Agriculture is the only area where markets don’t work. This is because, since India became politically independent in 1947, industry became independent in 1991 with economic liberalization, but the Indian farmer continues to remain colonized by the government, who control agricultural produce markets.
The three bills that were passed are
1) The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill
2) Farmers (Empowerment and Protection) Agreement on Price Assurance and
3) Farm Services Bill and Amendment to 1955 Essential Commodities Act.
The Essential Commodities Act, 1955, stems from a colonial era law, which regulated how much produce could be stored and sold in India. This same law was inherited in independent India and one of the first amendments to the Indian Constitution, included an amendment to Article 19, which guarantees Freedom of Trade and Commerce. The Act was amended as a new entry to the Concurrent List as entry 33, list three, schedule seven, which gives the government much of the same powers.
This manifested in the License Raj in agriculture in the 1960’s when farmers were jailed for keeping produce that exceeded the government’s sanction amount. This led to the creation of middlemen, which led to corruption from fork to plate and plate to fork.
The government said that the bills would transform the agriculture sector. It would also raise the farmers' income. Further the government had also promised double farmers' income by 2022 and the Centre said that the Bills will make the farmer independent of government-controlled markets and fetch them a better price for their produce.
The Bills propose to create a system in which the farmers and traders can sell their purchase outside the Mandis. It also encourages intra-state trade and this proposes to reduce the cost of transportation. Further, the Bill formulates a framework on the agreements that enable farmers to engage with agri-business companies, retailers, exporters for service and sale of produce while giving the farmer access to modern technology. It also provides benefits for the small and marginal farmers with less than five hectares of land. The Bill will remove items such as cereals and pulses from the list of essential commodities and attract FDI.
The farmers have been apprehensive about this Bill. They say that they are apprehensive about getting Minimum Support Price for their produce. They are also concerned about the upper hand of the agri-businesses and big retailers in negotiations. They feel this would put them at a disadvantage. They also say that the companies may dictate the price and the benefits for small farmers may reduce the engagement of sponsors with them.
Opposition parties accused the government of flouting parliamentary procedure by passing the bills hurriedly and not listening to their demand of sending the bills to a parliamentary committee for further deliberations. While Prime Minister Narendra Modi called the reforms a "watershed moment" for Indian agriculture, opposition parties have termed them "anti-farmer" and likened them to a "death warrant".
What Exactly are these Bills?
Taken together, the reforms will loosen rules around sale, pricing and storage of farm produce - rules that have protected India's farmers from the free market for decades. They also allow private buyers to hoard essential commodities for future sales, which only government-authorized agents could do earlier; and they outline rules for contract farming, where farmers tailor their production to suit a specific buyer's demand.
One of the biggest changes is that farmers will be allowed to sell their produce at a market price directly to private players - agricultural businesses, supermarket chains and online grocers.
Most Indian farmers currently sell the majority of their produce at government-controlled wholesale markets or mandis at assured floor prices. These markets are run by committees made up of farmers, often large land-owners, and traders or "commission agents" who act as middle men for brokering sales, organizing storage and transport, or even financing deals. It’s a complex system underpinned by regulations, and a host of personal and business relationships.
The reforms give farmers the option of selling outside of this so-called "mandi system".
Farmers are mainly concerned that this will eventually lead to the end of wholesale markets and assured prices, leaving them with no back-up option. That is, if they are not satisfied with the price offered by a private buyer, they cannot return to the mandi or use it as a bargaining chip during negotiations.
The government has said the mandi system will continue, and they will not withdraw the Minimum Support Price (MSP) they currently offer. But farmers are suspicious as there is no mention of MSP in the bill.
Why has it Caused such a Political Unrest?
Farmers have long been a crucial voting block for parties, and the controversy has certainly divided the parties. But the row is partly also the result of the manner in which the two bills were passed. Despite repeated requests from the opposition, the governing party BJP refused to extend the debate over the bill to the next day, or refer it to a Select Committee, where members could discuss it and refine it further.
