Farm Laws: A Viable Decision?

For Indian Agricultural Acts 2020 – Krisha Gandhi

The controversial farm laws have been a cause of indignation and discord among many since their introduction in September. People have largely split into two opposing factions, with each citing their own reasons for standing in solidarity or disagreement with the laws. The matter has received too much political attention, which has shrouded the economic gains these laws could prospectively reap. Gerry Rice, Director of Communications at IMF has stated, “We believe the farm bills do have the potential to represent a significant step forward for agricultural reforms in India.”

The first, most obvious gain: by allowing farmers to sell outside the APMCs these laws will do away with some levels of intermediaries between the farmers and buyers thereby allowing for higher agricultural income. The agricultural sector employs close to 40% of the Indian workforce and yet, it constitutes only 15% of the GDP. The law will at least ensure that a bigger share of the income from the sales of agricultural goods will be received by the farmers.

Source : Statista

The clamour from Punjab and Haryana however, is around the MSP i.e. Minimum Support Prices. MSP is a guaranteed price at which central and state government purchase certain food grains from farmers which are then redistributed via the Public Distribution System (PDS) and other welfare schemes. Although the MSP is declared for 23 crops based on the recommendations of Commission for Agricultural Costs and Prices, a majority of the government procurement is limited to rice (a Kharif crop), wheat (a Rabi crop) and some pulses. Of these close to 80% of the grains procured for PDS are wheat and rice. Essentially, wheat and rice are the 2 crops which yield the highest benefits of MSP.

Source: The Hindu

The farmers’ protests in Punjab and Haryana are put into perspective by analysing these 4 situations:

1. Punjab, Haryana and Madhya Pradesh account for 85% of the procurement of wheat. Punjab, Haryana, Andhra Pradesh, Chhattisgarh and Odisha account for 75% of the procurement of rice. Evidently, Punjab and Haryana are the 2 states who enjoy maximum benefit of the MSP system. Although MSP was intended to provide a safety net to all farmers in the country, it is glaringly clear that it fails to do so.

2. The 2 states have stretched their resources to the limit in order to ensure that they keep availing maximum benefit from the MSP (which is often above open price market) via mass production of wheat and rice. As a result of this, Punjab has lost close to 85% of its water table and Haryana has lost 75%.

3. The per capita intake of wheat and rice has declined due to a shift in consumer preferences but the production has increased due to an increase in the number of people employed. This increase in production, in turn, pressurizes government procurement creating stress on the fiscal resources.

4. Since almost the entire produce from these 2 states is procured by the government on arrival, it has seriously affected the entrepreneurial skills of the farmers to sell in an open market, where prices are determined by demand and supply forces. Dealing in open markets will propel these farmers into a state of innovation i.e. promotion of non-farm activities.

With these facts, one can better understand the reason for the farmers protesting. Now to address the elephant in the room, the fear of corporate exploitation in the open market. To better understand how beneficial open markets for agriculture can be, one can look at ‘Sahyadri farms’, a farmers’ producer company in Nashik, Maharashtra.

Several small and marginal farmers in Nashik came together in 2010 and formed ‘Sahyadri Farms’ after Maharashtra became one of the first states to open up its agricultural market. With an initial investment of Rs. 2 crores and initial membership of 500 farmers, Sahyadri farms started purchasing fruits and vegetables from its member farmers. Eventually, their product base expanded to the production of jams, jellies and fruit juice and they also formed contracts with major retail players for marketing their products. A decade since their inception, Sahyadri Farms has a capital base of Rs.100 crore, a network of 8000 farmers and a customer base of 4 crores across the state.

The obvious visible benefits of open markets were reaped by these farmers during the pandemic. Due to the nationwide lockdown, APMCs in Maharashtra closed in May. This, however, was not much of an impediment to farm sales as vegetable and grain producers from Pune, Nashik and Aurangabad started selling directly to housing societies in and around Mumbai. In a much similar fashion, mango sellers bypassed APMC sales and started selling directly in Mumbai. Not only did they expand their customer base, but also they managed to secure larger incomes by forgoing the commission otherwise paid to the middleman.

Among a plethora of interrelated farmers’ problems, one cannot deny that albeit open markets may appear daunting in the short-run, their long term benefits are immense. Those familiar with public policies acknowledge that a policy is only good as its effect. An economic policy should, in theory, aim to achieve maximum economic gain within constraints. By opening up the agricultural sector, these laws are good economic policies which had the misfortune of being caught in a political minefield.

Will they be a source of discomfort in the short run? Maybe.

Will they reap long term benefits to the economy? Definitely.

-Krisha Gandhi (Writer, Econ Declassified)

Against Indian Agricultural Acts 2020 – Abhinav Nath Jha

On 27 September 2020, the three farm acts, namely, The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, and, Essential Commodities (Amendment) Act, 2020, received Presidential assent.

