Farm laws: What India can learn from Kenya’s agri experiment

In the debate on new farm laws, emotions are running high with concerns that small farmers are being pitted against large agri-businesses. The new laws contain mostly untried policies and it is difficult to gauge what might happen when they are implemented. Surprisingly, little of the discussion has drawn on lessons learned from countries that have implemented large-scale policies to encourage agri-businesses.

Since the advent of market-oriented policies in the 1980s and 1990s, many governments in developing economies moved away from controlling agricultural markets to encouraging participation by private-sector firms. Hard evidence on how these policies have impacted farmers has proven difficult or come from very limited experiments, because of a lack of data on farmer-buyer relationships and the complexity of quantifying the many clauses that go into farm policies.

Recent research at the London School of Economics (LSE) overcomes these hurdles by examining a decade of high-quality farmer-buyer data from Kenya during a period when it introduced radical farm laws to encourage agri-businesses. Much in the same way as India is doing now, the Kenyan government introduced these laws with the expectation that the rise of such businesses would transform smallholder agriculture for the better. Over 20 pieces of legislation were repealed to encourage agri-business participation in crop markets that made up over 70% of small farm incomes.

It had its expected impact on the rise of agri-businesses. Their overall market share as buyers of farm produce almost doubled, reaching 38% by 2010. But within the crops that were “liberalised”, the story was not as straightforward. Soon after the policy was implemented, small farmers became more likely to sell these crops to agri-businesses, especially in areas that were more reliant on these crops due to agro-ecological conditions. But, five years on, many had stopped selling to these businesses.

Farm incomes from these crops had fallen. Farmers who were reliant on agri-businesses saw their incomes fall by an average 6%. They sold household assets to maintain their day-to-day consumption.

What went wrong in Kenya is what farmers in India fear. Kenyan farmers expected to see productivity gains from selling to agri-businesses, which initially gained market share at the expense of other buyers. The ease of doing business increased in buying and marketing. As agri-businesses moved into these new activities, greater investment outlays and hence greater profitability was needed to finance them.

Farmers began facing bigger agri-businesses which, on average, saw their profit margins rise by 5%. While some farmers were able to leave their agri-business relationships, many were facing bigger and fewer buyers in crop markets.

The Kenyan experience illustrates what can go wrong with large-scale untried policies and what provisions need to be in place to avoid hardship. In its revised agricultural strategy in 2010, Kenyan policymakers reflected on how small farmers can suffer when ease of doing business is prioritised in markets where there is “no critical mass and enough capacity for the private sector to grow”. India must heed this lesson before implementing its farm policy. Of course, this is not to say India will have the same experience. We are certainly in a better economic position in terms of per capita income, about a third higher than Kenya. But there are many common problems in smallholder agriculture, such as low productivity, investments and market access, which keep farm incomes low across India.

Kenya, if anything, was better placed than many in terms of political will and an infrastructure for poverty alleviation. India has often looked to Kenya for its innovative poverty solutions, such as online payment systems. Lessons can be applied in the current context too. A top-down policy, uninformed by bottom-up realities, is unlikely to transform the livelihoods of small farmers.

Swati Dhingra is an associate professor at LSE. The article draws on ‘The Rise of Agribusinesses’, co-authored with Silvana Tenreyro, supported by the European Research Council

The views expressed are personal