“If liberalizing agricultural markets is such a good idea for farmers, then why are farmers protesting?” enquired a reader of this column. To clarify, only a small minority of farmers are protesting. If a majority of India’s 250 million-plus farmers were doing so, the country would have come to a standstill. But his question can be answered through the insights of Gordon Tullock’s 1975 paper The Transitional Gains Trap.
The majority of India’s agricultural community will benefit. However, the current mandi system is captured by a politically well-connected minority within the farming community, which will lose its special rents.
Many state governments have a restrictive APMC mandi system, requiring licences to operate these, thereby providing special rents to mandi licence holders. This system reduces the size of the market for farmers’ produce, imposes charges, and depresses the prices that farmers receive. It also harms consumers, who are prevented from directly buying from farmers and gaining greater control over their supply chains.
There is also a second effect. Most mandi operators are politically-connected “farmers” who paid to acquire licences to control state APMCs. Over time, aspiring mandi middlemen compete and pay “market rates” for bribes and patronage to acquire such licences. These middlemen will now fight to preserve the mandi system, because eliminating their monopoly control hurts them.
Therefore, while farmers, policymakers, and economists agree that moving from the mandi system to an open market system will increase the size of the market for farmers and benefit consumers, there is a lobby that’s making it difficult to eliminate the old system. The strongest opposition will come from the most recent licence acquirers, who paid a lot of money, but the steady income stream associated with these licences is now at risk. So, each state gets stuck with an entrenched group, whose interests lie in preserving the system.
Tullock’s insight was that a transition from an inefficient system to an efficient one is not easy because a small minority, which has paid money to access special rents, will try to block the change.
What makes farmer protests in India even more interesting from a public choice perspective is that larger farmers who aren’t middlemen have also joined them. The reason adds a twist to Tullock’s original insight.
The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, creates a framework for contract farming between farmers and potentially large buyers. Based on the knowledge and expectations of the farmer and the buyer, they can contract specific quantities and prices for produce to be delivered on a future date, assuring the farmer of an agreed-upon price irrespective of the market price on that future date. A big change in India’s procurement system, this is intended to develop deeper and more sophisticated agricultural markets.
But large farmers in states covered by large government procurement systems are worried that this is the government’s first step towards eventually eliminating government procurement of food grains and minimum support prices (MSPs). Farmers in Punjab and Haryana will benefit a little and not lose much from the current reforms to eliminate mandis and enable contract farming. But they are protesting because these reforms increase the possibility of MSP elimination, which would leave them worse off.
According to the Department of Agriculture’s Price for Kharif Crops (2020), more than 95% of rice farmers in Punjab and about 70% of rice farmers in Haryana are covered by the government procurement system. But only 11.8% of all the rice farmers across the country are covered by the procurement system. The protests against future reforms are the loudest in Punjab and Haryana.
Tullock’s warning was that a government shouldn’t legislate in a way that these special rents get created in the first place. Once they exist, the minority that will lose privileges will block reforms that move everyone to a more beneficial system. So, rich middlemen and farmers hold up transitions that benefit smaller and poorer farmers, and even block beneficial legislation in the present that may lead to losses from reforms in the future.
The usual prescription to break the “transitional gains trap” is to buy out the losers blocking the reforms. In the case of farmers, this would entail working with state governments and ensuring MSPs for a few years before phasing them out. The government, unfortunately, has taken a different route of shock and awe, seen in a lack of adherence to proper parliamentary procedure, to ram these reforms down states’ throats. Not forming a consensus by getting the buy-in of states, or in some way compensating politically connected middlemen, can jeopardize what is otherwise a positive and perhaps the most important reform by the Narendra Modi government.
The following article was originally published in LiveMint on 28 September 2020.
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