Nikhil Kanakamedala

How would you define poverty? There are several definitions and each one of them helps us imagine poverty in different ways. One way to define poverty is the lack of resources required to lead a basic life. By this definition, as long as your basic needs of food, clothing and shelter are met, you are not in poverty. The United Nations defines poverty as the “inability of having choices and opportunities, a violation of human dignity.” A more quantitative definition from the World Bank defines poverty as living under $1.90 (Purchasing Power Parity) per day. This is the international poverty line. Amartya Sen’s capability approach describes poverty as “a failure to achieve certain minimum capabilities.” This means that poverty is not seen purely as an issue of economic development but includes measures of human rights and access.

It does not take long to realize that poverty has many faces. In a recent project called One Hundred Homes, researchers conducted a visual survey of India to examine what a household falling under a particular income or consumption level as per a standard government survey (IHDS, NSS) would look like in real life. The result was a collection of hundred visual essays showcasing the living conditions of families to understand the connection between wealth and poverty visually. A key insight is that it is almost impossible to predict which household is wealthier just based on the appearance of living conditions. We cannot simply look at assets owned to determine who is better off or worse off. Surveys usually measure poverty through consumption spending in a given period of time on a fixed category of things. This does not account for the value of the house, credit borrowed, subsidies received from the government, etc. In addition to this, the poverty line in itself is based on several assumptions such as calorie requirements and ignores indicators of education, health and wellbeing.

Figure 1: A snapshot from the One Hundred Homes project website (Source: One Hundred Homes)

Poverty, through its appearance and measurement, presents several puzzles. Some obvious facts about poverty may not be true. On the other hand, results from experiments to understand the lives of the poor may be counterintuitive.

For example, one knows about the vicious nature of poverty. But why do the poor remain poor? Do bad decisions cause poverty or does poverty cause people to make bad decisions? Sendhil Mullainathan and other researchers ran a series of experiments to understand how scarcity affects cognitive capability and decision making. For an illustration of how poverty affects thinking, they asked people to memorize a list of words similar to the one below in 20 seconds and asked them to recall as many as they can from memory.

Figure 2: List used by researchers in the experiment to determine effects of poverty on cognitive capacity (Source: Chicago Booth Review)

What’s interesting is that, although “money” was not on the list, people with low income are more likely to remember seeing money in the list than people with high income because words on the list are related to financial concerns. This portrays that money occupies a significant part of the cognitive load of the poor. Further, experiments also depict that people under financial stress perform poorly in cognitive tests such as Raven’s matrices and cognitive control tasks compared to those who are not. This implies that poverty in itself impairs sound cognitive performance. 

A more realistic experiment conducted on Indian sugarcane farmers tested their cognitive abilities pre-harvest and post-harvest. Sugarcane has one harvest cycle per year. Before the harvest, farmers are relatively poor and uncertain about their finances whereas post-harvest, the same farmer is relatively rich. A random sample of small farmers was tested pre- and post-harvest on Raven’s matrices, a measure of fluid intelligence and the traditional Stroop task, which gauges cognitive control. Controlling for other fixed effects such as nutrition, work effort, etc., the experiment showed that being poor reduces cognitive capacity. Farmers post-harvest performed better on cognitive tests compared to pre-harvest.

This research suggests that the poor are less capable not because of their inherent capabilities but because poverty in itself imposes a cognitive load. Imagine if you were to make a decision after staying awake an entire night. Would you be able to make the right decision? The effect of poverty on cognitive function is comparable to losing a full night’s sleep. The poor constantly make important decisions of education, health, consumption and saving in this state of mind. The implication of this is that policymakers need to be aware of the psychological nature and cognitive tax of poverty. Welfare programs with complex ordeals aimed at better targeting may be counterproductive. The timing of welfare policies is also critical. Cognitive aids such as nudge can go a long way in offsetting the effect of poverty on cognition.

This also begs the question, why do the poor have to make more decisions than the rich with regards to essential utilities like savings, healthcare, insurance and so on? A poor person, who may not have access to banking services or formal employment, must decide to save for his or her retirement. On the other hand, the decision is already made by the organization of a rich person through the provident fund. The same goes for insurance, healthcare and even water. A rich person in an urban area can simply open a tap in the comfort of their home and clean water flows out, whereas a poor person has to choose where to procure water from, uncertain of whether it is clean or not, and decide what to do if it is not clean. Poverty impedes cognitive function and affects decision making. Above this, the poor make a significantly greater number of decisions amidst a lot of uncertainty. Both these facts are detrimental to leading a good life. Human beings have bounded rationality and self-control problems, hence fewer the decisions, the better. This is the reason why in developed countries like the United States, essential utilities such as insurance, savings are left to institutions and not the individual. If a poor person has to consistently choose to save every month for his or her retirement, they are bound to run into self-control problems. It is unfortunate that despite evidence on this, policymakers have made little effort to minimize the decisions taken by the poor. What, if not this, is an indication of inequality?

