Farm laws: Resolving the deadlock

  • Blog Post Date 18 December, 2020
  • Perspectives
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Ashok Kotwal

University of British Columbia

In a recent Indian Express article, Bharat Ramaswami has proposed some rather provocative suggestions on how the present crisis triggered by the farmers’ protests can be resolved. In this post, Ramaswami elaborates on those views in an interview with Ashok Kotwal (Editor-in-Chief, Ideas for India).

Ashok Kotwal (AK): Bharat, as I see it, you have suggested a way out of the present morass. The main points (both implicit and explicit) of your case are: (i) Indian agriculture badly needs diversification to help raise farmers’ incomes, (ii) This can happen only if we allow and develop new markets, (iii) Reforms in this direction (and that include the new farm laws) are therefore necessary, (iv) Nonetheless, it is unnecessary for such reforms to be introduced in a `one-size-fits-all’ central law, (v) The way out can therefore be to withdraw the central laws and for the Centre to persuade the states (especially those that its party governs) to undertake reforms, (vi) In return farmers should withdraw the demand that MSPs (minimum support price) for all crops should be guaranteed in law. 

Do you think that allowing private traders to buy agricultural produce outside a mandi (market) (that is, without State supervision) is a necessary condition for inducing diversification? Why?

Bharat Ramaswami (BR): A market coordinates buyers and sellers. Both parties come with expectations of liquidity, fair transactions, and to find the right match between the product on offer and that being demanded. When it works well, the existing mandi system does a reasonable job of the first two. 

But not necessarily the third. As incomes grow, consumer food budgets shift from staples to non-staples. In addition, quality attributes become more important. Both these considerations are particularly important for exports. Our existing APMC (Agricultural Produce Marketing Committee) mandis have enjoyed a local monopoly and not innovated in these respects. Indeed, in most instances, they have actively barred new entrants from such activities. Prior to the new laws, central government policy had –with varying success – nudged state governments to remove this power of APMC mandis.

AK: Why is the demand for enforcing MSP – either for all crops procured by the government and/or even for procurement by private traders – unviable?

BR: If the MSP is to serve as an effective minimum price, somebody has to make an open-ended offer to buy at that price. Higher the minimum price, lower would be the demand from the private sector. The State has to fill the gap. So far this has been possible only for paddy and wheat and that too only in some states. Much of this procurement finds its way to the public distribution system (PDS). Even then, the Centre has struggled to cope with excess procurement. Resources are locked into unwanted stocks. Over the years, the government has found some ways to reduce the stockpile by supplying foodgrains to various welfare programmes. Even so, it has found it necessary to either export them or sell them domestically through open market sales, usually at a loss.

Other commodities do not have a retail government marketing system such as the PDS. Even if that is built up, the government will not be able to sell its stocks unless it is prepared to incur losses. This is bound to happen because the point of the MSP is to fix a price higher than the market price. These conditions of open-ended procurement, a system of selling stocks, and to have a budget for incurring losses on sales, pose tough economic challenges (and not to speak of logistical nightmares). Some state governments have tried to support their speciality crops. The Centre has also tried it with pulses. These experiments failed because they did not have a budget to support open-ended procurement and neither did they have ways of selling what they procured. Finally, there is often a substantial supply response to MSP policies. As a result, governments are often taken aback by how much they have to buy. Indeed, that is why in states that are active in organising procurement for paddy or wheat, you find rules that effectively limit how much they buy from an individual farmer. Even though the central government picks up most of the tab, the states do incur some costs or may offer a top-up subsidy. 

AK: Past data suggest that poverty in India went down when the terms of trade for agriculture improved. To the extent that wheat and rice constitute a sizeable part of agricultural production in India, MSPs for these crops has been a ready instrument in the hands of the central government. Do you think that this could be a justification for maintaining the present system of MSP-FCI (Food Corporation of India) procurement for the cereal market?

BR: Besides increases in MSP (after 2004), the rapid reduction in poverty in the 2000s also saw strong growth in the non-farm sector (especially construction), boom in world commodity prices, and the introduction of MNREGA1 (Mahatma Gandhi National Rural Employment Guarantee Act). The association between poverty and MSP therefore merits further examination. However, research does show that the shift of the terms of trade towards agriculture (as opposed to crop diversification or technical change) was a major component of productivity growth in agriculture. But, of course, it is not sustainable. 

Micro-studies as well as studies of comparative economic performance point to the importance of structural transformation within agriculture in sustaining and growing farm incomes – from predominantly grain-based agriculture to one that is diversified and produces grains as well as fruits, vegetables, milk, eggs, meat, and fish. The latter foods have higher income elasticities and demand shifts in their direction when incomes rise. For the millions of low-skilled workers locked into grains cultivation, diversification represents an opportunity to advance their incomes. But, of course, policies that dampen the incentives to cereal cultivation arouse the ire of those growers.

Short-termism sinks our agricultural economy further into the morass of a cereal-based economy while long-termism becomes hard to enact politically. That is why policy needs a fine balance. To be ultra-cautious is a recipe for stagnation while aggressive policy may discredit reforms for a long time. 

AK: You don’t seem to be too concerned by an issue often raised by the critiques that the farm laws will inevitably lead to an entry by large corporate firms like Adani and Ambani resulting in monopsonies in agricultural trade. Why?

BR: Historically, in the rich countries, scale economies have been important in retail and thus, consolidation happened when those chains extended backwards. In India, it seems doubtful that the organised sector can takeover food retail. The organised sector has the largest presence in milk – but with about a 20% or less market share. Move away from the major metros and their presence drops. With fruits, vegetables, or grains, it will be harder. The task of aggregating produce is difficult and the organised sector will find it hard to compete with the traditional chain. 

On the other hand, reforms will allow the long-established agri-businesses to invest more in the supply chains. With more assured supplies, they can become important players in agricultural exports. Of late, a number of tech start-ups have come up attempting to directly match demand with suppliers. Removing the monopoly also allows farmer organisations a freer hand in partnerships. Predicting the direction of entrepreneurial energies is difficult but it is important to have policies that do not stifle it. 

AK: You have suggested that a major reform of agricultural trade needs to be carried out cautiously by first carrying out small experiments in the most suitable areas and then steadily expanding the scope through a learning-by-doing method. This is an echo of your suggestions in your previous writing on how to introduce the biometric technology (Aadhaar).2 Should we think of this as a generic advice on the methodology in introducing any reforms or a technological change?

BR: The idea of experiments and learning forms a major plank of development economics and has been acknowledged as such by recent Nobel Prizes to this field. But probably there is an additional case as well. For policies and subsidies administered by the Centre, a new direction arouses great distrust. On the other hand, there is no constituency for reform. By carefully choosing the sites for new policies and enlisting the cooperation of states, the Centre can minimise the costs and disruption of transition. And if they are successful, they serve as a powerful demonstration while also creating support for reforms. 


  1. MNREGA guarantees 100 days of wage-employment in a year to a rural household whose adult members are willing to do unskilled manual work at state-level statutory minimum wages.
  2. Aadhaar or Unique Identification (UID) number is a 12-digit identification number linked to an individual’s biometrics (fingerprints, iris, and photographs), issued to Indian residents by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India.
1 Comment:

By: Vaibhav Kabdwal

Even with MSP, a clause like procurement at a price not less than 25% of the MSP prices, will also help in winning the trusts of the farmers. Big corporations in India have abused the retailers, commoners whenever they have got a chance. Everyone knows that the current NDA government has helped players like Adani, who a few years back was nowhere close to a leading position in Agribusiness. A price floor is mus to have clause when a sector employs nearly half of the population of the country.

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