Why Modi’s Laws to Liberalize Farming Worry Farmers
(Bloomberg) -- New legislation in India aims to fundamentally overhaul the way farm goods are produced and sold in the country of 1.3 billion people, almost half of whom depend on agriculture for their livelihood. A decades-old system of farmers selling mainly through state-run wholesale markets is being opened up in what Prime Minister Narendra Modi says marks a watershed moment that will help make India more self-reliant. Opposition parties and even one of Modi’s allies say it will leave those working the land vulnerable to exploitation by big private buyers. Farmers, who make up a powerful voting bloc, worry their income could fall, despite Modi’s promises to the contrary.
1. What’s the problem been?
Farming has remained relatively untouched by the push to modernize India; its growth has consistently lagged behind the overall economy for years -- often significantly. (The poverty rate in rural India is about 25% compared to 14% in urban areas, according to World Bank data.) Many farmers rely on the most basic of technologies and own small landholdings that preclude economies of scale. And the state-run wholesale markets they sell their produce into are often disorganized at best, dysfunctional at worst. In some, the federal government’s buying program doesn’t operate, leaving private players as the only option. That typically entails accepting prices well below government-set minimum rates, particularly after the middleman has taken a cut.
2. What has the government done?
Parliament passed two farm bills on Sept. 20 that the government says will boost farm output and income by removing many restrictions on sales. The new rules aim to promote barrier-free trade within states and across the country. Farmers and buyers will be free to trade outside the physical markets designated in each state -- at farm gates, private warehouses, processing plants or even on new electronic platforms. State governments are prohibited from charging any fees or levies on sales outside the old venue. Farmers can sign contracts to sell their products well in advance of planting for as many as five years out.
3. What’s the reasoning?
In a series of Twitter posts, Modi said that removing the decades-old restrictions aims to liberate farmers from bullying by middlemen. Farmers also may be more willing and able to invest in modern technologies and better seeds if they have an assured income or can get an advance from the buyer. Morgan Stanley says in a report that “the reforms are critical structural steps to remove supply-side bottlenecks and improve productivity of the farm sector by attracting investments and boosting rural incomes.”
4. Who’s against it?
Some opposition groups say the farm sector, which accounts for more than 40% of employment in India, should not be left at the mercy of market forces. Rahul Gandhi, a leader of the opposition Congress party, said in a tweet the law would “dilute the country’s public-procurement system and lead to the exploitation of farmers by traders, processors and bulk buyers. A long-time supporter of the ruling Bharatiya Janata Party, Shiromani Akali Dal, which rarely goes against Modi’s coalition, said farmers fear the demise of the government’s guaranteed purchases of certain agricultural products at set prices, which could lead to wild fluctuations in a country prone to weather extremes.
5. Is that going to happen?
Modi has said the government will continue to shield farmers. The day after the law passed he tweeted about a cabinet decision to raise some minimum prices for winter crops, an announcement seen as an attempt at reassurance. Although the government sets price floors for more than two dozen crops, it mainly buys wheat and rice for its welfare programs and some pulses and oilseeds to prevent distress sales by farmers. The guaranteed prices are used as benchmarks for various farm commodities, but private buyers don’t have to pay them. Some lawmakers want the law amended to change that, and to require the government to monitor transactions outside state-run markets to check on prices farmers are getting.
6. And the budget?
India has set aside 1.15 trillion rupees ($15.6 billion), or roughly 4% of its 30 trillion-rupee budget this year, to pay for food-related subsidies. The bulk of this goes toward procuring crops at the guaranteed prices. While on the face of it, any increase in prices would entail a budgetary cost, that translates into actual spending only if the procurement takes place. That remains to be seen.
7. Who wins, who loses?
The government’s theory is that the introduction of more competition for crops -- on top of government agencies -- could lead to higher prices for farmers, as well as savings on transportation and packaging. Bulk buyers, traders, processors, corporates and exporters may benefit as well as they can save on market fees by buying direct from growers. That could boost their competitiveness in the global market. India is already the world’s biggest cotton grower and ranks second in wheat and rice. On the flip side, state governments may lose a good chunk of the taxes they collect on sales at wholesale markets.
8. What about Modi?
The prospect of protests over the legislation has added to the worries of the Modi administration, which is struggling to check the coronavirus pandemic, resolve a tense border standoff with China, revive a shrinking economy and generate jobs. But they have so far been confined to a few states. The law could be challenged in the Supreme Court, but only its application, not government policy.
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