Farm laws: Separating grain from husk

The most fundamental aspect of the market economy is the autonomy of the participants and the free flow of goods and services. Decentralised and devolved governance are a prerequisite of a market economy, so that a wide range of experiences and experiments can be undertaken in diverse settings for the best practices to emerge. They are also critical for sustaining the freedom and autonomy of farmers, traders and other stakeholders in the agriculture market.

Consider the debate over MSP. MSP has emerged as the most contentious issue in the ongoing debate over the new farm laws. Ironically, the new laws don’t mention MSP at all, and the government has been saying that it has no plan to dispense with MSP. On the other hand, many policymakers fret about the potentially ballooning cost of the MSP system to the exchequer, and the distortions in price and production it causes.

Yet, many farmers fear that the new agriculture market law is aimed at restricting the scope of the regulated APMC markets, making them uncompetitive with burdens of cess and taxes, in turn resulting in procurements of crops at MSP getting scaled back. To cut this Gordian knot, let us look at the regulatory cost borne by the farmers.

Given the regulatory stranglehold on agriculture—with many kinds of restrictions on trade and technology—the terms of trade have rarely been in favour of agriculture in the past 70 years. Even with the various schemes/subsidies on input and the MSP system included—as the late farmer-leader, Sharad Joshi, had pointed out in the 1990s—Indian agriculture was burdened with a “negative subsidy” or, in effect, taxed despite being widely touted as tax-free. Even the government of India later acknowledged this unique phenomenon at the WTO.

A 2018 review of agricultural policies in India (OECD-ICRIER) found that even after including price support and various input and service subsidies to agriculture, the overall producer support estimate (PSE) received by the farmers was -14%, on average, between 2000 and 2016. Between 2014-16, while the PSE had improved to a modest -6.4% (still negative), the consumer support estimate during the same period stood at 24.7% across all commodities.
It is also worth remembering that the BJP, in its 2014 election manifesto, had promised to adopt the Swaminathan committee recommendations, particularly that MSP should be set at cost plus 50%, to ensure an adequate return to the farmers.

In 2017, the government announced its intention to double farmers’ income (DFI) by 2022. Over the next two years, NITI Aayog produced multi-volume reports documenting the state of Indian agriculture and various ways to achieve DFI. But nothing really changed; instead, there has been never-ending debate on how to calculate the MSP!

Rather than being the minimum support price, the MSP has become an inadequate compensation for denying the farmers the true market value for their produce. That is exactly what Sharad Joshi had said in support of Karj Mukti for farmers. He distinguished karj mukti from loan waiver. The former is a recognition of the additional burden imposed on the farmers to favour the consumers, while the latter was charity from the government.

Yet, as the studies show, MSP and all the other subsidies don’t offset the opportunity cost of the lost income endured by the farmers over the past many decades. This is in addition to the fact that none of these measures reach a majority of farmers.

MSP is not a welfare subsidy for farmers, but a recognition of the injustice done to the farmers, and therefore a legitimate, though modest, effort to compensate them.

This storm was completely predictable when the market access ordinance was promulgated in June 2020. The new market access law seeks to bypass the state government regulated APMC markets, and insulates the proposed private markets by placing them outside the scope of the APMC law. With the APMCs sidelined/ handicapped by state government regulations, cess and taxes, the farmers legitimately worry that MSP will necessarily become un-operational.

The need is to deregulate and decentralise agriculture to liberate the farmers. Then, the vexing question of MSP may naturally fade way. Indian cotton and rice, with their growing global presence, show that even with limited reforms in trade and technology, Indian farmers can look beyond MSP. Clever constitutional jugglery is not a fruitful way to initiate any honest reforms.

The three new agricultural laws don’t meet these requirements. The laws on market reforms and contract farming are assaults on federalism, and further centralise the regulatory control. The Essential Commodities Act is a central law, and in the garb of reforms, the scope of this draconian law has actually been expanded despite its history of abuse and its role in stifling investment in agri-storage/logistics.

If there is one issue on which we need a non-political, non-partisan perspective, it is agriculture. Agriculture is tied to the local geoclimatic conditions. Therefore, a decentralised and devolved approach to agriculture would be most conducive, rather than a centralised ‘one size fits all’ approach. The Centre has to play an active and advisory role to complement the state and local government in providing a conducive policy environment for the farmers, which is tailored to local conditions.

Independent commentator, and a long time advocate of market reforms, with a particular interest in agriculture policies