Agrarian Economic Relations: Theory and Experience

Kaushik Basu

Share tenancy:
A share tenancy or sharecropping contract is one in which the tenant
promises to give the landlord a fraction r, of the total output. This fraction is
decided in advance and empirically tends to be around 0.5.

If r = 0.5, if some new input increases the output by more than the cost of
the input, it would not be in the interest of the tenant to apply the input
unless the value of the additional output is at least double the cost of the
new input. Hence the application of inputs will tend to be suboptimal. This
is the Marshallian critique.
Corollary: it is irrational for a landlord to lease out his land on a share
contract instead of a fixed rent or wage contract.

But later, the focus of sharecropping literature shifted over to proof that
sharecropping may indeed be the dominant arrangement where it occurs.
The paper describes a simple model to explain the prevalence of share
tenancy.

Limited Liability in Agrarian Relations:

Limited liability axiom: If after a landlord and a tenant agree to a contract
there is a natural disaster which renders the crop yield sufficiently low, the
tenant will have the right not to pay the full amount of the rent that he was
supposed to pay. Empirical work points to the fact that the axiom does hold.
Recent research by Atchi Reddy (1990) has unearthed a large number of
‘tenancy contracts’ from Nellore district dating back to the first half of the
nineteenth century. This provides support to the belief that limited liability
and bankruptcy clauses are not primarily the preserve of the twentieth
century industrialized nations but were often formally written into tenancy
contracts in rural India.
Assuming that the limited liability clause underlies all contracts, the tenant
will have a tendency to accept riskier projects because the failure of the
project does not hurt the tenant as much as it would in the absence of such
a clause. But such a risk taking will go against the landlord’s interest and he
will try to devise a contract which steers the tenant to choose less risky
options to minimise the tension between the landlord and tenant’s
interests. Share tenancy minimises this tension.
From these explanations, some testable propositions emerge:
1. Share tenancy is more likely in areas where output is weather
dependent.
2. More likely in areas where technology is relatively fixed in coefficients,
not much scope for substitution between land and other factors.
3. Becomes less prevalent as a region becomes well off, as limited
liability clauses won’t have much weight then.

Credit Markets:
They were categorised by high interest rates. The lender’s risk hypothesis
attempted to explain this. According to the hypothesis, the high interest
rate was essentially a compensation to the lender for the risk of default in
markets the hand of law was weak. But empirical studies revealed that
default is not sufficiently high to explain interest rates as high as 120% per
annum. Also, not only interest rates could be very high in many backward
areas but they can also vary a lot.
An annualized rate may be meaningless in the rural context. Here what
matters is not the length of time for which credit is borrowed but other
things like whether harvest occurs between the time of borrowing and the
time of repayment.
Holi loan: For such a loan the amount of interest doesn’t depend on when
the money was borrowed as long as it is repaid immediately after the
harvest.
We need to model the relationship between rural seasonality and credit
market institutions and rates.
Q. How effective has government intervention been? On the face of it the
impact of the government seems impressive, with rural formal credit as
opposed to credit from moneylenders has grown from 7.2% in 1952 to
61.2% in 1981. But the question that rises is who gets the formal sector
credit?
Bulk of the institutional and formal credit goes to the large farmers. One
reason is the ballers’ legitimate need to ensure that the borrower has a
fixed address, can demonstrate the need for production loan as opposed to
consumption loan and possesses marketable assets. Another reason is the
issue of nexus between the banker and influential large farmers. The
farmer uses his contacts and influence to corner the bulk of the
institutional credit and get better terms.
Sarap finds that the bureaucratic delay that a borrower has to face in
getting a formal loan is inversely related to the size of the borrower’s
landholding and transaction costs of a smaller loan is greater than that of
bigger loans.
In contrast to popular belief that small farmers are the biggest defaulters,
Sarap’s study shows that the largest borrowers are the largest defaulters.
Since formal credit commands a much lower interest rate than informal
credit, the bulk of formal credit is cornered by richer farmers and also the
bulk of default. Hence it is highly unlikely that a rise in formal credit is
contributing to equity, in fact it has exacerbated the inequalities of rural
economies.

