In India, Modi Bets the Farm on Controversial Economic Reforms

In India, Modi Bets the Farm on Controversial Economic Reforms

Sep 30, 2020 | 10:00 GMT, Stratfor. Source: https://worldview.stratfor.com/article/india-modi-bets-farm-controversial-economic-reforms. Accessed on October 1, 2020.

 

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Indian Prime Minister Narendra Modi and his ruling Bharatiya Janata Party (BJP)’s new agricultural and labor reforms may help accelerate the country’s economic recovery from COVID-19, but the likely near-term financial losses for Indian farmers and unionized workers will risk fueling backlash from both protesters and state legislatures. The Indian parliament passed the reforms in an abbreviated monsoon session that ended Sept. 25. By usurping procedural legislative practices to close debate or refine the proposed agricultural reforms, the BJP was ultimately able to quickly push through its proposed legislation through a less precise voice vote in parliament instead of a typical ballot vote. Key aspects of the new reforms include:

  • The removal of virtually all barriers to intra-state trade of agricultural products, which will allow farmers to sell their products anywhere in the country by ending the practice of state-run regional markets with significant fees.
  • A framework for farmers to enter sales contracts with clients, which will allow farmers to have prices locked in prior to planting.
  • Changes to India’s labor code that increase the number of workers companies can lay off without government approval from 100 to 300 employees.
  • A new industrial code that prohibits unions from striking without prior notice and requires unions to represent at least 10 percent of the workforce in the sector they operate in.

The Intent

The reforms represent a long-sought victory in Modi’s push to reshape India’s regulatory environment, given that the country’s heavily restrictive agricultural market and its complex web of labor regulations have long stymied India’s economic growth potential.

The reforms to India’s agricultural sector, which accounts for about 40 percent of Indian employment, aim to dismantle the current onerous system, where politically connected traders and state-run markets hold significant power over a market structured to favor small farmers. By establishing a national agricultural market, India hopes that it can attract foreign direct investment to modernize the sector in order to boost its productivity and concentrate investment in the areas of India that are the most efficient.

The reforms to the labor code, meanwhile, are designed to make India’s labor market more flexible by reducing the power of India’s labor unions and making it easier for companies to hire and lay off workers as necessary – with the greater aim of finally allowing India to fully realize the potential offered by its low-cost labor pool for manufacturing and industry. The current fragmented nature of the country’s union landscape makes it difficult for companies to negotiate with union leaders. The power of the unions and the rigid markets also dissuade both domestic and foreign companies from expanding due to the high costs associated with doing so and difficulty in scaling down operations if the expansion fails.

COVID-19 has severely battered the Indian economy, and Modi and the BJP are hoping that the much-needed labor and agricultural reforms will hasten the country’s recovery, boost foreign investment and increase labor productivity. In the second quarter of 2020, India’s economy contracted by 23.9 percent year-over-year — the highest among major world economies. Unable to contain its COVID-19 epidemic, India reached 6.1 million cases as of Sept. 28. India is poised to pass the United States in the coming weeks for most cases worldwide. New Delhi is unlikely to impose a new nationwide lockdown for fear of public backlash, meaning the virus will continue to spread and cause localized shutdowns that affect the workforce of businesses across the country.

The Risks

Farmers are concerned that the reforms could make them less profitable by increasing competition and introducing significant price uncertainty. Although farmers were required to sell their produce at state-run markets under the old system, they were also guaranteed a minimum support price (MSP) for their product, which shielded them from downside price risk and competition from other Indian farmers. Indian farmers have raised concern that the removal of this heavily regulated system under the new reforms will increase competition between them, reduce their ability to mitigate price risks, and leave them more vulnerable to being taken advantage of by large farming entities and traders. These fears are not unfounded, as similar modernization drives have displaced workers in every other global agricultural sector.

The lifting of COVID-19 lockdown measures across India will pave the way for more protests and riots over the reforms in the coming weeks. Indeed, the passage of the legislative changes has already sparked significant protests among farmers in the Indian states of Punjab and Haryana. Once the pandemic is over, the less-rigid labor market will theoretically give businesses more confidence to hire workers and expand. But until India’s COVID-19 crisis subsides, unions will see their bargaining power reduced substantially by the new reforms, and the relaxations of restrictions on laying off workers could also lead to even more layoffs.

New Delhi is hoping the new agricultural and labor reforms will help accelerate the Indian economy’s recovery from COVID-19, despite significant opposition from farmers. With national elections not required before 2024, the BJP’s secure majority in parliament will enable it to weather any political backlash at the national level, though the same cannot be said for the state level. The only other party in India considered truly “national,” the Indian National Congress (INC), is in the middle of a leadership crisis and has suffered significant defections to the BJP over the last year, leaving it largely unable to politically capitalize on any popular opposition to the new reforms at the federal level. Despite its dominance in the Indian parliament, however, the BJP has a far smaller presence in many of the country’s state assemblies. The strength of regional parties may allow for opposition parties to gain ground against the BJP in many state governments. Given that many of India’s reforms ultimately require state-level legislation to see their full benefit, the loss of support in state legislatures could blunt the effectiveness of some of the new legislation. Sluggish implementation at the state level, however, would only embolden the BJP to continue stripping power away from states, just as it did in 2017 with reforms that reduced states’ tax authority, followed by the new agricultural reforms that get rid of state-run regional markets.

 

Professor Comments: For this week’s outside reading, just like last week, you will have to do some additional research to fully answer the questions.  Doing some research on India is important because it is one of the world’s major economic countries.

 

Questions:

  1. How big is the economy of India and where does it rank in terms of world GDP?
  2. What are the major exports of India and what are the major imports?
  3. By answering questions 1 and 2 you should have an understanding of how important India is in terms of international trade. What are the economic reforms that the Indian government has implemented and why are they doing this?
  4. After looking at the pros and cons does your team think these are good for the country? Why do you think so?