Centre vs State farm laws: Lessons from history for Punjab

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October 26, 2020 7:00 AM

Its new farm Bills to nullify the central farm-reform laws mirror Indira Gandhi’s failed attempt at govt takeover of wholesale trade of rice and wheat in 1973-74

kharif sowing, kharif harvest, msp, minimum support price, farm income, agri economyPaddy, being one of the most important staple crops in India, has seen a continuous rise in MSP over the years, growing at a CAGR of 6.8 per cent over the last decade.

By passing its own farm laws to circumvent the central laws, Punjab has fired the first salvo. Soon, other Congress-ruled states, Rajasthan and Chhattisgarh, may follow suit. Notwithstanding whether the president gives his assent to these state laws that essentially undermine central laws, the more important issue is to sift the grain from the chaff, i.e., how much of this is economics to help farmers and how much sheer politics. My take on this entire episode is that it is 90% politics and only 10% economics, if at all. Let me explain.

Punjab’s farm laws basically prohibit private players buying wheat and paddy below MSP (minimum support price) even outside the APMC markets. Anyone trying to do so will end up with three years in prison, along with a hefty fine! The point to be noted is that it has kept this legality only for wheat and paddy. Why not do it for all other crops, say maize, cotton, pulses, oilseeds, etc, that have the central MSP system? Or even extend it to milk and veggies by declaring their local MSPs? Because Punjab leadership is smart and knows well that it will create a fiasco in agri-markets, which may boomerang on them politically. So, just declaring this law for wheat and paddy, would it help farmers? Not really, as the central government already buys more than 95% of Punjab’s wheat and paddy at MSP through Food Corporation of India (FCI) and state agencies.

So, where is the new economic gain for the Punjabi farmer? Almost nil! Much of the uproar is to protect about Rs 5,000 crore that the Punjab state government (Rs 3,500 crore) and arhthiyas (Rs 1,500 crore) squeeze annually from FCI for wheat and paddy procurement.

But let me get to the economic roots of this politics. My reading is that the Congress and many social activists demanding MSP be made a legal instrument (rather than indicative) actually exhibit deep distrust in the role of the private sector and hence the markets. It goes back in time too. It may be worth recalling what late Indira Gandhi did to wheat and paddy traders in 1973-74 when she was at the peak of her popularity. Recall that she had won the war with Pakistan (that gave birth to Bangladesh) in December 1971, abolished the privy purses of the families of erstwhile princely states in 1971, gave the catchy slogan of garibi hatao (remove poverty) in 1971, and had nationalised commercial banks in 1969. That was part of the socialist era, although the word ‘socialist’ was inducted in the Preamble of the Constitution only in 1976.

In October 1972, Indira Gandhi announced an important agri-marketing policy step: The government will take over the wholesale trade in wheat and rice (paddy) as traders are very unscrupulous people not giving farmers their due MSP and manipulating prices! The first marketing season of government takeover of wholesale trade in wheat in 1973-74 turned out to be a major fiasco. Things went out of hand. Market arrivals dropped, and wheat prices shot up by more than 50%! It was a bitter lesson. But, she learnt the lesson, and gave it up the very next year.

In the Punjab farm laws, I find a reflection of going back to wheat trade takeover of 1973-74!
By the way, that was also the period of ‘licence raj’ in industry and marginal income tax rates going as high as 98%! Do we want to go back to the economic philosophy of those days of early 1970s that gave us the ‘Hindu rate of growth’ of the GDP, of 3.5%? (The term was coined by my professor, a famous agri-economist of those days, professor Raj Krishna.)

It goes to the credit of the Congress party leadership under then prime minister PV Narasimha Rao that supported the 1991 economic reforms package prepared by Manmohan Singh and his small team of trusted economists. It took some time for the results to come, but by 2000s, India was taking 7% GDP growth as its new normal, which was double the ‘Hindu rate of growth’ of 1970s under the socialist era of Indira Gandhi! But even the 1991 economic reforms bypassed agriculture marketing reforms.

It was only under the leadership of late Atal Bihari Vajpayee that agri-marketing reforms featured high on the agenda. The trigger came from the bulging stocks of wheat and rice with FCI. In 2003, a model Act on agri-marketing was circulated to states. Vajpayee’s style was more accommodative, as he was leading a large coalition government. But that model Act did not go far enough. NDA lost the elections in 2004 despite “India shining”!

The UPA government(2004-2014) did not pursue any major agri-marketing reforms. In food, they again turned socialist, enacting the National Food Security Act 2013, giving 5 kg wheat or rice to 67% of the population at `2/kg and `3/kg, respectively. One might ask what happened to garibi hatao of 1971 if 67% of the population was still food insecure in 2013?

The NDA government led by prime minister Narendra Modi set up a High-Level Committee (HLC) under Shanta Kumar in 2014 to restructure the grain management system. The HLC suggested many major changes, from cash transfers in the public distribution system to overhauling of FCI’s operations with a good dose of free markets to make the system more efficient. But the Modi government could not muster the courage to undertake bold reforms, except some marginal tinkering of labour reforms in FCI. It also tried going the Vajpayee way, with model Acts on agri-marketing reforms. But, again, it did not go far enough. It was the Covid-19 crisis that opened a window of opportunity to reform the agri-marketing system, somewhat akin to the crisis of 1991 leading to de-licensing of industry. The Modi government grabbed it. Patience and professionalism will bring rich rewards in due course, not noisy politics!

The author is Infosys chair professor for agriculture, Icrier
Views are personal

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