Were The Farm Laws a “1991 Moment”?

As with everything that happens in the world today, so also with the farm laws: a lot of heat, and hardly any light. Reams have been written about how the farm laws were good (or bad), about their introduction being a much needed thing (or not), and their withdrawal being a disaster for take-your-pick-from-Modi-BJP-India (or not).

I have neither the desire nor the energy to get into any of these debates. Here’s my simple take as a student of economics: markets almost always work. Where they don’t work, identify the reasons why they don’t work, and either correct those causal factors, or have the government step in until (and only until) those factors are corrected.

Things get tricky when you begin to ask pesky questions along these lines:

  • How do you define markets not working? Bench-marked against what standard? Who decides?
  • How do you correct these causal factors? How do you judge that they have been corrected? Are you sure they won’t return? On what basis?
  • To what extent should government step in? How are you sure this will make things better in all markets at all points of time? Using what framework?

But that is precisely what makes the study of India’s political economy so very interesting! And this is true of agriculture as well, not just in India, but in other places too.


For the moment, let’s take as a given the fact that government had to be present in agricultural markets in India these past decades. That may or may not be true, but for the purposes of this blog post, let us assume that there was a confluence of factors in India’s agricultural markets that necessitated the active presence of the government as a participant, not just as a regulator.

Now, if markets almost always work, and if government was present in agriculture, then we have to figure out a way for government to eventually not be present in agriculture. (Note, again, that your opinion may be different from mine. But play along with me for the moment, please.)


Yamini Aiyar and Mekhala Krishnamurthy argue in an HT article that in the case of the three farm laws, what the government missed out on was the word “eventually”. They argue that it was the suddenness of the move that was problematic, not the move itself.

There’s a political angle to the sudden withdrawal, and the authors refer to it in their piece. There’s a regulatory angle to the sudden withdrawal, and that is also covered by the authors. But there also is an institutional (and therefore economic) angle to it, and that is what I would like to focus on:

Consider this. The protesting farmers from Punjab, Haryana and western Uttar Pradesh are locked into a system where State intervention, driven by the logic of Minimum Support Prices (MSP) and the Agricultural Produce Marketing Committee (APMC) mandis, dominates. The State is not a benign actor. It has created and sustained local elites with vested interests – traders, middlemen and moneylenders, each of whom extracts to control market power. This undermines competition and compromises farmer interests in different ways. But farmers have learnt to negotiate these relationships of extraction. And the state through MSP and mandis has served as insurance that gives them bargaining power. Any attempt to break this system will inevitably, as the protests amply demonstrate, unleash anxieties.
In this context, the move towards genuine competition will not be viable without the State demonstrating its willingness to protect farmers interests and gain their trust.

https://twitter.com/AiyarYamini/status/1464452741325996032/photo/1

What is the point? The point is that the current system isn’t perfect, and it isn’t sustainable. As the authors point out, the farming sector isn’t competitive.

In theory, that should mean, to a student of economics, that they are not efficient. That, in turn, means that we should expect that producers aren’t producing as much as they could have, and whatever they produce is being produced at a higher cost than would otherwise have been the case. We should expect that procurement, storage and distribution are also potentially riddled with inefficiencies. We should expect divergent quality of produce, and we should expect consumers to be paying higher prices, potentially for a lower variety of goods.

We should also anticipate a whole host of things due to the fact that the farming sector isn’t competitive: prices aren’t transparently determined, there isn’t free entry and exit, certain sellers are likely to get a better deal, transaction and search costs are high, and on and on and on. This is microeconomics 101 in practice.

(A quick note to students of economics: ask yourself if you’re able to relate what you’re learning in your microeconomics courses to the two paragraphs above. If you disagree with my assessment, ask yourself what is it that is causing you to disagree. Can you frame your disagreement in the context of microeconomic theory? Secondly, irrespective of whether you agree or not, can you think of what data points you might need to empirically verify or disprove my arguments? Where might these data points be available? What models (economic and econometric) can we use to settle this debate? Finally, why stop at agricultural markets – which other markets can you analyze this way?)

