Farm Bills – A boon or a bane?

December 9, 2020 Seed

The agricultural marketing reforms brought about by the government through two new laws and an amendment to the existing Essential Commodities Act are in the right direction. These are over due and should have come 20 years back. When Late Prime Minister Shri PV Narasimha Rao, assisted by his Finance Minister Dr Manmohan Singh, brought about path breaking reforms in Indian economy in 1991, those reforms did not touch the agriculture sector. Farmer continued to be shackled through mandated selling of his produce through the APMC mandis which made his price discovery poor and his profits low. So, when the new reforms give him the freedom to sell anywhere he likes why is there so much of protest?
Lack of consensus building efforts
Looking at the politics that are playing out now in response to the liberalization of the agricultural marketing system brought about by the current government, we can appreciate the enormous effort the then Prime Minister Shri PV Narasimha Rao and his team made to build consensus among several groups within their own party and across party lines. The reforms of 1991 were of much greater magnitude but the effort that was made to carry the stakeholders by taking them into confidence was really praiseworthy. Lack of such an effort, in the present context, to build consensus and ‘to sell’ the farm reforms to stakeholders like states, farmers organizations and opposition parties has resulted in the current protests by the Punjab, Haryana and Western UP farmers and the stand being taken by different opposition parties around the country.
Agriculture is a state subject as per our constitution. While the primary responsibility for agriculture lies with the states, it is the centre which brings regulatory framework for the sector. Marketing of agricultural produce has been regulated by the APMC Acts of different states. It is precisely because of these reasons that it is not easy to bring about reforms in agriculture across all states. There is a need for a national level strategy for our agriculture but that would not be possible without alignment of all states and all important political parties. In view of this there was a recommendation made to the government, which was also endorsed by the then Finance Minister Late Shri Arun Jaitley, that a GST council type structure should be created to bring common approach among all states and centre on agricultural strategy, regulations, reforms, productivity, profitability, environmental sustainability, climate resilient agriculture, infrastructure creation, setting right our crop portfolio and several other matters. Lack of such a platform is one of the reasons for the current state of misunderstanding, misinformation campaign and politicization of the farm reforms.
We have to keep in mind that agriculture has moved from a production driven system to a demand driven system. Connecting farmers with consumers is very critical because matching the demand and supply will ensure better prices for the farmers, which is now possible due to the advances made with digital technology. Currently the agricultural produce changes hands 8 to 9 times before it reaches the consumer. The farmer gets hardly 30% of the price that the consumer pays. The Mandis, where the farmers has been mandated to sell his produce all along, have been exploited by cartels of middlemen who have been exploiting the farmer through improper quality assessments, faulty weighment systems, high commissions, etc. While the MSP is supposed to prevail at the Mandis it is not always so. Most of the crops operate at market prices, determined by the demand and supply situation, in the mandis and outside the mandis.
Role of MSP in Rice and Wheat crops in Punjab & Haryana
Crops like Rice, Wheat, Cotton and some of the oilseeds are global crops and their prices are influenced by global demand/supply situations. Others are all local crops whose prices are determined by domestic demand and supply situation.
Out of the 23 crops covered by MSP it is only in Rice and Wheat that the government buys at MSP. Every year the government procures about 70 million tons of food grains (essentially Rice and Wheat) to take care of public distribution system and various welfare programmes. Punjab and Haryana contribute to about 52% of the total wheat procurement and about 30% of the rice procurement by the government. Almost 90% of the rice and wheat produced in these states is procured by the government through the Mandis at MSP. In a way this has been an assured outlet of rice and wheat for the farmers of Punjab and Haryana which has not only made those farmers prosperous but also dependent on this system. This has actually led to over production of rice and wheat, thereby depleting water resources and reducing the fertility of soils due to over use of fertilizers. Crop diversification has been advocated in these two states for last 30 years but no great progress is made due to the assured returns on rice and wheat. The commission agents, called Adtiyas, provide credit to the farmers, supply them inputs on credit and also buy their produce back. They certainly do not like the idea of any reforms to the current arrangement.
What we are witnessing is resistance to change and reluctance to move from their comfort zones. Change management is a science by itself and the leadership has not carried out enough education and communication before bringing about the far reaching structural changes. This is being exploited by other political parties.
Out of the 14 cr farmers in India the majority (more than 90%) are outside Punjab and Haryana. Farm distress is high in many of those states, especially in the rainfed areas. Reforms that benefit a large section of farmers across the country should be seen in that context.
