Economics of Indian Farmers’ Movement: A Study of Agrarian Distress and a Vicious Debt Cycle

Photo by Randeep Maddoke

Photo by Randeep Maddoke

By Samir Bhatnagar

In September 2020, the Indian government introduced two new acts and one major amending act that sought to increase economic efficiency by liberalizing and deregulating the agriculture sector—creating a legal framework for farmers to sell agricultural produce directly to private buyers outside of government-regulated markets. These new farm laws could make the agriculture sector more efficient and generate aggregate economic benefits; however, individual farmers’ income might not be similarly benefited. The subsequent Indian farmers’ movement was a reaction to these laws increasing economic efficiency at the expense of economic security of farmers. This paper explains how the new farm laws reduce the bargaining power of farmers, thereby adversely affecting farmers’ ability to earn a livelihood and maintain economic security. Furthermore, to contextualize the current protests, this paper explores the history of agrarian distress fueled by high interest rate credit provided by non-institutional lenders. Finally, it argues that concerted efforts from the state are required to expand access to institutional credit, which will break the vicious debt cycle and preserve the economic security of farmers.

1. Making of the Farmers’ Movement

On November 26, 2020, trade unions and farmers unions across India organized a 24-hour strike in response to the passage of new farm laws. An estimated 250 million people took part in the strike, making it one of the largest protests in recent times.[1][2] Following the general strike, thousands of farmers marched to the nation’s capital, New Delhi. However, upon orders from the Indian government, police stopped farmers from entering into the city by digging trenches and using tear gas and water cannons. In response, the farmers decided to camp indefinitely in temporary townships outside New Delhi. These makeshift camps had enough food, electricity, and other essential amenities to allow the farmers to keep protesting for at least six months.[3] Mobilized by viral videos of clashes between the police and farmers on social media platforms, the movement has now spread to the rest of India and amongst the Indian diaspora throughout the world.[4] Since its start, at least 248 farmers have died or committed suicide in protest.[5] In 

January 2021, the government offered to put the new farm laws on hold for eighteen months; however, the farmers rejected this proposal and instead demanded a complete repeal of the laws.[6] This deadlock continues after eleven rounds of talks,[7] and as of March 2021, the protest is well into its fourth month.[8]

Specifically, the acts in question include:

  • The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020:[9] This act provides a legal framework for farmers to sell their produce outside of the markets run by the Agricultural Produce Market Committees (APMC) and prohibits state governments from levying any fee on trading produce outside these APMC-regulated markets. The APMC is a government-regulated marketplace for farmers to sell agricultural produce. The APMCs are established by state governments and allow for agricultural commodity trades to be monitored and regulated to protect farmers from exploitation by large retailers. Prior to the introduction of this act, most states mandated that the first sale of agriculture produce take place in APMC-regulated market yards. APMC is important for farmers, because a minimum support price (MSP) is guaranteed in these market yards. Stable and reliable levels of minimum prices in the APMC protect farmers from excessive price volatility and incentivize them to invest in productivity-boosting inputs such as fertilizers, pesticides, and high-yielding seeds.

  • Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020:[10] This act provides a legal framework for farmers to enter into contracts with buyers for the sale of future produce at a pre-determined price. This act also specifies a dispute resolution mechanism for farmers. 

  • Essential Commodities (Amendment) Act, 2020:[11] This act amends the Essential Commodities Act of 1955 to delist certain commodities (such as cereals, lentils, oilseeds, potatoes, onion, rice). “Essential commodities” are those for which the union government can control production, supply, distribution and stock limit. Thus, this amendment reduces the scope of market interventions available to the union government. Commodities deregulated by this act can only be regulated by the union government under "extraordinary circumstances," such as natural calamities, war, and famine.

