the rights of the farmers – (a) any citizen with a valid PAN card can directly purchase from the farmers outside the notified areas. A key implication of this is that agricultural markets are no longer limited to private players with privileged access to the government or those in power, but they have been opened up to farmers and other individuals with natural “propensity to truck, barter, and exchange” (Adam Smith, 1776). In addition, this will allow farmers to come up with spontaneous solutions to their problems rather than solely rely on those dictated by the government or government-appointed experts.

Protection for labourers

Second, the labour laws. As Professor P.C. Mahalanobis bemoaned in 1969, “…welfare measures tend to be implemented in India ahead of economic growth, for example, in labour laws which are probably the most highly protective of labour interests, in the narrowest sense, in the whole world.” He cited Japan as an important example, which introduced minimum wages only after per capita income of the country had reached $250-$300 per year. The good Professor warned, 50 years back, that the form of protection India had instituted for 5 per cent of its labour force would be an obstacle to growth and increase inequalities.

The original intention of the labour laws, which uniquely in India preceded economic growth and industrialisation, was to protect labourers from exploitation of the capitalist class. In reality, however, the law created two classes of workers: (a) formal workers – a privileged few (less than ten per cent of the labour force even today, according to the Economic Survey, 2020), who benefitted significantly from the protection of the law, for example, restrictions on hiring and firing, which delinked compensation from output, and (b) the second class of workers who were informal – these workers practically had no protection from exploitation.

However, the real cost to these workers was not in terms of exploitation, but the deprivation of rights to decent job opportunities for generations, which would have naturally emerged in the absence of stringent labour laws. The unintended consequence of the draconian labour laws was an unnatural and lopsided industrial development, which was capital intensive, where labour was a small fraction of total costs (perhaps why existing industrialists do not care much about the labour laws). Even for those few industrialists engaged in labour-intensive sectors, success and survival depended on privileged access to government, rather than on technology and productivity enhancement.

Consequently, a large number of workers remained informal and worked in small firms where productivity growth was highly curtailed. What is striking is that such a small fraction of the formal workforce was able to extract such privileges from the government at the expense of the many. Perhaps, the key to this lies in Mancur Olson’s (1965) theory of collective action – smaller exclusive groups are in a better position (in terms of costs and benefits) to organise their activities and bargain for collective action (protection) as compared to larger groups (informal workers). For example, the political and militant might of this small group via strikes and other means, such as rail roko and chakka jam, to disrupt daily life was a bargaining chip that resulted in rich dividends.

In conclusion, the reforms in agriculture and labour will have far-reaching implications in terms of expansion of individual rights, which, so far, were enjoyed only by a privileged few. These reforms do not imply a limited role of the government, in contrast, they redefine the role of the government in terms of what Friedrich A. Hayek advocated in The Road to Serfdom: “…that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody.” India is finally witnessing this much-needed rightward course correction of our political economy – a move towards enhanced individual liberties.

The author is an economist and former member of Prime Minister’s Economic Advisory Council. Views are personal.

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