Finance Minister Nirmala Sitharaman announced the third tranche of Modi’s 20 lakh crore economic package on 15th May. It mainly focussed on the agricultural sector. Besides measures related to strengthening infrastructure, capacity, and logistics, 3 key reforms in the sector were also announced.
[You may read- What does Modi’s 20 lakh crore package mean?]
This article seeks to demystify the reforms and explain the changes which will take place as a result.
These reforms are-
[1] Amendment of the Essential Commodities Act
[2] Dismantling the APMC Act
[3] Creating a legal framework for contract farming
[1] Amendment of the Essential Commodities Act, 1955
The government has decided to de-regulate cereals, edible oil, oilseeds, pulses, onions, and potatoes by amending the ECA 1955. Hence, stocking limits will not be imposed on these items unless there is an exceptional circumstance. While this ‘exceptional circumstance’ has not been defined, the finance minister, in her speech, gave an idea that it would entail natural disasters, abnormal price rise, etc.
The ECA is an outdated legislation. For a long time, agricultural experts have advocated for amendment/removal of the Act. In the Economic Survey of 2019-2020, the Act was severely criticised for being counter-productive and acting as an impediment to agricultural growth.
Under the Act, the government has the power to impose limits on stocks held for particular produce. For instance, in March, hand sanitisers and masks were brought under the purview of the Act. This was done to prevent dealers from hoarding them and selling them at a higher price. An MRP was also fixed, with the sellers open to litigation if they sold above it.
The ECA provisions were formulated in a specific context, i.e., a scarcity-hit India in the 1940s and 50s. While it was desirable to maintain the supply of agricultural products, then, the Act is of little benefit today. Because today, we are the largest exporter of rice and the second-largest producer of rice and wheat after China. Our granaries are overflowing, and we do not have the problem of scarcity anymore. Hence, imposing a limit on stocking does not make sense.
It discourages private investment in storage facilities, as the government can arbitrarily impose a limit and create hurdles. Imagine that a wholesale trader invests in a storage facility for onions and stores 100 quintals of it. Suddenly, the government decides to impose a limit of 20 quintals on storage. The remaining 80 quintals will then have to be sold. Thus, a wholesale trader may be asked to part with his produce at any time or be prosecuted if he does not comply. This also gives rise to inspector raj of the worst kind. According to the Economic Survey, 76,000 raids were conducted under the ECA in 2019, and the conviction rate was abysmally low. “The ECA only seems to enable rent-seeking and harassment. The Survey provides clear evidence that the case for jettisoning this anachronistic legislation is strong,” it said.
The Survey also said that the ECA fails to distinguish between hoarders and firms which genuinely need to hold stock (say a wholesaler). Because of this, the value chain remains fragmented, and a lot of intermediaries have to play a role in connecting the farmer with the end consumer.
Since the Act disincentivises investment in storage facilities, most of what is produced have to be sold, even if there is a bumper harvest. This leads to a lower price for the farmers. Also, selling excess produce leaves very little to be used when the harvest fails. Thus, a country like India experiences substantial price fluctuations in commodities such as onions.
The example of onion prices in 2019 shows how the ECA has been detrimental and counter-productive. Onions are harvested in April/May and then in October/November. The supplies from the April harvest usually last until the end of the year. But last year, floods damaged the warehouses, and onion supplies were severely affected. Prices rose to Rs. 80 per kg, from Rs. 7 in January. The government invoked the ECA to maintain a steady supply of onions. However, the floods had also ravaged the farmlands, and as a result, the October harvest was destroyed. There were no supplies left until November, as the traders had sold whatever they had when the ECA was invoked. This pushed onion prices to an unbelievably high price of Rs. 200 per kg. Thus, instead of maintaining a stable price, the ECA did the opposite.
Thus, this step by the government, to outlaw an outdated legislation, is indeed welcome. The caveat being the FM should define ‘exceptional circumstances’ in clear terms so as to not to leave it open to interpretations. Otherwise, if it will defeat the purpose of the reform.
[2] Dismantling the APMC Act
The Agricultural Produce Marketing Committee Act will be systematically dismantled to ensure the integration of farmers with the market.
The APMC Act requires the farmers to sell their produce only at designated mandis. The farmers need to take their produce to the mandi and sell their produce to the highest bidder. The auction is organised by agents, who act as intermediaries between the farmers and the traders/bidders. After selling the produce, agents charge a small fee as commission and pay the farmers. The process is usually filled with corruption and collusion. The traders collude to keep the price artificially low.
