New Farm Laws - Problems & Solutions

Background

The current situation in India with farmers protests in reaction to new farm laws has been a problem needing a solution for the longest possible time. The Green Revolution was a solution to the problem of many decades of food shortages and was designed according to the problems faced more than 6 decades ago. However by not modifying policy as times and needs of the country changed has created a situation which ensures the worst possible solution for all people concerned.

Input Factor Problem

Every factor of production is interfered with by the government (both state and central) in one way or the other as detailed below

Land

By keeping land designations fixed especially for agriculture, it keeps prices for agricultural land artificially low. This ensures that rent on lands (explicit or implicit) is never taken as a factor in costs which in turn ensures that farmers don't get an appropriate return on the land that they work on.

Electricity & Water

By giving electricity and water at zero (or close to zero) cost, it gives farmers no incentive to be careful with these inputs. it leads to perverse incentives such as theft of electricity for domestic use and wastage of water due to over irrigation.

Seeds & Fertilizers

By subsidizing urea (N based fertilizers) to the detriment of all other fertilizers such as P and K based fertilizers there is an incentive to over use the same. The quantity of ammonia absorbed remains the same while the excess leaches into the water table thereby making it unfit for use by both humans and livestock. it also leads to counter incentives such as smuggling of the same due to higher prices in Bangladesh and Pakistan

Markets to sell

By restricting sale of produce to only registered traders at the APMC and that too only within the same state and at government mandated MSP, gives the farmers no freedom to ensure that they get the best possible price for their products. In fact farmers cannot even chase a higher MSP in a neighboring state. By granting monopoly status to the APMC, farmers are forced

Final Consumer

The final consumer also has a perverse incentive to keep prices as low as possible. Every time prices of Onions rise there is an outcry against the same even though the same should theoretically benefit the farmers of our country. One would think that this would be an incentive to have high product prices if the benefit were not going to middle men and traders.

Implications

While there are a wide variety of implications from the problems listed above, the most damaging is the chronic over production of rice and wheat in this country with much lower production of other products such as vegetables, fruits, and oil seeds most of which would result in better yields to the farmers.

All of the above also ensures poor produce prices to farmers which don't reflect the reality in terms of cost and creates various other perverse incentives which result in damage to the environment, smuggling and endemic poverty for our country's farmers where more than 50Cr people are involved.

While we believe that interference in these markets is required to support the farmer as well as millions of BPL consumers, the nature of this interference has to better targeted and we must ensure greatest efficiency and minimum leakage. In addition there has to be further action taken to ensure greater farm productivity i.e. better yields (tonnage and Rs value) for every acre of arable land being consumed by the farm sector

The way forward

We believe that the way forward needs to include a number of steps only some of which are being addressed through the new farm laws

1. Eliminate restriction of use on land i.e. allow farm land to be converted to NA and vice versa. This will free up use of land in the best interest of the farmer and will raise farm land prices to a more realistic level and farmers will start weighing rent on their land as a genuine factor of production.

2. Do DBT for all input subsidies - Subsidies on electricity, water, seeds and fertilizers can be consolidated on a per acre basis for each state. This amount to then be transferred to the farmers bank account by DBT and the farmer then pays market prices for every input. It gives back freedom to the farmer to use all the inputs in his best possible interest instead of a state mandated manner.

3. Do DBT on food supplies - Estimate the various proportion of grains, pulses, oil and vegetables and fruits to be consumed by a typical person and fix a subsidy on the same. Do a DBT to all families below the BPL

4. Market Prices - Both of the above will ensure that all products (both inputs and outputs) from the farm sector will be sold through a market governed pricing mechanism

5. Incentivize Alternate Crops - While we face a glut of production of Rice, India imports Edible Oil to the tune of approximately 15MMTpa leading to large losses to the forex kitty. These are products which can be very easily be grown in India and will create an alternate supply chain to oils which are indigenous in nature