A better understanding of the political economy can resolve farm crisis

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By Himanshu

Govt’s response to the agrarian crisis is geared towards short-term electoral dividends

The massive protest by farmers on 2 October in Delhi was not the first for this government and it is unlikely to be the last. While this one managed to create headlines because of the violent reaction of the administration, a similar one on 5 September went largely unnoticed.

According to the National Crime Records Bureau, the number of farmer protests increased by eight times from 628 in 2014 to 4,837 in 2016 in just two years of this government. Since then, it has spread to almost every state with large mobilizations in Madhya Pradesh, Rajasthan, Maharashtra, Tamil Nadu and Uttar Pradesh. Some of these states are going to elections shortly and the farmers’ protests have managed to finally move the government to recognize the gravity of the situation. However, its response has been disappointing and short-sighted.

In most cases, the response has been politically motivated with sops to woo the largest voting constituency in the form of free electricity, loan waivers and notional rise in minimum support prices (MSPs). Unfortunately, none of these are likely to have any impact on the distress that the agricultural sector is going through.

In some cases, while it may give temporary relief as in the case of farm loan waivers and free electricity, they are unlikely to be sustainable beyond the election cycle. However, it also raises the important question of whether the government even understands the nature of the crisis.

The first point to note is that the crisis is not just of agricultural production. In fact, despite back-to-back droughts and adverse weather conditions, including deficient monsoon rains this year, agricultural production has continued to rise. And, if government statistics are to be believed, agricultural production has reached record levels in 2018.

The crisis is primarily one of the political economy of agricultural production in India, which has seen real incomes in agriculture decline despite agricultural production rising. While price realisation of agricultural commodities has declined in the last four years, input costs have risen faster. The index of terms of trade between farmers and non-farmers is now at the lowest level in this decade, having declined steadily in the last four years. It is unlikely that this trend is going to reverse based on the inflation numbers so far. Overall food inflation has turned negative despite non-food inflation rising to more than 6.5% in the last three months.

While the decline in product prices has been the immediate trigger and arresting the fall of price is the primary demand of the protesting farmers, strange as it may sound, the announced increase in MSP of rabi crops is unlikely to contribute to any reversal of this trend.

Apart from the ineffectiveness of the MSP procurement policy and the fact that procurement of rabi crops is unlikely to begin before April next year, the limited coverage among crops and regions make it unlikely to contribute to any price rise in the near future. But an important reason why this may be ineffective is also because the decline in prices is less from the oversupply of agricultural output and more from the collapse of demand in the rural economy.

However, unlike the oversupply situation, the demand collapse is due to multiple factors, agriculture being one of them. A second and important factor is the collapse of non-agricultural sectors, particularly manufacturing, construction and services, which have contributed to this demand collapse. A significant indicator of this is the trend in decline in real wages since the beginning of the year. One aspect of the changing nature of the rural economy with an increasing non-farm sector is that any policy solely targeting the agricultural sector is unlikely to lead to a revival in rural demand.

The problem of the rural economy requires a holistic approach with a better understanding of the political economy, something most governments have ignored over the years. But this government is not just guilty of ignorance of the structural factors, but has contributed actively in creating this crisis in the rural economy.

And it is not just demonetization and the hurried implementation of the goods and services tax (GST), but wilful neglect of agricultural investment, which declined in real terms during the tenure of this government and the absence of corrective market interventions which are equally responsible. What is worrying is that despite the crisis in agriculture spilling over to streets, the response of the government is geared towards short-term electoral dividends at the cost of long-term structural damage to the rural economy.

One thing is certain, the crisis in agriculture is unlikely to subside in the near future.

Source: Livemint

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