The less discussed side of the agriculture and labour legislations

The last Parliament session witnessed two landmark legislative changes. Three legislations each on labour and agriculture market were passed. There is little doubt about the need for these reforms. 

This post will not propose solutions. Instead the purpose is to sound a note of caution against any declaration of triumph and complacency, which will not only be premature but will also end up defeating the reforms themselves. 

They are also teachable examples of how wicked problems are not amenable to any flick-of-a-switch type legislative enactments or deregulations. In case of these problems, the reforms are merely the beginning of a long struggle.

They are also teachable examples on the limits of deregulation by itself as a reform. For whatever reasons, deregulation and liberalisation has an aura of reform around them. It is widely perceived that India's farmers and businesses are shackled by a web of regulations. Accordingly, the need of the hour, it is believed, is to deregulate and empower them to realise their full potential. There is considerable merit in these arguments. But it is also true that they present only a partial picture of the reality.

A takeaway from the historical development trajectories of countries point to the possibility of multiple equilibria emerging from the same set of reforms. This depends on both the prevailing socio-economic and political conditions as well as the nature of implementation of the reforms. When the former are not appropriate or adequate, it is for the latter to calibrate the design, nature, and pace of implementation, as required.

This means that the reforms are a necessary but hardly sufficient condition for realisation of the desired outcomes. In fact, most often, as with agriculture and labour, such reforms only get you to the starting line of a very long race. As with any race, under-resourced and weakly capacitated racers drop off or flounder, and fail to reach their destinations.

Having gotten to the starting line in the race on agriculture and labour market with the just announced reforms, the focus now should be on the race itself. There is nothing pre-ordained about the race, and plenty of history to suggest that the outcomes could not only fall short but end up leaving the system worse-off.

Let's start with labour market reforms. A summary of the changes brought about by the labour legislations. The labour codes provide for fixed-term employment contracts; higher employment thresholds for various regulations to be applicable, including for retrenchments; making unionisation and industrial action difficult; and deregulation of labour conditions on several dimensions, including allowing governments to further ease regulations. The universal feature of all the changes is deregulation.

This sweep of deregulation presents four risks. One, the likelihood of increased share of contract labour with weak protections. Two, abuse of the deregulated labour conditions by businesses. Three, labour losing its bargaining power due to increased restraints on collective action. Four, widening inequality and increased immiseration.

There is nothing that prevents the Indian labour market to slipping from one bad equilibrium to another even worse or nor better equilibrium. For example, with the freedom now to convert even permanent employees to fixed-term contracts, and then keep renewing them continuously (China and Vietnam, for example, puts a limit of two times for such renewals), what prevents slipping into a norm where fixed-term contracts become the norm? The poor quality of human resource development, spanning health care to school and higher education, and weak state capacity only heightens the risks.

All these trends are global in nature. However, in case of the developed economies, these trends have begun after labour incomes and standards have reached a certain basic level. Besides the strength of civil society and maturity of political systems make degeneration beyond a point unlikely. In the case of the East Asian economies, as best exemplified by Vietnam and China, labour conditions and regulations have been tightening progressively with development. However, in case of India, the deregulation is happening at a time when labour's bargaining power is minimal and labour standards and incomes are very low. Besides corporate governance standards are poor and state capacity is weak. 

As I have blogged on several occasions, India faces a massive capital accumulation deficit. It needs to significantly expand its human, physical, financial, and institutional capital to be able to sustain high growth rates for long periods. An important contributor to this is a broad-based consumption class. India's middle-class is shockingly narrow. Such broad-based middle-class emerges from access to productive and reasonably well-paid and secure jobs. It spurs both investments in both human resources and consumption.

Central to business and economic growth is the insight that Henry Ford imbibed when he paid his workers enough salaries so that they could save and become the buyers of Ford cars. A labour force dominated by low-paid and contracted workers without any benefits and social protections entraps the entire economy in a self-reinforcing vicious spiral. It breeds insecurity and limits consumption, as people end up saving most of their disposable incomes for the rainy day. Besides, it results in lower productivity, discouraging both businesses and workers investing in the latter's skill and capacity development.

In the context of China, economists have long documented the low share of consumption in national output as arising from the weak social safety protections and provision of welfare goods, which results in higher forced savings and resultant small disposable incomes for consumption. One of the priorities of the Chinese government in recent years has accordingly been to shore up the social safety net and enact other measures to boost consumption.

The reforms in agriculture cover three aspects - deregulation of farm produce sales and stocking limits, and a legal framework for contract farming. Again, deregulation is a feature of the reforms. 

