The Preface to Reform

Context: Laws that have distorted agriculture and labour markets should be reformed with social safety nets as a preface to such reforms.

Challenges faced by Indian Farmers: (before the Farm laws)

• Low income: According to Reserve Bank of India (RBI), a potato farmer gets only 28 % of what the consumer pays. (The farm gate price is 40-60 % less than the consumer price).
• Stocking limits: restricts bulk procurement and large-scale processing units which can run throughout the non-harvest season.
  • 30-40% of the post-harvest value (of vegetables and fruits), is lost due to inadequate storage.
• Trade distortion: Only traders registered in APMCs could buy farmers produce. (extract a greater share of value as they are price makers while farmers are price takers)
  • About 40-60% of the value is appropriated by intermediaries.
  • Farmers are restricted to selling within the taluka boundaries or limits of the APMC.

Benefits of the farm laws:

• Increasing farm incomes: by
  • Expands agro-processing and supply chains: thus enabling the farmer to retain a greater value.
  • Removing stock limit and introducing contract farming: will bring in investments to tap the wasted resource.
  • E.g. Karnataka implemented the Uniform Market portal in 2014, enabling trade across taluka APMC limits without APMC fees (Increasing profit margins for the farmers by 36%)
• Confined the authority of the APMC: to levy fees and give trader licences within the boundary of the market yard by Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill 2020.
  • Private players can set upmarket to buy the same produce.

Challenges with Labour market:

• Multiplicity of laws: instead of encouraging employment, have created disincentives for job creation due to high costs of compliance.
• Low employment elasticity: India’s employment elasticity with respect to Gross Domestic Product (GDP) growth is only 0.2 while China’s has 0.44, and Bangladesh has 0.38.

 Labour reforms and advantages:

• Legalized Fixed Term Employment: E.g. Bangladesh has shown the way to increase formal jobs by legalizing fixed-term employment and banning union activity in FDI industries.
• Relaxing the laying-off procedure: Raising the threshold for seeking prior permission for laying off workers will enable capital to move freely to new sunrise industries, creating formal employment.
• Social Safety nets: Existing social safety nets provides support in the forms of -
  • Food security:
    • Food Security Act guarantees highly subsidized wheat and rice. 
    • Leakage of subsidized grains was reduced by Aadhaar identification and digital ration cards paired with Electronic Point of Sale (E-POS) machines in fair price shops.
  • Direct income support:
    • National Social Assistance programme: Direct income support to over 40 million people
    • Income support annually to 145 million farmers.

Conclusion:  The real challenge is how to encourage growth while protecting the poor.

• A social safety net: needs to be created to provide direct income transfers to the vulnerable
• Factor market Reforms: involving labour and agricultural land need to be reformed to ensure productivity-enhancing growth.
• Employment-creating growth in the manufacturing and services sector: to lift the poor out of poverty and enable millions to move to higher-wage productive jobs.