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How not to reform the economy — Political strength should not lead to intellectual weakness in designing economic reforms

There is no excuse for the lack of analysis and expert consultation.

The protesting farmers are not pampered defenders of supernormal profits—they know that they are on the edge of disaster, with or without the marketing reforms: those have just brought them mentally closer to that edge.

As India’s farmer protests drag on, with high associated human and economic costs, it is useful to reflect on what the government might have done differently for a better outcome. Some of the old conventional wisdom, or rules of thumb, might have supported the government’s approach. A political economy of “multiple vetoes,” with a “strong consensus for weak reforms,” would have aligned with the idea that a good crisis should not be wasted and major reforms pushed through.

Indeed, the government had been signalling its intent with respect to labour law reforms and went ahead with them in this pandemic crisis period without causing the same upheaval as the farm bills did. One might have even made the case that agricultural marketing reforms had a much greater foundation since several states had been liberalising in this sphere already. In other states, the existing marketing restrictions did not seem to have much support among farmers in any case. So, despite the way that the government bulldozed through with the farm bills, one can make a plausible argument that they thought it was going to be another easy win for them. One can even argue that the timing was desirable because these reforms have the potential to bring down food inflation and prevent premature monetary tightening as the Indian economy recovers.

What went wrong? Initially, there was concern about deficiencies in the design of the reforms, as well as the manner in which the bills were passed. The greatest opposition came from a quarter that the government might not have expected—farmers in Punjab who are, on the face of it, not affected at all by the marketing reforms. Nothing in the legislation changes the existing foodgrain procurement system and its price supports. But the farmers saw the reforms as the first in a likely row of dominoes that would undermine their current protections. This view was fuelled by the general perception that powerful corporate interests were driving these changes.

There has been something quite compelling and sympathy generating about the nature of the farmers’ protests, and global media attention came quickly. The government fed the narrative by trying to brand the protestors as traitors and terrorists. The human rights violations have only made the government look worse, and farmers’ and human rights organisations from many places have expressed their support for the protestors. At the end of the day, this is an object lesson in how not to do economic reforms, at least in an open and democratic society.

Certainly, a more sympathetic and less ugly response by the government would have helped the situation. But perhaps the problem would have been the same, of farmers demanding the withdrawal of the laws and a government unwilling to do so—though they have backpedalled so much that there is little or no face-saving that remains, and they may as well start fresh. It is ironic that such a strong government has ended up looking so weak. It is even more ironic that the protests have finally turned attention to a major problem of Indian agriculture that is more serious than the restrictions on marketing that were being eroded anyway, and could have been tackled quickly by working with multiple state governments.

The serious problem is the structure of the public procurement system for wheat and rice and the production system that feeds into it. Too much wheat and rice are being produced, and too much rice is being produced in the wrong places. There are enormous subsidies for inputs that cripple the budgets of state governments and hurt the central government too. The end result is an environmental disaster that has no compensating benefits at all. This is a problem that is an order of magnitude greater than marketing restrictions.

State governments that are part of this system have been trying to edge out of this system, but the lock-in is too deep, and only the central government has the capacity to undertake the needed reforms, including providing resources that would get farmers to switch out of their current modes of production. The protesting farmers are not pampered defenders of supernormal profits—they know that they are on the edge of disaster, with or without the marketing reforms: those have just brought them mentally closer to that edge.

Any agricultural marketing reform should have followed on, or been bundled with, a reform of the public procurement system that would have given the farmers who are now protesting hope of long-run survival. Even minimal analysis or consultation by the government would have suggested that this was how they should proceed, purely on the grounds of net benefits to the nation, and completely aside from the details of the agricultural marketing reforms—which would also have benefitted from even minimal consultation.

A strong government can rationally choose to ignore losers from reform if it thinks that the political costs are outweighed by the gains from doing the reforms and doing them quickly. But there is no excuse for the lack of analysis and expert consultation. Political strength should not lead to intellectual weakness in designing economic reforms.

Professor of Economics, University of California, Santa Cruz. Views are personal

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