Start of the Agricultural Reforms in India

Highlights

- Agri reforms focus on deregulating farm practices

- Focused on liberalization of marketing, warehousing and contract farming

- Reforms could help reduce the skew in cropping patterns

- Could also reduce regional disparity in farm incomes

India’s Parliament recently cleared three agriculture reform bills amid much uproar and controversy. These new laws largely aim at deregulation of farm practices and bringing about liberalization in farm marketing & warehousing and contract farming. The current system imposes restrictions, fees and limits on movement and storage of crops which the new reforms aim to relax.

The main idea behind these bills is to create a free market in order to make the system more efficient and ensure better price realization. We believe these bills are largely in favour of the farming community and should be a positive for farm practices and incomes in the longer run. We have endeavoured to study the impact that these reforms could have on farming practices, farm incomes and corporate India.

Introduction to the bills and the current situation

The existing APMC (Agricultural Produce Market Committee) system imposes fees, taxes and restriction on the movement of crops outside states and favors large middlemen. The first bill removes the barriers to movement of farm produce across India and gives farmers the freedom to sell anywhere in the country.

In order to attract private investment in development of storage and warehousing infrastructure, the second bill removes restriction limits on storage of essential commodities.

The third bill is targeted at building a structure for promoting contract farming practices, again aiming at direct procurement by private players.

While the bills are largely in favor of reforming farm practices, there has been huge opposition to the move. The two biggest losers from these reforms stand to be the state governments and intermediaries. State governments stand to lose substantial income which comes from the APMC market in the form of fees and taxes. The reforms also target marketing freedom and direct procurement which stand to bypass and remove intermediaries and middlemen, who currently fear elimination.

The real fear of farmers is reduction in procurement under the existing MSP (minimum support price) system, especially in Punjab and Haryana where MSP procurement is predominant. While this does seem the obvious course in the longer run, the government has assured that procurement will not be impacted.

The Road Ahead

Government procurement under MSP and subsidies have forever impacted cropping decision, resulting in a highly skewed cropping pattern across the country. Assured returns lure the farmer to produce a certain crop in large quantities, leading to a demand-supply mismatch. Classic examples of this are paddy, wheat and sugarcane and the concentration of these crops in Punjab, Haryana and Maharashtra. Despite being a water-guzzling crop, paddy is largely concentrated in the semi-arid states of Punjab and Haryana owing to a strong government procurement system in these states. Currently, neearly 89 percent of rice in Punjab and 85 percent in Haryana comes under the procurement system. Similar is the case with wheat which remains concentrated in Punjab, Haryana and Uttar Pradesh again due to strong government procurement. On the other hand, power subsidies and other incentives have led to concentration of sugarcane, another water-guzzler, in semi-arid areas of Maharashtra.

Such strong bias in the cropping decision has led to rapid depletion in water levels, excessive dependence on irrigation and use of water resources and a demand –supply mismatch in the country. We believe that market-linked demand and price realization will encourage a free market and production of crops that are in demand. This will help in overcoming this skew in cropping patterns in the longer run and enable a more judicious use of water resources.

Removal of the intermediary and direct procurement will also provide better price realization for farmers, and eventually better margins and incomes for both corporates and farmers. In times of high food prices, farmers’ interests are put at stake in order to address consumer interests, and farmers are robbed of the benefits of a high selling price. Contract farming and free movement of crops from excess to deficit regions will help minimize such situations and bring in more price stability. Successful implementation of the reforms would also mean lower volatility in food prices and lower food inflation on an average.

Apart from this, it has also been noticed that government procurement has remained concentrated in the states of Punjab, Haryana and Uttar Pradesh with very little or no benefit to the country’s eastern regions. This has to some extent led to a regional bias in farmer incomes as well. Free markets and promotion of contract farming could be rather more beneficial for areas where government procurement has remained weak. This will help in minimizing the regional bias in incomes.

Currently there is immense skepticism and greater clarity is required on implementation of contract farming, land ownership records and disputes mechanisms. The implementation also calls for the development of a parallel countrywide infrastructure for the sale and purchase of crops, along with greater internet penetration and farmer education in rural areas.

While on one hand, the government has assured that procurement would continue, free markets will call for minimal government intervention in the long run. That said, we cannot ignore that government procurement is largely for public distribution and sale of subsidized grains under the Food Security Act. Doing away with the Food Security Act could be challenging. However, there are parallel theories of moving to direct cash handouts. Thus, it’s difficult to figure out what the eventual course will be.

While the current reforms seem to be in favour of the farming community, the real benefits would not accrue immediately. Given that a large section of farmers have small landholdings and limited access to marketing mediums, selling in the APMC market will still account for a substantial portion of farm produce. The size of the operational holdings for small and marginal farmers has shrunk from 1.15 hectares in 2010-11 to 1.08 hectares in 2015-16, according to provisional estimates of the 10th agriculture census 2015-16, and small and marginal holdings constitute almost 90% of our total agricultural land holdings.

What is more worrying is the fact that the top 10% of the households are now cultivating almost 50% of India’s total cultivable lands whereas the bottom 50% are cultivating less than 0.5% of India’s cultivable lands. The decline in the India’s bottom 50% land holdings is steady.

My reading is that in the next three to five years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk, as a result of these changes in farm laws. These supply lines — be it with farmers producer organisations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate. Some will fail, but many will succeed. These companies will help raise productivity, similar to what has happened in the poultry sector. Milk and poultry don’t have MSP and farmers do not have to go through the mandi system paying high commissions, market fees and cess. The choice is ours: Do we want growth that is financially sustainable, or create a mess somewhat like what we have created in the case of rice, wheat, and sugar. But with these changes state governments stand to lose crucial tax revenue. Experience across the world has shown that corporatisation of agriculture, contrary to improving farm incomes has often depressed them, says agriculture policy experts.

In the longer run, with parallel development of infrastructure these reforms could bring in a systemic change in farming practices, structure and cropping patterns. 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.