Modi needs to resolve the farm agitation or it may hurt India's recovery

Farmers’ protests are threatening to snowball into the biggest political crisis of Narendra Modi’s tenure. 

To give in to demands and scrap the laws would be an uncharacteristic admission of defeat for India’s strongman prime minister, who promised they would transform agriculture. But letting the unrest linger could cause chaos in food markets, alienate urban consumers, and potentially derail the post-Covid recovery. 

Nobody doubts that for India to have a shot at exiting its lower-middle-income trap, farming must come out of its sub-3% growth rut. Productivity of labor, land, fertilizer and water have to improve. Massive private investments need to take place in storage and processing for the country’s 2% share of global agricultural exports to increase.

The dispute is over which strategy to pursue. Markets or organizations? That’s an old dilemma, made famous by economist Ronald Coase in 1937. Modi is leaning toward markets, promising to turn the entire country into a free trade area benefiting 119 million farmers and 144 million farmhands, plus their families. A large and growing number view this move as an end to institutional state support, which they fear will allow profiteering corporations to rush into the resulting vacuum. Tens of thousands of farmers have been camping near entry points to New Delhi since Nov. 26. They plan to block at least two highways Saturday.

A compromise solution would require consultation — something woefully lacking when Modi’s government rammed the bills through a dubious voice vote in parliament in September. Even those who defend the reforms agree that both their intent and purported benefits should have been explained better. But it’s too late for public relations. A more tangible concession will have to be made: an additional law, perhaps. 

To see what that might be, consider first what’s making farmers restive. A small section of India’s agriculture — most notably in Punjab — relies excessively on selling rice and wheat to the government at so-called minimum support prices. The purchase takes place in markets, known as “mandis.” One of Modi’s bills gave farmers the freedom to sell their produce outside the designated yards — and without having to pay taxes and fees to one of India’s 29 state governments. For grain cultivators, the worry that cropped up was, “If the mandi falls into disuse, will the government stop buying from us at guaranteed prices?”

The fear isn’t entirely irrational. The Food Corporation of India’s granaries are overflowing. The excess stock costs the taxpayer $25 billion, money that could have other uses in the post-Covid economy. Farmers know this. One of their demands is for legal backing for minimum support prices, something that could have ugly consequences for public finances. Authorities currently announce prices for 23 commodities, but these are largely meaningless except for wheat, rice and cotton in a few states. 

Punjab is the dominant beneficiary. Each of its 1 million farming households gets $1,600 a year in subsidized fertilizer and free electricity to pump groundwater, according to Ashok Gulati, a professor of agriculture at New Delhi-based think tank ICRIER.They get these privileges, plus the minimum assured price, in exchange for fulfilling a half-century-old promise of not letting the country starve.

Changing this social contract is necessary. A water-guzzling rice crop isn’t suitable for Punjab. Overuse of groundwater is depleting aquifers, and the burning of paddy stubble is causing hazardous pollution in northern India. But farmers need downside protection before they can be made to believe that markets will bring them prosperity. One way may be to introduce an additional law guaranteeing a basic farm income, benchmarked to every state’s agricultural value added.

Even a $500 per hectare commitment, when implemented over 190 million hectares of gross planted area, works out to $95 billion annually, or 3.5% of pre-Covid GDP. It’s true that fragmented landholdings will greatly vary the amount households receive, but in India’s hinterlands, a $1,000 payout for two hectares won’t be negligible. It could become a starting point to gradually dismantle the market-distorting support prices. That’s when the handout will pay for itself. The challenge will be to make it reach tenant farmers. That’s been a problem even for the $80-a-year income subsidy for small farmers Modi announced before the 2019 general election. 

The other tweaks will involve correcting design flaws. Denying farmers the right to take disputes with private buyers to civil courts is problematic.Modi’s contract farming law won’t take off if small landholders fear they’ll be exploited. Relaxing strict rules on hoarding, the final part of the reform package, may benefit farmers’ organizations with sufficient warehousing capacity. But the big winners will be trading companies, says Indian Institute of Management Professor Sukhpal Singh. This power imbalance, too, needs a relook.

Market supremacy won’t reform India’s agriculture, but a combination of markets and institutions might. Politicians have to strike fresh bargains that will make farmers lose interest in old arrangements. Modi’s presidential style of working has botched things up. But there’s still a way to turn this crisis into an opportunity.