Repeal of farm laws reveals excessive social mistrust of private players. Farmers need public goods as well as private innovation
With the unexpected announcement of repeal of the three agricultural laws by Prime Minister Narendra Modi, a highly controversial chapter in the history of agrarian reforms in India seems to have ended. Yet, the policy issues flagged during this episode would remain relevant and deserve further discussion and resolution.
There seems to be a clamour for more government control over the development of the agricultural sector in India. What is missing in the debates on farm laws is a dialogue in search of a middle path strategy for developing Indian agriculture.
Three strategic approaches can be adopted to speed up agricultural development in a country (https://bit.ly/3cfStsp). The first is to provide a dominant role for the government in the strategic design and implementation of agricultural development programmes with a minor role for the private sector.
The second approach stimulates agricultural growth through a well-functioning free market such as the one prevailing in advanced countries.
The third approach advocates a middle path involving carefully designed government policy interventions to promote agricultural development, using the private sector as the instrument for those policy interventions. This approach does not leave agricultural development to the government or private sector alone, but attempts to combine the advantages of government policy interventions and market forces.
The core idea behind the middle path is that government need not always be the only purveyor of help; the private sector can also play a vital role in solving the problems facing the agriculture sector and farmers. The advocates of this approach are concerned about both “government failures” and “market failures.”
Direct government intervention often fails to produce desired results and make the best use of the resources by favouring special interests, inflicting high administrative costs, and restraining the growth of the private sector. For instance, direct government support for agricultural production in many developing countries through farm input subsidies has caused a heavy fiscal burden on the government, misuse of subsidies, and environmental degradation.
A free-market approach, for example, could favour the agri-business firms more, restrain the diffusion of agricultural technology, and cause monopoly power. Such “market failures” limit the ability of poor and smallholder farmers to take full advantage of opportunities of the market mechanism. Hence, the government has to ensure that such farmers are not excluded from the growth opportunities provided by market forces.
What should be the nature of government policy interventions under the middle path? The government must invest in public goods such as irrigation, rural development infrastructure, storage facilities, agricultural research and technology, rural health, education, and nutrition.
The government has to create strong institutions and provide an enabling legal and regulatory environment to facilitate responsible private sector participation in agricultural development. For instance, the government can establish a body or regulatory authority to build trust between the farmers and agri-business firms and oversee the implementation of modern agricultural practices like contract farming and electronic trading.
Such measures would help farmers and agri-business firms to come closer and enter into a mutually beneficial business relationship. Other important areas requiring government assistance to farmers are the supply of seed, fertiliser, credit and crop information, extension services, marketing facilities, and crop insurance.
Active involvement of the government in these areas is also important in less-advanced agricultural systems to overcome the barriers facing improvement in agricultural productivity and farm income. For instance, an increase in government spending on public goods was found to raise agricultural GDP per rural person by 2.3 per cent. (https://bit.ly/3nhJ7CH).
However, while handholding the farmers, the government should not be overly involved in the functioning of the market forces. Excessive government involvement may render market-driven agricultural practices less flexible for stakeholders and more prone to bureaucratic control and resultant ill effects. At the same time, too little government involvement may allow the stronger party to tilt the balance in their favour. What we need is prudent government involvement.
At this stage of India’s economic development, it would be more appropriate to adopt the middle path to agricultural development described above due to following reasons. First, in countries with a mature level of private sector participation in agriculture, the government intervention in agriculture is limited to implementing policies to facilitate market-driven agricultural practices.
Such an approach might not be suitable for India as Indian farmers are yet to fully exposed to an environment of working with the private sector who naturally are stronger stakeholders. Second, due to institutional and budgetary constraints, the government cannot resolve all the problems facing the farmers and improve their livelihood.
Third, from India’s experience with economic liberalisation policies during the last three decades, it is evident that the private sector can solve many of our economic problems. Also, our confidence in the private sector’s capacity to solve our economic problems has increased manifold over the years. Hence, there is no reason why we need to be sceptical about the private sector’s role, intention, and capacity in developing the Indian agriculture sector and helping Indian farmers.
The private sector’s potential role in improving India’s agrarian situation and improving the livelihood of Indian farmers should not be restrained. Instead, the private sector should be facilitated through appropriate government policy interventions and necessary safeguard mechanisms to protect the interests of the farmers.
It is high time we shift from the livelihood approach to the business approach in agriculture. As a profession, agriculture should be transformed into a business rather than a livelihood programme with active participation from the private sector.
The writer is Professor of Economics, Indian Institute of Management Kozhikode