Agricultural reforms should start with our land policy

I hold what is clearly a minority view of the current farmer protests. I have argued in these pages that abolishing the monopoly of Agricultural Produce Marketing Committees (APMCs), as well as bringing in reforms for contract farming, will benefit farmers. And to increase agricultural incomes, India also needs better contract enforcement, better transportation infrastructure, and ways to incentivize private-sector investment in storage and warehousing. But I also sympathize with the current protests, though farmers are seeking entitlements like minimum support prices (MSPs). Their grievances are a result of state policies trapping them in low-productivity agriculture.

The current protests are against reforms that have not even been announced, due to a fear that MSPs will be scrapped as the next logical step. According to the Department of Agriculture’s Price for Kharif Crops (2020), over 95% of Punjab and about 70% of Haryana paddy farmers receive MSPs. But under 12% of India’s paddy farmers benefit from MSPs: 20.6% of paddy farmers in Odisha, 7.3% in West Bengal, 3.6% in Uttar Pradesh, and 1.7% in Bihar. Unsurprisingly, farmers from Punjab and Haryana are protesting the possible loss of an entitlement given during the Green Revolution. If more reforms follow, like taking away free electricity or taxing the agricultural income of rich farmers; farming in those two states, propped up by entitlements and subsidies, will likely come to a standstill.

The grievances of Indian farmers, even rich farmers of Punjab and Haryana, are real. The benefits of the Green Revolution have reached maximum potential, and farmers find themselves with very few avenues to increase their incomes. Without increasing productivity, even removing the APMC monopsony and allowing competition among private buyers will not lead to massive increases in agricultural income. And the biggest reason for low productivity is India’s land policy.

India’s agricultural policy turned socialist in the 1950s to undo the harm caused by centuries of feudalism. It started with land reforms where, in addition to the abolition of zamindari, almost all states passed land ceiling and redistribution legislation with maximum-allowed limits on land holdings by an individual or family. States like Kerala and West Bengal imposed maximum holding limits under 10 hectares. The consequence was fragmentation of land holdings. Since the 1960s, when these laws were passed, the average size of land holdings has decreased, and the number of small (1-2 hectares) and marginal (0-1 hectare) land holdings has increased, mainly due to subsequent generations inhering land and splitting up their share of land holdings.

According to the Agriculture Census (2015-16), marginal and small holdings together constitute 86.08% of the total holdings. The average size of marginal holdings, which are 68% of all operational land holdings, is only 0.38 hectares. Only 0.57% of the total number of holdings in 2015-16 were over 10 hectares. This makes it almost impossible for farmers to viably invest in tube wells or drip irrigation, or storage; or buy inputs like seeds and pesticides in bulk.

India has imposed restrictions on importing agricultural technologies and also banned farming technologies like genetically-modified crops in brinjal, that enabled massive increases in productivity and farmer income in countries like Bangladesh.

To compensate the large number of farmers trapped in an unproductive sector, who form an important voting constituency, subsidies and hand-outs like free electricity and water, highly subsidized fertilizers, cheap agricultural loans, and loan forgiveness, have proliferated over the decades.

But the real problem starts with land policy. As farmer productivity decreased, farmers wanted to exit agriculture and engage in other sectors of the economy. Often, this would happen after a bad harvest or drought, when farmers sold the land in dire circumstances. Governments were worried that businessmen would buy land from farmers at fire-sale prices. So, to protect farmers, states amended their land holding legislation to prevent farmers from selling agricultural land to non-farmers. Or only farmers and not-for-profit institutions (religious, education and cooperatives) could buy farmland. State governments also imposed income restrictions on buyers’ non-agricultural income to prevent richer farmers with diverse income sources from exploiting poor farmers rendered helpless by financial difficulty. But these rules prevent farmers from exiting agriculture and also prevent richer farmers from increasing the size of their land holding to engage in more productive agriculture.

Indian states need to extensively reform their land laws by repealing land ceiling limits and facilitating the easy purchase and sale of agricultural land. This must be accompanied by good land-titling systems, as well as better contract enforcement, without which land markets will remain thin. Over 70 years of perverse and paternalistic regulation, the state has made it impossible for farmers to be productive. Political actors have ensured farmers stay poor and unproductive by making them reliant on subsidies in exchange for votes. India needs fewer farmers with larger and more productive holdings and access to newer technologies. Until India’s land policy is reformed to allow productive land consolidation, farmers will continue to block reforms announced by the government.

Shruti Rajagopalan is a senior research fellow with the Mercatus Center at George Mason University, US