Farm Reforms explained and concerns addressed.
1. The new reforms are needed and are in the right direction. In simple language what they are trying to do are:
Remove restrictions on the stock holding levels of agricultural commodities with farmers, processors, exports and traders. The Essential Commodities Act is from the times of food shortages and it needed to be dumped long back. Because of this Act the private sector never invested in building storage and transportation infrastructure including the cold chains. The result is that every year we lose about 30% of our agricultural production in post harvest losses in storage and transportation. This amendment will bring private sector investments into creating modern storge systems and will reduce these losses. This will be a huge gain for farmers who can get credit against the stored produce through the warehouse receipt systems which are nowadays getting onto digital platforms.
2. The One lakh crore rupees infrastructure fund will help farmers, FPOs, rural entrepreneurs and other private players to set up farm gate infrastructure like drying yards, private mandis, storage systems, primary processing facilities in villages and similar value adding services. Such infrastructure will help the farmers in improving the efficiency of post harvest management of their produce, improve the quality of their produce, add value to their produce and discover better prices for their produce. The FPOs can gain maximum benefits by utilizing this fund.
3. The Farm Produce Trade & Commerce (Promotion & Facilitation) Act 2020 makes the farmer free to sell his produce anywhere in the country. Private industry is allowed to set up private mandis in villages. The Act also provides for an electronic trading platform which can be used by the farmers to sell to customers who are in other states and markets. ENAM platform which government has set up and other private electronic platforms will help the farmers with this. Quality assessment of the produce will also be digitized so that the farmer gets a fair assessment of the quality. Farmer can sell at his farm gate and save on transportation costs. This will bring down the links in the supply chain from the current 8-9 down to about 2-3 so that the share of the farmer in the consumer price will improve to 50-60%. Then what is the problem?
We have to basically understand that this Act only facilitates setting up an additional market mechanism in addition to the APMC mandi system. It is not replacing the mandi system. It is similar to the situation when government allowed private airlines to come into operation in addition to Indian Airlines. Same way when private insurance companies were allowed to operate in the country in addition to LIC. These measures benefited the consumers.
In order to address the fear of the farmers in Punjab and Haryana that their established Rice/Wheat cropping system will get disturbed it is necessary to encourage
Punjab & Haryana farmers to diversify their cropping pattern. This Act may help in that process. But the governments may have to create some positive incentives for crop diversification and reducing the dependence on government procurement.
Some concerns are expressed by the farmers of Punjab and Haryana. The apprehensions and the answers to them are given below.
Concern No.1 : MSP system will be abolished
How it is addressed: Government has announced that MSP system will continue. There is no harm in the government giving this assurance in writing as this system has to continue as a safety net for the farmers in distress situations.
Concern No.2: Procurement by government will stop
How it is addressed: Not possible. Govt has to procure 70 m tons of food grains every year through Mandis for PDS & welfare programmes.
Concern No.3: Mandis will collapse since no farmer will sell in Mandis
How it is addressed: Mandis may lose some revenue. But they should reinvent themselves, become more efficient, tech savvy with modern infrastructure and get rid of the cartels. This will make them competitive and modern. Procurement & MSP operations will still happen through Mandis. Farmers will still use the Mandis when they want to sell food grains under the government procurement programs. Governments have to invest in upgrading Mandis.
Concern No.4: Private buyers outside Mandi will not be paying Mandi tax – loss of revenue for states.
How it is addressed: Yes. This can happen. The central government has to find a mechanism of compensating the states for this loss.
Concern No.5: Private buyers outside the Mandi will exploit by forcing farmers to sell at lower prices – farmers will not have capacity to negotiate – MSP should be made mandatory for those transactions.
How it is addressed: There will be many private players. Competition among private players which will give better prices to farmers. There is no opportunity for Oligopoly. Making MSP mandatory will defeat the purpose of the reform and will lead to highly inefficient production of crops which are not demanded by consumers. It will keep private industry away from this system. A regulatory body may be set up with adequate powers to keep an eye on oligopoly practices in these markets, especially among the big players. Even now a lot of trade takes place below MSP in mandis and outside mandis.
Concern No. 6: Fly by night operators will enter and exploit farmers, will not pay him and run away.
How it is addressed: Some kind of registration of private buyers will be necessary – Section 17(1) of the Act provides for such a system. This has to be set up by States.
Concern No. 7: No information about prices prevailing in private mandis outside the APMC Mandis. Information asymmetry will happen.
