The Indian Agriculture Acts of 2020 – a much-needed step towards agricultural transformation or simply an ‘act’?

Date: 4th May 2021

In February, with a tweet that set the Twitterati agog, global pop icon Rihanna shone the spotlight squarely on India’s long running farmer protests. Since November of the previous year, tens of thousands of farmers have encamped themselves in the outskirts of India’s capital protesting legislation that restructures India’s agricultural market. Their gripe is that the legislation endangers their security and sells them out to the private sector. As an interested Indian and a student of agriculture and food policy, my analysis of the legislation led me to one conclusion: reforms along the lines of those currently enacted are necessary. The changes have the potential to do what they claim - improve agricultural growth and farmer welfare. But in their present form, they are weak and insufficient with zero regulatory mechanisms for the private sector and no safety nets for farmers, coming across like a wolf in sheep’s clothing. In the following article, I explore this stance in depth.

A note on corruption

It is no secret that corruption is rampant in India and I am remiss if I don’t acknowledge its role in this debate. Many of the issues I bring up in this paper are closely tied to widespread corrupt behavior and the lack of virtuous governance. Systems are rife with exploitable loopholes and government officials have a reputation for being easy to bribe. The rich and powerful feel they can use their influence to control the market and get away with anything while lower to middle class Indians struggle to survive, sometimes resorting to petty forms of corruption. The network of corrupt behavior is convoluted and manifests in varying capacities across individuals, occupations, industries, businesses, political groups and the government.

Consequently, several gaps have surfaced in the current agricultural market structure leading to the need for reform. The status quo is untenable! However, the same reasons also demonstrate clearly that any reform must be bolstered with stringent regulation and oversight, lest corruption take over, leading to more harm than good.

How does the current system work?

India operates a regulated agricultural produce market. Instituted in the 1960s by a socialist minded government of newly independent India, the system protects small farmers against exploitation by big businesses and private interests. The Agricultural Produce Market Committees (APMC), a regulatory body run by State governments, oversees the functioning of the system. It operates physical markets, which brings together farmers and government licensed buyers. The first sale of agricultural produce must occur only within these market yards where transactions are monitored. Farmers bring their produce to the market and sell through auctions to the licensed buyers who then trade with private wholesalers, retailers and food processing companies. For its oversight functions, the APMC charges fees and levies which are a source of revenue for the State governments.

The system offers price protection for farmers as a bulwark against the vagaries of the free market. Minimum Support Price (MSP) was first introduced by the government in the 1960s when India was facing a major deficit in cereal production, to incentivize and stimulate production for crops which mainly include cereals, pulses, oilseeds and commercial crops namely copra, sugarcane, cotton and jute.[i] Public agencies such as the Food Corporation of India buy the surplus from farmers at set minimum prices. The government uses the produce to feed the public distribution system and hold reserves for use in times of crises.

What are the problems with the current system?

Although the current system provides mechanisms to monitor market conduct and protect the interests of farmers, problems and inefficiencies abound.

First, farmers find it difficult to get physical access to the market. There are an estimated 7,000 APMC markets across India. Although mandated to serve a minimum area of 80 sq. km in order to ensure that every farmer is able to reach a market from his/her town within an hour, in reality they serve an average area of 460 sq. km which makes it difficult for many small farmers to transport their produce on time.[ii] This has led to the emergence of predatory “commission agents” who take on the role of aggregating produce in small villages and bring it for trade in the mandated markets. Complemented by corrupt supervision, these agents have gained control over the market resulting in exploitative behaviors such as price fixing. Further, they lend informal credit at exorbitant rates of 24% (compared to a 3-7% interest rate with formal credit lending) to the small farmers, which they deduct from sales resulting in the farmers receiving extremely low payments for their crops.

Second, the APMC markets lack modern infrastructure. More than 50% of the markets do not have enough weighing scales and almost 85% of the markets do not have cold storage facilities. Due to these inadequacies, more than half of the marketable surplus is sold illegally outside these markets facilitated by the commission agents.[iii]

Additionally, as APMC markets fall under the jurisdiction of State governments, past attempts at reforms have not succeeded as each state has different political interest groups with varying ambitions. Moreover, APMC markets are a vital source of revenue for State governments, and they are loath to reform a system, which may cause them to lose revenue.