From low productivity to fragmented landholdings, lack of storage infrastructure and high indebtedness, there are several reasons for persistent agrarian distress in India. Agriculture, which employs half of India's population, has long been in desperate need of reform.
But the new - and controversial - bills are unlikely to be a panacea for farmers' troubles. Their goal, in essence, is to allow greater play of market forces in agriculture. One view is that this will improve farm incomes, attract investment and technology, and increase productivity. It will also free the farmer from the control of middle men who effectively run wholesale markets. But with these changes, they will lose their commissions, and state governments stand to lose crucial tax Revenue. And they are at the forefront of these protests - so vested interests are clearly at play.
But there is another view. Experience across the world has shown that corporatization of agriculture, contrary to improving farm incomes has often depressed them. "Leaving farmers to the tyranny of the markets would be akin to putting the sheep before the wolf". "There are leakages in the current system, and it needs to be reformed, but replacing one failed model with another is not the solution.
"Evidence from states where farmers haven't benefited even after wholesale markets were dismantled supports this argument. There are no easy answers. But experts agree that in a country where agriculture employs so many millions, leaving farmers' fates to the vagaries of the market cannot be the only answer.
While at first glance this looks to be a good thing to do, a little reflection makes it clear that only those farmers who have clout (large farmers - just 1% of total farmers) may see better and prosperous days. For all farmers to prosper, governments will have to put in place “success factors”. But first, the challenges the government should be ready for:
1. India is food grain surplus. So open market operation is likely to result in lower price for produce.
2. Every time there is a bumper crop, elasticity may come in to play and in fact reduce farmers revenue due to price fall
3. With more than 86% farmers having less than 1-hectare land, and 13% between 2 to 10 hectares, would such farmers be in a position to deal with the open market operations? They may still have to use intermediaries (Moment they do that, they will be worse off than MSP regime, especially in grain surplus years. If anybody thinks that small and marginal farmers (86% of total farmers) can manage without middlemen, they just have to look at how much lending gets done by local money lender despite governments trying hard to put an end to that system.
4. With free market operations and amendment of essential commodities act, with middlemen (possibly same people who hold APMC Licenses now) as intermediaries, there is always a possibility of cartelization, hoarding, withholding.
Success Factors Governments need to Activate
1. The farmer, to make more money, may start producing such crops where he faces a seller’s market (demand more than supply) rather than producing crops where he will be in buyers’ market. This shift may bring basic food grain shortage, leading to higher prices of staple food for the poor. Government will have to put in place mechanism to tackle this.
2. If the government wants to pursue this, the government should also put in place facilitative and/or regulatory mechanisms to help small and marginal farmers to form producer cooperatives so that middle men and middlemen can be eliminated and these small and marginal farmers’ cooperatives can directly interact with consumers in real sense. In due course, producer cooperatives can create infrastructure like silos, cold storage chains, refrigerated transport of goods, set up processing units to add value to their produce, set up technical and other units to guide on technology, weather, markets, etc.
3. The government could also experiment with forwards market and contract farming with big retailers to bring some degree of assurance and predictability in prices and income. Such contracts could be with cooperatives of small and marginal farmers.
4. Like said before, surplus food grains may depress prices. So, export may be an option provided Government follows consistent policy. You can’t put export curbs at the first sign of local shortage. You need a more mature and intelligent response than the traditional sledge hammer response of BAN.
5. Exports may require support as Indian costs and productivities are very low. Even Bangladesh has better yields than ours. Government will have to figure out how this can be done. Having said the above, this policy, at best, should be looked upon as short to medium term.
With 86 % farmers having holding of less than 1 hectare, and 13 % between 2 and 10 hectares, ultimately, India will have to wean out large % of present-day farmers from farming and push them into blue- and white-collar jobs. Given the land holding pattern, keeping farmers in farming is simply unsustainable – you can’t have 50% percent of your population producing just 15% of GDP, and that too at growth rates that are way below the growth rate of other two main sectors of the economy, namely, industry and services.
