IT industry offers clue to agri puzzle: Farmers need a roadmap to boost parity

Tamil-speaking finance ministers usually invoke the Thirukkural, the classic bounty of wisdom on all things, in their budget speeches, but Ms. Nirmala Sitharaman chose not to do so this year, despite her profound description of farmers as "annadata" (grain-givers). Had she chosen an appropriate couplet from Thiruvalluvar's compendium of couplets, she may have recited this:

Uzhudhundu vazhvarey vazhvaar
Mattrellaam thozhudhundu pin selbavar

That translates as:
They only live who live by the plough
The rest must stoop and trail behind.

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Alas, those words of wisdom are basic to economics but are lost in the noise over farmers' protests in northern India ahead of general elections. Propaganda, half-truths, random factoids, and incongruently offered data seem to obfuscate the fundamental truth of Thiruvalluvar, which, interestingly enough, is affirmed by classical economics.

It is time to dust up some old concepts and state the basic truth: Agriculture is not any old industry, but one that forms the foundation of other economic sectors such as manufacturing, services and high technology.

This is particularly true for India, which is the world's most populous country as well as one dependent on the vagaries of monsoon rains. Thus, any simplistic comparison with well-irrigated developed countries and economic activities that are qualitatively different from farming would not be appropriate.

Protesting farmers indeed have a long laundry list of wishes and woes, but the core issues are that of minimum support prices (MSP) and cheap electricity prices that need to be addressed. But we need a historical perspective to get a grip on the problems.

The hard historical fact is that the farmers of Punjab, Haryana and Western Uttar Pradesh have been the leading suppliers of buffer stocks of grains for decades now, aided by the Green Revolution's high-yielding variety of seeds and a slew of state-supported measures, from power and fertiliser subsidies to the currently contentious support prices.

It is because of these policies that the government has been able to manage food prices for decades. Grain prices are politically sensitive and socially touchy, and "food security" has been a key theme of public policy for decades, with good reason.

A misleading impression is being given that support prices bloat the state's fiscal burden. More often than not, support prices are like a safety net that helps drive up market prices.

While farmers need assurances that minimise their risks, it is equally true that industry stands on the shoulders of farmers. Food prices are politically and socially sensitive and the risk is as much of the general public as that of farmers. Food price stability aids inflation management, and by extension, helps interest rates stay in a range that helps industrialisation.

If you look at this hard enough, protecting farmers is equivalent to indirectly protecting the entire economy from volatile prices. There is a catch when there is an oversupply of grains that can be as difficult for farmers as a crop failure.

This is precisely why we need state support to stabilise agriculture and keep farming safe. While it is widely recognised that central banks like the Reserve Bank of India help orderly growth by balancing deposits and credit growth with reasonable inflation and interest rates, a similar price stabilisation framework is not sufficiently recognised for agriculture.

It is often argued these days that rich farmers are leading the protests and therefore their demands are unjustified. How different are they from industrialists who seek protection from foreign competitors through import duties? As lobbies go, they are no different. But superficial imagery of farmers in Mercedes cars ignores the reality that farmers ought to be partners in growth because agriculture is more like the foundation of a building.

Lofty infrastructure projects, high-rise buildings and manufacturing ambitions stand on agricultural foundations.

Economists use a concept called 'terms of trade' (ToT) to address the issue of parity between agriculture and other sectors. Terms of trade are measured as the ratio of agricultural prices to industrial prices, measured by indices. Studies have shown that in India in recent years, agricultural labourers have seen their conditions of exchange improve more than farmers, though the lot of both have improved.

So you could argue that farmers are demanding something that looks like a socio-economic arrears payment. However, with the RBI struggling to keep food inflation in check, what probably hurts the government is that giving farmers their historic dues may hurt interest rates and muscular industrial initiatives that serve as global showpieces.

But it is equally true that the ToT for Indian agriculture, which declined to 72.2 in 1985-96 from 90.2 in 1973-74, bounced back handsomely in recent years, reaching 126.7 in 2022-23. This is attributed to both global prices and state policies.

However, there have been both fluctuations and stagnation in the terms of trade. In the last few years taken as a whole, there has been an overall stagnation in the ToT for both farmers and farm workers.

Also, the share of agriculture in India's GDP declined to 15 per cent in 2022/23 from 35 per cent in 1990/91 as a result of high growth in industrial and service sectors.

Agricultural employment still serves at least 50 per centof India's population. Don't farmers need a slice of the upside in the GDP?

The issue, therefore, is how to discontinue overprotection while ensuring vital food security. Here is where the MSP policy is critical. Can farmers who provided nationwide support as "annadata" for decades be suddenly left high and dry? Some kind of policy to give parity to the farm and non-farm sectors is needed.

Also watch |Decoding MSP and its impact on farmers and agriculture

The clue to how this can be addressed lies in India's booming information technology sector, which witnessed a similar conundrum after software exports started peaking.

India's annual software exports touched $194 billion last year. What is often forgotten is that this is the same country that had to mortgage its gold in 1991 to avert a balance of payments crisis and took an emergency loan of $2.2 billion from the International Monetary Fund (IMF) with its forex reserves dipping below $1 billion.

Forex reserves currently stand at $622 billion, helping stabilise a whole load of import prices. IT exports have been a crucial force in boosting the reserves. Export earnings were exempt from corporate tax, serving as a big incentive for IT exports. Yet, as exports surged, the new darlings of India's economy came to be questioned as pampered entities.

The Software Technology Parks of India (STPI) scheme was created in 2000 to support the IT sector with a 10-year tax holiday provision and other fiscal benefits, including real estate benefits. As calls grew to tax the sector through the millennium's first decade, the IT industry lobbied to get the "sunset clause" due to kick in from 2009 postponed.

Later, there was a special economic zone (SEZ) scheme that kept a cushion for the industry for a soft landing.

What Punjab's farmers probably need is a similar soft landing. Some studies based on Commission for Agricultural Costs and Prices (CACP) data suggest they have already reached the remunerative levels recommended by the MSSwaminathan Commission -- whose report to aid farmers with higher prices has been by and large ignored despite his being posthumously awarded the Bharat Ratna, India's highest civilian honour, this year for being the father of the Green Revolution.

No wonder, his daughter Madhura, herself a food economist, wants the government to take protesting farmers along. What we could do with is a government white paper that outlines the position of farm support prices and incomes, followed by a scheme to help farmers get terms of trade that help them get the upside of an industrial growth they have laid the foundation for.

This requires a roadmap approach going beyond simple one-off negotiations on the eve of general elections. A dismissive, patronising approach to farmers seems to have been the policy so far. Something that Thiruvalluvar would not have approved.

(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)