2. Laissez-Unfaire: Economic Efficiency vs. Economic Security Tradeoff

In many ways, these agriculture acts are the continuation of economic liberalization, privatization, and deregulation efforts that began in 1991 and were carried out by Indian governments since.[12] These laissez-faire economic policies have helped India lift millions out of poverty. The benefits of such policies, however, have primarily accrued to the highly educated, skilled labor sector due to growth in the knowledge-based service sector that puts a premium on skills acquired through tertiary-school education.[13][14]

The agricultural sector, meanwhile, is notoriously inefficient and misallocates resources. APMC markets, in particular, are supposed to help determine prices of agricultural commodities through auctions. In practice, however, APMC markets are beset with rent seeking activities due to the presence of multiple intermediaries and the high commissions earned by commission agents, locally known as “arhtiyas.” Many state governments require these agents to procure a license in order to operate in APMC markets. This restrictive regulation has the effect of allowing license holders to extract high rent or commissions. 

Moreover, the agricultural produce has supply chain has market imperfections. According to a study conducted by the Ministry of Food Processing Industries in 2015, post-harvest losses are estimated to be about INR 92,651 crore (US$12.7 billion).[15] These losses are primarily due to a lack of proper storage infrastructure. Consequently, decreased supply results in higher food prices for consumers.

These market inefficiencies could potentially be addressed by ending the monopolistic practices of APMC markets and bringing private investments into agricultural production. This possible solution is the core idea behind introducing new farm laws. Such an increase in economic efficiency would come at the expense of farmers’ economic security, due to a decrease in their power to negotiate prices. Three principal factors for these apprehensions are:

  • Insufficient legal recourse: Section 19 of Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act 2020 provides that the highest level of appeal for the farmer against any private buyer is the Appellate Authority, and it also prevents farmers from moving to court for dispute resolution.[16] Section 19 also undermines Article 32 of the Indian Constitution, which guarantees farmers a fundamental right to constitutional remedies. This imbalance of power between farmers and private buyers weakens the position of farmers. Moreover, this act bestows power onto the executive to be judge, jury, and executioner. 

  • Oligopsony or monopsony: The creation of a legal framework for contract farming and an alternate channel to trade agricultural produce outside of APMC regulated markets have created concerns that weakening APMC would eventually lead to a market structure with a few large private buyers. Numerous farmers competing to sell their produce to a few buyers would decisively shift the bargaining power away from farmers. A study conducted by researchers associated with University of Pennsylvania and the Bill & Melinda Gates Foundation found that prices realized by farmers are driven by a farm’s location.[17] Farmers in remote villages, they found, are particularly vulnerable because of high transportation cost and limited number of buyers leading to greater monopsony power. 

  • Fear of large retail buyers driving down prices in absence of Minimum Support Price (MSP): The minimum support price (MSP) is the guaranteed price of the agricultural commodity to be bought from the farmer by the APMC regulated markets for 23 agricultural commodities. MSP is a form of market intervention that protects farmers from price fluctuations. On the one hand, MSP creates economic inefficiency as farmers prefer to grow the 23 agricultural commodities covered under the MSP regime rather than the other commodities demanded by consumers because of the protection from excessive price volatility and the opportunity to earn reliable levels of minimum prices. A higher-than-expected harvest can be catastrophic to farmers as agricultural prices plummet. In such scenarios, MSP provides farmers a degree of protection by creating a price floor when the open market leads to a lower price. This also benefits farmers who do not sell their produce in APMC markets, as equilibrium market prices are higher due to the existence of MSP. Moreover, Indian farmers are competing to sell their produce in an international agricultural market that is already heavily subsidized. 