If you keep farmers in farming, they will get poorer in relation to their fellow citizens in service and industry sectors as progressively the share of agriculture in total GDP goes lower and lower. Other important steps that are closely connected to this include setting up an effective price deficiency payment system for farmers or compensating traders who oblige to pay MSP, incentivizing farmers’ cooperatives, Panchayats, Women’s Self-Help Groups, FPOs or such entities to emerge as competent players in the market space etc.
Agricultural markets set up by the state government are regulated by the Agriculture Produce Marketing Committees (APMC). APMCs are responsible for: (i) providing infrastructure for marketing of agricultural produce, (ii) regulating sale of such produce and collecting market fees from such sale, and (iii) regulating competition in these markets.
APMCs are empowered to provide licenses to commission agents, administer disputes between buyers and sellers, and impose penalties for contravention of any of the market regulations. APMCs are working in most states (except Bihar, Kerala, and Manipur).
The Standing Committee on Agriculture (2018) observed that provisions of the APMC Acts are not implemented in their true sense, due to reasons such as: (i) a limited number of traders in APMC markets thereby reducing competition, (ii) cartelisation of traders, and (iii) undue deductions in the form of commission charges and market fee.
The Committee of State Ministers on Agricultural Marketing Reforms (2013) had observed that traders, commission agents, and other functionaries organise themselves into associations, which do not allow easy entry of new persons into market yards, stifling competition.
The average area served by an APMC market is 496 sq. km., much higher than the 80 sq. km. recommended by the National Commission on Farmers (Chair: Dr. M. S. Swaminathan) in 2006. There is a need of 41,000 markets to meet this requirement. The Standing Committee (2018) observed that infrastructure and civic facilities in most APMC markets are in a very bad shape.
The market fee and commission charges are to be levied on traders, but instead are collected from farmers. In some states, the market fee is levied even when it is not applicable. Also, the market fee is levied multiple times on the same commodity when traded across multiple APMC markets, even within the state.
In 2016, NITI Aayog assessed the adoption of reforms (such as availability of private markets, provisions facilitating barrier-free trade, and facilities for direct marketing and e-trading) by states in their APMC laws. It observed that APMC reforms were adopted very slowly and partially across different states and union territories.
In 2017, the central government released the Model Act to provide states a template to enact new legislation and bring comprehensive market reforms in the agriculture sector. However, there is a lukewarm response from state governments towards reforms in the Acts. It recommended that the central government constitute a Committee of Agriculture Ministers of all states to arrive at a consensus and design a legal framework for agriculture marketing. The three bills passed by the parliament resulted because of states slow progress on reforms required for APMCs.
The government should ensure to formulate bills and laws where the assurance of giving MSP without any reduction is guaranteed. Statements by the Prime Minister, Narendra Modi has promised that the minimum support price (MSP) regime is here to stay, and that the new pieces of legislation are aimed at increasing the incomes of farmers, many including the CPI(M)- affiliated All India Kisan Sabha (AIKS), believe that a greater role for corporate buyers of crops will result in a raw deal for smaller farmers.
In the present system, procurement creates an upward pressure on the state to do the distribution. Even this will cease, gradually putting the PDS also in trouble. The farmers are demanding expansion of public procurement at remunerative MSP, the government is doing just the opposite.
Although the MSP and procurement may continue to remain on paper, they will be rendered irrelevant by these legislations. Farmers know what the policy prescriptions of the advisors of the government on PDS and other food security schemes are – food stamps, DBT and so on – and realize that the overall direction in which it is moving is to shirk off its responsibility and dismantle the existing system rather than strengthening it.
Ensuring MSP is a legal right – a task that cannot be achieved by any one single measure – and also expanding and improving the existing mandi system is the way to reassure farmers. The government should guarantee remunerative price with the obligation.
If there is political will, this can be done by expanding its procurement network to ensure not just the buffer stock for food security schemes but also for procuring a wide basket of agricultural produce. It can be done by effectively carrying out market intervention when prices are falling.
All in all, it should be the government’s responsibility to ensure that the farmer who ensures meals for all of us, is ensured safety and does not feel exploited by its representatives.
Madhukar Jetley is a Member of the Legislative Council of Uttar Pradesh
Cover Photo: Zacharie Rabehi for The Citizen