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Welcome to the IVM podcast
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Ram Singh is a farmer in a small village in India one morning
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He woke up to a loud noise coming from over his head
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He got out of bed and looked out the window there
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He saw that there was a giant spaceship hovering over his hut with the logo of the Indian government on it
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It was lowering a giant steel cage that would fit neatly around his hut
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Alarmed Ram Singh rushed out looking for someone to speak to and spotted a Babu in a safari suit
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What's going on? He asked the Babu. What are you doing?
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The Babu said we are lowering this cage outside your hut so that you are trapped inside
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You can't go out and no one else can get inside
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Why are you doing that? asked poor Ram Singh
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The man in a safari suit just laughed at him. He said you fool
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We have been doing it for almost 70 years now
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This is the story of agriculture in India
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Welcome to the seen and the unseen our weekly podcast on economics politics and behavioral science
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Please welcome your host Amit Varma
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Welcome to the seen and the unseen my weekly podcast on the seen and unseen effects of public policy
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This week. I want to talk about some of the laws around agriculture in India
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one which restricts entry into agriculture by preventing the entry of big corporations into farming and
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Two which stops farmers from taking an escape route from farming by not allowing
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Agricultural land to be sold for non-agricultural purposes
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What is the seen effect of these laws?
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The seen effect of such restrictions on agriculture is that farmers are protected from greedy rapacious
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Capitalists and an important sector of our economy
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Agriculture is safeguarded
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All this sounds most noble, but is it possible that these regulations are actually hurting both?
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The farmers themselves and our nation to discuss the unseen effects of these regulations
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I have two guests on the show with me
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Paman Srinath is a fellow at the Takshashila Institution and
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Karthik Shashidhar is a renowned quant with a cult following a management consultant a
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columnist at mint an adjunct faculty at IIM, Bangalore guys
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Pavan give me some background on how we have regulated farming in India over the last 70 years
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So ever since independence we've had this idea that farmers are the backbone of the country
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They are poor they need to be taken care of and they are suffering through various because of various reasons, right?
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So in order to do this, there have been heavy restrictions placed on who can do farming. So the fear is
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You know, you can have a company which comes and takes land away from people
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You can have one of us who lives in a city who has more access to resources who goes in and cheats the poor farmer out of
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Wealth right because land is perhaps all that a few people own
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so so that's the intention of why only farmers and
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Collectives of farmers are allowed to own land and practice farming
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And even unless you have I think different states have different rules
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But unless you have an ancestor or a parent or a grandparent who has done farming or still owns farmland
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Can you get back into this? I must remind you heard Amitabh Bachchan as a farmer
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So more of us are farmers and we know Karthik. So what are the unseen effects of this?
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What is the problem with protecting the farmer in this manner?
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See the thing is there are two roles that a farmer has to play here
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What the problem with this regulation is that it forces a farmer to be an entrepreneur?
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And there is a scene effect there
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There's a noble thing that like it comes from on the back of the zamindari system where they said like oh
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You don't want the farmer to be a slave
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You don't want him to like be farming for someone else
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You need to own your land and farm for yourself and things that so you're forcing everyone to be entrepreneurs now
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Being a farmer and being a businessman are two completely unrelated skills
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And what is happening now is that the farmer whose primary skill is farming?
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he's also being forced to be a businessman and he's and there are a large number of risks associated with farming and
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Not only does the farmer have to take care of his crop and apply his crop science to the farm
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He also needs to be tracking the markets. We're a big hedging against the risks and so on
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So that so we are overburdening the farmer by forcing him to be an entrepreneur, right?
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So there's the risk of weather right and in a country where we can't even predict the monsoon really well right now
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Price risks as you mentioned there can be all kinds of
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shortages infrastructure problems
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I mean we are making them forced entrepreneurs and then sort of celebrating that as a virtue right imagine if every single software engineer in the
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Country was not allowed to form a company not allowed to form a group, but just work entirely on their own
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Even over there sure your technology to at least network people and you can't even network farmers, but that's the big challenge, right?
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I mean what software would India be producing?
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What technology would we be making if no one was allowed to form a company and then there's a cash flow cash flow problem
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So right now the way farming works is okay
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you own your land beginning of the season you have to invest to buy seeds by equipment by fertilizer and
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Then you farm and then in order to get paid you just have to pray and hope that you have a good crop
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And it fetches a good price. So the continuing pavans analogy
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Imagine that software engineers in India were not allowed to take a salary and they could only get paid in terms of dividends from
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Or profits from what they would make at the end of the year, right? So far farming is like that
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Continue on that analogy. What would happen?
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I imagine is after a period of a year a lot of software engineers would be out of jobs would be broke and they'd move on
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To other professions is that is that what is happening in farming?
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And is it possible for farmers to actually escape farming actually if that happens
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I don't think it's a bad thing because right now you have like some 40 or 50 percent of the country producing 15 percent of the GDP
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So if if you were to have 20 percent producing the 15 percent those 15 those 20 percent would be making a lot more than what?
