INDIA: The recent agricultural reforms introduced by the Government of India through its Farm Bills, are nothing short of historic and revolutionary. The three new ordinances have the ambitious intent of ‘Doubling Farmers’ Income’ through unshackling of the agricultural marketing structure and integrating Indian agriculture as ‘One Nation, One Market’.
Agriculture is a priority sector for India, contributing about 17% of India’s GDP and being the largest source of livelihood in India. Reform of the agriculture marketing system has been an ongoing process over the years. It would be useful to provide a context to the evolution of the three new farm bills.
Indian agriculture prior to Independence
Before Independence, India’s agricultural policy was largely driven by concerns of food security and so it prioritized on ensuring on keeping prices of raw materials, food grains and agricultural produce low for consumers, end industry and the public. Besides, India used to suffer regular droughts and famines on a regular basis. After gaining independence, India changed tack to augment production through incentives for farmers through remunerative prices in a fair and transparent manner.
The Green Revolution in India from the 70s onwards propelled India from a food deficit nation into a food surplus country. The introduction of High Yielding Varieties of wheat and rice and the amount of scientific research conducted by Indian scientists played a huge part in this. India’s agriculture policy saw its genesis when India was a food deficit nation, and regulation was needed to incentivise production and protect the rights of farmers.
Liberalization of the Indian economy in the 90s
However, in 1991, when India liberalized its economy and opened up its markets, the agricultural sector still remained largely unorganized and at the same time protected and insulated. In the years post liberalisation, it became apparent that while industry, manufacturing and services prospered under the reformed system, the agricultural sector lagged behind and remained disconnected from the beneficial effects of globalization. While incomes of industrial and services businesses grew manifold, farmers continued to struggle to eke out a living as the regulations of the day prevented them from seeking optimum prices for their produce, thereby reducing the incentive to increase production.
While there has been a clear demand for agricultural reforms for a long while, cutting across political party lines, the challenge partly emanated from the fact that the subject of agriculture was a State subject and not a central one. A national committee recommended in 2002 to “develop a National Single Market for agricultural produce, by removing all the existing physical, legal, and statutory barriers. It also recommended a Central Legislation to deal with “Inter-State Agricultural Marketing, promotion of agribusiness, trade and commerce at the national level” and creation of multiple marketing avenues for farmers and contract farming
However, in the 70s, low prices, high costs of marketing and substantial post harvest losses due to several factors lead to the institution of regulated primary wholesale markets called Mandis. The States (provinces) were empowered to set up such mechanisms, which they did under the Agriculture Produce Markets Regulation (APMR). The objective of APMR was to ensure to ensure a fair and transparent environment for agricultural trade and commerce.
Though a semblance of order was introduced into the agricultural sector, it did not yield the desired results. Over years, it became apparent that the system designed to protect farmers, was in fact, proving to become somewhat detrimental to them. It became clear that the agriculture produce could only be bought by traders registered in the market area. This meant that anyone who was not a registered trader could not procure from farmers, even outside the physical boundaries of the market yard.
Each wholesale (APMC) market yard functioned as an independent entity, but was totally disconnected to any other market. Nor was there enough markets. What was initially designed to be a transparent price discovery system became a structure where prices were decided by traders and middlemen. The wholesale markets also levied a series of fees and commissions raising the cost of the product which resulted in farmers receiving a smaller share of the final price paid by consumers as numerous intermediaries grew in the middle.
Indian agriculture began to suffer losses also due to inadequate and outdated wholesale markets, even though the APMCs were earning substantial revenues from fees and taxes. The primary reason for this was due to the fact that the extant policy discouraged private sector investment in the agriculture cold chain. We needed cold storages to store produce, we needed packhouses to sort and grade produce and we needed refrigerated vehicles to transport the produce. All of which did not happen.
The system further discouraged linkages of farmers to food processors and exporters. Despite being one of the largest producers of agriculture commodities globally, India only processes 10% of total production. Similarly, India’s exports in global food exports stands at 2.3%, well below its potential.
Need for a new policy paradigm
This situation called for a new policy paradigm under which the focus of policy needed to shift from deficit management to surplus management. This is precisely what the present Government did when it promulgated three ordinances in September 2020: (a) Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill (FPTC Act); (b) Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill (APAFS Act) and (c) The Essential Commodities (Amendment) Bill, 2020.
What does the Ordinances Mean?
The FPTC Act merely offers farmers multiple options to sell their produce. They have now the choice to sell within the Government regulated physical markets existing prior to the passage of ths Act or outside it; to private channels, integrators, Farmer Producer Organizations, or cooperatives through a physical market or on an electronic platform; and directly at farm or anywhere else.
The second law, APAFS Act, is a simplified and improved version of the Contract Farming Act that has already been adopted by 20 Indian states. It enables creation of agreements between farmers and buyers for production or rearing of any farm produce, enabling trade at (i) farm gate, (ii) factory premises, (iii) warehouses (iv)silos and (v) cold storages. The price of the produce will be clearly defined in such contracts and a dispute resolution mechanism will be in place to protect rights of both farmers and buyers.
The third law, the Essential Commodities Act allows the Central Government to impose stock limits based on price rises in extreme cases where there is a 100% increase in retail prices of perishable goods and 50% increase in retail prices of non-perishable produce.
Do the New Laws do not override existing ones?
It is important to note that the three new acts do not dismantle existing structure of State APMCs; rather they provide competition to this system by opening up alternative marketing structures, direct buying, and contract farming. Nor do these bills replace the prevailing system of public procurement at Minimum Support Price (MSP). The MSP is a minimum price guarantee that acts as insurance for farmers when they sell particular crops, which are procured by government agencies at a fixed price to farmers. Since the MSP cannot be altered in any given situation, it protected the farmers from crop prices fluctuations. Over 20 crops, including wheat and rice, are procured under MSP. The new laws simply provide more options to the farmers in addition to the MSP.
Benefits of the new reforms
These Bills are an attempt by the Government of India to address many of the prevalent shortcomings in the agriculture market and to fulfill long-standing demands of reforms in this sector. The main objective is to double the income of farmers through key structural changes as delineated above. They are also expected to unshackle agricultural marketing practices with an eye on a meaningful integration of Indian agriculture with the global agricultural scene.
It is also expected that the incentives being provided will allow for alignment of private sector investments across the entire cold chain, reducing post-harvest losses and ensuring better prices received by farmers. Better backward linkages will ensure better quality of produce, leading India to capture a bigger share of global export markets by linking it to global food chains. Employment in the food processing sector is expected to increase, which may a crucial factor that could put India on the path towards becoming the leading food exporter in the world, while maintaining its food security at the same time.