Expert Speak India Matters
Published on Sep 22, 2020
Agriculture reforms: ignore political rhetoric, embrace prosperity economics A visibly low-hanging economic reform contains within it several vested interests. The protests we see against three important agricultural reforms recently are, therefore, not surprising. They are one more step in the noisy democracy of India that desperately needs economic reforms on the one hand but gets swept by the tide of political rhetoric on the other. A reform that proposes to increase the prices farmers get for their output by giving them flexibility to sell, with governments continuing to support a base minimum thorough the minimum support price (MSP) within the extant system, should not cost anyone but benefit millions of farmers. And yet, the discourse against India’s recent agricultural reforms has been hijacked by protests in the name of poor small farmers. The drivers of these protests are rich, large and influential farmers and traders. This is one more example where politics of the past is attempting to prevent prosperity of the future. The Union government must not give in. In fact, it must start communicating directly with small farmers — the middlemen in the closed agricultural chain are the same that ensure exploitative politics on farms. While doing that it must offer a farmer credit driven Jan Dhan equivalent, an institution currently controlled by the same middlemen opposing this reform.

Three laws for one constituency.

There are three laws that have become controversial. Here are some key provisions these laws offer. The Essential Commodities (Amendment) Act, 2020. This law aims to ease excessive controls over the production and distribution of agricultural commodities. It brings an ancient 20th ancient law, the Essential Commodities Act, 1955, in tune with 21st century realities, flexibilities and aspirations. The law aims to deregulate cereals, pulses, potato, onions, edible oilseeds and oils that will come into effect “only under extraordinary circumstances which may include war, famine, extraordinary price rise and natural calamity of grave nature”. These circumstances have been specified — 100 percent increase in the retail price of horticultural produce, or 50 percent increase in the retail price of non-perishables. The time period has been specified — the prevailing price over the preceding 12 months or average retail price over the preceding five years. Given the wastage of food produce, this amendment paves the way for cold chain infrastructure to come up. It enables food storage and hurts none. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020. This law beaks the monopsony of Agriculture Produce Marketing Committees (APMC), overseen by state governments, and enables farmers to sell their produce to entities other than APMC — it does not exclude APMCs — and prevents state governments from levying any market fee, cess or levy outside APMC areas. Further, it prevents state governments from levying “market fee or cess or levy, by whatever name called” on any farmer, trader or electronic trading and transaction platform. It also sets up a dispute resolution mechanism. Agriculture is a state subject under the Constitution; but food is a national market. This law enables farmers to access that market while remaining within the Constitutional confines of Union-State relations. The issue of Union-State control does not arise as the state AMPC laws and infrastructure are not being touched; only a new enabling law has been enacted. This law too grants greater flexibility but changes nothing else, hurts no farmer. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020. This law flows in a logical progression from the one above. It creates a legal framework of agreements within which farmers can engage with companies and wholesalers that buy in bulk and sell further. The law aims to write into these agreements pricing, transparency, payment mechanisms and manner of delivery. It places compliances on quality and standards — a power held by the middlemen in APMCs and to which the small farmer has no questioning recourse. At worst, competition between APMCs and companies will ensure a better price to the small farmer. In addition, as protection to small farmers, it prohibits acquiring ownership rights of farmers at any cost. It links the agreements with financial instruments like insurance and credit. Finally, it creates a dispute settlement mechanism, including an appellant authority.

Focus on farmers…

Although procurement from farmers by the Food Corporation of India (FCI) under the MSP will continue as it is, the performance data is not encouraging. In the past 15 years (2003 and 2018), procurement by government agencies has been 26.8 percent for wheat (procurement of 359 million tonnes versus production of 1,340 million tonnes) and 31.3 percent for rice (procurement of 488 million tonnes, production of 1,558 million tonnes). The numbers are similar for last year (2018) — 31.3 percent procurement of wheat, 32.7 percent for rice. Where does the balance go? According to the Sixty-Second Report of the Standing Committee on Agriculture (2018-2019) titled, ‘Agriculture Marketing and Role of Weekly Gramin Haats’, presented to Parliament in January 2019, the surplus is purchased by moneylenders and traders at very low prices. The moneylender and traders buy independently or work as an agent of a bigger merchant of the nearby mandi. Clearly, the balance of power is against small farmers. The same story plays out in horticulture. In the picturesque hills of Uttarakhand, for instance, small farmers leave their produce on the road in two to eight wooden boxes. The boxes lie there until a small truck from one of the traders at the APMC in Haldwani drives past and picks it up. The farmer can see the price on his phone. But the traders pays less than the market price. His tools of price cuts are size of the peaches or the extent of ripeness, all as per his decision, which is opaque. The farmer has no recourse but to accept the price. Already reeling under the weight of reduced water in rainfed farms and warmer climes pushing more profitable apples northwards, small farmers here have been reduced to becoming price takers, the middlemen prices setters. With the change in laws, and competition between middlemen and companies, the small farmer will definitely get a chance at higher price. APMCs are not doing what they were supposed to; they are not working in the interest of farmers. Their monopsony status has entitled the worst practices — limited numbers of traders, reducing competition, cartelisation of traders, undue deduction in the name of market fee, or commission charges. On the last, while the fees and charges are legally to be levied on traders, the cost is transferred to farmers by deducting the amount from their net proceeds. In some states, these fees are levied even when sale of agriculture produce takes place outside the market yard. Despite the politics of agriculture being located in states and farmers there, successive state governments have come and gone, leaving the small farmers where they were. These reforms could — the word ‘could’ rather than ‘will’ is being used because the best of intentions and reforms can end up failing, as the repeated amendments to the Insolvency and Bankruptcy Code, 2016 have shown — bring economic justice to small farmers.

