Providing food for over 1.3 billion people in the second most populous country (at time of writing) in the world is challenging. However, in 2019, this already arduous job had been compounded by a perfect storm of issues, ranging from a reduction in income to climate change reducing crop yields. This left farmers desperately looking to their government for help. In response to their cries and protests, Narendra Modi implemented a minimum price law to increase the welfare and well-being of the farmers at the expense of the millions of consumers in abject poverty now forced to pay higher prices for food. Looking back a few years on, was it the right choice?
In November 2018, 100 000 farmers throughout India joined strikes and protests to gain the government’s attention. These workers were living from hand to mouth, and 12 000 of their colleagues committed suicide annually due to their seemingly insurmountable debt levels. Due to a lack of rainfall in the preceding years and two-thirds of land not having adequate irrigation (due to the country’s 20 million boreholes depleting groundwater), crop yields have been steadily decreasing per annum. Farmers also had to battle with increasing taxation on goods such as fertilisers and seeds, increasing their cost of production and leaving less money in their pockets after harvest. Fuel prices (which were at an all-time high) have since grown, making it more complex and more expensive to transport goods to market, as well as the fact that there was inadequate storage for the produce meaning large amounts went to waste. The situation was in dire need of government intervention.
The government believed that the key to the situation was all to do with economics. The deep-seated woe brought before them was that the farmers were not making enough money for a living, and problems like lack of irrigation and climate were compounding this issue as they could not increase their yield and sell more crops. The solution was to intervene in the markets and introduce a minimum crop price. In principle, this meant that the farmers’ income would increase because the revenue earned would increase for each unit sold. Farmers could now afford to invest in better technology to store their goods before selling. The policy change would also entice more people into farming as it would be seen as a more lucrative career, ensuring India would have a ready supply of labor to help feed its ever-expanding population.
The policies were put in place four years ago. Looking back, we can see that all is not as picturesque as one might have hoped. What was forgotten in the initial evaluation was the impact on consumers. Most people are as poor, if not poorer than the farmers protected by this policy. With the new price increases, many were forced to pay this higher price (since they had no alternative). Worse off still were the consumers who were so poor that they were priced out of the market and starved. This is a form of market failure are indeed government failure in this instance.
This common incentive to sell some crops at a lower price opens the doorway to a black market. If farmers sold their crops for below the minimum price to people who could not pay the maximum price, they would make some money rather than letting that food go to waste. Having a black market totally undermines the legislation and leads to unsafe produce because of the lack of regulation. However, the Indian government understood the dangers of a potential black market. They paired the minimum price with a law saying that they would buy any produce the farmers could not sell, solving the issue. There would be no reason for farmers to sell their goods on a black market when they could get a better price from selling to the government.
The final bit of legislation employed by Modi to help the farmers was the 400bn rupees pledged to help reirrigate the land so that more crops could be produced and then sold. This was introduced in 2016, but now we see very little in capital solutions off the back of the money. This is partly due to the inefficient political system, and the money has been caught up in bureaucracy and delays. Furthermore, what little money left has been used inefficiently. The government has no incentive to find the cheapest or best solution to the problem, so there has been little change between the lack of irrigation in 2016 and now.
Looking back, the government’s minimum price policy has been effective in its protection of farmers. However, alone it would have been very wasteful because black markets of crops sold below the minimum price would have sprung up everywhere, making it ineffective. The enforcement of a government purchase scheme was very smart since not only did it mean that no black markets would arise, but also, the poorest people in society were being provided crops via the government. The only drawback is that government lethargy and delay have meant that many crops go to waste. Despite costing the taxpayer billions of rupees annually, it has ensured that farmers are protected to continue supplying food and making a living.