Tale of two flawed agri ordinances

Sukhpal Singh | Updated on June 22, 2020 Published on June 21, 2020

The ordinances on freeing up trade and facilitating contract farming have confused the rights of farmers, traders and FPOs

Agricultural market reforms have been on the agenda of many Union governments, including the present one. However, they were so far being attempted more by nudging and persuading the States, being a State subject. But the NDA government has, after trying the same approach, concluded that States cannot be pushed beyond a point. Therefore, it has taken the ordinance route. The stated purpose is to create ‘one nation one market’, and provide farmers with the choice to sell their produce for better price discovery, and also to attract private investment in the agricultural market.

Here, we discuss some major aspects of the two major ordinances that deal with regulation and promotion of agricultural produce markets.

Trade and commerce

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020, shifts the domain from the State to the Centre. It intends to promote efficient, transparent and barrier-free inter- and intra-State trade of farmer produce outside the physical premises of markets or deemed markets notified under various State agricultural produce marketing legislations, and to provide a facilitative framework for electronic trading. Like the Agricultural Produce and Livestock Market (APLM) Act, 2017, this Ordinance defines a trader to include ‘agent’. It is common knowledge that traders take titles to goods, while agents do not — they work for a principal and charge a commission.

Status and role of FPOs: On the positive side, the Ordinance provides for the establishment of e-markets by farmer producer organisations (FPOs), though one is not sure how many can make use of this opportunity, given their poor capital and professional resources. This is similar to the State APMCs allowing private wholesale markets being set up by such collectives.

The Ordinance defines a farmer as a person engaged in the production of crops by self or hired labour or otherwise; this definition includes the FPO. It is important to note that no FPO is involved in farm production; most are into pre- and post-production aggregation, trading and value addition. The FPOs are also not defined as buyers, while cooperatives and co-operative societies are. This is problematic, especially for FPOs.

Agricultural transaction: More significantly, the Ordinance defines a transaction between traders, both within and across States,as one pertaining to ‘farmers’ produce’. How can this be justified, as once the primary transaction is completed, it stops being farmers’ produce? This is akin to the FPOs asking for exemption from income tax arguing that since they deal with the produce of their member-farmers, who are exempt from paying income tax, the FPOs should also be accorded the same exemption.

Regulation and role of States: The Ordinance attempts to regulate traders undertaking intra- and inter-State trade by mandating the use of PAN and electronic registration of a trade, besides directing that payments be made within 1-3 days. In case they are not, it imposes penalties of ₹25,000-5 lakh, with an additional ₹5,000 per day for physical trade (in case of the electronic platform, the penalties range from ₹50,000-₹10 lakh, plus an additional ₹10,000 per day). But the fact that it only provides for Central regulation of e-markets, and not all transactions, is difficult to justify.

Most surprisingly, the Ordinance still goes by State APMC-notified produce to define scheduled farmer produce. What is the relevance of APMC-notified produce here, when its domain is reduced only to the market yards? This leaves a part of the larger agricultural produce market unregulated, despite existing Acts.

Contract farming

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020, is nothing but a badly designed contract farming law. The use of the term ‘farming agreement’ itself is unusual, as it can be confused with other arrangements like share-cropping or leasing. Contract farming is about contract first, with farming being a part of it.

Direct purchase: The way it is defined, the Ordinance also includes direct purchase, which is not the appropriate transaction under this ordinance. One indication that direct purchase is a part of this Ordinance is the fact that large retailers are mentioned as contracting parties. In both global and Indian contexts, large retailers or supermarkets don’t have contract agreements with farmers, and buy directly without any prior price commitment.

Although it is desirable that they sign an agreement, under this Ordinance a written contract is not mandatory. This shows a lack of appreciation for the concept of contract farming.

Here, too, the definition of an FPO as a farmer is not correct. There are many FPOs in India which undertake contract farming directly or indirectly with their members and non-member farmers, like in seed production. So, clubbing them with farmers is not appropriate. They are more buyers and suppliers, rather than producers.

Poor design of contract: The very basic aspects of contract farming like acreage, quantity, and time of delivery are not specified, which is a must for any regulatory law as these are mandatory aspects of such an arrangement, whether by the supply of inputs or otherwise. On the other hand, the farm-gate pick-up of produce by buyers has been made mandatory, which was unnecessary. The parties should be able to decide themselves whether the farmer will deliver the produce at factory gate, collection centre, or whether the buyer would pick up the produce from the farm.

The Ordinance also leaves out many sophisticated aspects of modern contract farming practices, like contract cancellation clauses; delayed deliveries or purchases, and damage therein; and ‘tournaments’ in contract farming, where farmers compete with each other and are paid on relative performance, a practice which is banned in many countries.

It is also rather unfortunate that the Act links the contract price with the APMC mandi price or electronic market price, which is anti-contract farming in nature. The price, like many other basic aspects of contract, should be left to the parties to negotiate and shouldn’t be tied to any other channel — especially the APMC price, as the very rationale for bringing this law was to provide alternative channels to farmers and create competition in APMC markets, as price discovery was not efficient. Now, going back to the same mandi does not speak very well of the Ordinance.

Regulation or facilitation?: Unlike the Trade and Commerce Ordinance, this Ordinance does not specify any penalties for any violations of the contract provisions, which is surprising to say the least. Rather, it facilitates and promotes and facilitates the contract farming mechanism in lieu of regulating it.

That the Act goes all the way to facilitate contract farming is clear from the fact that it mentions that the stock limits law (ESA Ordinance) would not apply to contract-farmed produce. Why should a provision of another Ordinance be specifically mentioned, when it has nothing to do with the subject at hand?

The aspects of ‘farmer empowerment’ and ‘protection’, mentioned in the title of the Ordinance, have been given a go by in its contents. The proof of any law is in its implementation, but as far as farmer interest protection is concerned, these ordinances leave much to be desired in their design itself.

The writer is Professor, IIM-Ahmedabad. Views are personal

Published on June 21, 2020
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