How Indian farmers are forced by the government to subsidise urban consumers

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In July, food inflation in India was a whopping 11.5%. For vegetables alone, the inflation rate was an incredible 37.3%. This is not a new phenomenon. Food inflation has been climbing steadily for some years. An analysis by the Hindu shows that in Mumbai, the price of a home-cooked vegetarian thali – the cheapest meal that poor Indians could afford – has gone up by 65% in the last five years. But during this period, the average income earned by casual labourers in urban Maharashtra has increased by only 37% and that of salaried workers by 28%.

High food inflation coupled with stagnant wage growth mean that that three-fourths of Indians cannot afford a healthy diet, recent data from the United Nations shows. Within South Asia, only Pakistanis and Nepalis have more food insecurity than Indians. Bangladesh, Sri Lanka and Bhutan manage to deliver more food security to their people.

Bashing the farmer

In response to this crisis, the Indian government has taken a familiar route. It has decided to try and forcefully depress farmers’ incomes as a way of reducing prices that urban consumers pay for their food. The main route the Modi government has used for this is export bans, limiting the buyers that farmers have for their produce. This forces them to sell to domestic consumers at depressed rates. Exports of wheat and various varieties of rice have been curbed. So major is India’s hold on the export of rice that both the BBC and CNN Business reported on how this could deepen a global food crisis.

The Modi government has also, for the first time in 15 years, imposed stock limits on the wholesalers, retailers and processors of wheat. Similar curbs on the free market have also been placed on major pulses. If things are bad now, it might even get worse. Meteorologists have predicted that this year’s monsoon will be the worst in nearly a decade, leading to fears of even greater food inflation as crop production could dip.

The spoilt urban consumer

In 2020, when the Modi government introduced three new farm laws claiming that they would liberalise Indian agriculture, it tried to argue that it was promoting free market principles as opposed to the command-and-control agricultural economy that had been dominant since Independence. As is now clear with these mass controls on agriculture marketing, the Modi government actually has little faith in the free market.

Like all governments, it is terrified of food inflation. Given widespread poverty and the fact that most Indians spend a significant portion of their income on buying food, even small movements in price have significant electoral outcomes.

Taxed not subsidised

India’s affluent people often see Indian farmers as a pampered class who receive spades of government help. They point out that the government buys crops from farmers at guaranteed prices (the minimum support price) and that farmers’ incomes are not taxed. However, these measures benefit only small numbers of farmers. Buying at guaranteed prices or a minimum support price is limited to a few crops and exists in any substantial way only in the states of Punjab and Haryana. Official data shows that less than 6% of Indian farmers actually sell at the minimum support price.

In reality, however, Indian farmers are far from pampered. Data from the OECD shows, in fact, that Indian farmers are actually heavily penalised by the government. By using tools such as export bans and restrictions on the marketing of produce, the government significantly undermines farmers.

In 2018, estimates showed that the net effect of such policies on Indian farmers was a loss of revenue amounting to $41 billion. In contrast, richer countries such as the United States and China do actually provide a net subsidy to their farmers to protect them from the free market. In the US, this amounted to $53 billion and in China a whopping $289 billion.

This hampers a sector that employs some of India’s poorest citizens. Worse, it sits alongside a stark lack of alternate employment options for Indian farmers. India has lagged behind in creating industry: manufacturing makes up only around a sixth of its gross domestic product. Even more troubling is the fact that the situation might be getting worse.

According to data from the Centre for Monitoring Indian Economy, employment in agriculture has risen since 2016-’17. On the other hand, employment in manufacturing has dropped sharply. Thus even though Indian agriculture is highly non-remunerative (and might even not be profitable, with low yields and high implicit taxes), many Indians have no choice but to keep on farming given there are no other employment options.

In effect, poor farmers are being forced to subsidise the meals of urban Indians, given the exigencies of electoral politics. Even if this system works in the short term, it is clear that it is not sustainable in the long run. India will have to make Indian agriculture more efficient even as it moves Indian farmers to industrial occupations.

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