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New Agricultural reforms: Impact on farmers

By Saamiya Laroia

In September 2020, the government of India introduced three concerted ordinances to introduce major agricultural reforms. They included changes in governance of agricultural produce markets, regulation of contract farming and an amendment to the Essential Commodities Act (ECA). They are: Farmers’ Produce Trade and Commerce

(Promotion and Facilitation) Act, the Farmers (Empowerment and Protection) Agreement of

Price Assurance and Farm Services Act and the Essential Commodities (Amendment) Act.

The Farmers Produce, Trade and Commerce Act aims to increase market competitiveness and create a free trade ecosystem and eliminate barriers to inter and intra state trade that had previously been regulated by the state.  It gives farmers the option to trade outside the Agriculture Produce Market Committee (APMC) yards. Under the APMC system, farmers in many states are forced to sell their produce through licensed traders at designated trading yards or mandis. While some states allow farmers to sell to buyers  outside APMC facilities, farmers still have to pay service fees to APMCs. This act changes this by restricting APMC laws to physical market yards and prohibiting the governance of transactions outside markets. Farmers will be able to engage in direct contracts with outside buyers without having to pay APMC taxes and fees which ranged from 1% in some states to 8.5% in Punjab. The APMC system, by forcing farmers to sell through stipulated channels, constrained market competitiveness, led to lack of agricultural infrastructure and marketing investment, and had extremely high intermediation costs. It is to be noted that the act does not do away with intermediaries or APMC’s and simply gives farmers freedom to trade beyond APMC yards. By allowing farmers to have trading options without the interference of state-imposed market intermediaries and opening sale opportunities to larger intra-state and inter-state pools of buyers, this act provides scope for spatial integration of prices and is critical for creation of a common and cohesive national market of agricultural commodities.

Former Agricultural Secretary Siraj Hussain argues that this will in fact spur reform in the monopsonistic APMCs: “Now that they will face real competition from other trade areas, they will have to provide better facilities to farmers and become more transparent. In the interest of farmers, they should continue to get good business as they will still be the primary source of price discovery.” However, critics of the act believe that the act enables the atrophy of the APMC system and the corporatization of agriculture. Farmers and traders have fiercely protested this reform as they allege that it serves as an excuse for the state to discontinue the ‘Minimum Price Support’ regime. A common statistic being quoted is that “ 86 per cent of farmers in the country own less than 5 acres of land,” which contests the notion that the act enables farmers to sell produce anywhere in the country as the majority farmers would not be able to transport or ferry their produce farther than the nearest market yard. Rather than eliminating the intermediary, protesters believe the new act seems to create a new intermediary of the corporates. Randeep Singh Surjewala, chief Congress spokesperson, equated the introduction of this new mandated system with the recreation of the zamindari system. He quoted, ““When the mandi system is abolished, then the farmer will be solely dependent on contract farming and the big companies will decide the price for the farmer’s crop on his field at their own will. This is the new zamindari system.” He pointed to Bihar, which did away with APMCs in 2006, to show that act’s lack of a MSP mandate is a grave miscarriage: “Today, the plight of farmers in Bihar has gone from bad to worse. Agents are purchasing crops from the farmers at throwaway prices and selling that crop in other States at MSP and making huge profit margins.”

This could be seen as a misinterpretation as the act does not state that MSP procurement of produce would end and still allows purchases from APMC mandis. Proponents of the act are quick to point out that APMC yards and government yards will remain completely accessible to farmers as the act is devoid of any proposal which directly aims to deteriorate the role of mandis in any way. The idea that the act ensure greater profit margins for farmers by eliminating the intermediaries is a also claim that has been highly disputed, the belief among critics is that corporations will serve as the new middlemen and the large majority of small farmers with less than 5 acres of land will have diminished bargaining power and enjoy no leverage to negotiate prices, draw up and maintain long-term agreements with the giant corporates. Some have predicted that the entire event of price discovery will wither away.

In a response to the claim that there will be ease of completely direct contracts, Professor of Finance Gourav Vallabh, gave the example that “In the US, the structure of food service distribution is very mature. But even there, the farmer’s produce is purchased by, in some cases, a lower tier company that deals in commodities that further sells it to a processing company or directly by a processing company. This processing company then enters into a long-term agreement with food service distribution companies that actually sell to the end users that are again B2B—food stores like Walmart, Meijer or restaurants or retail outlets. So, the argument that the number of layers will simply reduce isn’t true.”

Economist Ashok Gulati, while hailing the act as a monumental and positive development, concurred with the notion that big buyers approaching individual farmers lacked efficiency as they need  scale. Regardless of the argument you subscribe to, it is germane to note the fact that the state needs to create farmer-producer organizations FPO’s  to help ensure uniform quality, lower transaction costs and allow greater bargaining power. Ashok Gulati further elucidated on this particular solution by saying that “NABARD has to ensure that all FPOs get their working capital at 7 percent interest rate — a rate that the farmers pay on their crop loans. Currently most of them depend on microfinance institutions and get loans at 18-22 per cent interest rates. This makes the entire business high-cost.”

