Reforms in recent months have ensured that the next decade will bring unprecedented prosperity to farmers and workers.
The 2020 monsoon session of Parliament will go down in history for ushering in modern India’s most transformative economic reforms. Farmers are now free to sell their produce to whomever they want, and the hitherto inflexible labor market has been opened up.
Economic reforms that economists were salivating over, but politicians deemed too difficult to manage, have now been implemented by the Narendra Modi government. The removal of the government’s dead hand from vital parts of the economy with the associated opportunities they have offered to politicians and bureaucrats has naturally led to an avalanche of criticism. But the benefits for the national economy are certain in the decades to come.
British state capitalism established in India was a laissez-faire form of British business, but strict state control over the entry and exit of Indians. During World War II, state control was greatly expanded.
For industry, the extensive Raj license (introduced during the war) was largely dismantled by PV Narasimha Rao in July 1991. But state intervention in agriculture, which began in 1886 with the British establishing mechanisms to control the price of raw cotton the regulatory mechanisms to cereals the following year, were extended by the state of Nehruvian.
In 1965, Prime Minister Lal Bahadur Shastri lifted many controls on food production allowing productive areas to develop rapidly, access better seeds, credit and irrigation and ushered in the Green Revolution. . This boosted agricultural productivity and enabled India to become self-sufficient and then a net exporter of rice and wheat.
But the distribution of agricultural products remained strictly regulated, with state governments operating as a monopsony. Farmers were obliged to sell their products to the mandi set up by each state APMC (Committee for the marketing of agricultural products). The price farmers received from the APMC was only a fraction of what retailers paid, with the margin (on average 50%) going to middlemen (usually politicians).
The Modi government’s reforms free farmers from bondage to the APMC, allowing farmers to sell (or even export) their produce to whomever they want, without the mandatory involvement of any intermediary. This will be a boon for farmers (allowing them to sell at a price closer to what retailers pay), but also a bane for politicians who run APMCs and make bountiful profits through mediation between farmers and farmers. the ultimate buyers of their products.
The MSP (minimum support price) mechanism will remain an interim source of support for farmers. But as the market mechanism begins to operate, fewer and fewer farmers will need PSM as an accessory. Agricultural pricing reform took a whole decade for Deng Xiaoping to implement in China (1979-89), but has now been passed in India in a 4-month flash.
Labor market reforms perfectly complement agricultural sector reforms. Almost half of Indians claim to be farmers, but they only produce a sixth of India’s GDP. This implies that the average productivity of each farmer is significantly lower than the productivity of the average Indian worker.
Thus, moving farmers to jobs elsewhere in the economy will boost average productivity, both by reducing the pressure on land (which has led to increasingly less profitable farms) and by creating jobs in more sectors. productive. Japan, followed by Taiwan and South Korea, showed how to achieve this by starting with a labor-intensive industry that absorbs surplus labor (those with low marginal productivity ) from agriculture.
After the war, Japan had 12 million workers in excess of agricultural needs. Textiles, clothing, footwear, toys, and the processed food industries have absorbed surplus farm labor, generating near-full employment in a decade, when Japan focused on heavy and chemical industries.
India has been the world’s largest textile manufacturer for most of human history. Hostile trade policies over the past two centuries, coupled with an inflexible labor market since the 1950s, have combined to dislodge India from its natural vocation as the world’s clothier.
India’s onerous labor laws discouraged companies from employing more workers, as it was almost impossible to lay them off later. Since 1973, any business with more than 100 workers needed permission from the state government to fire a worker; this ceiling has now been raised to 300. More properly, employers are now free to employ workers under specific conditions, which clearly excludes any need to dismiss a worker. Instead, they can be hired for another term if needed.
This gives employers complete flexibility when it comes to new hires, the centerpiece of reforms that have simplified 44 complex labor laws into four straightforward codes, eliminating more than two-thirds of all labor regulatory filings.
Coupled with a globally competitive corporate tax rate of 17% for new manufacturing units, India has created the ideal policy environment for a surge in labor-intensive manufacturing. artwork.
UP, Bihar, Odisha and Madhya Pradesh, so far the biggest sources of internal migrant labor have massive reserves of surplus labor like Japan in 1950. If they can capitalize on the news labor laws, labor-intensive manufacturing industry will take off in their states, attracting more workers from overworked farms, and increasing average productivity and real incomes.
The reforms of the past few months have ensured that the next decade will bring unprecedented prosperity to Indian farmers and workers, generating a growing demand for steel, cement, aluminum, petrochemicals, cars, tractors and more and more boats across the country.
Prasenjit K. Basu is a former Chief Economist for India and Southeast Asia at Credit Suisse First Boston and author of the award-winning book Asia Reborn.
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