Farm Bills: A watershed for agriculture?

For long, the laws governing agriculture markets in India have remained anarchic. The state has found reasons to over-regulate the agriculture sector — controlling prices, banning exports, restricting private trade, etc. Excessive regulation and lack of freedom have hampered the growth of the agriculture sector, making it one of the most uncompetitive activities.

Recognising the structural problems with the functioning of agriculture markets, the government announced a complete overhaul of the country’s agriculture markets. Subsequently, on September 20, amidst much uproar in Parliament, the government legislated the three Farm Bills.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill allows farmers to sell produce outside the APMC (Agricultural Produce Marketing Committee) mandi yard in the newly created “traded areas”. In these areas any buyer with a PAN card can buy directly from farmers without the requirement of licence and commission fees.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill provides an architecture for the contract farming, and the Essential Commodities (Amendment) Bill removes the restriction on stocking, movement and export of agriculture commodities.

Collectively, the Bills are designed to reduce the barriers in the agriculture supply chain, liberate agriculture from the dominance of arhtiyas (middlemen) and enable a framework for assuring farmers a pre-determined price at the time of sowing and minimising the effect of cobweb phenomenon.

The government hailed the Bills as a watershed moment that will enhance competition. The Bills, the government claims, will encourage private players to invest in the agriculture sector, especially marketing infrastructure, leading to higher productivity and prices to the farmer. The Bills are expected to help create a single unified market for agriculture, enabling farmers to sell their produce throughout the country.

However, the critics call the Bills anti-farmer, claiming they will result in untimely withdrawal of the government from the agriculture sector. Their main apprehensions are: the state will no longer support the farmers through MSP (minimum support price) and weaken the state procurement system; and without an adequate regulatory framework, the farmer will be left at the mercy of large corporate buyers, who will eventually assume monopsony power, reducing the farmers to price takers.

The misplaced debates

The debates around the Bills have unfortunately been reduced to only two issues; MSP and APMC mandis. As a result, critics are demanding a rollback of the Bills and inclusion of legal provisions ensuring MSP for farmers.

However, it is unlikely that farmers will get remunerative prices even if the government announce MSP for private players. The farmers’ distress is deep-rooted and is a result of multiple policy failures over the decades.

Multiple rounds of NSS survey as well as the NITI Aayog study conducted in 2015-16, showcase that MSP awareness remains low and the regime favours only a small proportion of farmers (6 per cent) and has been largely unavailable to the majority of the small and marginal farmer (94 per cent). The disaggregated data at the crop level reveal that the MSP awareness stands at around 17 per cent and 18 per cent for rabi and kharif crops, respectively.

Similarly, the share of households’ aware of MSP stands at 28 per cent and 23 per cent for rabi and kharif crops, respectively. Even for crops like Wheat and Rice, the awareness of MSP remains low at 39 per cent and 31 per cent, respectively.

The only crop for which farmers have a significantly high awareness is sugarcane. The reason being, for sugarcane the government declares a mandatory statutory price, a legally binding price that must be paid to farmers by sugar mill owners. At the all-India level, for crops like wheat and rice, the awareness of procurement agencies stands at 34 per cent and 18 per cent, respectively.

Another robust indicator to assess the impact of MSP is the actual sale made to procurement agencies. According to NSS 70th Round, only 25 per cent of agricultural households sold their produce in the APMC mandis, whereas 65 per cent of households sold to private players. For the two main food crops, wheat and rice, the figures remain abysmally low at 16 per cent and 10 per cent respectively.

The regime benefited few crops — wheat and rice — only in Haryana and Punjab, where the governments have monopsony powers. Farmers in these two States sell 90 per cent of their produce to the government through AMPC mandis. On the other hand, States like Uttar Pradesh, Bihar, West Bengal and Bihar have either no APMC or weak APMC, implying trade outside APMC mandis.

The present mandi system favour middlemen who earn a heavy commission — small farmers sell their produce to village middlemen, who sell to wholesale traders, who in turn sell in large mandis. Moreover, the system has created a monopsony market structure giving middlemen an undue advantage over the farmers.

Way forward

The debate should be on how to enhance farm productivity and increase farmers’ income. To achieve this, there’s a need to expand the existing marketing infrastructure by promoting more Farmer Producer Organisations and encouraging Panchayati Raj Institutions to establish Village Marketing Organisations.

FPOs/VMOs can buy and aggregate produce from small and marginal farmers and negotiate on their behalf with mandi agents, private players and wholesalers.

Establishment of alternative marketing platforms will enhance the competition for farmers’ produce and will limit the monopsony power of both mandis and private buyers.

A new incentive structure encouraging farmers to transition from foodgrains to dairy, horticulture, poultry, floriculture or fisheries should be created.

The transition from grain-based farming to non-grain farming is key. A similar diversification is required towards the non-farm sector that will make rural areas more economically viable.

Encouraging small, marginal and landless farmers to diversify towards non-farm activities by creating opportunities in food processing, livestock, retail trade, and rural infrastructure (roads) could help.

The writer, an Economist with Swaniti Initiative, was previously on the Economic Advisory Council to the Prime Minister. Views are personal