What happens when a nation attempts to shed its founding philosophy?
Over the past few weeks, thousands of Indian farmers, particularly those from the state of Punjab, have protested the farm bills passed in September by Prime Minister Narendra Modi’s government. The new laws seek to open up India’s heavily regulated agricultural industry to the private sector. Currently, the industry employs nearly 60% of India’s 1.3 billion people, yet contributes to a mere 16% of its GDP. Much of this discrepancy stems from outdated, post-independence laws and the socialist economic vision of Mahatma Gandhi and Jawaharlal Nehru, the first prime minister of India. State interventions under Nehru and former Prime Minister Indira Gandhi, including a disastrous nationalization of the financial sector, hamstrung economic growth in the four decades following India’s independence. Per capita GDP barely grew, and it brought India to the brink of default. Beginning in 1991, India began rapid economic liberalization. Tremendous economic growth followed, leading to a fourfold increase in per capita GDP over the next 25 years.
Given India’s history of rampant corruption and bureaucratic red tape, a planned economy is an inadvisable decision, as leads to a gross mismanagement of capital and creates inefficiencies in the economic system. By allocating capital more efficiently, free markets encourage innovation and growth. These farm bills will be a major step in upholding Modi’s reformist image, as well as mitigating the economic uncertainty brought to India by COVID-19 and slowing global macroeconomic trends. Notable academics and economists generally support the new farm laws, drawing comparisons to India’s successful steps toward economic liberalization and development catapulted by the 1991 reforms.
Until now, farmers were permitted only to sell their goods at government-sanctioned marketplaces within their states, known as “mandis.” However, to access these marketplaces, farmers had to pay both the state and various middlemen commissions on their profits, which reduces their profit margins. This severely limited where and to whom farmers could sell their produce, since relevant legislation and regulations differ between states. The new bills will remove this restriction, thereby opening up private and public markets throughout India to farmers and removing corrupt middlemen. The Punjab government pockets approximately $500 million from these mandi fees every year, more than any other state, which may explain some of its ire. Punjab and Haryana hold tremendous political power due to their geographic proximity to New Delhi, which allows them to call strikes and attempt to shut down the capital.
Another point of contention with the new bills involves two features known as the Minimum Support Price (MSP) and the Essential Commodities Act (ECA). The ECA is an existing law that prevents the hoarding of products deemed essential for daily life. The MSP is the center’s annual price floor for each of these essential items.
On paper, the ECA and MSP sound like reasonable policies. The farming sector’s abuse of them, however, has created a massive market failure. India produces an excess of rice and wheat that creates a general, resulting in tremendous annual wastage, while shortages of other produce cause nationwide food price inflation. Farmers lack an incentive to produce crops other than the ones listed under the ECA because they are guaranteed a stable income regardless of actual consumer demand for such products. Meanwhile, coined the “most expensive food procurement program,” the Indian government spends billions of dollars a year purchasing, storing and subsidizing excess produce, unnecessarily exacerbating fiscal deficits.
The farm bills will remove several agricultural products including cereals, pulses, potatoes and onions from being classified as essential to encourage diversification in production and match consumer demand. These laws were never made to last. The origin of the ECA and MSP can be traced back to post-independence India, which faced rampant poverty and famine. They were tools needed to ensure the country’s self-sufficiency — its deteriorating economy meant that it could not afford to import grain. India today is vastly different.
The ironic cherry on top is that these policies created a safety net for the relatively wealthy farmers of Punjab and Haryana, the dominant agrarian states of the north. Farmers in less-developed states like Bihar are forced to sell at a discount. The inefficiencies of this interventionist system are laid bare: over 90% of rice grown in Punjab and Haryana is procured by the government, while in states like Gujarat and Karnataka less than 1% is procured, with most of the rest going to waste. Over 75% of the wheat produced in Punjab and Haryana is purchased by the Union government, with only 0.04% in Bihar and no procurement from other agrarian states.
The current protests largely owe to fears that the government will end the MSP and allow corporate interests to squeeze farmers’ income. However, the Modi government has explicitly stated that the mandi system, along with the MSP, will stand, even though its creation of a market failure indicates that it shouldn’t.
India faces an identity crisis. The biggest hurdle in its path to economic development is the incessant romanticization and politicization of the rural archetype of “kisan” (farmer) as the “annadata” (food-providing deity). The agricultural sector does not warrant such special treatment, given the inefficient state of the industry currently. Rather, it should be opened up to the private sector to bring life to the engine of India’s slowing economy. We must let the forces of supply and demand dictate production because if history has taught us anything, it’s that governments are notoriously bad at managing it.
Good economics often makes for bad politics. Indian political culture has created a corrupting expectation of inefficient state intervention. The beauty of the free market is that consumers get to decide what is and isn’t worth it. India’s protectionism has plagued the very socio-economic fabric of the country’s democracy, perpetrating the recognition of and preferential treatment based on caste and religion. Today, India stands at the cusp of witnessing history repeat itself. It can choose to implement these bold reforms and take the road to prosperity and development, or, it can choose to acquiesce the antiquated ideals that should have died with Nehru and Gandhi and return to its destitute past.
Aayush Gupta (22B) is from Singapore.
Global With Gupta is a column dedicated to global politics and international relations.