What does the 2020 legislation seek to address? How does it do it?

Enacted in September 2020, a series of legislations known collectively as The Indian Agricultural Acts of 2020 seeks to alter the current system and remove the inefficiencies associated with its functioning. The most far-reaching of the reforms is the expansion of the demand-market that allows farmers to trade beyond the government’s APMC markets, directly to private and electronic trading platforms without a fee or levy.[iv]

What are the pros and cons of the 2020 legislation?

Proponents of this act point out that by opening up the market to any free entity for trade, it provides farmers improved access to the larger market and helps reduce their dependency on unfair commission agents. Since the act enables farmers to interact directly with buyers, be it private traders, corporates, e-commerce platforms or individuals, farmers will be able negotiate and sell their produce at the best price available, as in a competitive market structure.

A key area of concern for the farming community is the impact of this act on the Minimum Support Prices (MSP) system. Since the legislation no longer restricts farmers to sell only in the government markets, farmers fear this will relieve the government of procurement at the minimum price thereby undermining price guarantees and in turn their bargaining power with the corporates.

Dr. C. Sekhar, Professor at the Institute of Economic Growth & former Honorary Director of the Agricultural Economics Research Centre, University of Delhi argues that these fears are baseless. He points out that farmers are mistakenly equating the APMC government markets with minimum price support and fear that this act will eliminate the markets and therefore the minimum support price mechanism. The government procures grains to feed low-income populations under the public distribution system which currently caters to 80 crore (800 Million) beneficiaries.[v] It cannot purchase the quantity of grains required from the open market and if done so, will result in high price spikes. As such, “the government has no option but to continue MSP regardless of this act and if it doesn’t, it’ll be shooting itself in the foot”, said Dr. Sekhar, who is broadly in favor of the act as long as the government adds adequate regulatory mechanisms into it. Further, he clarifies that the act only opens up the market to private entities and does not remove the APMC markets.

Additionally, the majority agitating for MSP are farmers and commission agents in the States of Punjab and Haryana. The Food Corporation of India in these states procures more than 65% of wheat at the support prices.[vi] While the loss of minimum price supports is a valid concern, it is largely limited to these two states. A government committee report reviewing the functioning of the Food Corporation of India had found that only 6% of Indian farmers benefit from the minimum price supports for wheat and rice.[vii] This is concentrated in Punjab and Haryana where 80% of farmers have large holdings. However, almost 86% of farmers in India are small and marginal farmers, mostly rural and uneducated, who don’t benefit as much from minimum support prices.[viii] I would then argue that the current market system even with MSP is not equitable across all farmers and crops. An article in the New Indian Express states that over 57% of farmers interviewed for the piece were dissatisfied with the government market system. Opening up the market as the current legislation does can thus level the playing field for other farmers (if sufficient safety provisions are included).

Now, although the legislation makes long-overdue reforms that would increase agricultural welfare across the country, even if displeasing a few subgroups, it is far from perfect. The reform lacks market monitoring and requisite regulatory oversight of privatization creating the potential for fraud and exploitation. The only requirement for someone to buy from a farmer is a tax identification card. “This is ridiculous and has already recorded fraudulent trades and cheating of farmers in the past few months”, said Dr. Sukhpal Singh?– Professor, and Former Chairperson, Centre for Management in Agriculture (CMA). There is no provision for even recording the transactions that occur outside these markets.

Critics rightly argue that the lack of oversight will result in a shift of power from government traders to a few big industry players with prices dictated by the corporates and farmers are at their mercy if they want their produce sold. It is not reasonable to expect smallholder farmers to bargain and negotiate with giant companies when they struggle every day for immediate livelihood. As encountered several times in history and in various industries, they will settle for what they can get and the agricultural system in India will be controlled by food companies dictating what is grown, how its grown, what seeds are used, what prices it is sold for to the consumers and in which markets. As Dr. Sekhar notes privatization without regulation and careful scrutiny is disastrous.

Lastly, the government has not done itself any favors in ramming this through the legislative process without adequate consultation with the affected parties. Nor has it won plaudits for the ham-handed manner in which it has dealt with the protestors.

So, what do we do?

