Economic, political implications of repeal of farm laws

Ashok Gulati writes: Reforms in agriculture could get stalled. The tryst with the laws should be a lesson to the ruling party about values of consultation and transparency.

In a surprise move, Prime Minister Narendra Modi announced that the government will repeal the farm laws in the Winter Session of Parliament. He said that although these laws were passed with the best intentions for the betterment of farmers, his government could not convince the agitating agriculturists about their positive potential. PM Modi said that the government will constitute a committee comprising representatives of the Union and state governments, agri-experts and scientists to come up with a new package for farmers. He chose the occasion of Gurpurab to make his announcement. Is this a tactical retreat or surrender? What are the likely implications of the decision, economically and politically?

As far as agriculture is concerned, it will keep chugging along the path it has been on for about a decade or so. The agri-GDP growth has been 3.5 per cent per annum in the first seven years of the Modi government — the same as in the first seven years of the Manmohan Singh government. One expects this trend to continue — there might be minor changes in the agri-GDP depending on rainfall patterns. Cropping patterns will remain skewed in favour of rice and wheat, with the granaries of the Food Corporation of India bulging with stocks of grain. The food subsidy will keep bloating and there will be large leakages. The groundwater table in the north-western states will keep receding and methane and nitrous oxide will keep polluting the environment. Agri-markets will continue to be rigged and farm reforms will remain elusive for some time to come unless the promised committee comes up with more meaningful solutions.

But what will happen to farmers’ incomes? And will the Modi government accept the farmers’ demand for giving legal status to MSP? The latest Situation Assessment Survey of the NSO reveals that the income of an average agri-household in India was only Rs 10,218 per month in 2018-19. Translated to today’s prices, and applying roughly 3.5 per cent per annum growth in real incomes, the income of an average agri-household would be around Rs 13,000 today. Add another Rs 500 per month under the PM-KISAN scheme, and this is roughly the level of the monthly family income in rural areas for the largest segment of our workforce (roughly 45 per cent) — one that is engaged in agriculture. This is not a very happy situation and all out measures need to be taken to increase rural incomes in a sustained manner. The question is how? Should that be through higher MSPs or diversification towards high-value agriculture?

Given that the average holding size stands at just 0.9 ha (2018-19), and has been shrinking over the years, the income a farmer can earn from producing basic staples is not hard to guess. Unless one goes for high-value agriculture — and, that’s where one needs efficient functioning value chains from farm to fork by the infusion of private investments in logistics, storage, processing, e-commerce, and digital technologies — the incomes of farmers cannot be increased significantly. There is no doubt that this sector is crying for reforms, both in the marketing of outputs as well as inputs, including land lease markets and direct benefit transfer of all input subsidies — fertilisers, power, credit and farm machinery.

However, the most interesting implication of the PM’s announcement is going to be political. There is talk that behind this tactical “retreat” there is a political gamble. There is a strong possibility of the BJP joining hands with former chief minister Amarinder Singh — he has openly talked about this in the media — and work with him to win back power in Punjab. The turmoil within the Punjab Congress could come in handy to the BJP in this quest. The other possibility is that the party could repair its broken equation with the Akalis in Punjab. The coming days will throw up interesting outcomes in Punjab. But overall, if the Congress in Punjab is dethroned, and another party comes to power in the state, backed by the BJP, Modi might feel that his tactical retreat on farm laws has paid him back handsomely.

However, the BJP’s stakes in the elections in UP are much more than in Punjab. The U-turn on farm reforms could be aimed at checking the rise of Rakesh Tikait in Western UP. It’s difficult to say if the BJP can manage to achieve this objective. But one thing is certain: The agitating farmer leaders and opposition parties will surely be emboldened because of this “victory”. Farmer leaders are already asking for the legal guarantee of MSPs for 23 agri-commodities. Their demand could increase to include a larger basket of commodities. Similarly, there could be demands to block the privatisation reforms of public sector enterprises — Air India, for instance — or to scuttle any other reform for that matter. The net result is likely to be slowing down the economic reforms that are desperately needed to propel growth. Instead, we may witness freebies being showered in the run-up to state elections, followed by more freebies before the General Election in 2024. This competitive populism can give some succour to the poor in the short run, which they deserve, having suffered badly during the pandemic period. But going overboard in this respect could slow down investments, and thereby growth and job creation. So, it could turn out to be a trade-off between short-term freebies (read income support) and medium- to long-term loss with respect to the momentum of economic growth and job creation.

On a positive note, the tryst with the farm laws could provide important lessons to the BJP. The most important lesson being that the process of economic reforms has to be more consultative, more transparent and better communicated to the potential beneficiaries. It is this inclusiveness that lies at the heart of democratic functioning of India. It takes time and humility to implement reforms, given the argumentative nature of our society. But doing so ensures that everyone wins.

This column first appeared in the print edition on November 20, 2021 under the title ‘The setback & the lesson’. Gulati is Infosys Chair Professor for Agriculture at ICRIER

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