The new farm laws do not mention MSP and the government has given verbal assurance to farmers that MSP policy would remain intact. However, farmers fear that weakening APMC is a precursor to the dilution of MSP, given that, as of now, MSP is not codified in any law. Surjit Bhalla, a former member of the Economic Advisory Council to Prime Minister's Office argued for the abolition of MSP in 2019.[18] Apprehension that large retail buyers could drive down the agricultural commodity prices in the absence of MSP is not an irrational fear and has been seen globally. German farmers protested against new environmental regulations that would increase cost of production while competing large retails are driving down the prices.[19] French and Irish farmers organized similar protests.[20] Spanish farmers protested against low prices, demanding “guarantee retail prices” for agricultural commodities.[21] Recently, British farmers protested the reduction in milk prices by major milk processor companies.[22]

If the Indian government had consulted with all stakeholders, it could have foreseen the decrease in farmers’ bargaining power that would result from the new farm laws’ favoring of large corporate buyers. However, farmers’ representatives were not consulted, nor was a proper debate allowed to take place in parliament, due to the hasty process through which these laws were passed.[23]

3. Agrarian distress and the vicious debt cycle

It is important to take into account that these protests are happening against a backdrop of agrarian distress that has been going on for several years. This begs the question of why Indian farmers are in such a precarious position to begin with.

As of 2019, the agriculture sector accounted for around 16% of Indian GDP and employed more than 42% of the total workforce.[24][25] The agriculture sector was once considered to be the backbone of the Indian economy, but its contribution to GDP has been declining for years.

Figure 1: Sector-wise contribution to GDP of India at current prices. (Source: Ministry of Statistics and Programme Implementation)

Figure 1: Sector-wise contribution to GDP of India at current prices. (Source: Ministry of Statistics and Programme Implementation)

With this decline, farmers are facing increasing economic hardship. The “Report of the Expert Group on Agricultural Indebtedness,” produced under the chairmanship of Professor R. Radhakrishna, shows the dire economic condition of farmers.[26] Radhakrishna highlights the decline in farmers’ living standards as their income has become insufficient to meet even basic consumption requirements. The report details how rising input prices and declining earnings result in the inability of farmers to service debt, which has triggered a wave of suicide. Per the National Crime Records Bureau of India, 333,407 farmers have died by suicide since 1995.[27] Indian farmers are stuck in a sector that is increasingly economically unviable with few alternative employment opportunities available. 

The Indian agricultural sector is afflicted by many technical issues, such as inadequate irrigation systems leading to crop failures, lack of storage infrastructure resulting in harvest spoilage, and outdated technology causing low productivity. A study performed by economists Balakrishnan, Golait and Kumar found “a slowing of irrigation expansion since 1991 and a downscaling of production due to farm fragmentation” to be the key drivers of sluggish growth of the agricultural sector since 1991.[28] This study points out that access to institutional credit remains inadequate for the agricultural sector and is a key impediment to the adoption of new technological practices that could improve productivity. Evidence suggests that a 1 percent increase in real agricultural credit results in 0.22 percent increase in agricultural GDP.[29] However, of farmers who died by suicide since 1995, 76 percent to 82 percent borrowed from non-institutional lenders who regularly charge interest rates as high as 36 percent.[30]

In the aftermath of the 1991 Indian economic crisis, economic liberalization was carried out and major state-owned banks were gradually privatized. Based on recommendations from the Narasimhan Committee (the Committee on the Financial System), the banking sector implemented a number of reforms. These reforms increased capital adequacy norms and tightened lending standards. They also made Indian banks stronger, more autonomous, and more market driven. However, newly privatized banks retreated from less-profitable rural agricultural lending. The vacuum created was filled by non-institutional lenders.[31] The following table reflects this change between 1991 and 2002:

Table 1: Break-up of Institutional and Non-Institutional Rural Credit (Source: RBI WPS (DEPR): 05/2013: Persistence of Informal Credit in Rural India: Evidence from ‘All-India Debt and Investment Survey’ and Beyond).[32]

Table 1: Break-up of Institutional and Non-Institutional Rural Credit (Source: RBI WPS (DEPR): 05/2013: Persistence of Informal Credit in Rural India: Evidence from ‘All-India Debt and Investment Survey’ and Beyond).[32]

The following table demonstrates how the interest rate charged by non-institutional lenders tends to be higher than institutional lenders.