Violence, Triads and Power:

Why do peasants return borrowed money?
● Threat of violence
An interaction is triadic if the transaction between i and j can influence and
get influenced by an uninvolved third party.
Interpersonal fears among poor peasants can be used by a landlord to
exercise extortion and prolong his control over the local economy.

Free vs Unfree labourer:

A free labourer is one who is able to accept or reject the conditions and
wages offered by the employer. Once having taken a job he can decide to
give notice and quit.
An unfree labourer or bond labourer by contract is one whose bargaining
power is virtually non-existent or has been surrendered. Such a labourer
doesn’t possess the right to refuse to work under the terms set by his
master.
In a triad, the landlord achieves his goal of making the cost of not agreeing
to his terms more and more onerous to the labourer not through any
extra-legal means but by simply exercising his own right not to trade with
the merchant, deal with small employers, transact with house owners, etc.

Power Asymmetry and UNequal Exchange in the Agricultural

Value Systems: Case Study of Paddy
Manish Kumar

Agricultural Value System: The agricultural value system refers to the

interconnected set of activities, processes, and relationships that drive
agricultural production, distribution, and consumption. It encompasses the
various stakeholders and factors involved in agricultural activities, including
farmers, input suppliers, processors, distributors, retailers, consumers, and
regulatory bodies. The value system highlights the flow of products,
services, information, and finances throughout the agricultural sector.
Different units of production in the value system of a product can be
classified on the basis of social, politica, and economic hierarchy, which are
elements to determine the power relation.

Economic power that means differential access to resources is related to

political power that defines the position of different classes on a larger
spectrum.
The AVS involves multiple exchanges and processing of agricultural
products in the backward as well as forward linkages. The various possible
combinations of backward and forward linkages of farming make the AVS
nonlinear.
Bharadwaj 1974: “For small and marginal farmers, the linkages with
markets are fundamentally a ‘compulsive involvement’ which reflects
distress”.
So challenging the power of large corporations in AVS is beyond the ability
of smallholders, as power favours large corporations.

This paper analyses the role of power asymmetry and some of its sources
in AVS. the main objective is to understand the impact of power asymmetry
on surplus generation and distribution.

Exchange and Power:

Each stage or transaction of the value systems is in itself a process, where
some amount of labour is added to the product. Hence the exchange value
of any commodity is what it commands for exchange with
another commodity, which is not necessarily equal to use-value.
"Use-value" refers to the inherent utility or usefulness of a product or
service in satisfying human needs or desires. It represents the capacity of a
good or service to fulfil a specific purpose or function.
The definition of conventional power: It is the probability that one actor
within a social relationship will be in a position to carry out his own will,
despite resistance, regardless of the basis on which this probability rests.

In the absence of a standardised measure of value, economic exchanges

are the result of ownership rights and hence cannot be separated from a
power relationship.
The parties in exchange must recognize each other’s ownership over
respective commodities under exchange. Moreover, because of the
ownership right, power becomes intrinsic to exchange.
The respective powers of the persons at both ends of the exchange decide
the price of the commodity.
The nature of linkages reflects the pattern of power and the functioning of
the linkages is such that it reinforces that pattern of power. Hence the
pattern and involvement of all farming sections are not alike in AVS. The
forces of tradition, customs, social norms, and economic status all play an
important role in determining the bargaining strength of the actors involved
in the AVS. this set of social-political-economic factors weakens the power
position of the small farmers in exchange. The weaker position is reflected
in the unit price received by the farmers for an identical product.
Three types of market involvement (Bharadwaj 1974):
1. Operators, with a dominant bargaining position
2. Economically weak section with extremely weak bargaining position
3. Not powerful enough to exploit markets, but more self reliant than the
landless or very small farmers.
The ‘compulsive involvement’ is a form of unequal exchange between
different sections of the AVS. this affects not only the peasantry but also
the overall agrarian economy.

Among paddy farmers, 85% of marginal farmers, 84% of small farmers, 75%
of semi medium farmers, 72% of medium farmers and 63% of large paddy
farmers received prices less than or equal to MSP. The data indicates that
larger landholders have access to higher prices. Hence land endowment in
case of AVS plays an important role in defining the power position of
farmers. The power position of farmers with respect to output linkages
weakens with decreasing land size.