…but stop demonising middlemen.

Having critiqued them above in practice, the ongoing assault on the institution of middlemen is unwarranted. Bad practices, or twisting of an institution, does not render the institution inert. Middlemen provide an important service. This service happens across all economic activities, from auto sales (car showrooms) and real estate (property brokers) to stock markets (stock brokers) and insurance (agents). Without the stock broker, for instance, there will be no liquidity in stock markets. The middlemen are market-makers. Over a period of time, the premium commanded for their services falls. Every time this has happened in India, anti-reform voices have been raised, in the name of investors or consumers. Stock broking, for instance, carried a commission of 5 percent in the pre-electronic trading days; today, it is a statistically insignificant fraction of a market size that is a multiple of what it was in the 1990s. The only area where advantages have not reached consumers in the corporatised-institutionalised space is in insurance, where the regulator has been found deeply wanting — a sector crying for reform. This problem of vested interests opposing a proven and prosperity inducing reform is now happening in agriculture. The problem in this agency structure in agriculture is not the agency but the lack of regulatory oversight over that agency. It is also the social structures of financing and credit — the middleman is also the moneylender, even if the rates are usury — an area that commercial banking has not been able to penetrate, but can by extending the Jan Dhan Yojana. The market failure is the capture this institution by politicians, administration and middlemen. Once a corporatised structure enters the farm market, several of these problems could end. What the new institutions need to ensure is that there is no transfer of old practices into this new structure. For instance, state governments interfering with and slowing down companies. The latter may create new structures that align themselves with the current ones. This will be a work in progress. The middlemen may stay, but their extortive premiums and practices need to end. The three reform-laws will ensure this happens. The transition will also have political implications, whose results will define the outcomes of the 2024 elections.

Ignore political rhetoric…

Lost in the ‘farmer-farmer’ din is the farmer. Voiceless, powerless and exploited, he has become a bystander in the larger political wrestling in Parliament as well as on roads. In an amazing U-turn, the same political parties in whose manifesto these reforms have been written, is now fighting this reform. The ‘farmer’ has been devalued to a word, a lever for a politics that supports the entrenched and serves the powerful. The small farmer has become incidental. Remember, it is the larger farmers that have been hurt by MGNREGA, under which poorly-paid farm labour shifted to a more dignified and better paying social security system. Then too, they resisted but fell by the wayside as benefits to farm labour accumulated a momentum that has now set in. But it took one election cycle for these benefits to be communicated with on-ground changes. These reforms too are likely to go the same way.

…embrace prosperity economics.

The last argument against these reforms is also a red herring — that the Union government is selling out to corporations. The pathetic slogan ‘suit-boot ki sarkar’ will now find a new expression. That slogan slowed down reforms in the current government’s first term. Having learnt their lesson, these reforms must not be stopped. The evidence that economic reforms deliver political benefits is not clear. But the reform instinct is in the right direction. Living in palatial, colonial bungalows that are a startling contradiction to the poverty of India in general and small farmers in particular, it is very easy to say money is bad, properties are evil and prosperity for all a mirage. Getting taxpayer-funded benefits for life, law makers even had their taxes being paid by taxpayers. The large farmers pretending to fight for small farmers don’t pay taxes. If money and corporations are evil and vile, this celebration of taxpayer-funded entitlements must end — you can’t have the benefits and eat them too. As far as intellectuals go, they have been crying hoarse about getting these reforms for decades. Now that they are happening, with every protection given to small farmers, their sole argument seems to be a lack of trust in Prime Minister Narendra Modi. That’s not the world of ideas, not the universe of thought. They would do better to join a political party and follow their dharma there than to pretend to be independent thought leaders. These reforms must not be stalled or stopped at any cost.
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Gautam Chikermane

Gautam Chikermane

Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...

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