Of vested interests and a discredited economic model: CEA Subramanian’s take on current farm upheaval

By Krishnamurthy Subramanian

The opposition to the seminal reforms in agriculture is based on a discredited economic model that undermines the benefits of competitive markets – a model relying on the misguided tryst with socialism that never delivered India’s tryst with destiny. To understand how this discredited model cost India four decades of economic prosperity, it is crucial to study the 2,000 year economic history documented by Angus Maddison.

From being the economy that contributed over one-third of global GDP for three-quarters of known economic history, India lost its pole position because of the undermining of markets – first under British rule and then through our misguided tryst with socialism. As the Economic Survey 2019-20 demonstrated using a plethora of carefully constructed evidence, India’s historic pole position was achieved by marrying the invisible hand of markets with the hand of trust that, in turn, drew its vitality from India’s spiritual traditions.

Since 1991, economic liberalisation and reforms by successive governments across the political spectrum – except during the lost decade of 2004-14 – have enabled a return to these core economic principles. That these timeless principles – advocated in as disparate Indian literature as the Arthashastra and the Thirukural – work is seen in the enormous prosperity well-regulated markets have delivered since 1991. Even the Chinese economic miracle is testimony to the role of markets in enabling economic prosperity for citizens.

The opposition to the agricultural reforms relies on the discredited economic model of undermining markets to retain the political support of vested interests. It’s thus a desperate attempt by the vested interests to maintain the status quo that has served their narrow interests. The reforms were long overdue as existing laws kept the small farmer enslaved to the local mandi and their rent seeking intermediaries. While every other producer in India had the freedom to decide where to sell his/her produce, the small farmer did not.

APMC mandis enabled local monopolies to prosper at enormous costs to the small farmer. As he didn’t have the wherewithal to store his produce and couldn’t sell his produce anywhere else but the local mandi, the small farmer was left to the (nonexistent) mercy of the intermediaries.

John Nash, economics Nobel laureate and main protagonist of A Beautiful Mind, showed in his research that the value a seller gets in his relationship with the buyer depends upon whether the seller has an alternative option. If a seller can credibly threaten to sell his produce to buyer B instead of A, the credible threat forces buyer A to bargain with the seller, thereby providing him a higher price. However, if the seller has no alternative option, the buyer exploits his monopoly power to squeeze the last paisa out of the seller.

For medium and large farmers, this problem isn’t acute as they can either store their produce to sell once the deluge during the harvest is over or sell in another mandi. The buyer therefore realises that the threat of losing business from the large farmer is a credible one. So, the large farmer doesn’t get adversely affected by the status quo.

Research by IIM Ahmedabad professors Sharma and Wardhan provides forceful evidence of this phenomenon. The marginal farmer receives an abysmal 2.7% of the marketing surplus in wheat while medium and large farmers receive 30% of the same surplus. Thus, the seller and middlemen corner 97.3% of the surplus when they deal with the marginal farmer. Such cornering is greater in wheat than in rice. This difference is important because wheat is primarily produced in the states with dominant mandis – Punjab and Haryana – while rice is produced significantly in Andhra Pradesh where mandis are not as dominant. Can there be better proof of the unfair exploitation of the small farmer in the current setup?

The agricultural reforms enable competition, a sine qua non to enhance the small farmer’s income. Now the small farmer can sell directly to a food processing firm. Of course, if the farmer so decides, he can still sell at the local mandi. However, as postulated by John Nash, now even the small farmer has bargaining power because he is not beholden to the mandi but has alternative options.

Such choice increases the price the small farmer can get for his produce. With this change, e-NAM can become more effective, thereby enabling the farmer to access more markets. When combined with real-time price information across mandis, the small farmer can be provided a fair deal.

Who gets hurt by these reforms? The middlemen who creamed the surplus and those who benefit from the support of such middlemen. Quite pertinently, the two states that are leading the opposition – Punjab and Haryana – are the ones where mandis are most powerful, have the highest procurement through the mandis, and the state governments generate the maximum revenues from the levies charged in the mandis.

The toxic growth of vested interests around the APMC monopolies has perpetuated the ultimate irony in our politics, where agriculture is a political holy cow. The irony is that every political word eulogising the unsuspecting small farmer has only honey coated the poison pill delivered to him through every political deed that has strengthened the vested interests. The current reforms, therefore, mark a welcome departure where words and deeds are not dissonant for the small farmer.

The writer is Chief Economic Adviser, Government of India. Views are personal.

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