Opinion

Two concerns in the Farm Bills that may have escaped attention

Nilabja Ghosh | Updated on October 16, 2020 Published on October 16, 2020

Weakening of the open auctioning process will thwart price discovery, and in marketing with private companies, pricing is likely to become more confidentially done that will vitiate transparency and market intelligence for other agents

The three Farm Bills or Acts that the Government passed in the last one month created controversies for wrong reasons. Abolition of MSP nowhere found mention in the Bill, and even if ever considered, will be a completely different issue that will deserve its own criticisms. Another major apprehension raised is an implicitly fierce conflict between the farmer and the purchasing food companies. The relationship between the seller and the buyer essentially and always is about bargaining which, in its true sense, is never seen as a conflict.

Indeed, the companies have much to lose if they cannot satisfy and draw the producers to sell them which to them is a clear possibility when the sellers have so many options. In any case, the food businesses in the Bill are merely an additional component in the market and may constitute a smaller part of it than we fear. The Bills have added new options without eliminating any of the existent ones.

In an unlikely long-term horizon if the options are crowded out by the companies, indeed the ‘monopsonistic’ consequences would become a threat but there would be enough time to take corrective actions, even amending the Act by that time if required. As of now, one can guess that a part of the produce meeting certain standards and sold by more resourceful agents will gain greater acceptance with the companies but there will be enough produce to reach the traders through the APMC markets and other trading routes.

This argument does not rule out some kind of disparity emerging or increasing among farm classes and between disparate States but one can hope equalisation will be a likely tendency as smaller farms catch up in technology, the farmer collectives become effective, traders improve their marketing methods, profit-oriented companies become more sensitive to social responsibilities and rural employment is generated by the agro-processing industrial development visualised. These issues do need discussions.

Price discovery

However, the Bills do arouse many more challenges that are pertinent to question and address outside of the political cacophony. This article will pick up only two of those for attention. The first concern is about price discovery. As is well known, market price is generally a level that equates demand and supply but widely — firms fix up the prices in different ways. One that adds a ‘mark-up’ on the cost is also the process by which the government determines the MSP it announces. The mark-up would include a profit margin which depends on the competition in the market.

Fixing prices at high levels that do not generate enough demand is of little gain for the parties, especially the farmers if they cannot sell, more so for the companies if there are competitors who buy at lower prices. In an ideal competitive world, the price would be low with minimum or normal profit uniform across the market correcting for quality and transport costs but this price may also be too low to offer a good life and return for the effort or even to cover the material cost in which case the production becomes unviable without special public support and the private buyer will not find sellers. Ideally the farmers must consider changes in products.

The auction is a palpable manifestation of the invisible hand to determine prices that clear the market and, in fact, is a critical strength of the APMC markets that serves the society and economy. Even earlier on in the reforms path, the alternative and emerging channels like retail markets and contracts found pricing a challenge and had to rely on the APMC prices announced prior to their pricing. Over time the APMC received investment especially on computerisation and started the electronic platform e-NAM by the use of internet to help farmers access the national market.

The Act allows electronic transactions even outside the APMC markets possibly to bring the market closer to the farms and further from State government’s administrative hassles and its political confusions as an option. It can be presumed that the contracts, the futures and the food businesses will continue to receive transparent market intelligence to serve as their benchmarks as the APMC and the independent platforms continue and gain strength with reforms at the State level, central support and community enterprise.

Weakening of the open auctioning will thwart price discovery, distort pricing and hurt producers by giving greater market power to the producer. Since presumption is not enough, greater assurance is needed for operating an efficient market.

Data and intelligence

The second problem, not independent of the first, relates to data and intelligence. Increasingly and widely, data is becoming a basic ingredient for strategising and moving ahead. Some call it a new fuel of the economy. For improving the agricultural and the overall economy, agricultural information base has always served a useful role. Production outlook, government operations and stocks and wholesale prices were signals of agricultural growth and prosperity, of the size of non-agricultural markets, distress of farmers, impending food insecurity, fiscal and administrative challenges of the government and helped in early actions of organising logistics and finance, interventions, foreign trade negotiations and management of the macroeconomy.

The protocols of reporting have progressed over time with data generation taking advantage of new methods of space science, data analytics, internet transmission and moved towards real-time frequency. The regulated markets, where prices are determined and reported from, expanded in the AGMARKET portal beyond what the Ministry originally reported.

The advent of the e-NAM and now the new channels break up the market and the pricing processes in complex ways. Worse, in marketing with private companies, pricing is likely to become more confidentially done — behind closed doors — that will vitiate transparency and market intelligence for other agents. Without any mandate of private stock declaration, privatisation of food transactions and the Essential Commodities Act changes, anticipation of eventualities of shortages or gluts and for price extremes hurting farmers and consumers will have to be done in new ways.

No doubt electronic transactions, the need for PAN card and the presence of GST will make suppression of facts difficult if not impossible, but the data system, no longer hinged merely on wholesale mandi prices and public stocks, will become extremely complex waiting for clarification.

Professor, Institute of Economic Growth

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Published on October 16, 2020
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