Impact of New Economic Policies on Agricultural Labour in India

In 1991, India launched one of the most sweeping economic overhauls in its history – the New Economic Policy (NEP), built on the pillars of liberalisation, privatisation, and globalisation (LPG). While these reforms stabilised the economy and spurred GDP growth, their effects on agricultural labour have been deeply uneven. For the millions of rural workers who depend on farming for survival, the reforms brought a mix of new opportunities and serious hardships that continue to shape rural India today.

What was the New Economic Policy of 1991? 🔗

India’s NEP was introduced under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh in response to a severe balance of payments crisis. Foreign exchange reserves had fallen so low that the country could barely cover two weeks of imports. Under pressure from the IMF and World Bank, the government dismantled the License Raj, reduced tariffs, opened doors to foreign direct investment, and scaled back the state’s role in economic activity.

The core idea was to make the Indian economy more market-oriented, competitive, and globally integrated. For sectors like telecom and IT, the results were transformative. But for agriculture – which still employed nearly half of India’s workforce – the story turned out to be far more complicated.

How the reforms affected agricultural subsidies 🔗

One of the most direct impacts on agricultural labour came through subsidy reduction. The 1991 budget itself included cuts to fertilizer subsidies and the abolition of sugar subsidies as part of the fiscal correction strategy. In the years that followed, the government continued to scale back input subsidies for seeds, credit, and irrigation under pressure to reduce the fiscal deficit.

For small and marginal farmers – who make up the overwhelming majority of Indian agriculture – rising input costs meant tighter margins. When farming became more expensive, many farmers reduced their reliance on hired labour. Operations like weeding, pest control, and manual harvesting were either skipped or done by family members, directly cutting demand for agricultural workers.

According to the International Institute for Sustainable Development (IISD), Indian agriculture has faced persistent challenges partly because of a mismatch between food prices and production costs, compounded by weak input delivery systems and lopsided access to credit and marketing infrastructure.

Exposure to global market volatility 🔗

The reforms also exposed Indian agriculture to international competition in a way it had never experienced before. After 1991, import restrictions on agricultural products were eased, which led to price crashes in several commodities. Small farmers, already operating on thin margins, found themselves competing with heavily subsidised agricultural producers in developed countries – a contest they were not equipped to handle.

The WTO’s push for India to reduce agricultural subsidies further intensified this vulnerability. While developed nations continued to support their farmers through substantial Green Box subsidies, Indian farmers – particularly landless labourers and marginal cultivators – bore the brunt of this uneven playing field.

Mechanization and the displacement of labour 🔗

Another significant outcome of liberalisation was the acceleration of farm mechanization. As markets opened, foreign agricultural machinery became more accessible and affordable for larger farmers. Tractors, harvesters, and threshers replaced manual labour in ploughing, sowing, and harvesting – tasks that had traditionally employed the bulk of agricultural workers.

Research published in the Indian Economic Review highlights that mechanization has both a substitution effect (directly replacing workers) and a scale effect (boosting productivity and potentially expanding cultivated land). However, in practice, the substitution effect has dominated for unskilled labourers, especially women, who traditionally performed transplanting and weeding tasks.

A study on rice farming in Telangana found that when mechanised planting devices were introduced, labour demand for transplanting fell by about 7%, and wages for that task declined by roughly 6%. The workers most affected were women from marginal households who had few alternative income sources.

Uneven adoption across regions 🔗

Mechanization has not been uniform across India. States like Punjab, Haryana, and parts of western India adopted machinery rapidly, while eastern and northeastern states lagged behind due to smaller landholdings, difficult terrain, and poor infrastructure. This created a dual labour market: regions with high mechanization saw reduced demand for manual work, while labour-intensive regions continued to offer low wages and uncertain employment.

According to a Peninsula Foundation analysis, India has achieved only about 40% farm mechanization compared to 95% in the United States. Yet even this partial mechanization has significantly disrupted traditional labour patterns in the states where it has taken root.

Growing marginalisation of agricultural workers 🔗

The combined effect of subsidy cuts, global competition, and mechanization has been a steady marginalisation of agricultural labourers. Research from Geospatial World notes that the trend toward greater casualisation of the agricultural workforce, which began in the 1980s, intensified through the 1990s and beyond. Workers increasingly found only erratic, low-paid employment rather than stable seasonal work.

The numbers tell a stark story. At the start of the liberalisation era in 1990-91, over 40% of rural households were landless or near-landless. The percentage of small and marginal landholders rose sharply between 1981-82 and 1991-92, and this marginalisation process has continued. Average operational landholding in India dropped from 2.28 hectares in 1970-71 to just 1.08 hectares by 2015-16.

Impact on vulnerable communities 🔗

Agricultural workers from Scheduled Castes, Scheduled Tribes, and other marginalised communities have been disproportionately affected. Unlike land-owning farmers who could at least benefit from higher crop prices or shift to commercial crops, landless labourers had only their physical labour to offer in a market that increasingly favoured machines and capital.

