Think of a world where a producer of a good is told that you put in your own money, you utilise your specialised know-how, you put in your hard labour, you create your own storage capacity and you manage your own transport for the finished good but where you sell, how much you sell and at what price you sell will be decided by us, a group of people who are neither producers nor consumers but just a group of strong-arm middlemen who are insisting on this way because we can.
The first reaction of anyone when told of a such a system would be — sure, such systems existed in the medieval ages but why are we discussing it now? For now, the argument would be, in the modern times the entire systems have evolved everywhere in the world and producers of goods, and indeed services, are free to sell their produce wherever they want and to whoever they want and at whatever price they can command. Sound logical right? Except that it was not so for Indian farmers, who constitute more than India’s 50% workforce, till yesterday. That is why this past week has been a truly historic week for Indian farmers.
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It is quite ironical that even 70 years after Independence, India was continuing with a system in agriculture which was not just medieval in method and practice but was actually first introduced in the medieval period itself. Alauddin Khilji, the Turkic invader who ruled India in the 14th century, first introduced the trade and price control policies to support his large and marauding army and enrich the Turkic nobility. Later, East India Company during the late 18th and early 19th century further chained the freedom of the farmers by forcing them to grow Indigo and Opium and then sell it dirt cheap rates. A few decades later, The British, now ruling directly, followed the same policy to procure cheap cotton for their mills in Manchester. In 1887 they even promulgated an act that has survived in one form or the other till as late as last week.
A prosperous nation
The end result, the Indian farmers — who had created a prosperous nation that lasted more than multiple millennia — were impoverished within a few centuries and the rural economy completely decimated. A country with no significant record of famine or deprivation during the dark centuries of Europe was suddenly facing a devastating famine every few decades!
One would have thought that with India gaining Independence in 1947, the first order of business would have been to dismantle these destructive policies. The reverse happened. The 1887 British predatory law took rebirth as Essential Commodities Act (ECA) and the state-level Agricultural Produce Marketing Committee (APMC) Act in 1955.
ECA act was used to control production, supply, trade, and storage of commodities arbitrarily deemed essential. The APMC act forced the farmers to sell their produce only through designed channels and mandis (markets) and prevented trading outside their local area. So, soon after Independence, while the nation had been politically integrated after great efforts by Sardar Patel, the agriculture market was by design fragmented into a thousand pieces!
Exploitation of farmers
The net result of these policies, promulgated in a free India, were ironically the same that the policies of Khilji had seven centuries ago. A small, connected group of middlemen emerged, who monopolised the entire farm trade. The farmer got a pittance for his produce, since it was a monopoly buyer situation, while the consumer often faced high prices for essential items. The intervening layers of middlemen, controlled by politicians, were the big fat earners.
The three reform bills passed by India Parliament last week have completely dismantled this unholy nexus.
The first bill dismantles the restrictions on free trade. Farmers are now free to sell wherever they want. If they want to sell through the existing Mandi network, where they get a Minimum Support Price (MSP) they are free to do so. However, if they can get a better price anywhere in the country, either in a Mandi or to a private buyer, they are again free to do so. The stranglehold of middlemen has been broken. This will not only increase the earnings of the farmers but also help the consumers since the entire non-value adding middlemen layer has been nixed.
Damocles sword over the head
The second bill removes the tyranny of the Essential Commodities Act (ECA) and removes the Damocles sword hanging over those who invest and create storage networks. In the earlier regime they could be charged any day as hoarders! No worthwhile investment thus ever came. With that fear gone, infrastructure creation for storage, transport and logistics network itself is going to add immense value in the Agri-cycle.
The third bill is the most revolutionary. It allows a pan India model for contract farming. The path for big private investment in the agriculture sector has now been cleared. Large investment will bring along with it modern technology, economies of scale, modern farming equipment, better seeds, more crops, in-between-season crops, improved yields, better logistics and free access to markets, both national and international.
A sector which employs more than 50% of India workforce and supports more than 65% of India’s population was devoid of any private investment for seventy years. No wonder it only contributed to just about 17% of India’s GDP, one of the reasons why there was such prevalent rural poverty.
The reforms pushed by Prime Minister Narendra Modi, unmindful of any short-term political blowback by vested lobbies, are thus truly historic. They reverse not just a seven-decade old stifling policy framework but in fact a seven-century old cycle of impoverishing India’s farmers and by consequence the rural economy.
The agriculture reforms are significant not just for India but for the larger world too. As free trade becomes a norm, income levels will rise in rural India, a population zone of over 600 million, there will demands of all kinds of goods and services. While this will surely contribute to India’s GDP growth, it will also be a significant opportunity for the producers of these goods and services, across the world, to cater to an entirely new market hitherto untouched.
History will likely record these agriculture reforms as perhaps the most significant economic decision yet of the first two decades of this new century, one which finally allowed India to break-free from the endemic cycle of poverty. It is no accident that it took Prime Minister Narendra Modi, who himself comes from poor background, to realise the value of these reforms and then see them through.
