On the Distress of Indian Farmers – The Introduction

Of the three major sectors of any economy, agriculture is the primary sector. It is prior in time and naturally enough forms the basis for the other two sectors — manufacturing and services. Without a solid foundation provided by an efficient agricultural sector, no society can prosper.

Everybody — factory workers, quantum physicists, doctors, programmers, musicians, writers, politicians — needs food. Farming is the oldest occupation and all civilizations begin as essentially agrarian societies. Agricultural success is the necessary precondition for the advancement of civilization. Without an agricultural revolution there can be no avenues for social, technological, and economic development.

The claim of this essay is that India has not had a comprehensive agricultural revolution. All the other problems that India faces derive from that failure. The good news is that India has the opportunity to have an agricultural revolution. It has always had that opportunity. Primarily because of plain idiocy — let’s not sugarcoat this bitter fact — India has failed in progressing much beyond subsistence agriculture. India’s abysmal poverty follows relentlessly from that fact.

First let’s briefly lay out the outlines of how an economy grows from an agrarian society to become a complex modern economy. Subsistence agriculture is the first stage. Most of the labor is involved in growing food and a bit of animal husbandry. There is very little surplus. When times are good, population expands and maintains a precarious balance between the available food and the number of mouths to feed. It’s a Malthusian era. Life isn’t complicated but there are no luxuries either. Everybody is materially very poor.

At the start, technology is very primitive, and is mostly agricultural. By technology, we mean the knowledge people have about how to get things done. They know what to plant, when to sow and reap, etc. Slowly people discover better methods to grow things more efficiently. That’s technological advancement. The invention of the plough, the use of draft animals and irrigation were technological breakthroughs that raised agricultural productivity. That meant fewer people were needed for food production and therefore labor could be available for non-agricultural occupations such as weavers, potters, carpenters, metal workers, etc.

All these non-agricultural workers traded their produced goods and services for food. Continued increases in agricultural productivity led, first, to a fall in the proportion of labor employed in agriculture; and second, the surplus from agriculture could be used to build the non-agricultural sectors. That is, the surplus from the agricultural sector was used to grow the non-ag sector. How? By making the terms of trade disadvantageous to the ag sector. That is, the exchange rate was biased in favor of the non-ag sector.

Thus, in the initial stages of economic development, the ag sector is taxed and the non-ag sector is subsidized. Why? Because the non-ag sectors are too small and don’t produce any surplus anyway. You can’t make infants work. But with time the non-ag sectors begin to grow relative to the ag sector in terms of value of production as well as labor employed. Ag may have employed 80 percent of the labor force and non-ag 20 percent, at some time; gradually that situation gets reversed and you end up with only a very small fraction of the labor force in agriculture.At that stage of economic development, the non-ag sectors are taxed and the ag sector is subsidized.

The US has had its agricultural revolution and therefore graduated to be a post-agricultural economy. More than 50 percent of the US labor force was in agriculture a century ago. Today, less than 2 percent of US labor is in agriculture. American farmers are subsidized. The manufacturing and services sector of the US are taxed. American farmers get umpteen billions from the government.

The situation at present is this: India has not had an agricultural revolution. Farm productivity is extremely low. Around 60 percent of Indian labor is in agriculture. Indian farmers are taxed. The Indian non-ag sector is subsidized. It came as a big surprise to me when I first encountered that idea.

What’s the basic mechanism for this taxing of ag and the subsidy of non-ag? It’s through the aforementioned terms of trade adverse to the ag sector. Primarily what you do is protect industry through various policy levers. One of those is called “infant industry protection.” By providing protection to industries, industrial output is more costly than they need to be. This cost is passed on to the ag sector.

Suppose efficiently produced tractors can be exchanged for 1000 units of agricultural products. But inefficiently produced tractors are exchanged for 2000 units of ag products instead. That’s how the ag sector gets the short end of the deal.

There are various ways of allowing the industrial sector to be inefficient, all of which are used in India. One way is to limit competition in the industry through licensing; another way is make the industry exclusively public sector; a third way is to have barriers to imports (tariffs and quotas); and so on.

The story of the transition from an agrarian economy to a modern 3-sector economy is simple. You start with all of the labor engaged in agriculture. Then productivity increases lead to release of labor from ag for employment in the non-ag sector. The two sectors trade with each other — food in exchange for no-ag commodities (goods and services.) As ag productivity continues to grow, more labor is released which gets absorbed in the manufacturing and services sectors. The manufacturing sector produces the tools that the agricultural sector needs, such as farming equipment. Labor continues to move away from the ag sector till only a very minor fraction of the labor force is in agriculture.

