Farmer

As India steps onto the ladder of globalization, the divide between urban and rural India is continuously increasing. While the rich are laughing their ways to the bank, villages are crumbling under tremendous economic pressure. While many IT companies are competing to set up shop in its buzzing cities, villages are creeping in underemployment. Even as India fills its coffers with foreign exchange, local farmers are committing suicides. One India is shining, the other is moving deeper into the clutches of Maoist extremism.

Economic reforms have failed to move are expected and wanted. Along with an economic growth rate of 9.5% and a per-capita rise of 7%, comes the deadly inflation following close on heels at 6.9%. In real senses, while the urban IT workers are accumulating more and more wealth, it is not penetrating to the rural poor, and in fact receding from them. That is, the real earnings of almost all sections of wage earners, agricultural workers, women workers and casual workers of all kinds have fallen since 2000. The real economy remains stagnant, with a mere realignment of wealth from the poor to the rich, increasing economic imbalances and putting more pressure on society.

The per-capita income of the farming community increased ... a meager 12% in the last 42 years.

Unhappiness and dissatisfaction is evident over ‘India Shining’. Governments are tumbling and parties coming to power on the promise of distributing the new found wealth. Finance minister visions of completely eliminating poverty by 2040. Do any of those politicians actually have to solution to cure our poverty, or is all the rhetoric to remove poverty a mere gimmick to attract voters. Do they put their efforts to not just accumulate wealth by creating special laws to promote exports, but also a means to percolate that wealth across the country.

The problem needs to be analyzed not in terms of RBI issued paper currency, but in real value terms which explain most macro-economic phenomenon. Let us consider the cost of a basket of items, incl. a person’s daily meals, a liter of petrol, etc. be taken as a unit. During inflation the cost of this unit rises. Now, what is happening to India is, with rising export receipts, Indian exporters and IT workers are earning more. The earnings trickle into the market, shooting up demand and prices equally. The price in rupees of the economic unit increases. Inflation rises. While all this ensues in urban India, the poor farmers continue to earn the same for their primary goods, but are now faced with stiffer prices. While the average rise in salaries of 7% is un-uniformly distributed, an inflation of around 7% affects uniformly across rich and poor. The purchasing power or the real wealth has not grown, but merely relocated. If it is flowing to the urban India, it is obviously slowing from the poor.

Most of India lives in villages, mostly employed in farming. According to recent census, 70% of livelihoods are dependent on farming. The figures were even higher at 80% in 1965. When we talk of the deprived class, it is mostly this community that we speak of. Let us analyze the macro-economics of their situation.

Do them a favour; Drag them out of farming.

Let us consider the value of farm product consumption of an average human being to be 100 units of economic value. Across the sections, be it rich or poor, food requirement remains same, and they each require and consume this same value. 100% population consumes 100 units each of farm product. As the amount of import/export are insignificant in terms of the whole demand, especially so in primary sector, the demand and supply match perfectly. So, the 100 units of farm product for 100% population have to be grown by 70% involved in farming production. The average farm value they would thus manage to generate is 140 units (=100*100/80). I repeat, only 140 units of farm production. Of this, they would themselves consume 100 units, leaving only 40 units to satisfy their other wants, insufficient even to comfortably clothe themselves. Leave education, even shelter can’t be afforded. If they need a new hut or have to repair their house, loans are the only option, for which they have no means to repair. An already deficit earning, burdened by un-repayable loans, drive them to suicides.

Nationalize Agriculture.

Let us analyze, how much have, the lives of farmers, changed since independence. In 1965, 80% were involved into agriculture. Now, 70% of households are still involved. So, the per-capita income of the farming community increased from 125 units (=100*100/80) to 140, a meager 12% in the last 42 years, inspite of a strong and resurgent India. During the same period, Indian economy has shredded its over-dependence on agriculture and moved closer to manufacturing and services. There has been an influx of goods & modern gadgets in to the market. Those who had a radio in the 60%, now want a color tv. But with an annual 0.27% growth, they can’t even afford a second-hand black & white tv.

India needs forced movement of people away from agriculture. As agriculture is a primary necessity, it can’t push out everyone, and India needs to also safeguard it. The best way to go is to Nationalize Agriculture. Being a huge player, it can not only buffer the uncertainties in monsoons and national calamities, but also leverage high-end technology to improve and safeguard production. As for the farmers pushed out, they would slowly get deployed into secondary and tertiary industries. The completely unskilled can join construction or other labour intensive jobs. As India progresses along the path of development, the economic value of agricultural sector remains same, and the sector stagnates. But, the total value of secondary and tertiary sectors can continue to increase, by creating more economic opportunities and serving them. These sectors in the long run can continue to provide everyone livelihoods and scope for growth.

There are 70 crore farmers! What to do with them? Do them a favour; drag them out of farming before they kill themselves. And, they are literally killing themselves instead of a painful and prolonged death. It is difficult to move such a huge population. China frequently does. But, we are a democracy. Then, China wins, and India loses. China wins better lives for its people, but India actually loses human lives, not just the thousands that die in battles, but tens of crores of farmers.

Regulation

Regulation exists everywhere, in every country, in so many places. Even the hardcore capitalist thinkers accept the need for it. Governments simply like it, for it gives them power, and fill its coffers. Businessmen despise it for it cuts their profits and restricts them. But how much of it is actually needed, and where is it needed. For that we need to look at what a market is, how it operates, and why regulation is needed.