Another puzzle is that of risk and entrepreneurship. More number of poor people are self-employed and own businesses compared to the rich. Entrepreneurship involves risk and uncertainty. If the rich are better at managing risk due to their endowments and safety net, why is it that more poor people start businesses than the rich? This is the mystery of self-employment. That a person for whom it is easier is less likely to do it whereas a person for whom it is harder is more likely to do it.

A possible explanation for this is that the poor are natural entrepreneurs. But the question to ask is whether poor people are creative or does poverty force them to find creative ways of earning their income? This is not to say that poor people cannot be creative. An average poor person is probably as creative as the average rich person. However, there is an overrepresentation of entrepreneurs among the poor. The poor are entrepreneurs not because they want to be, but because they have to be. 

Economics teaches us that people are generally risk-averse. So, they must prefer a salaried job to starting a business. A survey question asking parents regarding their ambitions for their children confirms this belief. The results from rural Udaipur and around the world are that most poor parents want their children to be in a salaried job. Only 7% of parents want their children to run businesses. For the poor, a job is a means to achieve stability and move up the social ladder. However, public policy does not seem to understand this. The policy view is that poor people are more entrepreneurial in nature and several policies have been created to encourage the poor to turn into entrepreneurs. Rural areas have the RSETIs (Rural Self Employment Training Institutes), which focus on providing training for rural youth on entrepreneurial development. There is no such equivalent for urban areas. However, for the urban poor specifically, there is a Self-Employment Programme (SEP) under the NULM, which provides financial assistance to set up self-employment ventures.

From my field experiences of visiting and working with SHGs (self-help groups) of Maharashtra and Madhya Pradesh, the thrust has been for SHGs to begin businesses. NABARD, NRLM and civil society are invested in this idea, providing loans and market support. It is likely that most of the SHGs are not even interested in business but have to involve themselves in order to take advantage of the credit and market support. Even in the recent COVID relief package by the Government of India, the specific relief measure for SHGs was to increase the collateral-free loan limit to Rs. 20 lakh so as to meet their business needs. This differential focus on self-employment for the poor is concerning. 

Additionally, the traditional investment theory of risk-reward ratio does not work for the poor because of capital and technological constraints. Most businesses owned by poor people are not profitable. Different occupations are filled with different amounts of risk and uncertainty. Agriculture is one of the riskiest, yet least profitable occupations. Agriculture is subject to whether uncertainty, price uncertainty, market uncertainty, credit uncertainty, government uncertainty and what not! Hence, a poor farmer is not the same as a poor plumber and public policy needs to give attention to this fact. A reason why agriculture is one of the most intervened sectors by the government is not just populism but also the level of uncertainty tagged with the occupation.

There are many more such puzzles in the world of poverty. To unearth these puzzles, we need to rigorously test the traditional theories we hold about the poor. In a developing world, everybody is undergoing a transformation, with the poor transforming at a faster rate at the margin. Thus, we not only need to ask the right questions but also revisit the existing answers to update our understanding of poverty. Each piece of evidence gives us insights into the lives of the poor and incorporating these insights helps us create better poverty alleviation policies.

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

More than two months have passed since the three farm bills – (i) Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020; (ii) The Farmer (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020; and (iii) The Essential Commodities (Amendment) Bill, 2020 – turned into acts. While some have deemed the policy shift as agriculture’s 1991 moment, others have dismissed it as anti-farmer or pro-corporate. Sustained farmer protests against the Centre, witnessed primarily in Punjab and Haryana, have gone as far as to demand that the Acts be repealed altogether. However, not all farmers have responded to the policy shift alike. While Punjab and Haryana farmers participated in the ‘Delhi Chalo’ agitation, the Shetkari Saghtana – a farmers’ union from Maharashtra – rallied in support of the Acts.1 To put things into perspective, below are some common arguments for and against the farm acts. 

For the Acts

  • The acts provide greater freedom and choice to the farmers on where and to whom they can sell their produce.
  • They will improve agri-market competition and hence ensure better prices for farmers. 
  • They will attract private investment in warehousing, thereby improving the supply and value chain.

