New farm reforms: Managing Agriculture as a ‘way of life’ beyond MSP & APMC

Dr Basanta K Sahu, IIFT, believes that the recently passed farm bills have the right intent to improve farm sector performance, but farm reforms need a more comprehensive approach. Considering the constraints, nature and structure of farming and functioning of agriculture markets in India the policy formulation should involve wider debates and consultations with all stakeholders. Reforms in agriculture are long overdue and it is a daunting task to empower farmers, prioritise their interests and ensure desired outcomes from the new provisions.

It appears that major reforms are often announced during crisis. Despite the ongoing pandemic and its wider impacts across the economy, an intense debate has unfolded on the three new farm bills passed in the Parliament. All three are now new Acts and broadly cover agriculture produce, production arrangement, markets, storage, investment, participation of corporate sector etc. to improve the performance of farmers and the farm sector. The nature of agriculture markets and their functioning are more crucial for an agrarian society and rural economy like India as compared to others. However, arguments for regulated or free markets in agriculture in India and whether they are desirable for Indian farmers are well debated and documented.

Before discussing the major implications of new farm Acts and the way forward, let us understand some key issues of India’s farm sector and how these new farm reforms address it. In general, agriculture in India remains a way of life for many rural and farming households. It is not yet considered as business or market orientated, since a sizeable portion of Indian farmers are out of markets. While agriculture markets have been more volatile and farming has become progressively riskier, many poor farmers wish to opt out of farming.

However, agriculture continues to accommodate disproportionately large numbers of rural labour without much improvement in farm productivity and farm diversification. While productive labour shift from agriculture has been abysmally low, rising cost of cultivation has forced many farming households to indebtedness in India.

High agriculture market volatilities and growing changes in weather condition have also pushed a sizeable portion of farm workers out of land-based activities. Non-market factors like rainfall, water supply, temperature and other weather conditions constitute mighty weather-based risks frequently experienced in a monsoon economy like India.

Despite several farm reforms undertaken earlier to manage both market and weather risks, much has not been achieved and farmers continue to depend on government support, which has not proved viable. In this context, it is important to discuss some key aspect of three new farm Acts – The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020; The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 and The Essential Commodities (Amendment) Act, 2020).

New Agri-Markets and Way of Life Beyond APMC

Functioning of agriculture markets and implications are more complex in a monsoon agrarian economy like India. For different reasons, agri-markets are underdeveloped, inefficient and controlled, which further accentuates market risks. Agriculture market reforms in India are necessary and it is long overdue as the economy has shifted from a deficit agriculture production to a surplus one.

Since  independence, a variety of public policy supports have been extended to agriculture, both by the State and Centre, with a focus on investment, infrastructure, marketing, public procurements, farm subsidies etc. With regard to agri-product markets ECA, APMC, MSP, NFSM are some key govt  interventions. One of the major protests against the new farm Acts is apprehension about the end of APMC and MSP, which cover only limited regions, crops and farmers.

Although some state like Bihar and Kerala do have APMC, a very small portion of farmers participate in the APMC system, mostly prominent in Punjab, Haryana and parts of UP & MP. Similarly, only a few crops (23) are covered under MSP and very few crops are notified for public procurement for a limited period only.

It is not completely right to oppose the new Farm Acts with the argument that APMC is the ideal platform for farmers and for the price discovery mechanism. In fact, APMC covers about one fifth of total crop output sale and caters to not more that 6-10% of the farmers, leaving many agriculture commodities and regions.

In many cases, incidences of cartelization, rent seeking behaviour and high costs of market transactions under APMC have been reported, which show market inefficiency. Unfortunately, the farmers or producers bear disproportionately higher costs of this market inefficiency as compared to other stakeholders like buyers, middlemen, commissioner agents, arthiyas, etc. Another misunderstanding is comparing APMC with Minimum Support Price (MSP), which is not a law, rather it is a temporary provision by the government. A sizeable portion of farmers in Punjab, Haryana and UP depend on APMC and produce few select crops like rice, wheat and sugarcane, for which MSP is there. But this trend has discouraged crop diversification in these states as well. However, the new farm Act does not necessarily assure more favourable market conditions than APMC and a better price than MSP.

Farmers are the most fragmented and unorganized groups with low information and resources, which weaken their collectiveness and bargaining power more as compared to other stakeholders in the markets (both product and factor markets) and it gets more pronounced with agriculture market imperfections and underdevelopment. Since, inefficient and underdeveloped markets tend to augment transaction costs and often don’t give the market clearing price or offer price discovery, the role of the state is crucial to develop markets, improve market conditions and support weaker stakeholders.

