Dharma and Sankata of Markets for Smallholder Farmers in India

With due apologies for those who find the title boggling, here is a rough translation: What does it take to make markets work for smallholder farmers in India?

A couple of days ago, I virtually attended the launch of Samunnati’s Agri Startup Engagement Platform. Anilkumar SG, Founder and CEO, introduced Samunnati thus:

We are a value chain player. We work to make markets work for small holder farmers. That is the purpose of our existence.

Mind you, this is no easy task. If you’ve been following my blogs, you would know my obsession to get to the bottom of this question.

As I had noted earlier, Indian agriculture has many ground conditions for markets to fail.

  1. Does it require shared resources? Check.

  2. Is there information asymmetry? Check.

  3. Does it involve transactions in which the pay-off happens in the future? Check.

I am assuming that I don’t have to spell out how these operating conditions play out in the case of the Indian agribusiness. If you have questions, feel free to share your comments below.

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If Indian agriculture has several ground conditions for markets to fail, how do we make markets work for smallholder farmers in India?

Fascinating question, isn’t it?

So here is the deal.

I am going to unpack the complexity of this question. I can’t promise you a clear answer. I wouldn’t be writing this newsletter if I knew it:). I will provide a direction to think this question through from first principles.

If you go back to Economics 101, you would know that for markets to work, it must fulfil three criteria. My Economics teacher calls it the three Ps which are required for markets to be stable.

1) Private Property-This is a fundamental requirement for any economic activity. And if you go back to history during the times of the socialist era, they removed the ownership of property. We know what all happened.

2) Prices - Market Prices, at the end of the day, are information systems (You must thank Friedrich Hayek for this insight). These information systems clearly communicate and distribute information about the market through prices. What do we do when we don’t know what market wants? Simple, we rely on prices to give us real-time information (I am trying my best to simplify things, at the risk of sounding simplistic. Of course, prices also carry noisy human impulses of fear and greed. How do we decouple them from prices is a question for another day)

3) Profits - The lure of profits and the discipline of losses bring the necessary check and balances for markets to be stable. If you start messing around profit and loss, market stability is disrupted.

If you are serious about following the Dharma (Loose Translation: Nature and Order) of Markets, these are the basic rules of the game. But, what do we do? Once we go past ideals and arrive at where the rubber meets the road, you would realize that we face serious Dharmasankata in each and every rule of the game that is required for markets to work.

Regular readers of my blog know my proclivity to frame deeper challenges using Dharmasankata, a fascinating concept which is at the heart of Mahabharata. Call it a double bind, if you are not familiar with this word.

As was the case of Arjuna during the start of the war, so is the case with a serious inquirer who is trying to make markets work for smallholder farmers: I am in Dharmasankata, for I am damned If I do, and damned If I don’t.

1) Private Property.

Land Titles in India are presumptive, rather than conclusive. Well-meaning policies which were legislated to save small landholder farmers from the machinations of Zamindars and to prevent non-agriculturists from buying agricultural lands have led to second-order effects which are now working against the case of farmers.

If you take into account the lower quartile price of arable, agricultural land today at around Rs 8-9 lakhs per acre, a small landholder farmer who owns less than a hectare possesses an asset worth Rs 15-20 Lakh. If we do DMAT-ing of the land, i.e. we make this land asset digitally collateralisable, you could make an excellent value proposition to reduce the cost of farmer credit by 2-3X.

But the story doesn’t end here.

The problem isn’t as straightforward as it seems in the mind of blockchain enthusiasts who are dreaming of digitizing all the massive land records of India. Andhra Pradesh started digitizing its property titles, partnering with a Swedish Blockchain firm (Aatmanirbhar anyone?) and states like Karnataka and Haryana have eased land-ceiling laws to make it easier for non-agriculturists to buy agriculture land with fewer restrictions.

Infographics from Economic Times on the rising rural land prices.

The real problem is this: The moment you do land reforms, prices start to increase, and you make it easier for farmers to exit agriculture and become wage labourers. And that’s precisely what conventional economic logic states. When a country has become developed, a smaller number of farms feed a larger number of people, much like a smaller number of stores start to sell to a larger number of customers.

