September 26, 2021

Biz Journal

Business perfection

In his bid to revive Indian economy, Modi takes a gamble on the farm

Big changes are afoot in Indian agriculture, driven by Prime Minister at considerable political risk. Freeing up farming markets may be as significant as dismantling industrial licenses in 1991. However, if the state’s protection withers away only to reveal a few large capitalists as the new overlords, there will be chaos and misery rather than progress and prosperity.

To gauge the scale of what’s being done, picture the depth of the stasis: 119 million cultivators and 144 million farmhands — taken together, 10 times Australia’s population — yoked to a marketplace designed to be anti-competitive, and denied the lift in productivity that propelled urbanization from Japan and South Korea to Taiwan and China.

“It’s like a massive old table in the center of the room, crawling with parasites.” That’s how Hemant Gaur, an entrepreneur who’s bringing technology to potato farming in India, describes to me the “mandi,” or the designated market yard in which produce changes hands. “We dared not discard it, because how would we ever replace it?”

Finally, Modi has thrown out the old furniture by ramming legislation through parliament, passed by a dubious voice vote. Now growers don’t have to bring their harvests to the mandi. They can sell it at farm gates, factories, warehouses, silos, and cold storages. The market yard remains, but can’t charge any fee on transactions outside its physical space. Trades can take place online. Farmers can enter five-year, fixed-price contracts with corporate buyers. The government will tame only excessive price increases rather than impose caps on incremental jitters; free markets will be the rule.

The repercussions will reverberate across the world’s second-most populous country. India’s sheer size as a producer and consumer means ripples may also be felt as a long-term deflationary wave in global food prices.

Gaur’s SV Agri Pvt. operates at the intersection of technology and farming. It produces and markets seeds and inputs to farmers, buys back and stores their potatoes in modern warehouses before supplying firms that make crisps and snacks. In one stroke, the 2.5% mandi tax Gaur pays in Uttar Pradesh, India’s largest state, is gone. With the more efficient procurement that makes possible, he reckons on savings of up to 10%. The efficiency gains will be shared by farmers, processors and consumers. They’ll lead to more investments in cold chains, and less wastage, a huge problem.

But without the fees and commissions, the market yards may atrophy, and the local elite that’s thrived off the system but also buffered it could lose its sway, leaving farmers at the mercy of traders’ cartels controlled by corporate monopolies. This could be particularly true in the grain-producing belt of Punjab and Haryana, where the percentage cut in mandi taxes and other levies is in double digits. No wonder that political opposition will be fiercest in these northern states.

Modi has gambled big before, with some disastrous results. It’s asking a lot of people in rural India to trust him again. The ban on most currency notes in 2016 was supposed to immobilize tax cheats. It froze the economy. His goods and services tax became a compliance nightmare. Opposition parties claim that the agricultural “reform,” too, will fail, especially since freedom from the regulated yard in the poor eastern state of Bihar 14 years ago brought the market to the roadside, with no infrastructure and no open auction for price discovery.

Cultivators’ biggest fear from deregulation is losing their most important bargaining chip: minimum prices guaranteed by the state. Modi has assured farmers the support will stay by announcing prices for the winter crop, though as farmer activists have noted, the 2.6% increase for wheat is only half the cost escalation.

The need of the hour is for farmers to establish large sales organizations of their own. If state support could give them bargaining power, they wouldn’t be selling cotton to private traders for a quarter less than the guaranteed minimum. How will Modi assure base prices once the mandi system slips into disuse? The professionally run dairy cooperative in Gujarat, the prime minister’s home state, has $5 billion in annual revenue from its Amul brand of milk, butter and cheese. But that movement took shape in a very different political firmament of the 1960s, and it didn’t succeed everywhere or in all commodities.

With all the risks involved, a new farm-to-fork model is still worth it. Boosting agricultural productivity is important for societies to reach the “Lewis turning point.” Beyond that threshold posited by the economist Arthur Lewis, surplus rural labor ceases to be a drag on urban wages and living standards. Japan got there by nearly tripling per capita output between 1950 and the early 1960s, thanks to the shakeup from General Douglas MacArthur’s postwar land reforms. After independence from the British, India missed its chance to give land to tillers, and allowed absentee landlords to remain backseat drivers of policy.

Almost 9 out of 10 Indian farmers have less than five acres. A majority carry on reluctantly, barely able to scratch out a living. Landless labor is paid to stay in villages with a rural job guarantee from the taxpayer. The pressure of feeding India’s 1.3 billion people has led to suboptimal choices, like a water-guzzling rice crop grown in abundance in Punjab that bleeds aquifers dry. The burning of the paddy residue causes unbearable pollution in New Delhi.

Expected 20-fold growth in online grocery sales over the next five years is the surest shot to end the stifling status quo, provided farmers can unite and hold their own in negotiations with aggregators. With the Covid-19 lockdown hollowing out urban production centers, the rural economy has become more crucial. But free markets should also be fair. Otherwise, India’s farmers will crawl out of a hole only to land in a ditch.

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