Like with labour, these reforms too pose certain risks. For one, the unregulated or lightly regulated new private market places could become places of increased exploitation. Second, the governments could start to neglect the market yards and they become progressively dysfunctional, leaving the farmers even more exposed to exploitative private market places. 

In other words, the reforms could end up merely shifting the locus of exploitation from the mandis to the private market yards, and from arhatiyas to another set of brokers. 

As I blogged here, agriculture markets in India are characterised by several structural problems. 

The vulnerability to weather patterns makes agriculture markets very volatile. Globalisation only exacerbates this problem. This volatility generates a conflicting relationship between producers (farmers) and consumers. Complicating matters, most producers are also net consumers. Governments have to grapple the conflicting interests of its largest two electoral constituents, farmers and consumers. It can allow neither the farmers nor consumers to suffer when faced with a glut and low prices and scarcity and high prices respectively. It does not matter that the suffering of each is associated with benefit for the other. Therefore, the political economy demands that farmers have to be cushioned in times of glut and consumers protected when prices rise.

It is a different matter that the governments have differing levels of thresholds for each constituent. Accordingly, historically, arising from the dominance of the middle-class vote, consumers have benefited from a very favourable agricultural terms of trade. This, in turn, has come at a cost to farmers, who also suffer from another unfavourable trend, rural-urban divide whose manifestations include lower levels of infrastructure and other investments.

In this context solutions like futures market for agricultural produce can appear logically neat. The idea is to use the innovations of financial engineering to allow farmers to insure their production against price volatility. But when faced with the messy realities of the world, such solutions remain just appearances.

These are long-haul efforts. For illustration, even after decades, less than a quarter of farmers in India use formal APMC mandis to trade their commodities. Such markets require several enabling requirements, which go far beyond mere regulatory ones. They include credibility and trust, which are also, but not only, dependent on accurate price signals and effective contracting mechanisms. These emerge through painstaking and long-drawn capacity building (for example, on farm gate sorting and grading) and engagement (for example, adherence to contracts by farmers and buyers becoming the norm). As the Red Queen idea illustrates, these interactions can be facilitated by mature political and social intermediation.

This is not to reject such innovative solutions. They too should be embraced as best as possible. But their limitations and marginality needs to be acknowledged.

It is for this reason that agriculture futures market is at best a marginal part of the eco-system of market access channels for farmers even in developed economies, including the US. Further, all these markets are characterised by very large direct interventions by the government, mostly in the form of direct income support. This continues also despite the small electoral share of farmers.

Given these problems, the APMC mandis have an important role to play in keeping the private markets honest. It is also an important source of market information, which in turn is critical to the effective management of Minimum Support Prices. Like the mandis, the MSPs too have the role of keeping the markets honest. 

It should be noted that several famous economists have observed that agriculture and labour markets, as they actually operate in villages and cities of India, are very close to perfectly free markets. People make choices everyday on where to work.

Instead of the exclusive focus on deregulation, a more accurate response in terms of agriculture and labour reforms would be to complement removal of the wrong set of regulations (deregulation) with introduction of the right kinds of enabling and facilitating regulations. The latter is also important because markets work when supported by enabling regulations. Enabling regulations should provide all market participants safeguards against their exploitation and them being exploitative. In case of agriculture, it involves protections to farmers from being exploited by buyers of their produce, and assurance to farmers about . Needless to say, given the existing power balance, the former requires prioritisation. 

The deregulation and regulation, in turn, have to be complemented with the Red Queen race between the respective stakeholders - labour and capital in labour market, farmers and buyers in agriculture. The society and polity has an important role to play in moderating this race, stepping in where required to keep the dominant side honest in the respective races. 

The academia, commentators, and media have a responsibility to shine light on these concerns and emergent issues to keep everyone focused on the task ahead.  

Governments face a Hobson's choice. Reforms are essential for development and economic growth. But reforms, if not implemented well, can leave systems worse off. But implementation runs into challenges of weaknesses of state capacity and social mobilisation. It also does not help that we live in a world of short attention spans and vacuous public debates. 

It is also possible to take a more relaxed resigned view on this. Now that these changes have been initiated, they will play themselves out. The implementation will have its inevitable failings. But given the country's democracy, when exploitation deepens and becomes egregious there will be associated backlashes and society will notice and governments will step in with some corrective measures. And so on it will go, as has been the case with most other problems.

In summary, as mentioned at the beginning, many of these are clearly progressive or well-intentioned measures. The challenge will be with its implementation and details of associated regulations and operational guidelines.