#3 India’s Farm Laws 2020

Understanding the Laws

In June 2020, the Indian Parliament passed three controversial farm bills with the stated intent of ushering in pro-market reforms in agriculture. It primarily caters to providing “freedom of choice” to farmers & traders to undertake agri-trade through alternate channels and realize the true benefits of competition and price discovery.

1. PROMOTION AND FACILITATION OF TRADE AND COMMERCE OF FARMERS’ PRODUCE ACT, 2020

This act allows any registered private trader to engage in intra-State or inter-State trade of farm produce (of items specified in the State APMC Acts) with a farmer or another trader even in areas outside the notified market yards (regulated under the State APMC Acts). Such “outside trade areas” shall not be subject to any market fee or cess or levy normally applicable under any State APMC Act or any other State law on farmers, traders or electronic trading & commerce platforms.

The Centre may later frame guidelines for the electronic trade & commerce platforms specifying the eligibility of traders for registration, logistics arrangements & quality assessments of the farm produce, and the modalities of payments to farmers (receipt to be given on same day & payment maximum within three working days). Such platforms are also expected to have a Price Information & Market Intelligence System that corrects any information asymmetry and enable farmers to avail competitive price for their produce.

2. THE FARMERS (EMPOWERMENT AND PROTECTION) AGREEMENT ON PRICE ASSURANCE AND FARM SERVICES ACT, 2020

This act enables contract farming by providing a legal framework defining terms of production, trade & commerce between two parties (farmer & sponsor) or three parties (farmer, sponsor & any third party). In the agreement, the sponsor commits to procuring the produce of a predetermined quality from the farmer at a prefixed date in future. Third parties may include farmer producer organizations (that may negotiate on behalf of farmers) or farm service providers (that may provide agri inputs such as seed, fodder, fertilizers, equipment, technical advice etc to farmers on behalf of sponsor).

The quality & grade of the crop and the maintenance of sanitary & phytosanitary standards (pesticide residue, food safety, farming practices etc) can be checked as per the guidelines laid down by the Centre or the States. Some of these checks are to be undertaken after production at the farm gate & others may need to be certified by third party agencies during the production process. The onus of sticking to the timelines of procurement and inspection of quality before accepting the lot lies with the sponsor. The Essential Commodities Act has been amended to ensure that no stocking limit is imposed on such sponsors.

The act also mandates to include the price of the produce in the agreement. In case it is variable, there needs to have a guaranteed minimum price component and a bonus component derived after benchmarking againts prices prevalent in APMC market yards or any other trading platforms. This could imply transferring the risk of market unpredictability from the farmer to the sponsor. All such agreements are to be electronically registered under a Registration Authority created by the State Governments.

3. THE ESSENTIAL COMMODITIES (AMENDMENT) ACT, 2020

This amendment relaxes the erstwhile restrictions of the Essential Commodities Act around stocking of food items (including cereals, pulses, potato, onions, edible oilseeds & oil) for private traders / sponsors / participants in value chain. The intent is to incentivise private players to create grassroot agri-market infrastructure such as cold storage & warehouses.

Once this comes into force, the Centre shall reserve the right to restrict stocking of these specified items only during extraordinary circumstances (such as war, famine, grave calamity, extraordinary price rise). It is noteworthy that stock limits that could be imposed during extraordinary price rise (as benchmarked with past average) isn’t applicable for processing or value chain participants as long as their stocks are well within the installed processing capacity or correspond to the demand for exports.

Understanding the Economic Logic

The rationale behind some of the market reforms proposed can be explained by the Cobweb model. Agriculture in India follows a boom-bust cycle — whenever there is a bumper crop, the price crashes. This influences the decision of the farmer to sow that crop. As a result, the harvest quantity next season reduces and prices rise. Prices move to adjust the demand & supply. With respect to cereals (such as wheat & rice) that are staple in any diet, there needs to be a large price adjustment to disincentivize people from reducing consumption. To hedge producers & consumers against the risks of such price fluctuations, it is necessary for policymakers to create instruments that break the Cobweb model.

Enabling investments in cold storage & warehouses (where excess agri-goods in bumper season can be stored & released into the market in bust season), futures trading (where an assured price of produce in the future can influence farmer’s sowing decision today), and free trade (where high prices attract supply from other areas to correct the demand-supply gap) can bring in the much-needed stabilization of agri-markets. At least from a POV of macroeconomics, the above initiatives have been taken up by the farm laws and can be considered progressive in nature.