There is also concern for acts hitting state revenues, Punjab especially. It charges exorbitant taxes on produce and will suffer income losses if APMC yards decline.  In between April 15 and May 30, with a minimum support price of ₹1,925 per quintal of wheat, the state earned ₹736 crore in mandi cess. Many states have spoken out against the Centre’s act by calling it unconstitutional. Pritam Singh, a visiting scholar at Wolfson College, University of Oxford, called it an “attack on federalism” He quoted the following statement from the Farming Produce Trade and Commerce (Promotion and Facilitation) Act as evidence that the centre was trying to encroach on state autonomy: The Central Government may, for carrying out the provisions of this Ordinance, give such instructions, directions, orders or issue guidelines as it may deem necessary to any authority or officer subordinate to the Central Government, any State Government or any authority or officer subordinate to a State Government. Entry 28 of the State List of the Seventh Schedule to the Constitution gives state legislation power to regulate markets which enables the argument that the centre should not interfere in the regulation of agricultural markets. Ila Patnaik, economist at the National Institute of Public Finance and Policy and Shubho Roy, a researcher at the University of Chicago debunked these claims with the following statements. “Part XIII of the Constitution of India guarantees freedom of trade and commerce across India. No state can enact laws restricting inter-state commerce without the approval of the President. Most APMC laws, because of their restrictive provisions, impinge on this constitutional freedom. States have approached the President for approval to enact such laws [for example the West Bengal law mentions it has gained the approval of the President under Article 304(b)]. If these laws were mere regulation of markets and fairs, there would have been no need to approach the President.” The restrictions mentioned are twofold- the levying on APMC fees on outside transactions and the stretching of conventional law to create ‘market areas’ where farmers are under compulsion by law to sell in designated APMC markets.

This act also provides for the private establishment and operation of an electronic trading and transaction platform for trade in agricultural commodities without licensing requirements which needs to be accompanied by sufficient e-commerce regulation laws. Lastly it sets up a dispute-resolution mechanism for buyers and farmers to be operated by a sub-divisional magistrate. Most monetary disputes should be avoided by the mechanism that mandates that farmers will have to be paid on the same day or at most within three days.

In essence, the main features of the act allows greater freedom to farmers and has potential to herald an age of positive agricultural reform. Factually and historically, freer markets and less stringent government regulation have always led to greater economic prosperity. However, the scope of exploitation of farmers by corporations is a reality that cannot be ignored. For this act to be successful, the state must provide the necessary resources, regulations and platforms for farmers to have successful bargains with corporate agents. If an ecosystem is created where the position and leverage of farmers is protected by laws and regulation, it is very credible that this act could have manifold positive impacts.

The Essential Commodities (Amendment) Act is an archaic law that was enacted in 1955; it has its roots in Defence of India Rules of 1943 when India was facing food shortages and facing the upshot of World War II. It controlled production, trade and storage of essential commodities and gave state governments exhaustive powers to confiscate stocks, cancel licensing agreements and detain as well as raid ‘hoarders’. The new act introduces an amendment to Section 3 of the Essential Commodities Act. Produce that has been contracted in advance by processing companies and buyers will be exempt from stocking limits. Limits will be imposed when there is a hundred percent increase in retail price for horticultural produce or fifty percent increase in price of non-perishable foodstuffs. This amendment removes basic food items including cereals, pulses, oilseeds, edible oils, onions, and potatoes from the list of essential commodities. It helps address the qualms of private investors concerns of excessive regulatory interference.

A critical view of this act is that by removing stocking limits, the state is encouraging corrupt hoarding practices which will adversely affect costs for consumers. Such arguments fall flat in front of the indisputable fact that these laws were codified during famines and food-scarcity and are not necessary in the present day. In fact, they may sometimes help crop prices from falling and greatly benefit traders and stockists. A valid critique about this act is about the fine print stipulating reinstatement of limits after pricing. Economics expert Ashok Gulati said the following about the feature, “Would the government impose stocking limits on onions if the price goes up from Rs 22/kg, the price right now in Safal kiosks, to Rs 44/kg after a month? That would be unreasonable and all the reforms would be undone. One needs to understand how much is the “extra burden” inflicted by the price increase on the food budget of a household.`` A critical piece of reform was also missing from this act: all export restrictions on agricultural commodities were not removed. To fully remove export restrictions and liberalize agriculture, the Foreign Trade (Development and Regulation) Act, 1992 needs to be reviewed and amended.The fact remains that these amendments to the web of outdated, over-strained laws the Act put into place were critically needed. This act was an important step to curb counter-productive and excessive state intervention.

The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act aims to empower farmers to engage with processors, wholesalers, aggregators, large retailers, and exporters in a transparent manner without fear of exploitation. It sets up a framework for farmers to engage in contract farming and operate on a level playing field with consumers. It allows farmers to contract with processors and consumers for quantity, quality, grade and price. In addition to the stipulation in the Essential Commodities Act, it exempts intermediaries from stock limits for contract farming to incentivise large corporations to engage in contract farming and smaller traders to expand their operations. This framework is in stark contrast with the arbitrary 2018 model law for contract farming which constricted contract farming to notified commodities, included state price regulation and decreed district registration. This act allows contract farming of any agricultural commodity, leaves pricing to individual agents and allows for central, digital registration of contracts. Economic agents have freedom to stock food commodities without fear of prosecution for hoarding.

However, it is not completely exempt from concerns.

Ila Patnaik and Shubho Roy have highlighted the two potential scopes for government interference in the areas of Executive adjudication and suo motu litigation. Normal judiciary and its procedure are not used by the act. Instead dispute resolution is delegated to the sub-divisional magistrate who will not be bound by rules of procedure. They argue that not simply going to the judiciary “creates a window for reintroducing government interference by giving the executive powers to adjudicate disputes through suo motu cases. These are cases where neither of the parties to a farming contract has raised a dispute, but the authority still can enter into the contract and make changes. This violates a fundamental principle of contract law: If the parties to a contract are not complaining, third parties should not interfere in the contractual relationship (called ‘privity of contract’). Violating this principle undermines the commercial relationship between the parties. If the government intervenes in contract farming agreements frequently, buyers may back out.” Overall, this act might require a re-evaluation of dispute resolution measures but gives important measures of freedom to contractors and will reduce market risk by assuring intermediaries of supply and prices at harvest as well as allowing farmers to secure prices and buyers before harvest.



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