This is “agricultural demand led industrialization” or ADLI. Here’s what I wrote in 2003 December about that:

The transition from an agrarian to an industrial society was the great challenge that faced economies before. Much attention was paid on ways to make the transition. Of the various models of development (such as export-led growth, import-substitution industrialization, and others) used it is instructive to recall one called agricultural development led industrialization, or ADLI.

ADLI recognized that cost-reducing technological change increased agricultural productivity and therefore increased rural incomes. Increased rural incomes provided a demand boost for manufactured goods both for consumption as well as for use in agricultural production. The increased demand for domestically manufactured goods raised wages which in turn were spent on the consumption of agricultural output. On the labor side of the market, as agricultural productivity increased, labor shifted from the agricultural sector to the manufacturing sector. Thus the industrialization of the population was achieved at pace with the labor transition and was based on increased agricultural productivity attained through the use of appropriate technology.

[Source: ADLI: A Lesson from the Age of Industrialization.]

There are two necessary conditions for the transition from an agrarian to a non-agrarian economy. First, education. Without basic education, the labor released from agriculture cannot be absorbed in manufacturing. Second, even with a workforce capable of being absorbed in manufacturing, if there are no jobs in manufacturing, it only leads to unemployment or underemployment.

The Indian government has been the biggest barrier to Indian education. That’s a big problem whose baleful impact affects all sectors of the Indian economy. That’s the first strike against Indian agriculture. So also the government’s policies have prevented the manufacturing sector from growing. Industrial labor and licensing policies are to blame. If industries are prevented by the government from growing, they cannot absorb labor. That’s the second strike. And now for the third strike.

India could have been a manufacturing giant considering its immense labor force. But that did not happen. China became the world manufacturer.

Indian agriculture could have been highly productive. India’s land mass is 7th largest in the world, behind (in order) Russia, Canada, China, US, Brazil and Australia. But India has the second highest quantity of arable land (second only to the US.)  With modern technology, India could have had a highly productive agricultural sector. But unfortunately because of the idiotic policies of the Indian government, India is suffering, not just Indian farmers.

I’ve already noted that industrial policies and education system are critical. What else is missing? Markets. Unimpeded markets for land and for agricultural commodities.

The market for agricultural commodities are heavily distorted. Farmers cannot sell their produce in open markets. They have to go through middle-men who are government or quasi-government entities. This drives a huge wedge between farm gate prices (the price that farmers receive) and the consumer prices. The farmer sells onions at Rs 10 a kilo, and the consumer buys them at Rs 30 a kilo. Both the farmer and the consumer suffer — and the government agents (including politicians and bureaucrats) make a pile without any work.

Land markets are distorted. Farm land cannot be sold for non-farm use. Farm productivity dictates the value of farm land — which is almost always lower than non-farm use. Then there’s the grandfather clause about who is allowed buy farm land: you have to prove to some bureaucrat that you or your immediate ancestors were farmers.

Let’s make that concrete with a hypothetical scenario. Farmer Sharad Joshi owns 2 hectares of land. He toils hard and at the end of the year, his net income from the land is Rs 2 lakhs. His family is dirt poor. He is at the end of his tether. He wants to sell the land and get out of farming.

Farmer Amit Singh is somewhat better at farming — let’s say he can get Rs 2.5 lakhs of income from that land. Only a marginal increase in income. So Singh’s offer for Joshi’s land will be limited by that.

Now suppose Manoj Malviya Industries needs land to expand. In those two hectares, Malviya Industries would employ an additional 100 people and have a net increase in income of Rs 100 lakhs. So Malviya would be able to offer 20 times or more Singh’s offer for Joshi’s land. Joshi would exit the farming business, take his money and do something else — perhaps educate his children so that they can find non-farm employment in the cities.

But in India, Joshi will not be able to sell his land to the highest bidder (which will necessarily be a non-farming venture; ask me why.) Instead, some crony of a bureaucrat, Hemant Kapoor, will claim that he’s a farmer, buy the land from Joshi at a very low price of Rs 10 lakhs, work with the bureaucrat to transform it into non-agricultural and sell it to some developer for Rs 200 lakhs. That is why the government does not allow a free market in land — because if they did, the bureaucrats and politicians will not be able to suck the life blood of the poor farmers.

Just by the way, here’s something you can bet your life on. Any policy or regulation that the government makes is always — let’s repeat that — always good for the politicians and the bureaucrats, and almost always not good for anyone else, and definitely harmful for at least some. Therefore, if you wish to find out if a policy will be enacted, just note whether it will benefit the government; if yes, then it will happen; if no, then it will not happen.

Farmers suffering because of bad policies? Look carefully and you will find that it is good for the politicians and the bureaucrats. They make the policies that drive the farmers to kill themselves. And then the politicians and bureaucrats with fresh blood on their hands use it as an excuse to get greater power and use that power to wreak even greater damage and enrich themselves more.