Exchange in the AVS:

How does power function in the case of exchange between the cultivation
and non cultivation segments of AVS?
*A smaller amount of surplus value is created in agriculture as compared to
industry, due to the long period during which the product remains in the
process of production without any labour being expended on it.
Differentiating features of agriculture from other industries:
● In agriculture, the increase in surplus value through an increase in
labour time is possible only to a limited extent, but in industry,
workers can be forced to work longer hours to increase the
production and hence, surplus. With supply inelastic in short periods,
an increased demand leads to a fall in stocks and hence an increase
in price.
● Changes in price of agricultural products are determined by demand.
But changes in the price of finished goods are cost determined.
In the case of paddy, short run changes in demand directly affect the price
of paddy given a fixed harvested amount of paddy. But in the case of a rice
mill, which has a storage capacity for paddy, it can meet the changes in
demand for rice by a change in the amount of milling. This keeps the prices
constant while varying the quantity. However a change in demand for rice
will have an impact on the change in demand for paddy that would cause a
change in the price of paddy. Therefore, changes in the price of rice are
through channels of cost, which is a change in price of paddy.

Due to lack of storage and compulsion of loan repayment, and with a view
to begin operations for the next crop, most of the farmers sell produce
immediately after harvest.
Most of the markets for paddy function for 4-5 months after harvest and
later on the sales drop. This limited supply reflects the farmers’ incapacity
to regulate supply with respect to the demand. The peak season of paddy
begins with harvest in October and continues until February.
However, rice arrival reflects a relatively constant trend. This means that
the sellers of rice have the capacity to respond to the market demand,
unlike producers of paddy.
Hence the price of paddy is entirely demand determined in the absence of
external intervention whereas the price of rice is based on various input
costs.
The limitation to generate surplus in agriculture and demand determined
price places agriculture in a weaker power position in the exchange
vis-a-vis forward linkages. The lower surplus generation pushes capital
outside the sector in a capitalist economy until the rate of profit in all
sectors equalises. The lower surplus also causes lower reinvestment in
agriculture and in the end, it remains economically weaker.

A significant amount of surplus is extracted through backward linkages.

One reason can be that substantial amount of land is under tenancy.

Agricultural Price Commission 1965: It was formed to advise the

government on the prices of agricultural products. Along with general
protection to farmers, APC was mandated to provide an incentive to the
producers to maximise production using new technologies, to ensure land
and productive resources were used rationally and to take into account the
impact of price policy on the overall economy.

Extraction of Agricultural Surplus by Output Linkages:

Agricultural value chain is a series of interconnected production processes
or “labour processes” or “circuit of capital”.
M1-C1-M’1-M2-C2-M’2-M3-C3-M’3-M4-C4-M’4
M’1: Price of one unit of paddy paid by processing industry (rice mill)
M2: M’1 + price of auxiliary materials + Depreciation + Payment to workers
M1: money spent on procuring C1 capital
Extended circuit of capital: M1-C1-C’1-M’1
C’1: increase in value of product
M1 = C1 = c1 + v1
c1: constant capital v1: variable capital in production
C’1= c1 + v1 + s1
Surplus generated in sector 1 = s1 = (c1 + v1 + s1) - (c1 + v1)

Surplus generated in the production process is realised in the money form

in the market, and money value of a commodity may not be equal to its
value. Hence M’ may not be equal to C’, and because of the weaker power
position of the farmers in the exchange of paddy, it is most likely that M’<C’.
Hence Realised Surplus in sector 1 < Generated surplus in sector 1
In sector 2, Surplus realised = M’2 - M2 = M’2 - (M’1 + price of auxiliary
materials + Depreciation + Payment to workers)
Since M’2 is cost determined, there is a markup below which the price
cannot fall. Similarly the price of auxiliary materials and depreciation
cannot be controlled by the owner of sector 2. So there can be only two
sources of surplus; workers and M’1.
Hence sector 2 not only accumulates surplus generated by the workers of
sector 2 but also pulls a significant amount of surplus generated in sector
1, using a strong power position in exchange. A significant portion realised
in sector 2 is actually generated in sector 1.