Outright repeal of the bill is not the solution, and neither is setting a minimum price of procurement with the private sector, which would defeat the purpose of an open market. It is quite easy to be carried away by the portrayal of the woes of the farmers, particularly the plight of the protesters. However, that does not indicate that the government is doing the farmers wrong. Certainly, the farmers’ concerns are valid and their requests righteous in that they must have been involved in the decision-making. While this can be rectified, they must be willing to listen to logic without blindly fearing change. They may find that their suspicions are in fact unfounded.

For its part, the government must earn trust by including a clear statute in the act to regulate the direct trade at the state level. At the very least, there must be an independent judicial body where all trading entities must be properly registered with more than just a tax identification number. The collection of data concerning the terms of trade is indispensable and will enable transparency that can protect the farmers from unfair treatment or exploitation. Supervisory bodies must scrupulously monitor market conduct to prevent manipulative mechanisms and ensure perfect competition and fair trade. The judicial body must conduct just conflict resolution and strictly hold entities accountable for underhanded behavior. At no point must the government leave farmers at the mercy of corporate giants.

Vietnam, a country with an agricultural landscape akin to India, liberalized its agricultural sector with similar policies for oversight in 2013. It succeeded in improving economic growth, enhancing human development and reducing poverty.[ix]

On the private sector side, this must be supplemented with incentives to invest in improving agricultural and market infrastructure. On the farmer side, the government must consider income support for farmers in the form of direct payments to cover input costs and combat price uncertainty in a free market. Additionally, the government must clarify that price supports will continue irrespective of this act to ensure a sustained national reserve of grain. They must be transparent about the crops they will procure at minimum price every year and provide income support for crops other than wheat and rice, so that farmers can diversify and sell based on market demand. Finally, the central government must not pass further ordinances without cooperative consultation and sufficient thought.

Conclusion

Farmers will respond positively to the above-mentioned recommendations. Ultimately, our goal is to support the livelihoods of farmers and feed a nation. Liberalization is an undeniable pathway to increased private investment in agricultural technology and development. With foolproof regulatory mechanisms, a non-corrupt system and satisfactory safety nets for farmers, this could result in a thriving free market for India, much like Vietnam. Therefore, to the skeptics, I would say that considering that the current system is no better, ultimately, we have to try.

References:

[i] PRICE SUPPORT SCHEME (PSS): THE OPERATIONAL GUIDELINES ... (n.d.). Retrieved April 6, 2021, from https://agricoop.nic.in/sites/default/files/pssguidelines.pdf

[ii] A National Market for Agricultural Commodities- Some ... (n.d.). https://www.indiabudget.gov.in/budget2015-2016/es2014-15/echapvol1-08.pdf.

[iii] Dr. C. Sekhar, Professor at the Institute of Economic Growth & former Honorary Director of the Agricultural Economics Research Centre, University of Delhi

[iv] THE FARMERS’ PRODUCE TRADE AND COMMERCE (PROMOTION AND FACILITATION) BILL, 2020. Bill No. 113 of 2020, Lok Sabha, New Delhi. Retrieved April 6, 2021, from

https://prsindia.org/billtrack/the-farmers-produce-trade-and-commerce-promotion-and-facilitation-bill-2020.

[v] Additional free-of-cost foodgrains to be distributed to NFSA Beneficiaries under Pradhan Mantri Garib Kalyan Anna Yojana in May and June 2021. Press Information Bureau. (n.d.). https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1713561.

[vi] Evaluation Report on Efficacy of Minimum Support Prices on Farmers - NITI Aayog. (January 2016). https://www.niti.gov.in/writereaddata/files/writereaddata/files/document_publication/MSP-report.pdf.

[vii] Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India ?(January, 2015). Retrieved April 10, 2021, from https://fci.gov.in/app2/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English.pdf.

[viii] Agricultural Census – 2015 - 2016. Ministry of Agriculture and Farmers Welfare. (2019) Retrieved April 12, 2021, from https://agcensus.nic.in/document/agcen1516/T1_ac_2015_16.pdf

[ix] Baum, A. (2020). Vietnam's Development Success Story and the Unfinished SDG Agenda. IMF Working Papers, 20(31). https://doi.org/10.5089/9781513527024.001 ?