How it is addressed: Private digital e commerce platforms will have to be used with ENAM to capture all transactions. Section 5 (2) of the Act provides for this. A new system of logging price information from Mandis & Private players on digital platforms is to be developed.
4. Farmers (Empowerment & Protection) Agreement of Price Assurance & Farm Services Act 2020, makes it possible for the farmer to enter into forward contracts for his produce. This will facilitate contract farming.
This Act empowers farmers to engage with processors, wholesalers, aggregators, large retailers, exporters etc., on a level playing field. Price assurance given to farmers through the contract even before sowing of crops. In case of higher market price, farmers will be entitled to this price over and above the minimum price. These are covered under Section 5 of the Act.
Transfers the risk of market unpredictability from the farmer to the sponsor (contractor). Due to prior price determination, farmers will be shielded from the rise and fall of market prices. Reduces cost of marketing for farmers and improves his income since the Sponsor is supposed to pick up the product from the farm gate as per Section 6(1) of the Act. The payment terms are specified under Section 6(3) of the Act.
The contracts can be linked to the flow of insurance and credit facilities for the farmer from financial institutions as per Section 9 of the Act. This will be a big benefit for the farmers.
The contracts have to be registered with a designated registration authority as per section 12 of the Act. This makes sure that all the sponsors (contractors) are held responsible for the contracts they are entering into and the farmers are protected.
The quality specifications of the inputs to be used and the output to be produced would be described in the contract as per Section 4(2) of the Act.
We have to understand that production of any value added products like organic foods, nutrition fortified crops based foods, immunity boosting crops, etc have to be cultivated under contracts so that the identity preserved supply chain system can operate from farm to fork. Production of such crops under contracts will give higher incomes to the farmers.
Promotion of contract farming will increase private investments in infrastructure, local processing facilities and generate rural employment. Large corporates will depend on many small scale local players to bridge the last mile and provide services to the farmers and help the corporates in achieving the volumes they need. This will help in generating rural entrepreneurship and economic activity. Many models will develop over a period of time which will bring the full benefits of this Act. A new equilibrium will come into play that will balance the interests of several stakeholders.
Some concerns are expressed by the farmers of Punjab and Haryana. The apprehensions and the answers to them are given below.
Concern No.1: The contractors may not pay MSP for the produce
How it is addressed: Mandating MSP will kill this initiative and will keep the private sector away. Sufficient price protection is provided under section 5 of the Act which prescribes that the guaranteed price has to be mentioned in the agreement and it should be benchmarked against the prevailing prices in the APMC Mandi.
Concern No. 2: Corporates will form price cartels and exploit the farmers
How it is addressed: Private industry players have to compete with each other. Some of the crops can be grown only in some specific areas due to agro-climatic reasons. Farmers and FPOs will have sufficient bargaining power with different private players. Section 5 provides protection to the farmers.
Concern No. 3: Farmers are not equipped to deal with large private corporates
How it is addressed: Farmer Producer Organizations will have adequate strength to negotiate contracts. It is for the State governments to set up a business advisory structure in each district/Taluk to help the farmers in negotiating contracts. Capacity building among farmers and FPOs is to be done through a large scale training effort in contract making, digital proficiency, etc. This gives an opportunity to rural youth to set up such support systems for farmers and FPOs.
Concern No. 4: Share croppers are not protected
How it is addressed: Share croppers are protected under Section 3(2) of the Act
Concern No. 5: Corporates will take away farmers land
How it is addressed: Section 8 of the Act specifically prohibits any transfer including sale, lease or mortgage of farmers land or premises under the contract.
Concern No. 6: Dispute Settlement mechanism is inadequate
How it is addressed: An elaborate dispute settlement mechanism is described under Sections 13,14 and 15 in Chapter III. SDM & Appellate Authority (District Magistrate) are empowered to resolve disputes – no need to travel to courts and spend money.
Other factors
As an economy we have been moving towards reduced role for government in businesses. The reforms are a step in that direction. Basically government’s interventions in agricultural markets make the markets inefficient. If government loses money by buying at MSP while the market prices are low it is the tax payer who is paying for these losses. Such interventions will promote cultivation of unnecessary crops which are not demanded by the consumers. The government will not have enough money to buy all the 23 crops, covered under MSP, produced in the country.
Some of the activists who are helping the farmers of Punjab and Haryana are believers in increased government role in all businesses at the exclusion of private sector. So, there is an ideological divide here. These are the same activists who oppose introduction of modern technologies to help farmers to reduce costs, improve yields and increase their profits.

