Agricultural potential: Vested interests should not be allowed to turn India’s strengths into its weaknesses – The Economic Times

lipped from: https://economictimes.indiatimes.com/opinion/et-commentary/agricultural-potential-vested-interests-should-not-be-allowed-to-turn-indias-strengths-into-its-weaknesses/articleshow/87836227.cmsSynopsis

To be fair to this government, it has worked hard to counter both sets of vested interests in an effort to unshackle the economy. On one, it has surrendered. On the other, the jury is out. This climbdown may embolden other vested interests.

Dhiraj Nayyar

Dhiraj Nayyar

The writer is chief economist, VedantaA year ago, the passage of three farm laws was the most radical reform enacted by the Narendra Modi government, the most ambitious reform since 1991. Now, the repeal of those very laws is the biggest policy climbdown of India’s first single-party majority government since 1989. For Modi’s critics, this is a moment of schadenfreude. For India, it doesn’t bode well. Narrow special interests, which have hobbled India’s economic rise, continue to wield enough power to defeat a strong government and a popular PM.

Two sets of statistics sum up the key challenge for India’s economy 30 years after economic liberalisation. One, over 40% of the workforce is still employed in agriculture producing just 14% of GDP. Two, the share of manufacturing in India’s GDP has remained stagnant at about 15% for 30 years. In this oversized agriculture and undersized manufacturing lies the story of insufficient jobs, or at least an absence of enough good quality jobs. It also explains the failure to attain East Asian levels of growth and prosperity.

Two different sets of special (read: vested) interests have played a disproportionate part in perpetuating this weakness – large farmers and importers (of industrial goods). To be fair to this government, it has worked hard to counter both sets of vested interests in an effort to unshackle the economy. On one, it has surrendered. On the other, the jury is out. This climbdown may embolden other vested interests.

Often, special interest groups are themselves a product of policy. The large, relatively prosperous farmers of Punjab, Haryana and western Uttar Pradesh – and their associate middlemen – are a legacy of the Green Revolution. It is the generous hand of the State that lifted them to prosperity by providing high-yielding varieties of seeds, by investing in irrigation and by guaranteeing minimum support prices (MSP) for cereals like rice and wheat. That the lands of these farmers were naturally fertile was an added advantage.

Unfortunately, the majority of Indian farmers do not live or work in the Green Revolution belt. They do not make a good living out of farming. Too many are still dependent on rainfall, the local monopolist Agricultural Produce Marketing Committee (APMC) and no support prices. Because they are poor, they do not have the resources to organise and mobilise like the farmers of Punjab, Haryana and UP have. GoI tried to change policy to help the majority access larger markets and earn better prices, but the vocal minority has stalled it.

Realistically speaking, even radical farm reform would not enable agriculture to support 40% of the workforce. One only need note the example of Punjab, where there is a rush to emigrate to Canada and Britain in search of better livelihoods. The relative prosperity of those agricultural families enables investment in emigrating (it costs money). Other farmers do not have the option. They would seek alternatives within India.

In every country that has become prosperous, whether in the advanced West or in East Asia, surplus labour from agriculture has moved to manufacturing. The limitations of the services sector in absorbing labour from agriculture is apparent in India where, after three decades of very impressive growth, millions remain underemployed.

Pre-1991, it was protectionist special interests that prevented India from developing a competitive manufacturing sector. After 1991, the pendulum swung the other way. Aggressive tariff liberalisation created an importers’ lobby that had an interest to maintain the status quo of an uncompetitive manufacturing sector.

India is a large market and the manufacturers of the world need to sell their merchandise in India. By implementing import liberalisation without reforming land, labour, banking, power tariffs and freight rates, India became a completely importing nation. In 2000, India’s trade deficit with China, the world’s pre-eminent manufacturer, was just $1 billion (₹7,431 crore). It grew 60 times in the next 15 years on account of manufactured goods.

GoI has tried to reverse this by reimposing moderate tariff protection, announcing incentives like production-linked incentives (PLI) for manufacturers in India, and by beginning to reform labour laws and clean up the banking mess. It has cut taxes and is also trying to divest inefficient public sector undertakings (PSUs). No doubt special interests will work to derail or delay this concerted attempt to build manufacturing capacity. But with farm laws in abeyance, it is only manufacturing that can help farmers.

India has always been proud of its agriculture and its large market. These must be harnessed as assets. Vested interests should not be allowed to turn India’s strengths into its weaknesses.

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