 While four months have passed since, these so-called farm reforms have triggered months-long sit-in protests across various border areas of the capital, with farmers demanding a complete repeal of these laws and also demanding a legal assurance of MSP. The protesting farmer unions call these laws anti-farmer, the Centre claims that these laws will bring in much-needed reforms in the agricultural sector. In this regard, the fears of the farmers around these laws are not ill- justified. 

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020  eliminates any market fee or cess on the buying and selling of agricultural produce outside the APMC market. Now, such deregulation of private agricultural marketplaces could lead to more and more traders shifting from the APMC markets to private agricultural markets. This could emerge as a potential problem for farmers in terms of realizing prices at the level of MSP for their produce in private agricultural markets with the weakening of the APMC markets because of potentially lower economic activity due to the rapid shift of traders to unregulated markets.

Now, in 2006, Bihar became the first state to abolish the APMC Act in 2006. But, in the absence of the APMCs, the private players bought paddy only for Rs. 900-1000 a quintal, which was not even half of the MSP guaranteed by the Centre at Rs 1,868 per quintal, according to DM Diwakar, the former director of AN Sinha Institute of Social Studies in Patna.

Also, before the introduction of this act, state governments were allowed to charge tax not only at the APMC mandi but also in market places outside the ambit of the APMC. But with the elimination of such taxes through this act, state governments would find it difficult to engage in rural development as the revenue earned through such taxes is used to a great extent for the same. 

The data gathered from the Punjab Mandi Board shows that in 2019-20, the Punjab Government by charging market fees and Rural Development Fund at APMC and non- APMC markets, earned Rs 3642 crore. This revenue was used by the government for maintenance of 70,000 km of rural link roads and constructing new village roads.

The Farmers (Empowerment And Protection) Agreement On Price Assurance And Farm Services Act, 2020

The Farmers (Empowerment And Protection) Agreement On Price Assurance And Farm Services Act, 2020 allows a farmer to enter into an agreement with a buyer before the production of agricultural produce. Interestingly, section 3 of the act doesn’t make it compulsory for the agreement to be written, that is, it allows the agreement to be non-verbal as well. Also, while section 12 of the act empowers the state governments to notify a Registration Authority for electronically registering an agreement between a farmer and a buyer, again, in no way is it compulsory.

So, within this context, let’s assume that a farmer enters into a non-verbal contractual agreement with a company that manufactures potato chips. According to the agreement, the farmer agrees to cultivate a specific type of potato produce for this company which it will buy from the farmer after the end of the crop cycle at an agreed price per quantity. Not only is the price and the quantity of the potato produce agreed upon, but also, the company adds a certain set of quality standards that the final potato produce cultivated by the farmer must not deviate from.

So, let’s assume that the crop cycle has come to an end, and the time has arrived for the potato chip manufacturing company to buy the potato produce for the farmer. Now, the company interestingly chooses to be unethical and refuses to pay the agreed-upon price for the potato produce to the farmer claiming that the product does not meet its quality standards so it offers to buy the produce at a lower price. The farmer is caught in a very difficult situation. Since he had agreed to cultivate potato produce for this company which had specific industrial demands, such products will have no local demand. So, in such a situation, the farmer unwillingly accepts to sell his produce to the company at a lower price. 

As the act does not make it compulsory for an agreement to be verbal or get registered under a State registration authority, it leaves enough space for companies to exploit farmers and cause them severe economic losses in the absence of strict regulation.

The Essential Commodities (Amendment) Act, 2020

The Essential Commodities (Amendment) Act, 2020 is an amendment to a law that has existed in India since 1965. This particular amendment effectively removes the stock limit of items such as cereals, pulses, potato, onions, edible oilseeds and oils. This means stock limits will not apply to these commodities until and unless extraordinary circumstances occur which could be war, famine, natural calamity or excessive price rise where there is 100 per cent increase in the retail price of horticultural produce or a  50 per cent increase in the retail price of non-perishable agricultural foodstuffs.

Also, the provisions of the Act do not apply to value chain participants which range from activities such as production to other value-adding activities such as processing, packaging, transportation and distribution. 

With the removal of stock- limits, distributors can easily find a leeway to engage in hoarding or holding back supplies to ensure that the price of a particular commodity further rises when there is a high demand for that commodity. This could lead to a situation where consumers would be exposed to uneven and unprecedented price rise.

Conclusion

The three farm acts in its current format are highly problematic. Without proper social safety nets, these acts could cause great economic harms to both farmers and consumers.

– Abhinav Nath Jha (Writer, Econ Declassified)

To subscribe to our monthly e-newsletter and updates related to Economics Declassified, click here.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s