Migration from rural to urban areas surged as workers sought alternatives. But this migration often led to exploitation in urban informal labour markets – construction sites, factories, and domestic service – where workers lacked legal protections and bargaining power. Data from the National Center for Biotechnology Information (NCBI) shows that about 35.5% of workers in agriculture and allied sectors were below the poverty line as of 2018-19, compared to 26.3% in the non-farm sector.

Widening inequality in the post-reform era 🔗

The NEP’s impact on inequality has been well-documented. The income share of the top 10% of India’s population rose from 35% in 1991 to over 57% by 2014, while the bottom 50% saw their share shrink from about 20% to just 13%. Rural areas, dependent on agriculture, bore a disproportionate share of this growing gap.

The phenomenon of “jobless growth” became a defining feature of post-reform India. While GDP expanded rapidly – particularly in services and IT – employment generation in agriculture and manufacturing remained sluggish. Between 2004-05 and 2011-12, the overall employment growth rate was just 0.45% per annum, far below what was needed to absorb the growing labour force.

About 45% of India’s workforce remains in agriculture, yet the sector’s contribution to GDP has declined steadily – from around 30% in 1991 to under 18% today. This widening gap between the share of workers in agriculture and the sector’s economic output signals deep structural underemployment.

Government corrective measures 🔗

Recognising the distress caused by rapid liberalisation, the Indian government introduced several corrective programmes over the years.

MGNREGA and rural employment guarantee 🔗

The most significant intervention was the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), enacted in 2005. It guaranteed 100 days of wage employment per year to every rural household willing to do unskilled manual work. The programme served as a critical safety net for agricultural labourers during lean seasons when farm work was unavailable.

At its peak during the COVID-19 lockdown in 2020-21, MGNREGA generated over 389 crore person-days of work – the highest since its inception – functioning as a massive shock absorber when rural economies collapsed. In 2025, MGNREGA was replaced by the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, which expanded the guaranteed employment to 125 days per household annually.

Targeted subsidies and rural infrastructure 🔗

The government also reintroduced targeted subsidy programmes for small and marginal farmers, particularly around fertilizers, seeds, and credit. Investment in rural infrastructure – roads, irrigation, cold storage, and rural markets – helped create employment opportunities beyond direct farm work. Programmes like the Pradhan Mantri Fasal Bima Yojana (crop insurance) and PM-KISAN (direct income support) have attempted to provide a financial cushion to farming households.

However, critics argue that these measures have been reactive rather than structural. The fundamental challenge – creating productive non-farm employment at a scale that matches the outflow of workers from agriculture – remains largely unaddressed.

The debt trap and agrarian distress 🔗

One of the most troubling consequences of the post-reform agricultural landscape has been the rise of rural indebtedness. As state support withdrew and input costs rose, farmers and agricultural workers increasingly turned to loans – from banks, microfinance institutions, and informal moneylenders – to survive. When crops failed or prices crashed, many were unable to repay, leading to cycles of debt that sometimes ended in tragedy.

The connection between economic reforms and farmer suicides has been extensively studied. Over 10,000 farmers and farm workers took their own lives in 2017 alone, reflecting the depth of agrarian distress in post-reform India. While multiple factors contribute to these tragedies, the withdrawal of the state’s protective framework and exposure to global market volatility have been consistently identified as key drivers.

Lessons and the path forward 🔗

The experience of agricultural labour under India’s New Economic Policy offers some important lessons. Economic reforms can drive efficiency and growth, but without parallel investment in social safety nets, skill development, and institutional support, they risk deepening existing inequalities.

Several areas need attention going forward. First, the transition from labour-intensive to mechanized farming must be managed so that displaced workers have viable alternatives – whether in agro-processing, rural manufacturing, or services. Second, agricultural credit and insurance systems need strengthening so that small farmers and labourers are not pushed into debt traps during market downturns. Third, land reform remains a critical but politically sensitive issue; the continued fragmentation of holdings into uneconomically small plots limits both productivity and labour absorption.

India adds roughly 20 million new entrants to the job market each year but creates only about 2 million formal jobs. Bridging this gap – particularly for rural workers exiting agriculture – is perhaps the most urgent economic challenge the country faces.

What do you think? Can India achieve a balance between agricultural modernization and protecting the livelihoods of its millions of farm workers? What kind of policies would you prioritise to address the challenges faced by agricultural labourers in the post-reform era?

References

1. https://en.wikipedia.org/wiki/Economic_liberalisation_in_India
2. https://www.iisd.org/articles/policy-analysis/agricultural-subsidies-india
3. https://link.springer.com/article/10.1007/s41775-021-00120-x
4. https://www.thepeninsula.org.in/2019/08/23/problems-of-indian-agriculture-low-incomes-marginal-farmers-and-lack-of-modernisation/
5. https://geospatialworld.net/article/impact-of-economic-reforms-on-indian-agricultural-sector-application-of-geomatics-technology-to-reduce-marginalisation-and-vulnerability-of-small-farmers-in-india/
6. https://pmc.ncbi.nlm.nih.gov/articles/PMC8923099/
7. https://en.wikipedia.org/wiki/Mahatma_Gandhi_National_Rural_Employment_Guarantee_Act,_2005
8. https://www.downtoearth.org.in/governance/mgnrega-may-have-been-replaced-but-its-significance-in-rural-areas-is-undeniable