Same old mistakes

Same old mistakes

Maharashtra’s indirect attempt to ban some agricultural markets will boomerang.

India’s political economy is a paradox. Politicians derive legitimacy from popular support. But in office, their default approach is to deny people their agency. Hence, regardless of the political party, public policy is characterised by a distrust of markets and bureaucratisation of economic and social activity. The result is sustained economic underperformance in relation to the country’s potential.

All these features of political economy are sharply etched in public policy on agriculture. Notwithstanding its poor outcome, Maharashtra recently chose to repeat old mistakes by trying to suppress its agricultural market. It has now made it illegal for a private trader to buy below the minimum support price (MSP). This is fixed for 24 crops but is influential primarily in rice and wheat. Even in the case of the two cereals the extent of influence can be gauged from the quantity of production which is procured at MSP by government agencies. At best, about 32-33% of production is procured. Procurement is far lower in the case of other MSP crops. This means most of the production is sold to private traders at a price which is determined by the demand-supply dynamics of the relevant crop.

Therefore, there may be situations when market price is below MSP. However, the government now wants to ban this by fiat. Since a trader will not buy at a price at which he thinks he will make a loss, this in effect means the farmer’s crop will remain unsold. The result can only deepen the agrarian crisis. If this were not enough, Maharashtra proposes new layers of bureaucracy to grant approvals to farmers who wish to raise “water intensive” crops. This proposal will almost certainly lead to more corruption.

Over four decades ago, the Indira Gandhi government nationalised wholesale trade to tame “hoarders.” The adverse consequences made the government soon reverse policy. But the spirit which permeated that policy continues to exist and takes a toll. If the Narendra Modi government really wants to double farmers’ income it should allow the market a bigger role in agriculture and prod Maharashtra’s Fadnavis government in the same direction. If it wants to reduce the hold of traders, it should open the door to more competition. If it wants to put “minimum government, maximum governance” into practice, it can start by removing all agricultural commodities from the purview of The Essential Commodities Act.