Mises Institute : India’s Agrarian Reform Mark a Departure from Socialist Mahalobian Thinking

ECONOMICS FOR BUSINESS, LAW & ECONOMICS / Saturday, October 17th, 2020

By Satyajith MS on the Mises Wire

Over the past thirty years, India has experienced some periods of economic liberalisation, but the country still retains many aspects of its former periods of widespread state control of the economy.

In recent weeks, we’ve seen some new efforts at liberalisation once again. For example, three farm bills (now acts), namely the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) BillFarmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, and Essential Commodities (Amendment) Bill have led to protests within and outside the parliament. The reforms were initially announced as a part of the national economic relief package, popularly called Atmanirbhar Bharat (self-reliant India), in May 2020. The government claims that these reforms will lead to an increase in farmers’ incomes, in line with its ambitious target of doubling them by 2022.

Essentially these laws liberate the farmers from the clutches of state control and provide them the freedom to manage their supply and trade. Farmers have long had to sell their harvests at government-designated markets where the balance of power is in favour of the middlemen, reducing the bargaining power of the farmers. The restrictions and regulation of supply and trade of agricultural produce led to artificial determination of prices. While it is true that when legislation regulating the supply came into effect India faced food shortages and scarcity, the regulations’ persistence into the modern era is nothing less than astonishing. This is probably due to the fact that India had to undertake liberalising reforms in 1991—beginning India’s most significant liberalisation period—due to dire economic need rather than an ideological shift in policymaking.

A History of Interventionism

India was essentially a mixed economy on paper but socialist in spirit until 1991. For instance, the Essential Commodities Act (ECA), a highly interventionist plan, was enacted in the year 1955. The legislation intended to prevent scarcity of food supplies and avoid price fluctuations to the benefit of the consumers. As economist Ludwig von Mises put it, the effect of state intervention is that men are now able to use their knowledge and ability in a less efficient way, making them poorer. The ECA is a textbook example of what Mises clearly opposed by suggesting that such measures impair supply, not improve it. As a matter of fact, India’s Economic Survey 2019–20 recommended abrogation of the aforesaid legislation. It said that imposition of stock limits on pulses (dried legumes), sugar, and onions had no bearing on the volatility of retail and wholesale prices. It further noted that “the Act must be jettisoned in order to grant more economic freedom to the market and to facilitate the process of wealth creation in the economy.”

Interestingly, this particular legislation was only a continuity of a policy initially introduced by a fourteenth-century monarch named Allaudin Khilji. Records suggest that he regulated the prices of all articles to enable his soldiers to live on moderate pay, thereby adjusting the laws of demand and supply artificially. He also ensured that the grain was stored only in royal granaries and that no private hoarding was permitted. This policy continued during the British colonial period to the benefit of the colonizers.

It is surprising to see such intrusive state policies existing even in twenty-first-century independent economies even though there has been an ideological transformation toward libertarianism over the years. This policy of state control over supply and trade of agricultural produce may have seemed to make much more sense in a period when India faced food shortages. There is also a high probability that such legislation was enacted by the then government with the memory of the 1942 Bengal famine fresh. However, with the passage of time, when the review of Mahalobian1 policies in hindsight suggested that they had failed, the state should have undertaken the structural reforms.

The principle which underlies the recent structural reforms is probably a shift toward laissez-faire approach. The rationalization of government intervention is not only necessary for the effective functioning of the economy. It also emphasises the degree of freedom that individuals who are engaged in different economic activities get. If one looks at the socialist legislation which regulated the supply and trade of farm produce in terms of principle, it essentially contradicts the constitutional provision of freedom of trade which is enshrined in article 19. While it goes without a saying that every freedom is complemented with certain reasonable restrictions, one wonders if the reasonable restrictions would also include a policy legitimising a nanny state.

The new legislation which intend to deregulate the agricultural sector is transformative in its own ways. At one level, it suggests a departure from the Mahalobian thinking, which is essentially socialist in nature. At another level, it represents a new dawn for the agricultural sector in which the farmers are now liberated to sell their harvests at the places designated by their own wisdom and not that of the state. While it is true that only time will tell if the specifically tailored legislation will yield the desired results, the shift in the underlying framework toward a laissez-faire approach is welcoming.

  • 1.P.C. Mahalanobis was an Indian statistician who was instrumental in drafting the second five-year plan for India. He was a member of the erstwhile Planning Commission from 1955 to 1967.

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