Against the Acts

  • The reforms will bypass the APMC mandis and the government will slowly stop public procurement (replacing PDS with direct cash transfers). This will also do away with MSP. 
  • Outside the APMC mandis, farmers will be cheated by private buyers and they will not get a fair price. 
  • Big corporates might exploit farmers through dubious contracts and take away their land. 

As is evident, there are good arguments on both sides. However, it is interesting to note that arguments floating against the Acts lean towards implementation, whereas arguments that speak for the Acts take on a principle standpoint. Freedom, competition, and aligned incentives are some of the economic principles which the Acts intend to reinforce in the agriculture sector. While implementation concerns regarding these principles are inevitable given implementation failures of the past (demonetisation, GST, Adhaar, etc); for the sake of analysis, it is better to delink the policy reform from implementation and look at these two aspects separately before we join them back again. To arrive at a shared understanding of both opportunities and challenges that may emerge from the central acts, the arguments and the counterarguments must speak to one another. Prior to any analysis, however, understanding the purpose of APMC mandis, MSP, and public procurement is crucial.

What is the Purpose of APMC Mandis?

The history of mandis takes us back to Sir Chhotu Ram, a renowned political leader from pre-independence era Punjab.2 Back in those days, the sale of produce happened directly on the farm where the farmer met the trader. The farmer had no way of knowing if the price offered by the local trader was fair or not. To curb exploitation of farmers, Sir Chhotu Ram played an instrumental role in getting the Punjab Agricultural Produce Markets Act passed in 1939, which allowed for the formation of market yards or mandis in notified areas. These mandis, in turn, allowed for price discovery. Farmers would bring in their produce, understand the supply pattern, and witness the actual demand for their produce by the traders. The price of the produce was fixed through a transparent open-cry auction. Thus, these mandis (at least in theory) allowed for price discovery and realisation.

The reality of the mandis although was quite different. They neither helped in price discovery, nor did they enable fair and better prices for farmers. Today, the APMCs have a similar tale to tell. The state-run mandis are far from perfect with cartels of traders and commission agents working their way around regulations.

What is the Purpose of MSP and Public Procurement?

The central purpose of price support, when it was introduced in the 1960s, was to spur production and adoption of new technologies under the Green Revolution. A support price would mean little without assured procurement. Hence, the Food Corporation of India (FCI) was set up to procure grains at MSP and manage the Public Distribution System (PDS). MSP and public procurement have since achieved twin goals of an assured price for farmers and an affordable price for consumers. Farmers could, however, sell their produce to other buyers or traders if they got a higher price. Today, the costs of MSP and public procurement far outweigh its benefits. Only 6% of all agricultural households have benefitted from MSP.3 Of the 22 crops for which MSP is announced every season, only two – rice and wheat – are procured consistently at MSP; predominantly from the states of Punjab and Haryana.4 MSP distorts market signals and incentivizes farmers to only grow crops that qualify for a support price, as opposed to those demanded by consumers. It disincentivizes crop diversification as an assured market price for certain crops hinders risk taking ability of the farmer. The farmer is entirely dependent on the government’s announcement of MSP every season and ignores the larger, changing market signals. In a state like Punjab, with an alarmingly receding water table, growing a water-gruelling crop like rice is clearly unsustainable.5 In the years to come, this will result in many farmers making distress exits. Hence, it is fair to say, MSP has made farmers more vulnerable than secure.

Figure 1: State-wise procurement of rice and wheat. Punjab and Haryana are among the highest producers. Source: Agriculture Statistics at a glance 2019
Figure 1: State-wise procurement of rice and wheat. Punjab and Haryana are among the highest producers. Source: Agriculture Statistics at a glance 20196

Public procurement, especially open-ended procurement, is a huge fiscal burden on the government. The government procurement agency, FCI, has tripled its debt in the last 5 years. It borrows primarily from the National Small Savings Fund (NSSF), which constitutes postal deposits and social security schemes like public provident fund, senior citizens’ savings scheme, etc.7 Reasserting operational inefficiency, the FCI has also consistently maintained 2-2.5 times the buffer stock limit in the period 2013-2019.8 One must not bite off more than one can chew seems befitting as the government tries to breakout of a position where it can neither guarantee MSP nor procurement.

Figure 2: FCI Stocks as a percentage of buffer norms. Source: Financial Express
Figure 2: FCI Stocks as a percentage of buffer norms. Source: Financial Express8

How do the Arguments on the Farm Acts Fare?

