Indian farmer at crossroads, it’s time to look beyond market and State

For the farmer of India, it’s a historic occasion. Prime Minister Narendra Modi has come out to declare that the three farm bills, termed by agitating farmers as “anti-farmer” would be taken back. The genuine issues and fears raised by the farmers and Opposition parties include the end of  the Minimum Support Price (MSP) regime in due course, irrelevance of State-controlled Agricultural Produce Market Committee (APMC) mandis, risk of losing land rights under contract farming rule, reduction in price of farm produce due to market domination by big agri-businesses and exploitation of farmers by large contractors through contract farming practices.

Given this background, the first question which arises is what would be the alternative? After decades of agriculture development, farmers continue to be vulnerable to frequent episodes of losses in their economic activity that neither the State nor the markets have been able to mitigate.

Market economy and State

In his book, Wealth of Nations (published in 1776), Adam Smith explains that in a market economy, guided by the motive of self-interest, individual decisions collectively determine the economy’s allocation of scarce resources through free markets for social good. 

In other words, operation of demand-and-supply forces, through a perfectly competitive market, results in optimal allocation of resources and a perfect market leads to social efficiency and maximum social welfare. But, in the real world, perfect competition is not so ‘perfect’ as it appears at first. That means unless demand and supply reflect, respectively, all the benefits and all the costs of producing and consuming a product, the prices determined in perfect competition may not necessarily be ‘perfect’ or ‘right’ ones. If so, perfect competition cannot ensure maximum social welfare or markets fail to achieve social efficiency. Economists call this ‘market failure’. 

In ordinary sense, market failure means that prices fail to provide the proper signals to economic agents — consumers and producers — so that the market does not operate in the traditional way. This is also precisely reflected in agriculture markets in India, where neither the producing farmers nor the consuming citizenry is satisfied with the prices. 

However, government policy interventions, such as taxes, subsidies, wage and price controls, and regulations, may also lead to an inefficient allocation of resources, or government failure. Given the tension between the economic costs caused by market failure and costs caused by “government failure”, policy makers are sometimes faced with a choice between inefficient market outcomes with or without government interventions.The real challenge today is indeed about finding the right balance between the market and government and to let farmers explore own institutions beyond the market and the State.

Collective action and cooperative economics

Agriculture cooperatives with over 400-million-member farmers are responsible for over 50% of agricultural production and marketing in the world, including India. It is no coincidence that the world’s most successful and stable economies generally also happen to have the world’s most co-operative economies.

Farmer collectives are therefore viewed as an important element in linking small holders with modern markets (input and output) as they provide many benefits for this interface. Further, primary producers’ organisations or collectives are being correctly argued to be the only institutions which can protect small farmers from ill-effects of globalisation or make them participate successfully in modern competitive markets. Producers’ organisations not only help farmers buy or sell better due to scale benefits but also lower transaction costs for sellers and buyers, besides providing technical help in production and creating social capital.

Dr Ramesh Chennamaneni, MLA, Humboldt Expert in Agriculture, Environment and Cooperation