And for all of these reasons and more, reform is needed. It cannot possibly be anybody’s argument that the status quo in India’s agriculture must persist forever.


Which then, in turn, gives rise to two separate questions:

  1. If reforms are to be introduced, how?
  2. However they are to be introduced, how fast should we proceed with their implementation?

Again, the question isn’t one of the desirability of reforms, or their appropriateness. Rather, the question is about whether the reforms should be a top-down, one-size-fits-all initiative, or a more locally driven approach. And second, should reforms be introduced all at once, or slowly and gradually, one step at a time.

And I would like to argue that at least in this one regard, we should be looking at China. Not for the specifics of their reform and a CTRL-C CTRL-V hit job. But for their approach, beginning in the late 1970’s.


When I first proposed the household responsibility system (HRS), I was criticized as follows: Chairman Mao had been dead only a few years. Supporting the HRS, a system he opposed, meant forsaking his principles. This was the severe environment that reform faced at first. Our support of the HRS, of institutional innovation, and of transformation of the agents of the rural microeconomy would inevitably involve adjusting a number of interests. To avoid risk, it was necessary to carry out trials first. Also, the HRS could not move ahead on its own. It had do so in connection with other institutions and be realized in the course of reforming the institutional environment as a whole. But this institutional reform is not something that could be accomplished in one fell swoop. To carry out reform, a strategy of gradual advance was unavoidable.

http://ebrary.ifpri.org/utils/getfile/collection/p15738coll2/id/125214/filename/125215.pdf (Emphasis added)

That’s Du Runsheng, the author of a short publication called The Course of China’s Rural Reform. He did, um, some other things besides.

In the publication that I have excerpted from above, there are some points that I am going to summarize that I think help me make my point better:

  1. Resistance to the introduction of market based reforms was anticipated in China back then, and was in some sense inevitable. Three measures were conceived of to reduce this resistance:
    1. “First, the reform would not initially call for abandoning the people’s communes, but rather would implement a production responsibility system within them. This approach enabled many who would have opposed the change to accept it.”
    2. “Second, the responsibility system could take a number of forms, among which the populace could choose. One did not impose one’s own subjective preference on the populace but respected its choice.”
    3. “Third, the reform began in a limited region, where it received popular support, and then widened step by step.” (Emphasis added)
  2. “In 1980, after the central leadership was reorganized on a collective basis, the top central leaders, including Deng Xiaoping and Hu Yaobang, consistently supported allowing different areas to adopt different forms of the agricultural production responsibility system. It was then proposed to divide them into three types of areas: impoverished areas would carry out the HRS; advanced ones would adopt specialized contracts with wages linked to output; and intermediate regions could freely choose.”
  3. Or, as Ajay Shah and Vijay Kelkar put it in their book:
    “The heterogeneity of economic and social development, across the regions of India, generates heterogeneity in the public policy pathways desired by different groups of people. A policy position that is well liked in Uttar Pradesh may not be liked in Kerala, and vice versa. This creates conflict in a centralized public policy process.”
    Kelkar, Vijay; Shah, Ajay. In Service of the Republic . Penguin Random House India Private Limited. Kindle Edition.
  4. Finally, there’s a lot to pick at and think about here when we get down to the specifics. I’m not suggesting that China in the late 1970’s had the exact same problems that India does today. Nor am I suggesting that India do today exactly what China did back then. I am making three points:
    1. I agree with Yamini Aiyar and Mekhala Krishnamurthy when they say that one of the problems was the suddenness of the proposed reforms, both in terms of their scope, and in terms of their geographical spread. I also agree with them when they say that the introduction of the reforms ignored the ground realities of the both the sociology of agricultural markets, and their institutional complexity (note that I am paraphrasing here, these are not their words).
    2. But having read their article, one must ask: if not the pathway that we have now left behind us, what else? That is, for better or for worse, the three farm laws now stand withdrawn. Is the status quo desirable? Should we seek to perpetuate it, or change it for “the better”? (Inverted quotes because better means different things to different people.) My opinion is that we should seek to change it for the better, and maybe yours is the same.
    3. But that gives rise to the next question: how? And that is where Du Runsheng and his write-up is of limited help. Learning how other nations did it is a good place to start if you are a student of economics, India or public policy, and post-Mao China holds some valuable lessons for us.