Table 2: Percentage Distribution of Amount of Cash Debt of All Rural Households by Rate of Interest, All India – 2002-03 (Source: NSSO (2005), All India Debt and Investment Survey 2002-03, p. 34).[33]

Table 2: Percentage Distribution of Amount of Cash Debt of All Rural Households by Rate of Interest, All India – 2002-03 (Source: NSSO (2005), All India Debt and Investment Survey 2002-03, p. 34).[33]

Higher interest rates demanded by non-institutional lenders increase farmers’ debt service burden and the probability of default. Reliance on expensive non-institutional lenders is trapping farmers into unsustainable debt burden. This vicious debt cycle is fueling India’s agrarian distress. Over a long period of time, the agricultural labor force engaged is expected to transition to manufacturing and service sectors. Until then, it is imperative that concerted efforts are made to increase access to institutional credit to keep agriculture an economically viable option for farmers.

4. Potential political ramifications

Indian political discourse and electoral politics are usually driven by caste, and these voting blocs tend to choose candidates from their own community. This could change because of the government’s response to the farmers’ movement. 

The government’s heavy-handed crackdown on protests, labeling protestors as “anti-nationals,” appeals to the conservative nationalist base but alienates farmers and creates a trust deficit that will be hard to overcome. Resentment and disenchantment are growing, particularly in the rural north, which relies on the agrarian economy. Additionally, farmers have widespread support from transport unions that represent over 14 million drivers, and millions more represented by labor and trade unions.[34][35]

The constitutional validity of the new farm laws is also questionable. The responsibility of agriculture law-making lies not with the federal government but with the state government. The federal government, therefore, is banking on a concurrent law allowing both state government and federal government to legislate on matters of “trade and commerce.” As the new farm laws prohibit state governments from levying any fee on produce trading outside APMC-regulated markets, state governments would lose income.[36] Farmers’ unions and multiple states have already announced that they will challenge the federal government’s overreach and the constitutional validity of these new farm laws. The constitutional question could become a protracted tussle between state government and federal government. Regardless of the Supreme Court’s eventual decision, farmers’ unions and labor unions' political clout will increase as farmers coalesce to protect their economic interests. The movement has also created space for cross-caste alliances driven by converging common economic interests.

In last three decades, successive governments have implemented liberalization and privatization policies to move toward a market-led economy with minimal government intervention. This period witnessed the weakening of unions as the private sector became dominant in the economy. However, revival of unions could increasingly make implementation of such market-friendly policies politically untenable. Thus, the outcome of the Indian farmers’ movement remains uncertain; however, it is certain that the impact of this movement will be felt for years to come.

5. Conclusion

Laissez-faire economic policies – liberalization, privatization, and deregulation – have helped India lift millions out of poverty; yet people employed in the agricultural sector have been left behind. Agriculture is increasingly becoming an economically unviable option for many farmers. Hence, some reforms are certainly required. The new farm laws would make the agriculture sector more efficient; however, they will also hurt farmers’ income. Risk mitigating policies are thus required to protect the economic security of farmers and promote job creation to employ displaced farmers and reduce reliance on the agricultural sector for employment. Rent seeking activities by commissioned agents in APMC markets could be reduced by modifying commission structures to ensure that the commission fee doesn’t amount to more than a few percentage points of the total value of produce. Capping the commission fee would make APMC markets more efficient without compromising the bargaining power of farmers. Given the ongoing agrarian distress that has been fueled by the high-interest credit provided by non-institutional lenders, there is an urgent need to expand access to institutional credit with reasonable interest rate for farmers.

About the Author

Samir Bhatnagar is an Associate Director at CRISIL (A S&P Global Company). He has previously worked at Credit Suisse and Ernst & Young. He completed his Master of Public Administration in International Finance and Economic Policy (IFEP) from the School of International and Public Affairs at Columbia University in 2016.

