Economic Impact of Farm Laws

December 7, 2020
1:34 pm

The recent farm laws passed in India by avoiding deliberate debate have drawn mixed views. There are people who support them but majority of the farmers are against them. Shekhar Gupta, a journalist who is not a part of the ‘Godi’ media considers these as very good reforms. Raghuram Rajan had refused to comment upon their economic impact and had only expressed that these should have been passed after greater deliberation. Reforms in agriculture sector are definitely required. In this blog I have tried to explain the macro-economic picture as regards agriculture and the recent laws for the benefit of my students and followers.

Big Problem of Agriculture

India has about 44% of the population directly engaged with agriculture. The contribution of this population to the GDP is around 15%. Small and marginal farmers with less than two hectares of land account for 86.2% of all farmers in India, who own just 47.3% of the crop area. In comparison US employs less than 2% population in the sector and UK 1.5% of the population. India thus has a high amount of disguised unemployment in the sector. This shows very clearly that there is poverty among farmers and there is a need to redeploy the population in other sectors.

Solution

Increasing the size of farm holdings and reducing the number of people engaged in farming will increase crop production by promoting the use of modern methods. The 86.2 % of the population presently engaged with agriculture if redeployed in manufacturing or services sectors will increase their earning and thus India’s GDP. A factory or a warehouse or a cold store established on one acre of land is likely to employ more people and also generate greater wealth than wheat and rice sown in the same piece of land. In the next 10-12 years approximately 10-15% of the population should remain engaged with farming and the balance should be redeployed in other sectors for India’s economic development.

Likely Impact of Farm Laws

The farm laws brought in are likely to have the following impact over the next 5-8 years:

The small and marginal farmers (85%) will be forced to sell their land to the big corporates because they will have to sell their crops at low prices and the input costs of seeds, diesel, fertilizers, pesticides and electricity will go on increasing. These farmers have no bargaining power with the buyers because they have no capacity to store the harvested crop.
These farmers, after selling their land, will be available as cheap labour for the manufacturing and services sectors for the Indian corporate. India will also export more labour to the world.

Is Economic Situation Ideal for Present Laws?

Had Indian economy been growing at around 10%, the capacity utilization of manufacturing sector been above 90%, had “Make in India” been successful then these laws would have made a very positive impact on the GDP because unemployment situation would have been good and the capacity of the secondary and tertiary sectors to absorb labour would have been good.
In the present circumstances the Indian economy does not have the capacity to engage the large population which will get unemployed as a result of these laws.
This year the government is likely to have a fiscal deficit of about Rs 12-14 lac crore. The government is incapable of reducing the revenue expenditure and thus the capital expenditure will fall. This trend is likely to continue for the next 3-4 years. Thus the ability of the government to generate employment through infrastructure creation will remain restricted.
The corporate is unlikely to increase investment or generate employment in the absence of domestic demand. India cannot become a manufacturing hub for the world suddenly without the requisite infrastructure, environment and trained manpower.
In my view these laws will make India a larger version of the state of Bihar which exports hard-working people to the rest of the India. India may be forced to export cheap labour to the rest of the world because India is unlikely to generate employment for the large number of farmers who will be pushed out of farming.

Farm Laws are Good or Bad?

I have presented an analysis; now please decide as to whether these laws will prove to be good or bad?

References:

Centre’s expenditure 240% of income this fiscal; deficit at 7.7% (businesstoday.in)