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The farmers are making now, so it's not a bad thing
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But again you have restrictions in other markets because of the restriction in land that power mentioned that you can't buy land
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Unless you're a farmer the number of the market for farmland is not particularly liquid and it's hard for the farmer to kind of
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Sell and like get away from his capital and so on right so the value of that land will accrue to the person who has
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The ability to change the use of that land which is typically some guys sitting in a government office somewhere
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Rather than the owner of the land right so he can't he's not even in full possession of the wealth
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So a farmer who's in debt and commits suicide might actually be sitting on debt capital to use an end of the sort of words which
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He can't actually make use of absolutely, but to go back to this
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Every single country which has increased in prosperity which has increased incomes has had a large exodus of people out of farming and into
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Typically industry but out of farming into more productive things right and in this process there's more skilling that is happening
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There is security that is given in fact the start of you know modern ideas of social security comes from
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From Bismarck's Germany right where you have sort of industries going up and then sort of a conversation on okay some sort of support should be provided
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So that all those things that we think of as now as a part of the stable
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Evolved from that idea of first you have a company they give you security by giving you a salaried income
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And they give you benefits you get regularity you have predictability and predictability is one of the most wonderful things in our lives right
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I mean those of us who have a lot of it can take it for granted and want adventure and spontaneity
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But I wouldn't inflict that on and no farmer has that and it's you know some of us take
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Unpredictability and entrepreneurship by choice we like to take those risks, but farmers don't have a choice in the matter
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And and coming back to an earlier point right like apart from not having a choice in the matter what it also does is like
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A farmer is forced to do things he's unsuited to do things like how do I sell it to who do I sell it to do
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I sell it in the local market or do I take it to Bombay or do I like
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Kind of just sell it to the guy next door and there's so many decisions and what crop should I plant this year?
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These are all things that are like hardcore business decisions
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They need to be done by hardcore business people and you're forcing the poor farmer to do all of that
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Now the contour view to that is that if you just allow others into farming if you allow say big companies like Reliance and Atata to get into farming
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They buy out all the poor farmers and you know, then the farmers don't have their land anymore and
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So on and you have these big conglomerates controlling farming
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So I don't know if they necessarily need to buy out the farmers, right?
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So you can have interesting architectures around that you can have farmers as I don't know
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Shareholders in a company that is formed locally you can have farmers who are given sort of guarantees of various sorts
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And the idea is yes, all of that is hard. Yes sort of enforcement of contracts is hard
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But we have so many people who are happily taking salaries and not complaining and they're not necessarily getting cheated out
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So this idea that somehow a corporation can come and take over everything just because bargaining rights are different is wrong
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And the other the unseen effect of all of this right is people repeatedly ask for the benevolent hand of the government
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Which is never terribly benevolent, right? So you want intervention and price because price is uncertain you want
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Intervention for crop failure because of weather because that is uncertain
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So every single problem and we've listed all these problems the automatic solution everyone's asking for is government intervene
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So one intervention begets many many other interventions
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So since this logic seems so infallible to me that you know, you give the farmer some security don't force him to be an entrepreneur
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And so on what are the obstacles to the policy change that you recommend?
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Who are the interest groups who want farmers to remain?
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Empowerished and in the condition that they are see the main interest group there is the government as power mentioned like
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Because the farmers have an uncertain future lots of risks and they keep asking for the benevolent hand of the government
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If the farmer slot becomes better if he gets paid a regular salary and if he doesn't have to face all these risks
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That he faces now and maybe he has an employer
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He'll stop asking the government for its benevolence and when you stop asking the government for benevolence, you're taking power away from the government
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So it's not in the interest of the government to actually deform this law and reduce the need for their own benevolence
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So in a sense what we've done I think is to get rid of the ills of the zamindari system
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We sort of nationalized the zamindari system, right?
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So you have a national government, which is the uber zamindar and that's what they're doing
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They're extending patronage right in the form of benevolence. And so you kill a patronage network their power goes away
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So educate me on this what percentage of the Indian population depends on agriculture and what what are the comparable percentages in advanced Western countries?
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Okay, so here's the number that keeps floating around right 60% of India depends on farming
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Right two fallacies over there, but 60% numbers a bit older numbers actually reducing second is even people who are
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Token dependent on farming are actually getting most of their income from non farm sources, right?
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They're doing odds and ends small service jobs
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They're sort of participating in the rural economy in various ways and the other thing which is sort of hidden is
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You go to rural India, you don't find as many young people anymore
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People between the ages of 20 and say 35 because they're off in the city trying to work
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So sons of farmers daughters of farmers are not doing farming
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So if you actually do an age profile that 60% comes first of all starts with something like 50 and then that drops down to about 20%
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And that depends of course state by state. What are the implications of that?
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The implications of that is you need new sources of jobs and India has been bad at providing that the informal sector in the country
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Absorbs a lot. So we don't have a traditional sort of a labor strike
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Or a labor movement that way
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I mean, we don't have the kind of insane unemployment rates that other countries do but there's a desperate need for more jobs and which
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In the context of the demographics you mentioned that if you have older generations of farmers who continue farming
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But the kids go away to the towns and the cities to work in industries, etc. What happens to farming then?