A Conversation With Rationality

I’d gone to the RTO the other day for some work, and I suppose you know what comes next.

I wouldn’t say it is impossible to get work done without the help of an agent, but it is certainly true that it isn’t a breeze either. And if one teaches opportunity costs, it makes sense to take the “help” of an agent. Sure you can do it yourself, but it then becomes eye-wateringly expensive in terms of time. And therefore, money.

And while I waited in the numerous byzantine lines to get my work done, I reflected, like every good economist should, on what could be done to reform the system.

Just ban agents, my understandably irrational brain screamed as a first pass solution. Why doesn’t the bureaucracy come up with a better process map that just gets out of the way instead, Cold Calculating Rationality suggested.

Because they aren’t incentivized to, C.C.R went on to reason, proceeding to shut me out of the conversation altogether. Although I was, truth be told, a very interested bystander by now.

But why aren’t they incentivized to – isn’t that the next logical question to ask, mused C.C.R.

I mean, won’t it make their job easier if they make their processes easier?

Well, yes, but they earn the same either way, no? It’s not like payments are linked to productivity increases.

How would they earn more?

Maybe through a Coasean solution in which there’s connivance with the agents, and they get a cut? That is, make the process impossibly cumbersome, and continue to keep it cumbersome, no matter what any well meaning committee proposes. That then facilitates agents stepping in and “helping” blissfully ignorant citizens get their work done faster – for a fee, of course.

They take a cut of the fee – and hey, there you have it! Bureacracts have an incentive – but not to simplify the system! They have an incentive to continue to clog up the system.

C.C.R needed a break at this point in time, so it and I played a couple of rounds of Fruit Ninja on my phone.

But why, C.C.R asked – for it can take only so many minutes of mindless swiping – would anybody want to be an agent? I mean, there are surely better, more remunerative ways to earn a living.

C.C.R. and I stared at each other in part jubilation, and part horror.

“There aren’t better ways, no?!”, we said in unison.

“I mean, if markets are weakly efficient, nobody would willingly work as an agent, surely”, said C.C.R triumphantly.

“And so”, C.C.R went on to say in that insufferably smug way that is its wont, “if you really want to reform the system, you need to create better employment opportunities everywhere else. Reforming this particular system is just putting a band-aid on a cancer. Because yes middle-mean are bad, but nobody grows up dreaming of being a middleman. Of course the middlemen, and that entire nightmare of a system is going to be up in arms if you seek to eliminate it. The lack of alternative, viable careers: that’s the real problem.”

“So, just more pro-growth policies, you’re saying?”, poor old irrational me asked timidly.

“Well, yes. Easy answer, tough implementation, I’ll concede that point”, replied C.C.R.

“I wonder where else we can apply this line of thinking”, I was about to ask C.C.R… but then it was my turn at the window, and I was so happy that I was finally done with the whole thing that I stopped thinking about it altogether.

So it goes.

India: Links for 9th September, 2019

  1. Mild disagreement with the conclusions of this piece, but that notwithstanding, a useful piece to read. This is on the slowdown in the Indian economy
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  2. “Those who access public services can be roughly divided into three segments—those who can pay to get, those who vote to get, and then there is the middle class.”
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    Shankkar Aiyar is a fine, fine writer. Here’s further proof.
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  3. “There is no real right time for disinvestment—only the right reason. Yes, mergers are good, but what about erosion of value—the market value of HDFC Bank is more than all PSBs put together.”
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    And even further proof
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  4. Niranjan Rajadhakshya on the linkages between GST reform, DTC reform, and how they feed into and out of each other.
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  5. On Bouncing Boards.