Farm Bills – Breaking Resistance to Pending Reform


If history remembers P V Narasimha Rao as architect of modern India, the Narendra Modi rule will be remembered for breaking every resistance to reforms and implementing proposals, pending for decades.

The latest and the most critical addition to this list is farm sector reforms. If backed by the right regulatory environment, they are potent to bring long term change in the wider agri-economy that dominates lives of majority Indians.

The reforms freed the farmer from the restrictions on market access, which were imposed by a food-deficit India of control-era. The Essential Commodities Act, that now stands amended, had an even narrow objective of sourcing cheap food for soldiers during World War-II.

The change will take time, probably next four-five years, to reflect on ground. But the tepid response to the Opposition’s call for protests, beyond Punjab and Haryana; is an indication that majority farmers didn’t gain from the erstwhile system.

For the rich, by the rich

Such reactions were not unexpected. Successive committees recommended removing the stranglehold of State level APMC (Agriculture Produce Market Committee) Acts that denied the farmer the right to decide his point of sale.

The erstwhile legal framework forced the farmer to sell his produce to designated APMC mandis or market, dominated by rich farmer-trader-middleman-politics cartel visited by a set of buyers. Small farmers could barely afford this trouble, they sold produce to middlemen at farmgate.

As a result, small farmers missed out from the ‘open-ended’ state procurement at MSP (minimum support price) spearheaded by Central government-run Food Corporation of India.

In 2015 the “High level committee on reorienting the role and restructuring of FCI”, quoted the 70th round of National Sample Survey (NSSO) data to point out that only 13.5 percent paddy farmers and 16.2 percent wheat farmers (constituting six percent of the total farming community) sold produce directly to procurement agency during kharif season of 2012 and Rabi season of 2013.

The second point is even more critical. Rich farmers and that too from a few States, enjoyed the maximum benefits of state procurement at MSP.

In the 2019-20 agri-marketing year, India produced 106-million-ton wheat and 117 mt of rice. FCI procured roughly one-third of wheat and 44 percent of rice production. Nearly 85 percent of wheat was procured from three States and 73 percent of rice was contributed by six States.

Punjab and Haryana are top gainers, together contributing two-third of wheat and a little less than one-third of rice procurement. Punjab tops either list.

The procurement doesn’t come cheap. With complete stranglehold over the farm produce market (through APMC act), the farmer-politics cartel, particularly of Punjab, forced the Centre to hike MSP rates way above all viable limits.

Between 2010-11 and 2019-20, MSP for common paddy and wheat increased by 81 percent and 75 percent respectively. The increase was sharper after 2014.

The end result is, MSP was converted into ‘maximum selling price’. Rich farmers of select States gained. Farm practices became unsustainable (as is evident in the high NKP ratio of Punjab) as returns were assured. Some States gained too by pocketing high Mandi tax, which now stands abolished.  

The nation paid a fortune in procuring wheat way above the stock limits. Leakages soared. According to Shanta Kumar Committee (2015) 46 percent of cheap food grain was diverted from the public distribution system (PDS).

Last but not the least, the subsidy burden increased astronomically. Between 2016-17 and 2018-19, FCI’s borrowings from National Small Savings Fund alone increased from Rs 70,000 crore to Rs 1,86,000 crore (Bloomberg, September 20, 2019).

Disruptive Reform

The Centre assured that the MSP and FCI procurement will continue. But, farmer-politics nexus in Punjab and Haryana are afraid that they will lose the ability to arm-twist the government to hike MSP.

The suspicion is valid. The reforms have thrown Punjab farmers open to competition. It will be difficult for FCI to justify procurement of wheat at high MSP, if the local millers procure the same at a lower price from UP or Bihar.

But that is a narrow perspective of the reform. As the attractiveness of MSP wanes and contract farming gains momentum, there will be crop diversification away from rice and wheat, which is bound to offer natural support to prices of these two commodities.

It means, reforms will trigger a shift from the present model of farming, where rice and wheat are produced way above requirement.  But any such eventuality will take time to unfold, as MSP has reached so high that it will continue to be attractive for the next couple of years.

Also, the government needs to invest in integrating markets across the country to allow free flow of price information. The regulations are to be tightened so that we do not see a repetition of Bihar experience.

Bihar liberalized the agri market from the stranglehold of APMC, in 2006. However, due to lack of due mechanism, the middlemen regrouped to serve buyers sitting in big cities, without much impact on the ‘farm-to-fork’ price differential that stands at a staggering 65-70 percent in India.

The purpose of the agri reform is to reduce the differential by allowing play of more efficient market forces, preferably the organized sector, so that both farmer and consumer benefits at the expense of the middlemen.

Chain reaction anticipated

In all probability the farm sector reforms captured by three Acts – the Farmers’ and Produce Trade and Commerce (Promotion and Facilitation) Act, 2020; Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 and; Essential Commodities (Amendment) Act, 2020 – passed by the Indian Parliament will trigger a chain reaction.

There will be some political noise – as is signified in exit of Shiromani Akali Dal (SAD) from NDA – in nearly half a dozen States which were most benefited in the previous regime and thereby created a sizable interest group(s).

It will initiate restructuring of FCI, which is long overdue. The direct transfer of fertilizer subsidy should henceforth be a reality. Together both these measures will plug leakages and reduce the total estimated food subsidy bill of Rs 5,00,000 crore, thereby ensuring fiscal prudence.

The bill may also have a significant impact on the power distribution sector and State finances; as the reforms will call for fiscal prudence in States. As states like Punjab lose mandi tax, there will be demand for fresh taxes.

It will be interesting to watch how the farm sector reform unfolds in West Bengal.

Shanta Kumar Committee pointed out that despite being a front runner in rice (and vegetable) production, farmers in the State failed to take advantage of the FCI procurement regime due to infrastructure paucity. In comparison Odisha did better.

Post-reforms, farmers in border districts might take advantage of the inter-State sales to optimize earnings. It is an opportunity for farmers in North Bengal districts to take advantage of the integrated market space with Assam.

The northeast India which failed to take advantage of its potential in agri-horti production in the past, can take advantage of contract farming to attract investment in food processing.

India inflicted a great harm to its farmer community by living in a state of self-denial to contract farming so far. On the one side there is West Bengal which gave contract farming license to Frito-Lay as early as in 2005, but denied to open the market to competition.

On the other hand, North East India paid the price of shunning contract farming altogether. Over the last few decades, a number of attempts were made both by the State and private sectors to tap the horticultural potential of the region.

Public sector North Eastern Regional Agricultural Marketing Corporation Ltd (NEAMAC) had closed all four processing facilities in the region. The Mega Food Park in Assam which was inaugurated in 2015, failed to establish backend linkages.

Bangladeshi food major PRAN opened a pineapple processing facility in Tripura in 2015. The facility now survives on imported pulp. The reason behind is the disconnect between the farmer and processor.

Due to its geographic location, North-East is a high cost producer of cereals and pulses. But it can surely turn the table in agri-horticultural production, provided it braces for contract farming.

(The writer is a columnist, researcher and a public policy expert. Views expressed are his own)

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