Indian Agriculture #1: Perils of Socialism
The importance of considering second and third order effects when designing policy.
India is one of the world’s largest agricultural producers. India has the highest net cropped area in the world followed by the US and China. Major products are rice, wheat, milk and sugarcane among others. However, yields are very low across the board which is why even though India has the highest land under agriculture, it isn’t the world’s largest producer.
The agricultural sector in India is host to a number of problems. It underscores the worst socialist tendencies afflicting the Indian economy. Farming in India has very low productivity, compared to other major producer nations like US, Brazil, China, Russia and France. Farmer incomes are very low and coupled with low access to formal credit, they’re easily pushed into the hands of unscrupulous moneylenders. With usurious rates of interest, farmers are pushed into a debt trap and then suicides follow.
Ostensibly to protect farmers’ interests, the government has designated markets where farmers are compelled to sell produce. Ideally, there are auctions for produce which helps price discovery, but in practice, buyers form a cartel and depress prices. If this wasn’t enough, there is the Minimum Support Price (MSP) that the government offers for certain staple crops. This distorts prices and perverts incentives. It reduces crop diversity, develops crop monocultures — which are highly susceptible to diseases — and leads to excessive extraction of water - especially for crops like rice.
I discuss some of these in no particular order. In part 2, I cover some more problems like the minimum support price regime and availability of credit for agriculture. In part 3, I cover why the three farm laws passed by the Modi government in 2020 were essential to modernizing the state of agriculture in India. Part 4 will cover some policy recommendations by various committees in independent India. As soon as they are up, I’ll update the links to these for easy reading.
1. India’s low productivity agriculture
The biggest challenge facing Indian agriculture is its low productivity. While agriculture contributes about 15% to India’s GDP, it employs nearly 40% of the workforce. This translates to a meager $2,000 of value added per agricultural worker—a pitiful figure by global standards. In contrast, the world's wealthiest economies, such as the United States and the European Union, have agriculture accounting for a small fraction of their GDP, employ less than 1% of their workforce in the sector, and achieve significantly higher value addition per worker.
Richer nations have much larger farm holdings compared to India. This is intrinsically helpful for productivity because the farmer gets economies of scale. You get various inputs like seeds and fertilizers at a lower cost if buying bulk. It makes more sense to invest in farm mechanization machinery like tractors and harvesters, reducing the need for labor. A downstream effect of this is freeing up labor for other more productive parts of the economy. With bigger farms, comes bigger produce which gives the farmer access to wider markets and increases negotiating power with buyers.
The Dalwai report on doubling farmer incomes had this to say on the size of land holdings:
Indian agriculture is dominated by small and marginal farmers, who account for more than 86 per cent of the total number of landholdings, that counted to 11.88 crore as per 2011 census …
of the 86 per cent of the small and marginal land holdings, the majority are marginal (equal to less than 1 ha. in size). The small size of land holdings is a challenge by itself, which is rendered more complex by its fragmentation….
The average ratio of farm to non-farm income as a proportion of the farmers’ income was 60.20: 39.80 (60:40 approx). It is relevant to observe, that the ratio of farm income was directly correlated with the size of the landholding [emphasis added].
2. Agricultural Produce Marketing Committee
Question: What’s a textbook example of the unintended consequences of government meddling in free markets?
Answer: The Agricultural Produce Market Committee (APMC).
APMCs are different markets set up by state governments across different parts of the state. Farmers are allowed to sell their produce only at those markets. In theory, farmers would hold auctions for their produce and only licensed traders could buy the produce from them. In practice, there are few traders and most of them form a cartel, depressing prices. Additionally, due to the perishable nature of the goods, farmers are eager to sell as quickly as possible, further depressing prices.
The report of the Standing Committee on Agriculture had a scathing indictment of the poor state of affairs of APMC.
The status of infrastructure and other civic facilities in APMC Markets varies widely across the country and only 65% market have facility of toilets whereas only 38% markets have Farmers Rest House. The Committee further notes that only 15% APMC Market has cold storage facility whereas weighing facility is available in only 49% of the markets. These APMC markets also fare poorly in banking and internet connectivity. The Committee has also been informed that civic infrastructure at most of the APMC Markets are in very bad shape causing inconvenience to the farmers.
Further down, the committee has the following comments on the corruption prevalent in APMCs
Agriculture Produce Market Acts (APMC Act) […] have become hotbed of politics, corruption and monopoly of traders and middleman. […] are not working in the interest of farmers due to various reasons such as limited numbers of traders in APMCs markets thereby reducing competition, cartelization of traders, undue deduction in the name of market fee, commission charges etc […] Market fee and commission charges are legally to be levied on traders, however, the same is collected from farmers by deducting the amount from farmers net’ proceed.
When we put all of this together, farmers with smaller landholdings face higher input costs because they cannot purchase inputs in bulk. The less land a farmer owns, the less produce they can cultivate. At APMCs, traders often form cartels while farmers remain fragmented, placing them at a structural disadvantage. This imbalance eliminates true auctions, forcing farmers to accept the prices dictated by traders. It’s hard to imagine a more perfect example of the unintended consequences of market interference.
Fortunately, things are changing now. Some states have passed laws allowing produce to be sold outside APMCs. There are indications that this has reduced farmer suicides, by allowing farmers to get higher prices for their produce thereby reducing the debt trap that they fall in.
3. Essential Commodities Act
The Print has a very good write up on the Essential Commodities Act (ECA). It correctly identifies the act as a major roadblock holding back agricultural incomes.
Summarily, the ECA prevents traders from stockpiling produce. This prevents investments in warehouses, cold storage chains and other allied facilities. Since these are high investment facilities, there needs to be a way to recoup costs. The government of the day has access to draconian provisions in the ECA that allow it to raid any storage facility if it suspects a trader of hoarding. There doesn’t even have to be a shortage of any particular produce for the government to take such an action. Since the ECA has a long prison term for crimes, investors are naturally cautious and hold back investments.
My view has always been that free markets provide superior outcomes in most cases. Designing fair markets is a challenge, but if done well leads to a net economic surplus for producers and consumers. Agriculture in India is a case study in how socialist thought can lead to ruinous outcomes.
Government intervention coupled with the desire to protect farmers from the capitalist trader leads to such adverse outcomes that farmer suicides kept increasing decade over decade. Repealing such laws is difficult because while the benefits are diffused over a larger number of farmers, the costs are concentrated among a small number of traders. That creates its own lobby which opposes all change1. While things are changing slowly, there is still a long way to go.
This is a textbook example of regulatory capture.
Thanks for a great and informative piece