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Part-3: Long term consequences of no reforms

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Vinod is a HR leader for a leading tech company in the Silicon Valley. He writes on topics including the economy, science and education. He is an alumnus of IIT Bombay, Cornell University and the University of Wisconsin-Madison.

India is stuck in the past. Figure 2 shows that it is almost 200 years behind the rest of the world when it comes to moving out of agriculture, and transitioning to other sectors of the economy like manufacturing and services. When the British ruled India, they had an incentive in keeping India out of manufacturing. The only role for Indians was to be consumers of their manufacturing output.

Farmers are also saying that they are more comfortable doing farming (an occupation at least 12000 years old) rather than move to modern sectors more suited for the technological age. Indian agriculture while it employs around 50% of the population only contributes 18% to India’s GDP. Most of the farmers are doing work which creates little or no economic value.

Unwisely the Congress made disastrous choices in terms of making negligible structural reforms during the last 60 years. Indian agricultural reforms are stuck since 1955, not a good sign for any economy. The BJP in 2003 had taken some fledgling steps to reform the APMC through the model APMC act. Consultations on state wide reform had begun then and has been going on for 17 years. There has been some adoption though. Bihar ditched the APMC act in 2006. States like Andhra, Bihar and Madhya Pradesh who adopted the model APMC act saw an average agricultural growth rate between 5-7% after adoption and diversified their cops. Punjab which refused to make any reform, saw an average growth rate of 1.8% during this same period. Punjab has only itself to blame for its current state of problems.

Figure 1: Percent employment in Agriculture
Figure 2: Global trends

China which faces problems like India, managed to move 60% of farmers out of agriculture in the last two decades, unlike India which has managed to move only around 30% of its people in the same time (Figure 1). Indian manufacturing is also miles behind Chinese manufacturing. Agriculture compared to services and manufacturing pays 10 to 30 times lesser, hence it is a question for farmers if they want to make 10 to 30 times more money or cling to low paying agricultural jobs at any cost. Agricultural survey indicate that farmer are not blind to their predicament – about 40-50% of children of farmers want to get out of farming and want nothing to do with it.

  • Shrinking farm sizes: Farm sizes are shrinking and farming for marginal farmers is a sure path to perennial poverty. The average farm size in India has shrunk 100% from 2 hectares in 1976 to around 1 hectare currently. It continues to shrink as people have more kids and land gets more fragmented. Other countries have broken this vicious trap of poverty by allowing cooperatives, contract farming and forward contracts, by roping in the private sector. But the archaic and Nehruvian era APMC act insidiously prevents any involvement of the private sector. The act ensures that while farmers are free to reach out to a third party to sell, the third party cannot procure from farmers without the approval from mandis. Mandis are also to be paid taxes of 8-14% for services they have not rendered. By becoming a supercop policing private players, Mandis have ended up becoming a mafia cartel, beggaring the already impoverished farmers and becoming fat cats in the process.
  • Water scarcity: In regions outside Punjab and Haryana, there is a severe shortage of canals and irrigated water. Hence the farmer is always at the mercy of the monsoons. They indiscriminately use groundwater for cultivating water intensive crops like wheat and rice. This kind of use has caused an astounding 61% reduction in groundwater levels in India between 2007 and 2017. India is the biggest user of groundwater in the world even though it has 17% of the world’s population living on 4% of the world’s water reserves. It extracts more groundwater than China and the US (the next two biggest users of groundwater) combined. A Niti Aayog report released last year predicts Day Zero for 21 Indian cities by next year because of falling groundwater. Day Zero refers to the day when a place is likely to have no drinking water of its own. Big cities like Delhi are the most susceptible. India is living like there is no tomorrow.

Wheat and Rice are poor choices for India and totally unsuited. MS Swaminathan who worked with Norman Borlaug during the Green Revolution has pointed out that the harmful practices of farmers in Punjab and Haryana is creating a new set of “demographic, ecological and economic problems.”

