In 1986 or 1987, I was young and foolish,and single, which means I was always looking for love. I was in my favourite bar in Bandra one night, drinking a Rosa rum and coke, when, rather surprisingly, two African women walked in and sat at a booth some ways behind me. One of them was the most beautiful woman I had ever seen in my life.
I immediately realised I had to do something, so I took another sip, got to my feet and—cool and casual as ever (ha ha)—wandered over to their table and said, “Excuse me, are you girls from Switzerland”?
They were startled so I quickly slid into the booth opposite the lovely one. And, before I could say anything else, she, looking more at her friend than me, said, “Interest rates in India have been kept artificially low for too long”.
I was stunned. I stammered, “That means inflation has been kept artificially high”. She nodded in agreement and we all toasted to that. Turned out they were exchange students and had just come out of an economics class where they learned that, in the early days after independence, the government kept interest rates low to promote industrialisation. That it resulted in artificially high inflation, which kept India’s poor under the gun, did not seem to have occurred to policymakers at the time. Fortunately, the rest of the evening was far more entertaining and requires an entirely different story.
But, I remembered that evening when I read an article last week describing some research done by ICRIER and the OECD on agricultural policies in India which concluded that “Indian farmers have been ‘implicitly taxed’ through restrictive marketing and trade policies that have an inbuilt consumer bias of controlling agricultural prices” to the extent of 14% of the value of agricultural output. This worked out to around `45 lakh crore over the past 17 years. With agriculture contributing about 15% of GDP, this means that around 2.5% of GDP was unfairly transferred from farmers to consumers—in other words, consumer inflation has been kept artificially low by underpaying farmers. While this is doubtlessly one of the reasons for the urban middle class boom, it is also the key structural reason for rural distress. It also means that interest rates have been artificially low because of this structural control of inflation.
Note that this is the reverse of what prevailed in the early days, when politics was much more defined as nation building. That they got the policies wrong is another issue. Today, politics is its own end and all recent governments have worked to keep the urban consumer happy by keeping prices and interest rates as low as they possibly can. That they got the policies wrong with the farmer ending up paying the cost is, again, another issue.
Except that—and about time, I would say—farmers are now seriously up in arms. We have been hearing about rural distress, farmer suicides and farmers’ protests on and off for decades. But this time, it seems different—not only are the protests widespread, they also appear to be more sustained. No doubt this is partly because of the false hope sowed by Modi in his promise to double farmers’ incomes. Equally, it may be because today there is almost no segment of society that is happy with the government, so any protest generates both empathy and (at least) moral support.
Politicians—of all stripes—are, of course, clueless. Farm loan waivers are de rigeur, even though these do nothing to address the real issue, and work, at best, as a palliative for the farmers, and serve to undermine credit culture. There is talk of a universal basic income, which, while interesting and, perhaps, useful is, again, largely a palliative.
The solution has to be to ensure that farming is profitable on a sustained basis. While there are many apparently open-and-shut ideas for increasing agricultural productivity—larger farm sizes, increased technology use (for both operations and marketing) and accelerating the build-out of irrigation infrastructure—the solution has to include a process to balance the terms of trade between farmers and consumers, however politically difficult that may be.
The next government, whatever shape it takes, would have to construct systems that ensure substantially higher prices to the farmer, which would lead to generally higher rural demand. Urban consumers will be squeezed, which may lead to a decline in savings so financial markets may not be too happy. Inflation will be higher as the implicit subsidy to (mostly) urban consumers will be lifted, and interest rates, too, will be higher (for a given set of global macroeconomic factors). This would also underpin the rupee.
These changes are critical both in terms of fairness and sustainability. And while the transition would be volatile—so what else is new—once the process is tightened, a wide array of efficiencies would kick in and enable growth to rise even faster as agriculture plays a larger role.