I  think that Indians will never be free until the last politician is strangled with the entrails of the last bureaucrat.

With that introduction to the topic, I am ready to look at the problem of farmer’s distress in India. Next up.

[This post is in response to a request for comment from Keshav Bedi.]

 

Author: Atanu Dey

Economist.

10 thoughts on “On the Distress of Indian Farmers – The Introduction”

  1. “The farmer sells onions at Rs 10 a kilo, and the consumer buys them at Rs 30 a kilo”… It is 1:20 here in most cases. Farmers in Nashik are currently selling Onions between Rs.1 and 2 a Kilo. It retails at 20 a Kilo in my neighborhood. A Ratio of upto 1:3 exists in developed markets and is considered ‘efficient’. In India the ratio is upwards of 1:10. Almost always.

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  2. Btw the most interesting ‘Economics’ worth investigation is India’s farm and rural sector. Many regulations at work here. Land ceiling act, Essential commodities Act, Minimum support price and Land use regulations ALL are instruments that enrich the police-politician-bureaucrat nexus. It is a nice little racket that works for them. A farmer CANNOT decide what he gets to do with his land. He can’t even build a warehouse. If he manages to build one, he wont get the power supply or permits for storing ‘essential’ commodities that is another racket since the Indira Gandhi’s times. “If you are storing farm produce to make a profit, you are evil”. The ‘ugly bania’ in old Hindi movies was a ‘ration chor’ who hid bags on paddy and wheat in his court yards from where the cops and the hero will confiscate the grain and give it away to the hungry poor.

    But I am NOT sympathetic to farmers because they elect one of their own leaders who happens to be a landlord of their caste. It is these leaders who suck them to death. They know where and who it can hurt the most. That is why most Indian politicians come from Agrarian background. E.g. Sharad Pawar, Chandrababu Naidu,Deve Gowda, Laloo Yadav are classic examples.

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  3. A recycled post from elsewhere.

    “To all those who think food prices are going up, here are some alternatives.

    a) Grow your own food in your ‘gated’ enclaves.

    b) Change your food habits. Switch to cheaper sources of protein and carbs.

    c) Contract with a farmer for your supply of food by paying him in advance (I can assure he won’t cheat you unlike your real estate agents or other corporates)

    d) Change your buying habits…stock it up during harvest season right at the source.. drive to the nearest farm and load your boots.

    f) Make farming your second occupation.. that way you save taxes too. Dont buy plots and schemes. Buy farmland. Its more glamorous and meaningful than a ‘corporate’ job where you perhaps get paid for doing nothing or have to compromise your self-esteem for sake of some tin pot boss.

    g) Organize a protest march at Jantar Mantar and demand that food imports and FDI in food retail be allowed without any duties and restrictions.

    If you can’t do any of these, do not complain of food prices. Farmers are not obliged in any manner whatsoever to grow for you. He too wants to buy 1Cr apartments and he too wishes to educate his children in top schools for corporate jobs.”

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  4. Another recycles post

    “Just like a corporate CEO, a farmer has NO moral or ethical obligation to feed the nation for cheap while he continues to get exploited by the usurers, commission agents and rest of the feudal ilk who have successfully created an ecosystem of permanent loot. So Indians should STOP expecting potatoes to retail at Rs. 5 a Kilo. If Potatoes or Onions are beyond reach, following options exist

    1) Eat Tapioca or Sorghum.
    2) Grow your own veggies in your Kitchen
    3) Switch to cheaper sources of Nutrition incl. Beef..
    4) Vote for Walmart.
    5) Finance the farmer NOW to assure you of a fixed quantity and price of whatever you want to eat next year.”

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  5. Another one.. Why is farmer not an entrepreneur?

    “Builders can hoard real estate. Stock market racketeers can hoard stocks. Jewelers can hoard gold. Money changers can hoard currencies.But a farmer (in many cases who double up as traders and commission agents) cannot hoard onions and grains. Something that he grows on his land, using his labor and his resources.

    As Supratim says a farmer is fundamentally an entrepreneur but he is not looked upon such by the state and society in general. He is looked upon as an Anna daataa, the giver of food. This is a view that must change.

    If I were a farmer and a farmers leader, I will make sure that Onions cost Rs. 200 a kilo all year long and I am fully capable of making that happen. Well I will only sell the export surplus in Indian markets. Let the state allow imports if they want to regulate prices”

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  6. Another one from long time ago..

    “I have an intense problem with the categorization of economy into Agriculture, Industry and Services and then all the disconnected analysis that erudite do based on this eternal classification.