  • Fertilizer subsidies: Farmers use large amounts of fertilizers which are given as generous subsidies from the central government. The fertilizers ruin the natural soil fertility balance and the land requires increasing doses every year. The chemicals further leach into the water table and cause all sorts of health issues.
  • Unsuitable crops: One kg of Rice or Wheat each gobble 4000-5000 litres of water per kg. Back of the envelope calculations show that currently India uses as much groundwater for rice and wheat as the entire groundwater needed for its population of 1.4 billion. Farmers have noticed that they keep digging deeper and deeper borewells searching for water which doesn’t seem to exist. They seem to still think that their present mode of farming will continue forever. In Punjab, 30 lakh pumpsets are being used compared to 17 lakh, 12 years back. This continues to increase. 80% of land is exploited in Punjab versus 50% in Haryana. The CNN reports that Punjab has turned into the cancer belt with high rates of cancer.
  • Electricity subsidies: Free electricity in states like Punjab have ensured reckless usage of groundwater. The government is moving to a system of giving cash subsidies and making farmers pay for units they consume. In the current model, unscrupulous farmers can get away by pumping an infinite amount of groundwater. These subsidies comprise 10% of the budget of some states. When a voluntary scheme was launched to meter the connections, just 600 out of 12.5 lakh farmers participated, showing how resistant they are to change.
  • Disconnect with the market: Because farmer produce foodgrains with no link to the market expectations, their products are not saleable in the external market and are also priced too high for any private player to get involved in. Most Indian farmers just want to produce three water hungry crops covered by MSP – wheat, rice and sugarcane, ensuring that every other crop takes a backseat. 26 crops are covered by MSP in India compared to an average of 3-4 crops in every other country. It is a luxury which a poor country like India cannot afford.
  • Diversification of crops Why is it that nobody wants to talk about production of fruits, vegetables and milk which consume less water, are more suited for the Indian environment, more exportable and appeals to a growing middleclass. Inspite of not being covered by MSP, these options have been very profitable for farmers. Basmati rice is not covered by government procurement, but is more remunerative and requires lesser water.
  • Farmers and NPA’s: Because of supply chain inefficiencies, farmers outside Punjab and Haryana get the short end of the stick. They typically find farming unsustainable as middlemen grab all the supply chain profits. In the past, they used to borrow from National Banks to pay for fertilizers, produce and also the usurious moneylenders. Trying to save farmers, governments started granting farm loan waivers. This ensured a perfect disaster. Most farmers stopped paying loans because they began expecting the state governments to waive it. Because farmers stopped paying, national banks stopped lending. Unwise decisions of lending to farmers under government pressure, Loan waivers and favoring handpicked corporates has meant that Non-Performing assets (NPA’s) at many National banks are between 12-15% compared to 1-3% at private banks.

Because the big banks don’t lend, farmers began to borrow from cooperative banks which are loosely regulated. These banks have historically had close links with state politicians and sugar mills. Research shows that 56% of cooperative banks had chairmen who contested assembly and parliamentary elections between 1993 and 2005. Because of endless loan waivers, farmers don’t pay back their loans too. This means that cooperative banks are stuck with NPA’s of 18-29%. Next time you hear about your money in Punjab and Maharashtra Co-operative Bank or Lakshmi Vilas Bank being held up forever, you know that your money is compensating for the fact that rich farmers and big corporates either can’t or don’t want to pay back their loans.

Studies in the past have shown that two-thirds of all government farmer subsidies go to relatively well-off, mainly rich farmers. This is also the same group who don’t like to diversify their crops from wheat and rice, unlike small farmers who are way more diversified, and hence less impacted by MSP changes. Punjab farmers also don’t want their waters to be diverted to lower riparian states and think that not diverting water will improve yields, which will enable them to make more rice and wheat.

It is because of all these reasons that I propose that the central government pays the farmers in Punjab for stock they do not produce. Otherwise, the government has to pay inflated electricity subsidies, the inflated procurement prices jacked by middlemen, foodgrain transportation and storage costs, and finally end up seeing foodgrains rotting in granaries because nobody wants them.

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Vinod is a HR leader for a leading tech company in the Silicon Valley. He writes on topics including the economy, science and education. He is an alumnus of IIT Bombay, Cornell University and the University of Wisconsin-Madison.

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