Can free-trade and corporate farming improve farmer income?

The recently ordained Farm Bills on agricultural markets have caused an uproar in the Rajya Sabha, and big debates are being carried out on print and electronic media regarding its impact on the rural economy. While the opposition is claiming that the Bills will harm the farmers due to farming’s corporatization, the government argued that it would induce structural reforms in the agricultural markets in several dimensions.

The Bills have the following vital components: first, it includes amendments to the Essential Commodities Act 1955, which gives arbitrary power to both Centre and to the States to regulate essential commodities, restricted trade in food products to licensed traders, and defined limits on stock holding.

Sweeping changes

The new Bill restricts the government from intervening in essential commodities markets only under specific extraordinary situations such as famine, war or unexpected price rise, and other emergencies. Secondly, the Farmers Trade and Commerce Bill, 2020, aims to end the monopoly of Agricultural Produce and Market Committee (APMCs) and allow Indian farmers to sell output outside APMCs. The earlier Agricultural Produce Marketing Committee (APMC) Act required that farm produce be sold by paying fess only at designated government markets, mandis, through registered intermediaries.

Finally, the Farmers Agreement of Price Assurance and Farm Services 2020 Bill allows contract farming with agri-business firms, wholesalers, exporters, or traders. The proposed law allows private entities and corporate bodies to set up inter- or intra-state electronic trading platforms for farm produce.

The government argued that the new regulations would create an ecosystem that would enable the farmers to trade freely in the market in response to price signals, improving the farmers’ earning and welfare. The new Bills gives the impression that farmers had unnecessary restrictions to trade freely for agricultural products, and mandis is the designated space for all transactions.

However, NSSO data on the Situation Assessment Survey of farmers of 2012-13 presents us with a different rural India image. Data on the percentage of households reporting the sale of crops to various agencies reveals that most households sell off their crops through private traders or input dealers and not mandis or cooperatives (Table 1).

In practice, mandis are not the only place to sell farm produce; farmers sell a significant crop share to private traders. Thus amendment of the APMC Act and the political uproar have no significance for most farmers except for few locations in Punjab and Harayana, where mandis is the central place of transaction.

Mandi blues

A matter that should be of real concern for politicians or civil societies, which surprisingly does not draw any attention, is the low price of products the farmers get when they sell through agencies such as local private traders or input dealers. Nevertheless, such deals exist because of several reasons. Firstly, mandis are physically absent in most places. Secondly, even if it exists, a large number of small and marginal farmers avail the service provided by private traders/input dealers owing to their lack of access to formal credit (Table 2).

Procedural complications and delayed credit disbursement also avert farmers from approaching banks. Thirdly, Private traders/ input dealers easily lock the farmers in low price deals by providing timely credit/ other essential inputs without any collateral requirement. Finally, the relationship network that farmers develop over time with traders or input dealers is quite resilient. It spills beyond the business network and offers a safety net at times of crisis that formal institutions will never provide.

Can corporate farming break existing rural contracts and provide a solution to farmers?

The contracts between traders and farmers (mainly small and marginal) are informal and perpetual. Such contracts are difficult to break without multi-dimensional government intervention to provide credit and other social security schemes to agricultural households.

There is, therefore, a need for an aggregator (such as Farmer’s Cooperative), which will be an alternative to private traders in each place. In the absence of such intervention, it is possible to end up in a situation where only big farmers and private traders/intermediaries may establish relationships with these corporations instead of small and marginal farmers.

In Bihar, for instance, the abolition of the APMC Act in 2006 did not cause a spurt in agriculture sales for small farmers. Though the maize market witnessed corporate farming entry, the procurement was done either from large traders or aggregators. Trade between farmers and Ninja Cart, India’s most prominent B2B Fresh Produce Supply Chain platform that sells the product from farmer to the end customer, also led to the same outcome. Due to economies of scale, the cost of inspection and transaction reduces when the company procures in bulk from larger farmers or traders rather than multiple small sellers.

Moreover, due to the perishable nature of commodity and inelastic demand, any strategy that reduces transaction costs and enhances faster delivery substantially improves the B2B company’s profit; hence the incentive to purchase from large farmers is higher. Consider e-Choupal the ITC e-business initiative for agri-business.

Technological glitch

Many small farmers cannot benefit from the e-initiatives because of low teledensity in the rural market and the Internet’s low-broadband speed. India’s rank is as low as 132, and its mobile Internet speed performance was even lower than Bangladesh’s. Small farmers, who sell their products individually to traders, consequently may miss out on the opportunity of technology and higher price. Hence, in the long run, market dynamics can augment inequality in rural areas. Any policy aiming to improve farmer’s income should consider the additional interventions as cited above.

The entry of the corporate sector into business may have other implications for the rural economy, worth mentioning. Generally, the rural non-farm sector has a captive relationship with some agricultural sector segments. For example, rice mills, textile firms, or firms making potato chips or puffed rice in rural areas may depend on the farmers to supply input. The introduction of more prominent players through corporate farming (which may also ask the farmers to produce a different crop) may break this relationship.

It may cause job loss in the rural non-farm sector and make the non-farm sector more vulnerable. The corporate may also generally induce the farmers to produce non-food crops, pushing them towards food insecurity. The government needs to consider such possibilities if they plan to go ahead with the reforms.

Without understanding the dynamics of business, credit, and relationship network anchored in the rural economy, any intervention may lead to unforeseen and undesirable outcomes like food insecurity and joblessness, which the politician must consider before drafting any new regulation.

Bhattacharjee is presently an Assistant Professor at Mahatma Gandhi Government Arts College, Mahe, UT of Puducherry. Mazumdar is faculty member of the National Institute for Industrial Engineering (NITIE) Mumbai

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