IndiaSpend ResearchWire - October 9


In this edition of ResearchWire by IndiaSpend, we discuss the new farm bills, how reservations are effective, evidence that history matters, how spending on the poor could potentially make money for taxpayers, why Indians consume fewer calories as they gain wealth, and a podcast recommendation.

If you’ve missed the earlier editions, you can read them here.

The elephant in the room

Unless you’ve been living under a rock, you know that the Modi government recently bulldozed three agriculture reform bills through Parliament. The details are here but very briefly:

  1. Bill no. 1 allows farmers to bypass state-mandated mandis and sell to whoever they like.

  2. Bill no. 2 gives a structure for ‘contract farming’—i.e. farmers can enter into a direct agreement with a buyer to sell at pre-determined prices.

  3. Bill No. 3 lowers government control on production, sale and distribution of key commodities.

Touted as the next best thing since the 1991 reforms, these bills are to enable farmers to sell what they like, to whom they like, and at the prices they like. You’d think this would make farmers happy, but that hasn’t been the case.

Do we need agriculture reform? Yes and hell yes. So, what’s the problem?

First, read this by Roshan Kishore on how farmers do not trust big capital, and rightly so. India doesn’t have the regulatory landscape and implementation architecture to ensure that the single buyer (government) of agricultural commodities is not replaced by two or three large corporate buyers. The corporatisation of the agricultural input market over the years has increased input prices sharply.

To wonder why is to be oblivious to the power dynamics between small farmers and large suppliers.

It is factually incorrect to argue that agricultural markets were completely shackled before these reforms. Farmers have been selling their produce to private traders even earlier.

Second, read Ajit Ranade here on how at the heart of farmer protests lies the fact that the agri-reform bills have chosen to stay mum about Minimum Support Prices: Nothing on government procurement, no assurance on continuing MSPs. This makes farmers nervous as they see MSP as “the most pro-farmer measure”.

MSPs in agriculture act like floor prices—like minimum wages do in labour markets. They exist to minimise exploitation.

If you’d like to know more about MSPs, read this in-depth analysis.

Third, working with state governments is critical to liberalising agricultural markets. Read this on how—while the States have had mixed successes in reforming agriculture and implementing MSPs—the failure of many states to overcome their political economy constraints does not give the Centre carte blanche to act like a bull in a china shop. This approach creates more problems than it solves.

Finally, read this scathing piece by Yogendra Yadav on the difference between “the policy advisor” who must think of the possible benefits of a policy, and “the advisor to the poor” who must focus on the likely consequences of a policy, and its implementation.

You cannot fault these reforms on ambition. The government wants to create a class of ‘agripreneurs’—‘farmers’ is perhaps too last season. It wants more productivity, so the more efficient farmer can grow and everyone else can leave. A Lewis-Model style structural transformation possibly—but where is the expanding capitalist sector, and where are the jobs to move into?

P.S. I like reforms and would really like to be less harsh, but they haven’t given me much to work with.

Reservations work

The debate around political affirmative action or reservations is an old one in India. If you grew up here in the ‘80s or ‘90s, you couldn’t have missed it—you probably even participated in a Mandal Commission protest or two.

Critics of affirmative action argue that (1) reservations displace ‘meritorious’ individuals and this impacts development outcomes, and (2) any benefits to a minority group come at the cost of other vulnerable groups. A new study proves them wrong.

An analysis of political reservations in the Scheduled Areas of India reveals that reservations deliver no worse overall outcomes. There are large gains for targeted minorities, but these gains come at the cost of the relatively privileged, not other minorities.

Political reservations are an effective tool to redistribute both political and economic power, with no cost to other minorities, or to society overall.

The authors do note that in the long term, quotas can create a new dominant class that just replaces the old elite, and positive effects can disappear. And that’s the tricky bit, isn’t it? It is easy to give reservations/ subsidies/ patronage—but so hard to take them away.

A very good, accessible piece on this research is here. If you’d like to read the original paper, go here.

History matters

Read a study by Guo Xu of the Haas School of Business at Berkeley on how patronage in civil service appointments during the British Raj had effects that persist even today. Based on data from 70 colonial territories, he finds that colonial governors who were appointed because they were “connected” or enjoyed patronage were poorer performers.

And it isn’t all history yet.

Modern countries exposed longer to connected governors during the period of patronage exhibit lower fiscal capacity even now (2010).

So why is this important? Like the previous link, it teaches us that policies persist, pressure groups guard interests zealously, and behaviours are hard to change. Think about how easy it is to grant a tax exemption but taking one away will often have the most determined administrator weeping in frustration.

One more reason to spend on the poor

There’s research to show that using taxpayer’s money to pay for social assistance programmes (health, education, insurance, food subsidies) is a good thing—and not only because giving money to the poor is necessary, a moral imperative, prevents social unrest and is the job of any government.

Even when viewed from the narrowest lens of financial returns, spending on the poor is not money you’ll never see again.

Harvard economists Nathaniel Hendren and Ben Sprung-Keyser looked at US data on welfare spending and found that many programmes “made money for taxpayers, when all costs and benefits were factored in”. This happened as investments in the poorest gradually increased their incomes, they paid more taxes and became less and less reliant on government support. The full paper is here and an excellent summary article by Seema Jayachandran is here.

There are two things to note:

(1) Some government programmes will not do this and that’s fine (e.g. disability insurance that makes people stop working and therefore paying taxes). Please use this only to add one more reason to support government spending on welfare.

(2) For India (and other poor countries), this argument may not work as neatly. The poor here are so far from the point of taxable income that it will take more than one generation of welfare support before they can become taxpaying citizens. Welfare programmes will enable them to spend more, so returns through indirect taxes are more likely. Also, note the much smaller tax base in India and the nature of India’s economy, which remains largely informal. That is the one they are more likely to join.

A real head scratcher

Data show that on average, Indians consumed fewer calories even as the average wealth in the country increased. This seems counterintuitive. Shouldn’t people be moving to eating more as they get wealthier? Watch a (very) short video here explaining this calorie paradox. If you want more detail, the original paper by Josephine Duh and Dean Spears is here.

If you want my two-line summary, it is this: Reducing open defecation and infectious diseases matters. As people face a lower burden of infectious diseases, their systems get better at absorbing what they eat. They now need to consume fewer calories to get the same amount of energy.

Podcast recommendation

If you’ve ever wanted to throw terms like “opportunity cost”, “at the margin” and “externalities” in a conversation (why wouldn't you?) and don’t know how, I recommend an excellent eight-part podcast series by Planet Money. The Planet Money Summer School is a series of short podcasts on the first principles of economics, applied to the real world in an engaging and insightful way. The first episode uses examples from the host’s dating life to understand concepts like opportunity cost, sunk cost fallacy, marginal benefits and costs and market equilibrium. I particularly enjoyed this one on the economics of running a cocaine business, and this one on externalities.

Amee Misra
Contributing Editor, IndiaSpend
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