Understanding the Conflict

Now the question is this. If the farm laws are so beneficial to agri-markets, why are they facing such a united opposition by the farmers? And are there merits in their arguments?

Fear of the End of the Minimum Support Price regime

Farmers believe that encouraging unregulated markets (without any taxes or levies) outside the APMC markets shall ultimately render the latter financially unviable & thus effectively mark the end of the Minimum Support Price regime. The most vocal in these protests are farmers from Punjab & Haryana — two states that have a robust APMC mandi network & contribute significantly to government procurement of paddy & wheat at MSP. Also, the fees earned by APMCs contributes more than >3500 Cr rupees annually to the state exchequer. In several representations by the government, assurances have been given that the MSP regime won’t end but the farmers want it codified in law and want MSP to be mandated even in the unregulated markets.

Minimum Support Price was introduced as a policy instrument to incentivize production at a time when India wasn’t self-sufficient in food production & had to avoid geopolitical subservience to the United States (our the then source of food imports). Almost three decades later, the Food Corporation of India’s warehouses are overflowing with grains, the cost of procurement is many times higher than the markets & the subsidized excess cannot even be exported since it is distortionary & against the WTO rules. It is about time that there is a healthy market alternative to the state-supported MSP regime.

Now let’s consider the financial viability angle. For such unregulated markets to completely displace APMCs, they will have to be financially viable themselves and offer the best terms to farmers. The farm laws do provision for fees to be charged by electronic trading platforms in unregulated areas. Also, farming contracts should factor in the cost of credit and agri-inputs as well. However, it will still take significant time for such markets to be ready (i.e. roads, storage facilities, threshing/drying/weighing equipment). And it is yet to be seen to what extent private traders shall foot the bill for such developments or will the governments have to intervene. We also need to factor who will act as substitute for the intermediaries (such as the brokers or middlemen called “arhatiyas” who charge commissions but do provide access to credit) that are an essential factor in the success of APMC markets. The existing regime (benefiting from the monopolies in APMCs) would never vote in favor of competition but that may be in the interest of the larger farming economy. If the free markets & competition work in times to come, it may encourage some stakeholders to diversify to high-value crops and others to exit the sector for more remunerative opportunities.

All said & done, no political party would take the risk of completely dismantling the MSP regime and facing the wrath of voters in elections. As long as we live in a democracy, MSP is here to stay & co-exist with free markets. Hence, the fears here may be a tad bit exaggerated. Also, MSP is an assurance & not a legal right. The demands for codifying such an artificially fixed pricing mechanism in law and extending it to free markets to assuage fears are preposterous.

Lack of Consideration for Small & Marginal Farmers

Many economists have pointed out that while the farm laws may be well-intending, they may not be very effective since they fail to consider the actual problems of small & marginal farmers who form ~83% of India’s farmers. Statistics show that the APMC & MSP regime has primarily benefitted the large farmers (with the wherewithal to incur the transportation cost to travel to mandis). In order to reach out to such farmers, the National Commission of Agriculture headed by M.S. Swaminathan had recommended that more APMCs should be set up to ensure that the average area served by it one APMC is not more than 80 sqkm (as against the current 496 sq.km). The Shanta Kumar Committee had pointed out that only 6% of farmers in India are able to avail MSP for their produce. This means that the majority of India’s farmer population has already been selling its produce in unregulated markets.

This may imply that the so called “freedom of choice” introduced by the laws may not affect the life of such small & marginal farmers. Agriculture today stands unremunerative for such farmers since they do not have affordable access to institutional inputs such as credit, storage & transportation. Also unless organized under the aegis of farmer producer organizations or co-operatives, they may not have the wherewithal or bargaining power against private traders.

Corporatization of agriculture may not be as evil as might seem from the “Adani & Ambani” slogans raised by the protesting groups. But it may be naive on the part of policymakers to not consider the probability of market manipulation by oligopolies in the unregulated market yards. Though clauses around pricing, quality standards & dispute resolution mechanisms have been touched upon in the farm laws, they need to be laid out clearly and should be enforceable to prevent any arbitrary action against the welfare of farmers.

In conclusion, the farm laws are a step in the right direction but fall behind in factoring the power dynamics that exist in agri-markets. Also, there is a lot of diversity in agri-scenario across India and care needs to be taken by the Centre to not encroach upon a subject under the State List. It is disheartening that stakeholder consultation between the government and the farmer representatives couldn’t resolve the issue and that finally the judiciary had to step in. It’s a wait & watch from here on !

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