From a principle standpoint, liberalizing agriculture has been long due. Farming is one of the riskiest yet least profitable businesses. The Essential Commodities Act has restricted any form of investment in storage infrastructure through arbitrary stock limits, leaving the farmer fearful and confused. The new Essential Commodities (Amendment) Act addresses these shortfalls and allows for such limits only in certain extraordinary conditions. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act legalizes selling of produce outside the notified APMC yards without market fee and the purchase of produce without a license. Inter-state transactions are allowed. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act gives the legal power to private entities to enter contracts with farmers directly before the start of production. The counterargument that ‘just because contract farming is allowed, it doesn’t mean a noble corporate will be willing to buy from the farmers at a higher price,’ is a compelling yet invalid one. No reform is readymade. Within a federal structure like that of India’s, implementation of any reform involves a lot of coordination from multiple stakeholders. Hence, whether a corporate is ready to buy from the farmers at a higher price depends on its incentives and the ease of doing business. Consequently, the idea of contract farming itself cannot be countered this way.

Game-Changing for the Ecosystem

Incentivising desired actions of various actors with a checks and balances mechanism is the purpose of sound public policy. In this regard, the three Acts have essentially changed the rules of the game. Hence, these reforms must be judged not only on whether they help the farmers but also on the incentives they create for different players in the agri-market ecosystem. 

A valid concern today would be that of transportation; even if farmers can sell anywhere, would they be able to? It is only by creating the possibility to sell anywhere, we send a signal to corporates and startups to address the new challenge innovatively. Similarly, efficient storage solutions would be sought after by traders. FPOs would need to be strengthened and given visibility. Agri-tech companies will play a crucial role in every aspect, from input assistance to processing and marketing. Corporates that wish to enter contract farming may have certain demands regarding the quality of the produce and monitoring of crops. This would create new opportunities for agri-tech companies. What was once unthinkable would now become doable. 

Presently, the entire ecosystem needs to overcome the inertia generated from the controversial nature of these reforms. This will depend greatly on how states adopt and implement the Acts. States must critically look at the winners and losers, and draft measures to balance both sides. Although no interest group has displayed public support for the Acts yet, it is up to the state governments to meet with FPOs, agri-tech businesses, and retail chains to initiate discussions on how to yield long-term benefits from the reforms.

In the end, implementation is everything. Hence, the urgent action at the moment is for states to strategically invite investments, create an environment where the farmers are able to trust private players, and one where private players are allowed to operate without stigma. If the state governments do not take on the role of the facilitator, these reforms are likely to turn into a wasted opportunity.

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

References:

  1. Phadke, M. (2020, October 9). Not all farmers are against Modi’s new farm laws, this group in Maharashtra is celebrating. The Print. https://theprint.in/statedraft/not-all-farmers-are-against-modis-new-farm-laws-this-group-in-maharashtra-is-celebrating/519382/
  1. Damodaran, H. (2020, September 27). The men behind APMC, MSP and Procurement. The Indian Express. https://indianexpress.com/article/opinion/columns/the-men-behind-apmc-msp-and-procurement-6617277/
  1. Shanta Kumar Committee. (2015, January). Reorienting the Role and Restructuring of Food Corporation of India. Food Corporation of India, Govt. of India. https://fci.gov.in/app2/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English.pdf
  1. Development Monitoring and Evaluation Office. (2016, January). Evaluation Study on Efficacy of MSP on Farmers. NITI Aayog. http://niti.gov.in/writereaddata/files/writereaddata/files/document_publication/MSP-report.pdf
  1. Bajwa, H. (2020, January 23). Punjab sounds alarm as water table recedes fast in 109 administrative blocks. The New Indian Express. https://www.newindianexpress.com/nation/2020/jan/23/punjab-sounds-alarm-as-water-table-recedes-fast-in-109-administrative-blocks-2093203.html
  1. Ministry of Agriculture and Farmers Welfare. (2020, March). Agricultural Statistics at a Glance 2019. Directorate of Economics and Statistics, Government of India. https://eands.dacnet.nic.in/PDF/At%20a%20Glance%202019%20Eng.pdf
  1. Nair, R. (2019, October 7). In 5 years of Modi rule, Food Corporation of India’s debt tripled to Rs 2.65 lakh crore. The Print. https://theprint.in/economy/in-5-years-of-modi-rule-food-corporation-of-indias-debt-tripled-to-rs-2-65-lakh-crore/301887/
  1. Financial Express. (2019, May 6). Height of inefficiency! Govt’s foodgrain stocks 2.7 times the buffer norm. Financial Express. https://www.financialexpress.com/economy/height-of-inefficiency-govts-foodgrain-stocks-2-7-times-the-buffer-norm-highest-in-six-years/1568992/