Corporates can help expand market rather than driving out mandis

Arvind Panagariya

That nearly all opposition parties have joined the farmer protests against recent reforms of agricultural markets is not surprising. In democracies, opposition parties are there to oppose, sometimes even policy changes that they themselves championed when in power.
What is surprising, however, is that the present episode has seen even some leading economists switch sides. Specifically, the last two Chief Economic Advisers (CEAs) under the United Progressive Alliance (UPA) government, who had both recommended reforms similar to those just enacted, have now come down heavily on them.
The Economic Survey 2011-12, which the then CEA Kaushik Basu authored, states that any farmer “who gets better prices and terms outside the Agricultural Produce Marketing Committee (APMC) or at its farm gate should be allowed to do so.” It adds, “Considering significant investment gaps in post-harvest infrastructure of agricultural produce, organised trade in agriculture should be encouraged and the FDI in multi-brand retail once implemented could be effectively leveraged towards this end.” The survey even recommends allowing imports of agricultural commodities in limited quantities.
Successor CEA Raghuram Rajan made the same recommendation in the Economic Survey 2012-13. This survey states, “It is necessary that we evolve mechanisms for linking wholesale processing, logistics and retailing with farm-production activities so as to generate enhanced efficiency, better farm prices, etc. The private sector should be allowed to operate in developing these market linkages… Recently the government allowed FDI in retail, which … can pave the way for investment in new technology and marketing of agricultural produce in India.”
Both CEAs had thus endorsed the entry of not just Indian private companies but also foreign multi-brand retailers in agricultural marketing. Yet, both have now argued that the new laws open the door to the exploitation of farmers by private companies. It is possible that they made the recommendations in the Economic Survey despite holding contrary views because this was the government policy. But, to my knowledge, neither has offered such a clarification.
Be that as it may, the substantive question the critics must answer is precisely how a private company would exploit the farmer rather than serve as counterweight to the APMC commission agent who, in cahoots with the wholesaler, fixes the price of his produce without any consultation with him while also charging a hefty commission?
When reminded of this pitfall of their argument, critics switch to arguing that the large corporations would simply drive out the APMC mandi and then pick up the farmer’s produce for a song. One wishes that corporations had this kind of power to drive the government out of an activity it chooses to undertake. Reform advocates would then be spared decades of effort to persuade the central and state governments to exit many manufacturing activities in which they persist.
Economists Ramesh Chand and Ashok Gulati further remind us that private corporations such as Nestle and Hatsun have been buying milk from hundreds of thousands of small milk producers side-by-side with government cooperatives for years. Rather than exploit the producers, they have helped expand the demand for their milk by greatly expanding markets for milk products.

It bears reminding that agricultural marketing reform is not as new as critics would have us believe. Prime Minister A B Vajpayee first initiated it through the Model APMC Act, 2003. With encouragement from all subsequent central governments, to-date, 20 states have amended their APMC Acts with 16 notifying rules and regulations implementing one or more features of the Model Act. Additionally, Bihar entirely did away with its APMC Act in 2006. Broadly speaking, states such as Andhra, Bihar, Gujarat and Madhya Pradesh that embraced the Model Act in earnest have seen agriculture grow faster than other states. Between 2006-07 and 2018-19, the sector grew at annual average rates of 7.1%, 5.3%, 3.9% and 6.8%, respectively, in these states.
The corresponding growth rate in Punjab was a paltry 1.8%. Some critics compare the poverty of Bihari farmers to the prosperity of Punjabi farmers to argue that APMC reform hurt Bihar. Such comparison is wholly fatuous. Bihari farmers are poorer than their Punjabi counterparts despite faster agricultural growth in recent years because they started out far poorer. Punjab, which had ranked 2nd among all states in per-capita Net State Domestic Product rankings till 1992-93, fell to the 10th rank in 2018-19.

Some critics have argued that unlike the 1991 reforms, which responded to a balance-of-payments crisis, the present “big bang” reform has been introduced without there being any crisis in agriculture. But is it not the case that India’s farmers are in perpetual crisis, partially due to poor realisation of price for their produce? And can the present reform be really characterised as big bang? In a large number of states, it has been under implementation in some form via the Model Act for a decade or longer. Moreover, whereas the 1991 reforms had dismantled the licence-permit machinery in one stroke, the current reform leaves the APMC structure intact, allowing the farmer to continue to transact as before.
A final criticism is that the reform has been introduced without sufficient prior groundwork. The flip side here is that prior groundwork can become an excuse to deny the farmer justice perpetually. None of telecom and airline reforms under PMs Narasimha Rao and Vajpayee, right to education reform under UPA and the Goods and Services tax under PM Narendra Modi’s government would have progressed to their current stage had the respective governments waited till the ground had been fully prepared.
(Panagariya is professor, Columbia University. He has been chief economist of the Asian Development Bank and vice chairman of Niti Aayog)
Agriculture laws need reform but not at the expense of small farmers

