After the cancellation of the three agricultural laws enacted in 2020, agriculture remains outside the realm of liberalization and globalization. On the other hand, some of the protesting farmer organizations are asking for a legislative guarantee for the minimum support price (MSP) for the products.
India’s experience and that of international commodity agreements have amply demonstrated that administered pricing is not an effective policy instrument to increase producer incomes. Doubling or even quadruple the per capita income of farmers over the next few years requires the modernization of agriculture and the creation of non-farm jobs must progress at a rapid pace.
In 1966-67, to overcome the food crisis, a wheat PSM was introduced to encourage farmers to increase their production. Since then, MSPs have been extended to 23 crops – wheat, rice, pulses, oil seeds and cash crops of raw jute, cotton and sugar cane, among others. In addition, central and state governments provide subsidies to farmers for fertilizers, electricity, credit, irrigation, and crop insurance, which account for more than 2% of gross domestic product (GDP). And agricultural income is exempt from taxes.
Large farmers have been the main beneficiaries of PSM and subsidies or exemptions. Moreover, despite the subsidies, most farmers live a fragile economic life and the relative gap in per capita incomes of the population engaged in agriculture compared to those engaged in other sectors of the economy has grown. expanded from 1: 2.3 in 1950 to 1: 5.3 in 2019. The productivity of most agricultural crops is 20-50% lower than the world average.
However, the main cause of the growing gap between farm and non-farm income and the plight of farmers is not declining productivity but rather 50 years of slow industrial growth and slow absorption of labor. resulting agricultural work. This has led to the massive accumulation of surplus labor (disguised unemployment) in agriculture.
A few points should be emphasized here. The PSM above the market price is not sustainable. It will fuel inflation and eliminate private investment in agriculture. PSM and subsidies on fertilizers, credit, electricity, etc. have neither been nor are a solution to the plight of poor small farmers. Keeping agriculture within the confines of the current highly regulated and controlled trade and investment regime can return the Indian economy as a whole to the old era of low growth.
The Indian economy is polarized between a highly productive and globally integrated formal sector and the low productivity sector comprising most of the informal agricultural and non-agricultural activities.
In seeking a solution to the plight of farmers and seeking to double, triple or quadruple farmers’ incomes over the next few years, the central policy issue is linked to excess labor in agriculture. While 10 to 15 percent of the total labor force will be sufficient for modern agriculture in India, 50 to 55 percent are currently engaged in it. The main challenge India therefore faces is to suck up over 80 percent of the workforce engaged in agriculture and productively absorb them into other sectors.
According to McKinsey Global Institute, India needs to create 90 million non-farm jobs between 2023 and 2030 to achieve an average annual growth rate of 8-8.5%. In my opinion, to absorb the surplus agricultural labor force and achieve growth rates of over 8 percent, India needs to create over 16 million non-farm jobs per year over the next 20 years. . It will also require the formalization of the informal sector and the integration of agriculture into a globalizing global economy.
To achieve the twin goals of GDP growth and non-farm job creation, modernization of agriculture, including food processing and other value-added services, is as important as intensive industrialization. labor-intensive and export-oriented and make India a global hub for manufacturing and technology services.
A number of other tasks are related to these two processes, such as the Make in India program, the development of smart cities, the accelerated privatization, the development of high quality physical and social infrastructure, the achievement of 100% literacy, including digital literacy, strengthening social security and social protection systems, and ensuring effective and transparent governance.
With progress in these areas at an adequate pace, PSM and agricultural subsidies, including farm income tax exemptions, will gradually become less relevant, even politically.