    Agriculture is every F.IN bit an ‘industry’ in its own right. It is another phenomenon that Labor moves from one sector to another IF opportunities exist. That is NOT necessarily because Industry or services is more rewarding. Not always the case. Labor migrates for a VARIETY of reasons. A barber in a village is a part of both services economy as well as agriculture economy. He might be tilling some land too or he perhaps is a labor in both ‘sectors’.

    Producing Tomatoes is no different from producing Cars. AS FAR AS economic value addition is concerned. From the point of view of wealth creation, a farmer is every bit an entrepreneur just like the owners of the Automobile company. Both follow identical investment and accounting standards. Both take risks. Both predict something that affect their business favorably or unfavorably. In fact a farmer takes more risks. Weather being the most important risk of all. Both hire and deploy labor – both skilled and unskilled. Both pay bills for consumables and utilities. Both negotiate with a variety of ‘services’ providers and product sellers (pesticides, urea…) . Both try to maximize profits.

    Unless Agriculture is looked at as an ‘Industry’ as ‘important’ as say Aviation or shipbuilding or steel making or personal grooming, the economists are fooling themselves. They can never understand how the economy works.

    Farmers do NOT need special favors. I can prove that even a small farmer with 1 acre of land can produce something to make 4 lacs a year PROVIDED the state facilitates the export of his produce or allows the farmer to make use of his land differently. e.g a brick kiln or perhaps a abattoir or perhaps a warehouse for storing farm produce.That is still Agriculture if you must call it something. Arun Jaitley if you wish to help a farmer become rich somehow, just try and find ways to help his ‘migration’ to something… some other industry, some other city or some other country or some other skill. Can you do it?”

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  7. 1.) I don’t think that small countries have much of an agricultural sector at all. And therefore, I don’t think that it’s necessary to have an agricultural sector for a country to prosper. Such a thinking assumes self sufficient economic systems with no interactions with other countries.
    2.) Your claim that “even with a workforce capable of being absorbed in manufacturing, if there are no jobs in manufacturing, it only leads to unemployment or underemployment” ignores the aspect of entrepreneurship considering the fact the substantial chunk of our workforce is self employed.
    3.) When you say the farmer is taxed, he/she is taxed only in his capacity as a buyer of goods whose prices are inclusive of taxes. Otherwise, farming in India is exempted from taxation.
    4.)Subramanian Swamy in his studies on Chinese economy had argued that China is not a manufacturing giant. It merely adds value to semi finished goods manufactured by countries like Japan and exports it to U.S. and Europe. It’s due to this that China had a huge trade deficit with countries like Japan but surplus with western countries. China invested hugely in infrastructure and to fuel it’s growth along these lines.
    5.)You say that farmers cannot sell their produce in open market. Is there some law which prevents them from doing so?
    6.)The argument that politicians give against allowing farmers to sell their land is that private groups or government will pressurize the farmer to sell his land or aquire it via fraudulent means. This was the hullabaloo against the Land Acquisition Bill which BJP brought in the beginning of its term.

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    1. @keshavbedi,

      “5.)You say that farmers cannot sell their produce in open market. Is there some law which prevents them from doing so?”

      The Law STILL restricts the movement of produce across the borders by a variety of ways, incl. the ‘quasi’ govt. markets like APMC that continue to be a major market for the farmers. All APMCs are managed by rowdy friends of local politicians who make the members of the management committee of APMC. Secondly the price line set my the Govt. viz. MSP for food grains sets no basis for price discovery. The traders across the country somehow try to get the produce at Govt. announced prices. A cent less or a cent more. This has nothing to do with demand and supply. This does not hold true for e.g. perishable products where farmers can’t afford to ship long distances and again is at the mercy of the nearest APMC / Mandi where they must accept any price offered to them. Then there are other laws like Essential Commodities applicable for grains and also for produce that is seasonally short in supply. If I want to store 1000 tons of Onions in MY OWN warehouse AT MY OWN FARM, the law has ample provisions to seize that stock and force you to sell at Govt. approved prices ESP. when the prices lead to public outcry.

      Were players like Walmart and Costcos allowed in retailing the Infra needed for storage and cultivation would have developed enough to make good the opportunity to hold stocks for a time long enough to make a a few cents more per Kg that is all that the farmer needs to make good his labor. Excess production of farm produce causes many problems in Europe and US too but there the state actively promotes exports and does not set Minimum Export Prices unlike us.

      So yes there are many laws and thinly enforced regulations that can screw your happiness. It is ENTIRELY at the discretion of the state. The ‘opening up’ of markets of farmers does not eliminate existing laws.

      For a detailed analysis on this topics I suggest you read the works of Dr. Sharad Joshi. Unfortunately he is no more.

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