To Reform and to Procure: An Analysis of the Role of the State and the Market in Indian Agriculture

Abstract

Since the early 2000s, some Indian states started allowing private traders to buy directly from farmers outside the state-regulated market system. The experience of these states can shed light on the impact of market-oriented reforms and the role of public procurement. Using individual-level National Sample Survey Data on agricultural wages and a new dataset on state-level average real farm income per cultivator for 18 major Indian states between 1987–2012, this paper shows, using both a difference-in-difference and a triple difference framework, that marketing reforms alone did not contribute to higher farm incomes and agricultural wages. However, when these reforms were coupled with public procurement at the minimum support price, farm incomes and agricultural wages significantly improved. Our results suggest that market-reforms and public procurement at minimum support prices were complements which together contributed to raising rural incomes in states like Haryana, Madhya Pradesh, and Andhra Pradesh.

Keywords:

• farm incomes
• agricultural wages
• market-oriented reforms
• public procurement
• India

JEL CLASSIFICATION:

• O13
• Q13
• Q18

Acknowledgements

We thank Uttara Balakrishnan and three anonymous referees for their comments and suggestions. We also thank the participants of the Center for Development Economics Seminar of the Delhi School of Economics and seminars organized by the Middle Tennessee State University, National Institute for Applied Economic Research and Jawaharlal Nehru University for comments on the earlier version of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The commission rates vary significantly across states. For instance, arhatiyas in Punjab and Haryana charge around 2.5 percent commission but those in Andhra Pradesh charge around 1 percent (Chaba and Damodaran, 2020).

2 Swaminathan (1999) provides a full assessment of the costs and benefits associated with the public procurement system.

3 The next section provides an overview of the progress in reforms across the states. For a full history of APMC Reforms see (Purohit et al., 2017; Chand & Singh, 2016).

4 There are two reasons why we have classified Punjab as a control state even though it has made significant progress in promoting contract farming. First, this paper is primarily interested in studying the impact of reforms that enable greater access to corporate buyers to buy directly from farmers. Since farmers in Punjab predominantly rely on APMC mandis as the primary site of exchange between licensed buyers and farmers, we decided to classify it as a control state. Second, our classification of Punjab as a control state is consistent with existing literature at rank states’ progress across various policy recommendations of the Model APMC Act of 2003. For instance, Chand and Singh (2016) rank Punjab 14th out of 30 states (with a composite score of 43.9) due to the “poor implementation of market reforms in the state”.

5 Supplementary Materials provide details of state-level marketing reforms.

6 Budgetary allocations for NREGA peaked in 2010 and subsequently declined and correspondingly, workdays generated under NREGA declined from 230 person days in 2012-13 to 132 person days in 2014-15 (Kapur and Adhikari, 2015). Reduction in public employment generated under NREGA, coupled with delays in wage payment significantly attenuated the guarantee of employment provided by NREGA (Basu and Sen, 2015).

7 States that contributed to food procurement by the FCI remained relatively constant throughout the period 1999 – 2012. All rice procurement was done from Andhra Pradesh, Haryana, Odisha, Madhya Pradesh (and Chhattisgarh), Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal. Similarly, 90 percent of wheat procurement was done from Bihar (and Jharkhand), Gujarat, Haryana, Madhya Pradesh (and Chhattisgarh), Punjab, Tamil Nadu, and Uttar Pradesh.

8 Supplementary Materials provide details of variable construction and discusses the process of classifying states into reform and treatment groups in greater detail.

9 Table 6, Components of Net State Domestic Product at Factor Cost by Industry of Origin, Handbook of Statistics on Indian Economy. See https://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy.

10 The unit-level data used in the analysis corresponds to the 43rd round (1987-88), the 50th round (1992-93), the 55th (1999-00), the 61st round (2004-05), the 64th round (2007-08), the 66th round (2009-10) and the 68th round (2011-12) of the NSS.

11 Farm income data is also available in the Situation Assessment Survey (SAS) of Farmer Households data. We use the three rounds of the SAS data, the 59th Round (2001-02), the 71st Round (2012-13) and the 77th Round (2018-19) to construct a measure of the annual farm incomes. The results are presented in the Supplementary Materials.

12 In our empirical analysis, $s=1,2,\dots ,18,$ is the index for the 18 states in our sample, and $t=1,2,\dots ,7,$ is the index for the following 7 time periods for which we have data from the national sample survey: 1987-88, 1993-94, 1999-00, 2004-05, 2007-08, 2009-10 and 2011-12. The complete list of control variables appears in the footnote to Table 2.

13 The sample for estimating this model has individual-level observations from 591 districts in 18 major states for the years 1999-00, 2004-05, 2007-08, 2009-10 and 2011-12.