Free and unregulated agricultural markets may not be work for the large number of small farmers who are unequal partners. Besides inadequate market information, high transaction costs, small, fragmented markets and lack of availability to all groups and regions at all times are key issues to be addressed.

The APMC or regulated market system has been often found inadequate and inefficient. Though reforms in APMC have been argued and initiated earlier, the changes were not effective in addressing the core issues of agriculture product markets. Improving the functioning of APMC with suitable reforms is desirable, but there is no such specific provision in the new farm Acts. Given the predominance of small and marginal farmers and their unorganized nature, the provisions under the new Acts in terms of market choices may not necessarily work in the farmers’ favour. Under this condition, participation in free markets, as argued in the new Acts, may be counterproductive for many farmers, who would need some assurance on their produce prices. Moreover, farmers were free earlier to sell their produces outside APMC and in other markets.

Despite several flaws, APMC is a key institutional marketing arrangement since the 1960s. More reforms and corrective measures in APMC should be undertaken along with new interventions. Hence the government’s initiative to provide new market options to farmers beyond the APMC is appreciable, but there is lack of clarity about the back up plan, if this does not work to improve farmers’ conditions. A whole lot of preparations and provisions are required beyond the new farm Acts. Some key points that need to be adequately addressed with the new provisions are:

• • • Strengthening APMC and re-designing the framework to match the regional and
      crop-specific requirements.
    • Identifying market conditions across regions and crop types..
    • Providing market information to farmers and suppliers as well as buyers and
      corporates.
    • Adequate institutional and legal arrangements for the stakeholders in support of the
      new policies.
    • Detailed roadmap for already declared rural markets (Grameen Agricultural Haats) –
      construction, connectivity, functioning, maintenance etc.
    • Government should avoid MSP on the products, which are in deficit and are imported, such as pulses.

Given the situations and policy provisions, we need to understand whether (and how) these new farm Acts will give more choices, opportunities and freedom to the farmers and improve performance of Indian agriculture.

Farmers (Empowerment and Protection) Agreement on Price Assurance

Dealing with agriculture production, storage, transport and marketing are very different from non-agriculture sectors, mainly in terms of nature of production and produce, production environment, seasonality, quality, markets, regulations etc. Due to poor crop planning, rising production and market uncertainty, some farmers depend on inadequate but available government support in terms of assured product prices, markets, input subsidies and public procurement for a long period. Many of them may not intend to opt for a new system unless they are consulted, convinced, and agree voluntarily. With few exceptions, the overall situation in agriculture has not been impressive in recent years and many farmers wish to quit farming.

Under this condition, many farmers are not aware of the new system of contract farming or they are apprehensive about the final outcomes in case opt for it. It is important to consider farmers concerns and interests and reduce their apprehensions. For instance, pre-determined agri-produce price under contract farming without any assurance or alternative may augment market uncertainty and hence accentuate farmer’s plight. For a different reason, if farmers get lower prices than MSP or price in other markets after the contract, it will push them further into distress. From the buyers side, it may not be the case as corporates and other bulk buyers have more alternatives unlike farmers for whom farming is an issue of their life and livelihood.

In the earlier regime, the government was largely controlling prices in the agricultural product markets through MSP and public procurements. Pushing for market choices outside APMC raised an apprehension about decline in public support in agri-product markets to reduce public spending on these schemes. The provision of government role in controlling price rise, under certain condition is not clear and much is not known when these control mechanisms will be invoked. The bureaucratic system of controlling market prices may not be very objective always, particularly for the farmers.

Contract between Unequal Partners

It seems the new farm Act (Farmers Agreement on Price Assurance & Farm Services) is proposing a contract between two unequal partners. Some of the past experiences of contract farming (in potatoes, cotton and sugarcane) have not been very successful. The pre-determined price mechanism may not always favour farmers. Also, farmers cannot sell their products in APMC or other markets, once the contract is signed.

With regard to dispute settlement under this Act, it is too narrow and limited up to the district magistrate, which may be a good option for the buyers but not for the farmers. However, it is good that the farmers’ land holding will be protected, as no farmers’ land will be disposed in any dispute settlement.

It is also feared that contract farming may affect local food security, because a contract between farmers and corporates normally covers particular crops of the buyer’s choice, which may affect production of required food grains and other crops. It is not clear how the government will procure and arrange the required huge volumes of food grains and supply to meet the food security objectives. Though inter-state movement of products is allowed, high transport and other costs could discourage farmers, particularly small farmers, as usual.