Disclaimer: The views and opinions expressed in this paper are those of the author and do not reflect the position of any organization the author is associated with.

Endnotes

  1. Ravi Agrawal, "Why India's Farmers Are Protesting," Foreign Policy, December 10, 2020, https://foreignpolicy.com/2020/12/10/india-witnessing-biggest-protests-history-modi-farm-reform/.

  2. Nitish Pahwa, “What’s Driving the Biggest Protest in World History?” Slate Magazine, December 9, 2020, https://slate.com/news-and-politics/2020/12/india-farmer-protests-modi.html.

  3. “Protest Site Draws ‘Sewa’ — Medicine Stalls, Laundry Service, Temple & Library Come Up,” The Indian Express, December 11, 2020, https://indianexpress.com/article/cities/delhi/protest-site-draws-sewa-medicine-stalls-laundry-service-temple-library-come-up-7100228/.

  4. Mayank Kuma and Manoj Bhardwaj, “Sikh Diaspora Drums up Global Support for Farmers’ Protest in India,” Reuters, December 18, 2020, https://www.reuters.com/article/india-farms-protests-diaspora/sikh-diaspora-drums-up-global-support-for-farmers-protest-in-india-idUSKBN28S0Y6.

  5. Parth MN, “100 Days and 248 Deaths Later, Indian Farmers Remain Determined,” Al Jazeera, March 5, 2021, https://www.aljazeera.com/news/2021/3/5/100-days-and-248-deaths-later-indian-farmers-remain-determined.

  6. Himanshu Shekhar Mishra, "Farmers Reject Government's Proposal To Pause Farm Laws For 1.5 Years." NDTV.com, January 21, 2021, https://www.ndtv.com/india-news/farmers-reject-governments-proposal-to-pause-farm-laws-for-1-5-years-want-full-repeal-2356130#:~:text=Farmers protesting against the controversial,continue with a fresh committee.

  7. Sravasti Dasgupta, “Eleventh Round of Talks between Modi Govt and Farmers Fails, No Date for next Meeting,” ThePrint, January 22, 2021, https://theprint.in/india/eleventh-round-of-talks-between-modi-govt-and-farmers-fails-no-date-for-next-meeting/59052.

  8. Devjyot Abidi and Adnan Ghoshal, “Indian Farmers Squat on Railway Tracks to Mark Four Months of Protests,” Reuters, March 26, 2021. https://www.reuters.com/article/india-farms-protests/indian-farmers-squat-on-railway-tracks-to-mark-four-months-of-protests.

  9. Act No. 21 of 2020.

  10. Act No. 20 of 2020.

  11. Act No. 22 of 2020.

  12. Manmohan Singh, “Review of Budget 1991-92 Speech of Shri Manmohan Singh Minister of Finance,” July 24, 1991, https://www.indiabudget.gov.in/doc/bspeech/bs199192.pdf.

  13. S. Mahendra Dev, "Economic reforms, poverty and inequality," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016, Indira Gandhi Institute of Development Research, Mumbai, India.

  14. Yoko Kijima, “Why Did Wage Inequality Increase? Evidence from Urban India 1983–99,” Journal of Development Economics, volume 81, no. 1, 97–117, https://doi.org/10.1016/j.jdeveco.2005.04.008.

  15. Jha SN, Vishwakarma RK, Ahmad T, Rai A and Dixit AK, “Report on assessment of quantitative harvest and post-harvest losses of major crops and commodities in India,” ICAR-All India Coordinated Research Project on Post-Harvest Technology, ICAR-CIPHET, P.O.-PAU, Ludhiana-141004, 2015.

  16. Section 19 of Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 decrees:  “§19. Bar of jurisdiction of civil court—No civil Court shall have jurisdiction to entertain any suit or proceedings in respect of any dispute which a Sub-Divisional Authority or the Appellate Authority is empowered by or under this Act to decide and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any rules made thereunder.”