In effect, therefore, they end up creating a monopsonic market, where only one single buyer is deciding the price. The traders can collude because bidding licenses are given only to an exclusive group by the APMC. Farmers often walk back with very little money. Since these mandis regulate a vast area, the farmers have no incentive to take back their produce without selling it for a low price, as they do not want to incur transportation and storage costs.
By dismantling the Act, the farmers will be given access to other channels through which they can sell their produce. They can also sell in other states of the country, depending upon the price they get. Hence, there will be greater competition among buyers. Another advantage is that consumers can get grains, even in areas where there is a shortage.
However, merely dismantling the Act will not be enough. The Government will have to take follow-up measures to facilitate free trade. Even today, a lot of farmers sell outside the designated mandis to unlicensed traders and intermediaries in local exchanges. The primary reason for this is the absence of enough mandis in the country. The 2017 Doubling Farmers Income Report estimates that in addition to the current 6,676 principal and sub-market yards under APMCs (also woefully limited in terms of infrastructure), India needs over 3,500 additional wholesale markets. Approximately 23,000 rural periodic markets (or haats) have also suffered long-standing neglect.
When Bihar eliminated the APMC Act in 2006, little changed in the lives of the small farmers, who continued to sell in local exchanges, only the large farmers benefitted, as they had the scale to negotiate and enter into agreements with large corporations. The small farmers found themselves in a worse position, with no bargaining power and no agency to approach in case of malpractice. This has to be changed by addressing many other concerns that the farmers face, like access to credit, inputs, transport, and scale. The third reform, Contract Farming, can address many of these issues.
[You may also read: Pradhan Mantri Fasal Bima Yojana Explained]
[3] Contract Farming
In contract farming, growers enter into long-term contracts with a buyer, who provides the inputs, know-how, and transportation facility to the farmers. In turn, they buy the produce at a fixed pre-determined price. This leads to price security for the farmers, as they deal in forward contracts. Therefore, contract farming is a form of an insurance scheme. It has various other advantages as well.
It can solve the problem of scale. When one corporation enters into a contract with several small farmers, their farmlands are, in a way, consolidated. This can solve a significant policy challenge that has been haunting policy-makers for a long time now.
Since corporations provide the inputs and the know-how, productivity will increase manifold.
These corporations will also invest in storage facilities now. They will further be incentivised because of the APMC amendment.
Contract farming will also lead to crop diversification. At present, crop choices are mainly dictated by MSPs and other government schemes which are directed towards rice and wheat. But contract farming will allow the farmers to grow a wide variety of crops.
[You may also read: What is MSP or Minimum Support Price?]
And lastly, contract farming will lead to people moving out of agriculture (as lesser people will be required due to economies of scale caused due to consolidation of the land of small farmers), thus solving the problem of disguised unemployment. This has to be supplemented by the creation of jobs in other sectors, towards which steps are being taken already. The new jobs created through these reforms itself will absorb some of the people.
[You may also read: Companies to move manufacturing out of China– Will India benefit?]
This reform, coupled with the APMC reform, will allow farmers to sell their produce anywhere in the country. While an individual farmer will find it challenging to transport his produce, the same can be done through large corporations that invest in contract farming. Hence, all these three reforms go together.
The government needs to address a few issues while framing legislation for contract farming. They need to create a mechanism for proper registration of contracts so that farmers can be protected against the risk of entering into contracts with corporations that are formed overnight. There should also be a mechanism to create a scale. As noted, agriculturist Ashok Gulati notes, “big buyers like processors, exporters, and organised retailers going to individual farmers is not a very efficient proposition. They need to create a scale, and for that, building farmer producer organisations (FPOs), based on local commodity interests, is a must. This will help ensure uniform quality, lower transaction costs, and also improve the bargaining power of farmers vis-à-vis large buyers.” He also suggests that the FPOs must get credit through formal means at a reasonable interest rate. The creation of scale will also enable greater contract enforceability amongst the parties.
The three reforms announced by the government for the agricultural sector are at par with reforms taken in 1991 for the industrial sector. It will be interesting to see how the reforms materialise on the ground.
[You may also read: Is farm loan waiver by the Government a good idea?]
Economyria is now on Telegram. For a simplified analysis of topics related to economy/ business/ finance, subscribe to Economyria on Telegram