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Theory Vs Reality

How the agricultural economy is meant to work vs how it actually works.

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Primer on Market Economics

Before delving into the economics of the current Indian agriculture industry, let’s first establish how a market system should work in theory.

In a market economy, many buyers and sellers interact through voluntary transactions to achieve a mutually beneficial outcome. On one side you have the farmers (producers) who grow the crops and make them available for purchase. Customers, be they businesses or individual consumers, seek to buy these crops off the farmers. Both sides are seeking to have their own interests met.

Now, each farmer has a minimum price in their heads that they are willing to sell for. They would not like to give away their produce at a price lower than this, but would be happy to sell at any amount above this. Simultaneously, each consumer has a maximum price they are not willing to pay more than in exchange for these goods. This conflict of interest allows for a natural market price to develop where most producers are willing to sell at a price most customers are willing to pay for.

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As illustrated in Figure 1, when there are many buyers and many sellers, no one farmer can charge an extraordinarily above market rate (since buyers will go to another farmer), and no one buyer can put in too low of a bid (since the farmers can sell to someone else). There is ample competition and therefore many choices and alternatives available. Each buyer and seller will negotiate an agreement that is unique and mutually beneficial to them, however, overall the price of the same good would tend towards a natural, average level. What determines the maximum amounts each consumer in the market is willing to pay is entirely subjective and may be a result of a multitude of factors. Similarly, the farmer must also consider the costs involved to grow their crops and profit they need to make to fund their own needs and wants.

Since not everyone has perfect information, or is perfectly rational, there may be better or worse trades, but they all fall under a general average price. Hence, if everyone knew about and had access to the farmer willing to sell at 9 Gold pieces, they would all go to him. However, even then his supply is limited, and so the buyers would then tend to go to the next best, and then the next best after that etc.

This all ensures the best interests of the most possible people are met as each buyer and seller are able to trade at a price they both agree on

[1]⁠

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Theory Vs Reality

So what is the issue in India? Why doesn’t this currently work? The problem arises when there is not enough competition.

As of right now, the buyer’s market is largely dominated by two groups. The first is the central government through the state approved ‘mandis’. A system originally set up by the British

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, these are yards overseen by the government who purchase state approved crops at fixed rates, regardless whether there is an actual consumer demand for them or not. Hence warehouses fill up with crops that didn’t go on to sell to the rest of population (surpluses). The state can not just export them and get rid of the surpluses on the global market either. Price control polices (which we will discuss next) make crops like wheat and rice cost 20-30% more, making Indian crops uncompetitive in international markets

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The second group is the state-backed ‘monopolies’ and corporations. The state-backed aspect is very important here, since through their links with the government they are able to establish barriers to entry into the industry, thereby gaining an unfair advantage over their competition. Through a practice known as ‘corporate political activity’, and lobbying in particular, they effectively bribe the government into securing their market shares and inhibit the ability for others and small businesses especially to compete with them.

Alongside this, the top offenders of such practices, namely Ambani and Adani, have used the governments influence over the economy to establish monopolies over multiple industries in India. This all further solidifies their position as conglomerates, thanks to the support they are able to negotiate with the government.

To deny this link is foolish. Whilst data on the amount each of the above mentioned “business”-“men” (both these words are questionable) spends on lobbying is not as easily available in India, Ambani’s company Reliance’s lobbying expenditure in the US can be accessed online

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. If they lobby foreign governments we can be sure they do so domestically as well. From Modi flying around in Adani’s private jets to other special privileges, the corporate pandering towards the state is clear to see

[5]⁠

Let’s visualise all this in Figure 2:

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Here the buyers are restricted to just two participants for simplicity. Since the farmers all need to sell their produce, the buyers now have a far stronger negotiating position. Instead of the buyers having to conform to the average market price established in a competitive system, they now have a ‘price-setting’ power. Now the farmers have only two options: either don’t sell at all and receive nothing, or sell at whatever price they can get so that they at least get something. This was the valid fear amongst many farmers by ‘privatising’ the system through getting rid of government mandis.

So, to answer why is it not working? In short, because the government is involved. The state has distorted the otherwise natural market forces of supply and demand in this sector by restricting the level of competition to help the big players. The whole state apparatus is being used as a tool to consolidate power and wealth into the hands of a few.

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Endnotes

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[1]⁠

(Click note number to go back to paragraph)

For more about this, read Section II - Markets of the Azadist Manifesto:

Link:

Markets (azadism.co.uk)⁠

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Raw: https://www.azadism.co.uk/markets

(Under the header: “Universal Basic Income (UBI)” and “Negative Income Tax (NIT)”)

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[2]⁠

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Link:

Brief History of Marketing Regulation.pdf (dmi.gov.in)⁠

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Raw: https://dmi.gov.in/Documents/Brief%20History%20of%20Marketing%20Regulation.pdf

Directorate of Marketing & Inspection (DMI) is an attached Office of the Department of Agriculture, Cooperation and Farmers Welfare under Ministry of Agriculture & Farmers Welfare.

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[3]⁠

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Link:

Wide Angle: How India Faces A Peculiar Problem Of Food Surplus (standpointindia.in)⁠

Raw: https://www.standpointindia.in/articles/wide-angle-how-india-faces-a-peculiar-problem-of-food-surplus

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[4]⁠

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Link:

Reliance Industries Ltd Lobbying Profile • OpenSecrets⁠

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Raw: https://www.opensecrets.org/federal-lobbying/clients/summary?cycle=2019&id=D000056005

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[5]⁠

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Link: ‘Modi’s Rockefeller’: Gautam Adani and the concentration of power in India | Financial Times (ft.com)⁠

Raw: https://www.ft.com/content/474706d6-1243-4f1e-b365-891d4c5d528b

Link:

Modi and Adani: the old friends laying waste to India’s environment (climatechangenews.com)⁠

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Raw: https://www.climatechangenews.com/2017/06/27/modi-adani-old-friends-laying-waste-indias-environment/

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Bunga Azaadi — Institute for Azadist Studies

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Primer on Market Economics

Theory Vs Reality

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