No turning point for Indian commodity demand growth as agricultural reforms are abandoned

One of the most important, yet least appreciated drivers of the next commodity super-cycle lost momentum this week.

This week India’s prime minister Narendra Modi announced that the government will withdraw all three agriculture-related market reforms introduced in September 2020.

In his address to the nation, the prime minister said: “The objective of the three farm laws was that the farmers of the country, especially small farmers should be strengthened, they should get the right price for their produce and maximum options to sell the produce.”

The laws, aimed at modernising the Indian agricultural sector resulted in widespread protests. Farmers feared that the long-standing minimum support prices (MSP) would be taken away and that agriculture would become increasingly concentrated, at the expense of smaller farms.

Over 40% of the workforce are employed in agriculture, and so farm workers represent significant political clout, something Modi has had to reluctantly bow down to. In the short term the withdraw may appease the Indian electorate, but unfortunately it stymies the country’s future development.

Much of the slow uptick in Indian urbanisation relative to other countries has been due to agricultural policies such as the MSP. When farm incomes are stable and supported they discourage the movement of people, especially the young to more productive jobs in the city.

The Indian economy was approaching the point at which urbanisation and overall economic growth starts to take off. Known as the ‘Lewis turning point’, it is a situation in economic development where surplus rural labour is fully absorbed into the manufacturing sector. This typically causes agricultural and unskilled industrial real wages to rise. This then leads to increased urbanisation, more spending on construction and appliances, and higher energy consumption.

Earlier in the year I pointed to projections from the IEA which suggested that India would be at the centre of global energy demand growth over the next two decades. If the government could push through the agricultural reforms then India stood to be one of the main drivers of energy and commodity demand growth.

What once looked like a turning point for India, one that promised stronger economic development and higher commodity demand growth, now looks increasingly vulnerable to stagnation.

Related article: Indian energy and commodity demand on the verge of a generational turning point

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