When farmers from developing countries find it unaffordable to buy lands in their own villages, thanks to the rocketing prices, what else will they do, other than succumb to the conventional economic logic of the day?

Do you now see the double-bind?

I am damned, if I do land reforms, for it would make land prices unaffordable for smallholder farmers.

I am damned if I don’t do land reforms, for it would rob farmers of the safety and reliable access to capital.

2) Prices

If you follow the work of Devinder Sharma, who has been making efforts to show how the entire business game of agriculture has been rigged against the welfare of farmers, he made a strong argument recently arguing for MSP to be made a legal right for farmers.

The logic is powerful, albeit problematic if you look at it from how market works.

Here is how the logic derives its appeal: If farmers from remote regions, who do not have access to regulated wholesale markets, end up selling their produce in local ‘haats’ at rates lower than government announced MSPs, it becomes necessary to make MSP a legal right to instil farmers’ confidence.

However, in real life, this doesn’t play out this way, as the experience in Maharashtra has seemingly shown us. As Prof. Ramesh Chand, Member of NITI Aayog, states in this interview,

“Last year, they declared that any transaction to buy soyabean less than a particular price will be treated as illegal. So the private sector bought the best quality produce and then they stopped buying. You can’t ensure such things through legislation”

Now, obviously, when you talk of things like MSP and assured income, you are distorting the market information system mechanism. But, what to do when the government itself fixes the MSP price based on a gross undervaluation of costs?

A recent blog post by Vijoo Krishnan of Center for Financial Accountability laid down the numbers from Kharif Marketing season 2018-19 and 2019-20 to help us understand what’s really going on.

What do we do when for every Rabi crop the MSP fixed is way below C2+50%, whether one takes the CACP projections or the projections by State Governments? Does it justify the cost of making MSP a legal right for smallholder farmers?

Or do we work towards stopping the government intervention altogether, and rely on market forces, which will ensure that only a smaller chunk of farmers who have access to consolidated land capital and advanced technologies will address the food security needs of our country?

Do we choose the devil or the deep blue sea?

  1. The lure of profit and the discipline of losses

In an ideal world dreamt by market purists, the checks and balances of profits and losses is necessary. The corollary is that only those who have a healthy discipline of profits have the right to survive.

But, in real life, we have corporate loan waivers and if past crises are any indicator, governments have saved organisations like General Electric which they considered too big to fail.

While delivering the Hormis Memorial Lecture organised by Federal Bank, India’s former Chief Economic Adviser to the Government of India, Arvind Subramanian said

It is a very difficult problem and not unique to India. No political system finds it easy to forgive debt to the private sector, especially to big companies. You need to be able to forgive those debts because this is how capitalism works. People make mistakes, those have to be forgiven to some extent

If this is how Capitalism works, why are farm loan waivers considered, in the words of former RBI Governor Urjit Patel, to undermine “honest credit culture”, and could affect “the national balance sheet”?

This argument is no new. Devinder Sharma has been making this argument for a while now.

If you look closely, in this article, I have largely summed up who said what and raised more questions than answers. Such is the wicked nature of bringing markets to work for small-holder farmers. And I don’t think there are straight easy answers.

Net Net, if you consider all the double-binds involved in making markets work for the benefit of small-holder farmers, we face a mounting challenge ahead.

Given the trend du jour of digital technologies to save the problems of human existence, worldwide, experts have cautiously placed their bets on data to solve this problem of making markets work. They hope that building the necessary legal and technology infrastructure for farmers to access and aggregate data can make markets work for smallholder farmers.

The thing with digital agriculture technologies is that it comes with a winner-take-all proposition. How do we build digital agriculture technologies in a way that farmers don’t end up where consumers are today, totally exploited for the data they have willingly shared to the big players in the world of tech?

Btw, the folks at Samunnati are betting on Value Chain Financing to solve this problem of making markets work for smallholder farmers.

Be it data, or value chain financing, these are interesting propositions worth examining. I will explore them deeply, going forward.

Do share your comments and perspectives. I’m all ears.