Since price is demand determined, farmers have a control on price only up

to their capacity to respond to change in demand with change in supply.
Large farmers have more capacity due to larger land holdings, which leads
to the conclusion that the relative power position of the farmer in exchange
is directly proportional to the land ownership.
M’1 is more for large farmers than small farmers.
While land holding is important, labour remains the sole source of surplus.
The proportion of family labour increases with a decrease in size of land
and leads to a higher proportion of value added by own labour as compared
to hired labour.
From a survey conducted in Patna district and Patiala district, it was noted
that farmers’ earnings from one unit of paddy are smaller than other actors
of the value system of paddy. While farmers suffer a deficit, other actors
gain a positive return, which reflects the weaker power position of the
farmers in the paddy value system.

Role of the State:

From the perspective of surplus generation in agriculture and retention of
the same, the state has a twofold role; intervention in the backward
linkages and intervention in the forward linkages.
The state’s intervention in backward linkages helps the farmers to generate
more surplus in the short run or long run, while intervention in forward
linkages help retain the surplus generated in agriculture to a significant
extent.

Comparing Punjab and Bihar, there’s a huge difference in consumption of

electricity with 28% of total consumption in Punjab and 2% in Bihar, due to
lack of electricity subsidies in Bihar. Despite the good presence of tube
wells in both states, total irrigated land in Bihar (48%) is much less than
Punjab (>99%).
Subsidy on fertilisers and electricity directly acts upon the cost of
cultivation, and helps to increase the surplus from agriculture. On the other
hand, the government’s support in accessing institutional credit by farmers
helps in minimising the leakage of surplus as interest on borrowed money.
Research and development also helps increase productivity, and hence
surplus in the long run.
Hence intervention of the state in backward linkages help farmers procure
more surplus as compared to its absence. The agricultural policy of the
state is one of the reasons behind the higher surplus of paddy farmers in
Punjab compared to Bihar. But government intervention is not enough to
stop the leakage of surplus completely.
The state’s intervention in the forward linkages mainly consists of the
market, connectivity to the market and public procurement. Increasing the
market density or smoothing the connectivity with the markets helps the
farmers to realise a higher rate of return than otherwise. Benefitting from
economies of scale, large landholders take their produce directly to the
markets, while small landholders sell to local traders.
Easier access to the agricultural market strengthens the power position of
the farmers in general and smallholder farmers in particular.
Public procurement is a major intervention which directly and immediately
benefits the farmers by procuring their produce at an MSP which protects
them from fluctuating market prices and hence a difference in power
position.

Case 1: Without public procurement

Demand: Qd = A - 𝜶P1 ; Qs = B
therefore , A - 𝜶P1 = B
Or P1 = (A - B)/𝜶

Case 2: With Procurement

Let C amount is procured from farmers at MSP. Empirically, the price paid
by procurement agencies is higher than average market price. Also, C ≤ B.
If C < B, farmers sell the remaining paddy in the open market.
So Qs = B - C.
A - 𝜶P2 = B - C
P2 = (A - B + C)/𝜶
So P2 > P1
Therefore the average market price in the absence of public procurement is
lower than the price in the presence of public procurement. Also, P2 is
directly proportional to C. The farmers can decide where to sell based on
the market price and the MSP provided.
However there is limited awareness about MSP. One reason for this is the
lower level of public procurement. There’s a vast difference between public
procurement in Punjab (78%) and Bihar (17%).

Swaminathan Level: In 2004, the National Commission for Farmers was

formed, headed by Prof. M.S. Swaminathan. Regarding MSP, Swaminathan
recommended a procurement price 50% above the C2 cost of production.
The agricultural market is demand dominated and without any demand side
intervention of the government at an adequate MSP, the power position of
the farmers is weaker than other actors in the transaction.
Arguments against public procurement:
Policy to place more emphasis on the non price intervention to increase
yield can help farmers to earn more from the given size of land.
But in the absence of public procurement, the realisation of high income
may not take place because of the nature of demand determined
agricultural price.

Conclusion:
The two factors which distinguish agriculture to non agriculture
manufacturing are:
1. Lower surplus generation capacity of agriculture compared to
manufacturing.
2. Demand determined price mechanism for agricultural products.
These are the reasons why actors in agriculture are at a weaker power
position and are responsible for the power asymmetry in the AVS. it leads
to a transfer of surplus from agriculture to non agriculture segment of the
AVS.

This power asymmetry causes outflow of surplus from both ends, in the
form of rents collected by the owner of the land in backward linkages, and
weaker power position results in suppression of price in the forward
linkages.