Reforms alone can’t raise farm growth, Bihar example shows

Bihar’s agricultural reforms of 2006, which saw the state liberalise agricultural trade by abolishing state-regulated markets, resulted in better prices for produce such as rice, wheat and maize, but the changes also brought greater price volatility, ultimately hurting farm growth, a study has suggested.

The reforms did not result in any significant private investment in new market infrastructure and a missing floor price due to the government’s withdrawal from the sector continued to put farmers at a disadvantage, the study by the National Council of Applied Economic Research (NCAER) said in their ongoing research project “Agricultural Diagnostic for Bihar State of India”.

The findings of the study come in the wake of Parliament enacting three controversial farm reforms that aim to liberalise the agricultural sector, including ending local monopolies of state-run wholesale markets -- known as agriculture produce market committees or APMCs -- by opening them up to private competition.

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The National Democratic Alliance (NDA) government pushed the three bills -- The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020; the Farmers (Empowerment and Protection) Agreement on Price Assurance, Farm Services Bill, 2020; and the Essential Commodities (Amendment) Bill 2020 – in Parliament last month despite protests by farmers’ outfits and opposition leaders who demanded greater scrutiny of the laws.

Big farmers’ groups, particularly in Punjab and Haryana, say the Centre’s farm reforms could pave the way for the dismantling of the MSP system and that deregulation will leave them vulnerable to powerful agribusinesses and in an even weaker negotiating position than before.

Bihar was one of the earliest states to scrap the APMC system. This changeover did not benefit the farm sector to the extent it should have, and it serves as a cautionary tale for the rest of the country in doing away with regulations without the right incentives for private investment in agriculture, economists have said.

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Bihar is one of the fastest growing states in India, with its gross state domestic product, or GSDP, growing at a compound annual growth rate of 12.14% between 2011-12 and 2016-17. The share of agriculture in the state’s GSDP is about 23%, higher than the national average of 14%, which means that the farm sector generates more income as a proportion of the overall income in Bihar than it does in the country as a whole.

The reforms don’t appear to have improved Bihar’s agricultural growth. Farm growth in the state averaged 2.04%, lower than the all-India average of 3.12% in the period between 2001-02 to 2016-17. “This happened despite a stable political environment, improvement in investment on rural infrastructure and reforms in agricultural marketing,” said Elumalai Kannan and Sanjib Pohit, authoris of the NCAER study..

The post-reforms period, when compared to the pre-reforms period, does show an increase in the average wholesale prices of major crops such as paddy, wheat, and maize. The average price of paddy increased by 126%, wheat by 66%, and maize by 81%, the authors said.

However, analysis showed that a simultaneous increase in volatility of prices affected the “stability of farmers’ income”, ultimately affecting farmers’ ability to invest and diversify. This instability in prices of farm produce, the authors note, could be a reason for Bihar’s lower agricultural growth. Price volatility refers to price fluctuations of a commodity.

Maize is a major crop in the state. In the pre-reform period (2002-06), the price volatility of maize (as calculated by a statistical measure known as ‘coefficient of variation’) stood at 11.2%. This went up to 24.9% in the post-reform period (2007-16). Similarly, price volatility had gone up significantly for also paddy and wheat. A knock-on effect of the lockdown has resulted in maize prices crashing to ₹1,000-1,300 per quintal, against a minimum support price (MSP) of ₹1,850, this year.

An analysis by Jaipur-based Chaudhury Charan Singh National Institute of Agriculture Marketing (CCSNIAM) conducted in 2011-12, along with the NCAER study quoted above, unanimously state that after APMC market yards were abolished in the state, there has been scant private investment in new markets.

This has led to “low market density”, meaning farmers often lack secure market channels within easy reach. The studies have called for a public-private partnership for developing wholesale markets.

One reason why the reforms did not pay off for Bihar is the lack of enabling policies. The state needed to have incentive mechanisms, such as tax concessions, to attract private investment in the creation of agricultural markets, cold storage and warehousing facilities, economists said.

The withdrawal of the government has meant that there is no assured floor price in the form of MSP. “Farmers are left to the mercy of traders who unscrupulously fix a lower price for agricultural produce that they buy. Inadequate market facilities and institutional arrangements are responsible for low price realisation and instability in prices,” the NCAER study has noted.

The latest countrywide farm reforms, therefore, are no silver bullet. “The expectation with these reforms is, once you allow markets to determine both production and prices and what to produce, it will help farmers with better price discovery. That’s the assumption,” said NR Bhanumurthy, the vice-chancellor of the Bengaluru BR Ambedkar School of Economics.

Bhanumurthy said the opening up of state-run APMC markets to private competition alone won’t work if it is not accompanied by other factors, such as an efficient crop insurance, expansion of food processing, storage infrastructure and better market information systems.