  17. Shoumitro Chatterjee, et. al, “A Study of the Agricultural Markets of Bihar, Odisha and Punjab Final Report,” Center for the Advanced Study of India. (University of Pennsylvania: Philadelphia), 2020.

  18. “Former EAC-PM Surjit Bhalla Says next Govt Should Abolish MSP in 3 Years, Cut Corporate Tax by 5 per Cent, ETNownews.com, May 20, 2019,” Ficci.in, http://www.ficci.in/ficci-in-news-page.asp?nid=17362.

  19. Ben Knight, "Explainer: What Are Germany's Farmers so Angry About?" DW.COM. January 18, 2020, https://www.dw.com/en/explainer-what-are-germanys-farmers-so-angry-about/a-52054387.

  20. Jane Byrne, "Farmers Show Anger with Protests in Ireland, Germany and France." Feednavigator.com, November 27, 2019, https://www.feednavigator.com/Article/2019/11/27/Farmers-show-anger-with-EU-wide-protests.

  21. Pauline Bock and Gerard Escaich Folch, "Why Are Spanish Farmers Protesting against Low Prices?" Euronews, February 19, 2020, https://www.euronews.com/2020/02/18/why-are-spanish-farmers-protesting-against-low-prices.

  22. Claire Marshall, "Dairy Farmers to Protest over Milk Price Cuts," BBC News, October 01, 2014, https://www.bbc.com/news/science-environment-29448193.

  23. Mayank Bhardwaj and Rajendra Jadhav, “Explainer: Why Many Farmers and Politicians Oppose Modi’s Farm Laws,” Reuters, September 21, 2020, https://www.reuters.com/article/india-farms-idINKCN26C1WG.

  24. "World Development Indicators: The World Bank," World Development Indicators | The World Bank, http://wdi.worldbank.org/table/4.2.

  25. International Labour Organization, ILOSTAT Database, "Employment in Agriculture (% of Total Employment) (modeled ILO Estimate) – India," https://data.worldbank.org/indicator/SL.AGR.EMPL.ZS?locations=IN.

  26. Government of India, “Report of the Expert Group on Agricultural Indebtedness,” Ministry of Finance, Government of India, New Delhi, July 2007.

  27. The Wire Staff, "After 3-Year Delay, Government Releases Farmer Suicide Data," The Wire, November 08, 2019< https://thewire.in/agriculture/farmer-suicides-data.

  28. Pulapre Balakrishnan, Ramesh Golait, and Pankaj Kumar, “Agricultural Growth in India since 1991,” Development Research Group (DRG), Study No-27, Reserve Bank of India, Mumbai.

  29. Duvvuri Subbarao, “Agricultural Credit – Accomplishments and Challenges,” RBI Monthly Bulletin, August, 2012, pp. 1413-1422. 

  30. Balakrishnan, Golait, and Kumar, “Agricultural Growth in India since 1991,” 37.

  31. Duv Reddy, “Farmers’ Indebtedness and Agricultural Credit Situation in Andhra Pradesh,” 2015, 10.13140/RG.2.1.1092.1446.

  32. This is the most recent data that is publicly available.

  33. This is the most recent data that is publicly available.

  34. Tribune News Service, "Farmers' Protest: Transporters Threaten to Halt Operations in North India from Dec 8," Tribune India News Service, December 02, 2020, https://www.tribuneindia.com/news/nation/farmers-protest-transporters-threaten-to-halt-operations-in-north-india-from-dec-8-178997.

  35. Shemin Joy, "At Least 25 Crore Workers Participated in General Strike; Some States Saw Complete Shutdown: Trade Unions," Deccan Herald, November 26, 2020, https://www.deccanherald.com/national/at-least-25-crore-workers-participated-in-general-strike-some-states-saw-complete-shutdown-trade-unions-920200.html.

  36. Section 7 of The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020.

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