A market is where trade occurs. A transaction is a give and take of resources between two parties. Many transactions constitute trade. Involved parties seal a transaction based on its individual benefits to each. They both gain value through it. This is how a free market works in the absence of regulation. The net value of the two-party system always increases during trade. But what the involved parties do not account for is the impact on physical and business environment. Regulation is needed to account for it. Trade also removes uncertainties in future trading and self stabilizes the system. In come cases, speculation plays a major part, and destabilizes the system. Regulation is the only way to bring it back.

The market is mostly in a stable equilibrium, as regards the prices of goods and services, in that, any variation in them tends to bring it back. As demand increases, price increases. It creates new opportunities for production, and methods of production previously unviable, now become profitable. So higher prices, increase supply after a small time lag, and bring down prices. Except for this small lag, the correction phase, the system is in a stable equilibrium. The prices self-correct. This holds not only for the market as a whole, but also for individual consumables. This is a typical competitive market, running in a perfect state, and should not be tinkered with any external levies or regulation.

Regulation is needed to account for the harm done to the natural environment. As individuals and groups evaluate the feasibility (if earnings>investment) of their economic activities, they do not routinely evaluate the effect of their actions on the environment. In order to force them to weigh the environmental harm into their decisions, it is essential to penalize them by the amount of harm. Something like a pollution tax on all polluting units and fuels, in proportion to the pollution they generate.

When a market is controlled by a single player, it is called a monopoly. A single stake holder, being party to all transactions, deviates from the regular behaviour. He may not over supply when demand prices have gone up, and harms the business environment. He may sell lower to undercut competition. Also monopoly feeds monopoly, which in the long run may adversely impact consumers in the market. To control such behaviour, regulation is needed. While regulating to curb monopolies, care should be taken for some markets cannot sustain without one.

Sometimes essential goods are subsidized as part of regulation. In almost all cases, this is harmful to economic health. It encourages wastefulness of the resource. It discourages those pursuing to seek alternatives. For example, by providing for free electricity, it increases consumption. It disadvantages people seeking natural ventilation to avoid or atleast decrease use of lights and fans. It hinders penetration of low power devices. It increases consumption to extents that it becomes costlier to source it. Finally, the governments would be forced to put a variety of conditions on these subsidies, but they still remain harmful. Restricting it to a section of people, like below poverty line, would retain the problem to slightly lower extents, but with additional organizational overheads. Sometimes subsidies come in the form of lower price tag, but restricted supply. It deviates from perfect economy by denying to those who genuinely need it and willing to pay a commensurate price, like students needing light in exam days. All kinds of subsidies meant to make goods more affordable, serve to cut from the overall economic value. The best way to make an essential good available to the people would be to let the market run its free course, and equi-distribute the whole money meant for the subsidy. This serves to make the good affordable, reward those who save, and charge those who over consume. It keeps consumption under check.

Another need for regulation is to ensure that the stable equilibrium achieved by the market is sustainable and not by depleting reserves we inherited from our ancestors. If petrol is dug from the ground, it needs regulation, for even in the ground, it was a natural resource and not of zero value. When mobile telecom companies are operating in an area, they are consuming spectrum of that area, and disturbing the ability of others to operate using the same bandwidth. Whenever such resources are consumed, they must to be accounted for. All natural resources need to be ascribed a value, and their consumption for any kind of economic activity be charged. This ensures that unprofitable economic activity does not go unheeded, by destroying large flora and fauna for small profits.

Stock markets trade stocks, which are not consumables, but extract their worth from the potential to generate value. They are purely investments. They are bought for the potential to generate profits, which would come back to the investors as dividend, or reaped back into the company as further investment to yield higher rewards in future. A stock of 100 value that yields a fixed dividend of 5 each year is a 5% stock. This is an unstable equilibrium, for if the stock suddenly happens to earn a profit of 6%, the price of the stock would drastically change from its initial state, without any converging price. A market that generally yields 5%, will value a stock yielding 6 at 120. A relatively small increase in profits from 5% to 6% has shot the stock from 100 to 120. By trading in this stock, an investor can reap in an extra 20 besides the 6. Again, the 5% market would view this as a golden stock as on the rise having yielded 26% in the last year, and would value it at 520, more than 5 fold increase. Price continues to shoot up, till some sane advice prevails and prices stagnate. The stagnated prices cannot yield the same kind of returns, and the stocks fall, completely a bull cycle. It has potential to similarly lower the prices and go into a bear cycle. The bull and bear phases trigger each other, without letting the price to stabilize, and fluctuating at the mercy of investor mood. It is a perfect case of an unstable market which seeks regulation to control pricing.

To come up: How to regulate speculation, and make trading self-correcting

Destabilizing effect can also be seen in currency markets. Say interest rates in the local Japanese and US markets are 3% & 4% respectively. For markets to be balanced, a given amount of sum, held in different countries, should after a year grow to the same amount. So Yen should increase in value by 1% to the dollar each year. But what actually happens is a falling Japanese Yen due to carry trade. Say initially, the rates of Yen and Dollar were stable. Investors react to the difference in interest rates by selling Yen for Dollar, holding Dollar for a year, and then buying back Yen. As many investors follow the practice, it causes rapid selling of Yen across the globe, and Yen keeps falling, till the slide is curbed by proactive governmental interferences. This is another case calling for regulation. And, the governments do regulate by pegging the currencies. But, they can defend the prices only till it pushes within a price band. This is a case where some regulation is needed, a regulation is in place, but it does what was not intended – pegging the currencies.