The Farm Reforms are a step in the right direction. Through discussions with multiple stakeholders the government may have to clarify several provisions in the Acts and remove obstacles in their implementation without sacrificing the spirit of the reforms. Simultaneously the Centre and States must carry out some of the enabling actions listed below to make the reforms successful.

  1. A digital registration system for all private buyers of agricultural produce. Current provision that any one with a PAN number can buy from farmers has to be replaced with a digital registration system. This national register should be set up by the central government.
  2. Mandatory registration of all contracts with private buyers with a designated authority in each district by designating the registration authority in each district – this is to be done by the state governments.
  3. Capacity building for farmers and FPOs – in conducting commercial operations, making contracts, digital proficiency, hand holding to help them use infrastructure fund and set up farm gate infrastructure. This is to be taken up by the state governments and private enterprises.
  4. Creation of a national grid of private digital platforms for selling output with ENAM and making it available to farmers to conduct inter state trade. This technological innovation has to be set up by the central government.
  5. Integration of digital quality assessment technologies into the digital trading platforms. This is to be done by the central government
  6. A young, qualified, experienced Business Manager in each DM office to help farmers and FPOs in the district with making contracts with private parties. This support mechanism is to be set up by the state governments.
  7. Promote crop diversification in Punjab and Haryana through positive incentive programmes. Oilseeds, Maize, Vegetables and other crops to be promoted.
  8. Invest in APMC Mandis to upgrade their infrastructure, modernize processes, introduce modern digital tools, dismantle the nexus of traders and make it farmer friendly. Suitable storage facilities to be created around Mandis so that farmers can store their produce and get credit through the warehouse receipt system. This will give them flexibility to sell when they get a good price. There is a lot to be done on this front since Mandis will remain very relevant and will establish a new equilibrium with the private Mandis that will come up.

As economist Joseph Schumpeter said 90 years back, every disruptive technology, innovation, product or business model will result in a creative destruction of the old systems/products/technologies and create a completely new normal which will bring greater efficiencies for the benefit of all stakeholders and the society in general.
Let us hope all the stakeholders will work together and make these path breaking reforms succeed and create a new normal in the agricultural markets for the benefit of our farmers, our consumers and our economy.

By Dr Ram Kaundinya

Gubba Group

About the author

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