Is Privatization = Efficiency in agriculture?

India achieved independence in 1947 and we started off as a very conservative economy which basically meant we were closed to the outside world. Think: wide nationalization of sectors, License raj, quota raj and Monopolies and Restrictive Trade Practices (MRTP) Act. But we know that this didn’t work out. By the 1970s we had a rapid inflation, huge balance of payment crisis in the form of current account deficits (Import > Exports) and rupee had devalued drastically. The country kept on financing the deficit through borrowings from abroad but there came a time when we didn’t have enough money for essential imports and we were weeks away from actually defaulting. We desperately needed a bailout and thus ended the license raj era. 

Era of Liberalization

India then liberalized almost all sectors of the economy, which basically meant making the economy market oriented and expanding the role of private and foreign investment rather than state controlled. Some changes included reduction in import tariffs, deregulation of sectors, allowing foreign direct investment and likes to attain high economic growth. While it is true that this did help the economy a lot – GDP went up, the income inequality also deepened, jobless growth happened and the nutrition values took a hit. But overall, the liberalization, privatization and globalization reforms brought “efficiency”. How? The argument goes like this. Allowing private players will increase competition, where each of the players will try to give maximum value to the consumer and in this race the overall efficiency of everyone will increase which in turn will increase the GDP.

Privatization in Agriculture

But then, agriculture has always been a sector where privatization hasn’t “really” happened. Sure, in recent times, government has deregulated APMC a little bit [please refer to my previous blog post], PPP and contract farming is happening in some states, but there is a lot of inefficiency in the agriculture domain. While India’s income is increasing, the farming revenues are not. Over 60,000 farmers committed suicide in 2018, the average income of an Indian farmer is Rs 6400 per month, there is a crisis in the management, planning and marketing of agriculture produce and farmers suffer severe exploitation in the hands of middlemen. Moreover, it is still reliant on natural forces and one bad yield due to bad rains for example, leaves the farmers with no buffer! They’re risk averse which means unable to innovate, change or plan long-term. During some months, onion prices are sky high and during some, the farmers have to throw the produce because transportation costs are more than the market price. Agriculture being a state subject, leads to confusion between the center and the state policies. The technology used in farming and at various stages of the supply chain is outdated, the last substantial and wide-spread research in seed productivity and irrigation practices only happened in the second green revolution. The sector is not profitable and since decades there is an ongoing discussion on doubling farmer’s income but it hasn’t happened yet.

Is Privatization the Panacea?

While the above is true, is privatization the panacea? It does make a strong case. Because most small farmers (86% of all farmers) rely upon minimum support prices to hedge the risk. This translates to growing “bad crops” just to get the minimum price. For example, rice enjoys a high MSP but it also requires a lot of water and thus electricity to pump it up. In states where there is water scarcity (eg: Telangana), farmers still chose to grow rice just to receive subsidy and MSPs. Where is the wisdom in this? Private enterprises mean more choice and freedom to the farmer.

Some of my concerns are - Can earth’s resources be privatized? The thing is, agriculture cannot be compared to sectors such as automobiles or discoms. Government has always regulated and controlled agriculture in terms of marketing and distribution because it is the bulk purchaser to ensure social security. The farmer tends to the land and cares for the soil. The same land passes over generations and becomes part of the culture. There is a very real risk that privatization will lead to commodification and thus chemicalisation of land. The goal of any private company is to maximize profits. We already know that in market economy, social costs are not considered. Sure, fertilizers will increase productivity and thus profits but this is food we are talking about! Food that we ingest, food that supports all life on earth! Another issue is of mechanization. What happens when private players substitute farm labor for machines? Given the national unemployment rate of 9.2%, can the economy absorb the displaced workers? Thirdly, given the WTO agreements and global markets, we know that cash crops fetch more prices than food crops. If agriculture becomes completely market oriented, who is going to grow essentials? Lastly, what happens when private enterprises decide to export most of the produce in lieu of better prices? Can we really risk shortage and inflation in crop prices? On similar lines, if private enterprises find cheaper produce from other countries and decide to import instead to grow here, what happens to our farmers?

Food for thought:

Is productivity the answer? Let’s say if our productivity doubles, will farmers income also double? Not really, because our productivity has been increasing over the decades but that has only led to the produce becoming cheaper or the money not reaching to the farmer. Theoretically, changing this disproportionate share of revenue can double farmer’s income. Question now, is how? We again come back to the central question, is privatization the panacea? Or we go down the route of cooperative federalism (loosely translated to mixed economy)? One reference that comes to my mind is NASDA, a cooperative and federal entity in the US. Can NASDA model work here? More in my next post.

I told you what my concerns are, what do you think? Do mention in the comment box. J

Illustration: Chad Crowe