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So you have a massive adverse selection, right?
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So you have people who are desperate and have are unable to do anything else for a variety of reasons
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Who are sort of stuck in farming and anyone who can do something better exits
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Actually, we have we can see what's happening there in commercial agriculture where you can you for-profit farming is allowed
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It's in so-called cash crops like coffee and so on
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So the big story about how some coffee companies have grown is that like you have all these coffee farmers
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Whose sons and daughters don't want to be coffee farmers and then like they just get acquired
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And the easiest people for them to sell their land to is this big coffee plantation company
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And and those guys employ their workers and so on and and they've been managing it and I think it's been doing rather well
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So I think that the plantation sector which I think is still open for commercial investment
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Shows the way to what agriculture and you don't have this kind of distress
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You don't have coffee plantation workers committing suicide or so on their workers, right?
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They're workers on an employee they might be committing suicide because their employer might not be treating him
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Well, they're not committing suicide because the coffee crop failed because their workers are working on a salary and so on exactly
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So they have that security as all of us do in whatever jobs we have. Of course, there are problems
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I mean, there are problems in the software sector as well
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But I think it's unarguable that their lot is better than structurally the lot of you know
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A rice farmer in any state in the so I interrupted you a little while back
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So you were saying that the 60% figure is for false and is probably on a spectrum between 60 and 20 somewhere, right?
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What is it in like say Germany USA single-digit percentages?
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So there's this idea that we need so many farmers for food security
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The food security thing still remains as a narrative. No, you need a smaller number of people to do the farming
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You need more people in other sectors
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So I mean countries are managing with much smaller numbers
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China has done a brilliant job of moving humongous number of people out of farming
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I think now China might have dropped to single digits or that in their early double digits
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So if India gets its act together and I don't want to put cause and mix cause and effect over here
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It's cyclical, but if we get our act together, we grow we provide new jobs in industry and so on in 20-30 years
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We should be able to achieve what China did
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Not unthinkable and we are already sort of automatically doing it in spite of you know bad laws
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Right. So finally, I'll ask each of you. What would your reform suggestion be in this context?
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I think one important reform would be in terms of liberalizing the market for agricultural land
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Even if we were to not reform this whole thing of I mean Pavan mentioned about not changing land use and stuff
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But if everybody is allowed to invest in agricultural land
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The market for agricultural land will automatically become far more liquid
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And that will enable any farmer who wants to exit the system and who currently is not able to do so
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To exit in a more graceful manner and that will possibly make things far more efficient
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Yeah, I completely agree. The single biggest thing is liberalize the land market
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Allow more people to buy and sell allow different modes of it need not be a sale per se
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It could be you know some form of a land bank that's formed such that even if value accrues over time
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Dividends from that accrual can go to people who originally owned it
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So a lot of things can be done, but yeah, that's not just an agriculture problem
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But a pan India problem liberalizing the land markets, but I think that's the single biggest
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So here's what I don't understand liberalizing the land market is something that would actually be in the interest of big business
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Now for the last few maybe decade and a half government has essentially been run by interest groups
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And you could say run by big business. So what is really the obstacle here? I mean, okay, so I think
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Liberalization is in favor of all big businesses when you have
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But when you have interest, but it's not in what is in favor of all businesses is not in favor of interest groups
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So what's happening now is that because of you had the land acquisition act and all the there's an amendments to that and so on
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It's in favor of the special interest groups and not in favor of all big businesses. And so it's like kind of
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What we tend to see the scene is that special interest group equal to big businesses
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But the unseen is that special interest group is a subset of big business and it depends on the government in power and so on
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Right. So if you were to take out the ability of the government to intervene on behalf of the special interest groups
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It is not in the interest of either the government or the special interest group, but it's in the interest of big business
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So you need to separate out this thing between big business and and the groups
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I want to pull out an analogy that my colleague Nathan by uses and that's what how
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Because regulations are so dense because it's so hard to do business and so hard to operate in the land markets
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Incumbent players who are successful are successful because they have created me sized loopholes, right?
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So they managed to get themselves into this entire thing. So and then now protected from competition
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So you have big real estate houses big businesses who know how to play this game and they you know set their entire thing together
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So now if you liberalize it, they lose their incumbent advantage. They have to face stiff competition
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Nobody wants to do that. Awesome. Thank you so much for your insights
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Karthik and Pavan pleasure having you on the show. Thank you
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The laws in India around agriculture are actually a perfect example of how good intentions often lead to bad outcomes
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And these are outcomes that could have been predicted by any competent economist given the kind of incentives created by these laws
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Just because an effect is unseen does not mean that it is unforeseeable
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On that note, I'll leave you for this week
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Next week Amit Varma will be talking to Suyash Rai an economic analyst about the seen and the unseen effects of demonetization
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For more go to seen unseen dot in