Kaushik Basu & Nirvikar Singh
Both of us have argued in the past that India’s farm laws are antiquated, that the APMC Acts need reform, and that overall the agriculture sector needs to be reformed. On the face of it, we should be happy with the new farm laws, which seem to expand the choice that farmers have. But, on close examination, we are convinced that these reforms, even if they increase efficiency, will hurt farmers, especially small and marginal farmers.
The faults lie not in the laws’ headlines or even most of the explicit provisions, but in what sits between the lines. First, it is good to expand choice, but with greater choice and freer markets come risk. There is no indication of risk mitigation policies, especially for poor farmers, alongside these new liberalisation laws. There is reason to fear what the farmers fear, namely, that with the planned deregulation, minimum support prices (MSPs) and government purchases will gradually be replaced by corporate buyers with inordinate market power. The present system has asymmetries of power, but these will be magnified, especially for small farmers.
Second, the nature of the amendment of the Essential Commodities Act, which is admittedly inefficient in its present form, by allowing holding of larger stocks, may facilitate big players coming in and heavily influencing markets via their stocking policies.
Third, reading the fine print, one realises that what at first sight looks comforting, namely, the scope for farmers for dispute resolution, is actually not so. Even if the initial plan to restrict redressal to the level of sub-district magistrates is expanded to include regular courts, any legal challenge will be costly and risky for small farmers pitted against corporations.

Apart from these kind of specific problems, there are more overarching concerns. This entire exercise of crafting a new regulatory system seems to ignore the fact that farmers, the world over, receive subsidies and protection. This is true of Chinese agriculture and true of US farmers. To dismantle much of the government’s marketing structure without concomitant risk-mitigation support, as is being planned in India, is to further disadvantage Indian farmers — already struggling with small farm sizes and powerful intermediaries — compared to those of other nations.
We believe that, in general, it is better to give people more choice. But this cannot be without exception. Various types of “voluntary slavery”, such as the idea of “warranteeism,” proposed in the slavery-era American South, ostensibly expand the options of workers, but the real beneficiaries are the slave masters. No one would now advocate this type of expanded choice.

The reason is the expansion of choice is an unmitigated good when one side is not effectively without other reasonable options. When that is not the case, such as when we have a monopoly or a monopsony, and the other side faces a survival threat, we need laws to shore up the strength of the small players. The United States, bastion of the free market, realised this as early as 1890 when it adopted the Sherman Act, to curb the market power of big corporations. There is now renewed writing by prominent scholars, such as Eric Posner, Glen Weyl, Suresh Naidu and Cass Sunstein, that in the age of large digital corporations, monopsony power is on the rise and the state has to be active in protecting small retailers and workers.
India’s reform seems to be going the other way by jettisoning protections for the vulnerable, rather than updating those protections and making them more effective. In the case of agricultural reform, deregulating markets should be accompanied, if not preceded, by a programme that enables small farmers to escape their precarious status, by offering financial support for shifting to higher-value added crops, organising new farmer-controlled marketing organisations to equalise bargaining power, providing training for informed market participation, and expanding access to non-predatory and reliable credit.
In this context, the claim that those who are protesting represent a small proportion of farmers, and are those who benefit from the current implementation of MSPs and public procurement, needs to be addressed. Indeed, this system has flaws, but the problems have to do with narrowness in geography and range of crops. These features have led to unsustainable groundwater use and increased pressure on small and marginal farmers, even if they are in relatively better-off states. Rationalising and broadening the MSP and procurement system would make sense in this situation, alongside any liberalisation in marketing structures.

We recognise that our agricultural laws need reform and liberalisation. But the new bills have serious problems, as did the non-democratic process that generated them. Given the profound changes they are set to make, it was surprising that the bills had to be tiptoed past the state assemblies, expert scrutiny and serious parliamentary debate, and enshrined as law.
It is not clear that piecemeal amendments can now repair the situation. The government should withdraw these laws and quickly return to the drafting table to create new laws that are efficient and also fair, and incorporate the perspectives of farmers. This new process should also involve the states, which have constitutional responsibility for agriculture, and were already trying to implement reforms suited to their needs. Indian farmers deserve this, not the vilification that has been inflicted on them these past few weeks.
Basu is the Carl Marks Professor of International Studies at Cornell. He was India’s Chief Economic Adviser and Chief Economist of the World Bank. Nirvikar Singh is Distinguished Professor of Economics and Co-Director of the Center for Analytical Finance at the University of California, Santa Cruz