From UPSC perspective, the following things are important :
Prelims level : Essential Commodities Act
Mains level : Paper 3- Ensuring growth while protecting the farmers
The article suggests the two steps to ensure growth while protecting the poor. The first is the creation of social safety net and next is factor market reforms.
Issue of farmers’ income
- An Indian engaged in industry or any aspect of the services sector (this includes a waiter in a restaurant) earns more than an average farmer.
- This is an anomaly.
- So, despite all the pro-farmer laws and protection, why do farmers in India earn less?
- A recent study by RBI showed that across all crops, the farmgate price is 40-60 per cent less than the consumer price.
- The real challenge is how to encourage growth while protecting the poor.
Encouraging growth while protecting the poor: 2 steps
- 1) A social safety net needs to be created to provide direct income transfers to the vulnerable.
- 2) Factor markets involving labour and agricultural land need to be reformed to ensure productivity-enhancing growth.
- Only way to ensure growth which benefits the poor is through employment creating in the manufacturing and services sector.
1) Social safety nets in India
- Despite a narrow tax base, India has created a comprehensive social safety net, which can cushion growth-enabling market reforms.
- Accurate targeting under India’s Food Security Act to the bottom 67 per cent through Aadhaar identification and digital ration cards paired with E-POS machines has considerably reduced the leakage of subsidised grains.
- The National Social Assistance programme intends to provide direct income support to over 40 million elderly landless agricultural workers, poor women-headed households and families with physically-challenged children.
- India also provides income support annually to 145 million farmers, paying out Rs 75,000 crore.
- This benefits all farmers while MSP benefits only 6 per cent of farm produce.
2) Factor market reforms
- If state support for social safety net has to become sustainable, wide-ranging growth, which will broaden the tax base, is essential.
- India’s growth itself can be designed to reduce the number of people who need state support.
- The agriculture and labour reforms recently passed create the conditions for productivity-enhancing growth, benefiting millions of small farmers and unorganised workers.
Let us take a look at what the farm laws achieve and how they will change the status quo
1) Amendment to Essential Commodities Act
- The stock limits under the Essential Commodities Act do not enable large tur or moong and rice processors to procure in bulk for their entire season’s processing requirements.
- This restricts large-scale processing units which can run throughout the non-harvest season.
- This draconian anti-farmer rule has now been done away with.
- This will enable the expansion of agro-processing and supply chains.
- A larger share of the produce procured for agro-processing increases its shelf life, enabling the farmer to retain a greater value.
- 30-40 per cent of the post-harvest value, particularly in vegetables and fruits, is lost due to inadequate storage, processing and transportation facilities.
- Removal of stock limits and the accompanying contract farming act will bring in investments to tap the wasted resource.
2) APMC regulation
- The second law, removes another distortion: Only traders registered in APMCs can buy farmers produce.
- Even though conditions for perfect markets exist, the APMC regulation creates this bottleneck.
- Intermediaries extract a greater share of value as they are price makers while farmers are price takers.
- This situation is further aggravated as farmers are restricted to selling within the taluka boundaries or limits of the APMC, and if they have to sell in other APMC, they have to pay the APMC tax.
- The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill 2020 confines the authority of the APMC to levy fees and give trader licences within the boundary of the market yard.
- Farmers will continue to have the option to sell in APMCs but any private market/non-APMCs registered trader can also set up an agricultural market and compete with APMCs to buy the same produce.
- Karnataka implemented the Uniform Market portal in 2014, enabling trade across taluka APMC limits without APMC fees.
- An analysis by researchers at the MIT Sloan School of Management has shown that prices of many agricultural goods increased by 3.5 to 5.1 per cent.
- Significantly, profit margins of small farmers increased by more than 36 per cent.
- Apart from agriculture, the abundance of labour is the second greatest comparative advantage of India.
- However, multiple labour laws instead of encouraging employment, have created disincentives for job creation due to high costs of compliance.
- While India’s employment elasticity with respect to GDP growth is only 0.2, China’s is at 0.44. Even for Bangladesh, the elasticity is 0.38.
- India’s path-breaking labour reforms leverage the true comparative advantage of the country’s factor endowments to promote growth with higher employment elasticity.
- The old labour laws protected existing jobs at the cost of preventing new job creation through creative destruction.
- Bangladesh has shown the way to increase formal jobs by legalising fixed-term employment and banning union activity in FDI industries.
- Raising the threshold for seeking prior permission for laying off workers will enable capital and land locked in sunset industries to move freely to new sunrise industries.
Consider the question “An Indian engaged in industry or any aspect of the services sector earns more than an average farmer. What are the factors responsible for this anomaly? Suggest ways to achieve growth that could ensure sustainable safety net?”
The need of the hour is to continuously communicate with those unhappy with the reforms to explain how the current status quo is hurting farmers and informal workers.