As regards the duration of contract farming, the period between one crop season of 3-6 months and a maximum of up to 5 years may not suitable for all farmers in all regions. Both parties should be free to decide it, but farmers need more flexibility depending upon the cropping practice, farming conditions and other local issues. If the contract is not renewed, what will the farmer do? Farmers cultivate every year as it is their livelihood, but this is not the case for the corporate buyer.

While farmers demand for MSP as minimum price under contract farming, this may not be acceptable to buyers other than the government, as MSP is normally higher than average market prices, which will discourage private parties. In fact, the government does not have many options to be able to address this anomaly.

Provision of fixing of price by the government is not in the spirit of a market economy, but some assured price should be there initially for the benefits of farmer, beyond which no transaction should take place. It is important to just avoid buyer-driven transactions at very low price levels.

The government can start experimenting with a few crops and regions or few selective buyers and sellers to popularize the practices. Once it succeeds, it can be extended to other crops, regions, or sellers. Going in totality in one go may be a problem. Farmers may take time to get acquainted with new contract and market practices, for which they need initial handholding, training, information and other supports.

The issues relating to agriculture markets, pricing, contract farming etc are far more complex and require series of discussions, debates, and consultations with all stakeholders. The government should incorporate views of farmers associations, who have huge stake holding at the state level. As agriculture is a state subject, states are in a better position to design and implement this act given their local and regional concerns and differences. Two possibly negative implications of the new Act for the states having more practice of APMC are as follows:

• They may lose revenue (6-10% tax on market transaction in terms of market entry
  fee and market cess).
• It may affect the states as they do not have much control over the food
  arrangement, supply and storage, at least to ensure their own food security.

Another important aspect of these new farm Acts is that they focus only on the agri-product markets issues and not on factor market issues. In fact, both product and factor 0markets are inter-linked as functioning of agricultural product markets depends on factor markets like land, labour, credit, fertilisers, seeds, power, water, etc. If the factor market issues are not addressed and reformed, changes in product market reforms may not achieve the desired outcomes.

How Essential are Essential Commodities?

Control of production, supply and trade of food, fertilizer, petroleum etc. has come under essential commodities in the past under certain conditions, but they are no more essential barring a few exceptions. Reclassification and changes in commodities under essential commodities should be flexible based on factors beyond its price changes.

There are lesser issues and concerns in relation to the third farm Act (Essential Commodities Act Amendment Act 2020), which is about the commodity stock limit, inter-state movement, exemption under export and processing etc. Many items such as cereals, pulses and food are exempted from the list. Stock limit has been defined based on the price rise (100% for horticulture and 50% for non-perishable food items). So long as food security of the local area is assured, the amendment in ECA seems not be a major issue with its provisions on production, supply and trade of farm products. However, the government’s intervention under the clause of extraordinary situations need to be clearer.

In sum, the intent of the new farm Acts is good and it was demanded by policy makers, agriculture specialists, researchers, and others. But more needs to be done on the contents and the process and an alternate plan needs to be ready in order to achieve the purpose of the new changes in totality.

One of the major problems in India’s farm sector is the absence of crop planning – what crops should be grown, where and how much, what should be the market orientation, etc. are not clear at farmers, community, regional and national level. A vicious circle of low investment, productivity, return and market orientation continues in Indian agriculture with progressive increase in market and weather risks that make large numbers of farmer vulnerable and overdependent on the government.

However, farming in India has changed from a deficit to surplus production in several agri-commodities, despite low crop diversification and productivity. Some diversification has also been observed, in non-cereal high value items matching the market conditions and food consumption diversification. But not much has changed in practices or farm management at the farmers level, particularly on how to manage the agriculture surplus.

One must avoid the mistake of viewing agriculture and farming as a business transaction between two parties. Farm income is no more adequate for a farming household, rather it has been more volatile and declining over time. Without adequate and assured farm income, many farming families have to look for all possible non-farm income, including involuntary outmigration.

To make Indian agriculture sustainable and work for farmers, the market has a crucial role to play and policy focus should be broader and more on structural issues – agrarian relations, farm investment, processing, technology, market, storage & supply chain, export orientation etc. Serious policy changes are necessary to address these systemic issues, beyond just creating few market options that may only benefit a few stakeholders.

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Dr. Basanta K. Sahu is a Faculty in Economics Division, Indian Institute of Foreign Trade, New Delhi. Views expressed are personal. Usual disclaimers apply.