Three days after Prime Minister Narendra Modi’s ‘quantum jump and not incremental change’ speech and just when all of us had given up on the government’s ability to think about leave alone announce and even less execute economic reforms, Finance Minister Nirmala Sitharaman delivered a pleasant surprise. After her usual history lessons on how much the government had done as part of solutions to deal with a slowing, even potentially contracting, GDP due to the COVID19-infested economic crisis, followed by the proposals that sound more like a Budget speech than stimulus, Sitharaman has given us the first glimpse, a trailer, of what economic reforms may look like going forward.
The task before her is huge – to give current respite to citizens and businesses while investing in the future in a country of 1.3 billion people in a country that has a per capita income of $2,000, a tax-GDP ratio of 17% and political demands that are benchmarked to countries with populations that are a fraction of India’s, whose per capita incomes are 30 times India’s and whose tax-GDP ratios are at least double of India’s. On the former, she has leaned on a mix of past actions and financial engineering, peppered with some real outgo. But it is the latter, particularly the two reforms announcements made towards the end of her 15 May 2020 presentation, almost as an afterthought, that give us a signal that the government is finally moving and hope that more will follow over the next two days. In the first attempt at such an announcement – there’s a lot goes from intent to announcement to legal drafting to enactment to action – there are two big ideas, lingering for decades for lack of political will, that Sitharaman has placed before us, all crucial for farmers.
In the third-last slide of her 20-slide presentation, Sitharaman boldly stated that the “Government will amend Essential Commodities Act”. The idea is to enable better price realisation for farmers. Among other food items, cereals, edible oils, oilseeds, pulses, onions and potato will be deregulated. Limits on stocks – the amount of inventory an economic agent can keep – will be imposed only under “very exceptional circumstances like national calamities or famines”.
The law was enacted on 1 April 1955 and enabled the government regulate the production, supply and distribution of ‘essential’ commodities such as drugs, oils, kerosene, coal, iron, steel and pulses to ensure their availability to the people at fair prices. Working in tandem with state governments, the consumer face of this law are the 532,000 fair price shops that have been licensed to distribute such commodities. At a time when India was emerging from the aftermath of Partition and shortages, the objective was to protect citizens from exploitation by “unscrupulous traders”.
But like all other laws, drafted with good intentions but captured by bureaucracies on the one side and their irrelevance to the 21st century India, it has become a hurdle. This is a law whose time had gone decades ago but has lingered on to serve rent-seeking. The law prevents with the seasonality of the agriculture sector by preventing the building a stock of inventory in harvest season and drawing down from it in the lean season. By placing stock limits, the law proposed to check volatility. However, more than six decades after it was enacted, the law has been unable to prevent price volatility.
The law “distorts incentives for the creation of storage infrastructure by the private sector, movement up the agricultural value chain and development of national market for agricultural commodities,” the Economic Survey 2019-20 argued, and termed the law “anachronistic”. Earlier, a 2015 NITI Aayog report noted that “there is also need to apply the Essential Commodity Act more judiciously so as to make private investments in the marketing and storage infrastructure more attractive.” Besides, in most of the commodities that Act oversees and seeks to regulate by licences or permits, are already in surplus production.
The amendment to the law will also enable the financial proposal Sitharaman offered. Understanding that the lack of cold chain and post-harvest management infrastructure in the vicinity of farm-gate causes gaps in value chains, she proposed a Rs 100,000 crore financing facility to fund agriculture infrastructure projects. Once the law is amended, it could provide an incentive for private investment in cold storages.
Related to the above but giving a different freedom to farmers, Sitharaman said the government will formulate a new law to provide adequate choices to farmers to sell their products at attractive prices, ensure barrier-free inter-state trade, and draft a framework for e-trading of agriculture produce. Another ‘reform’ that is decades behind its time, this is an important change that will directly benefit millions of farmers, who are today, by law, bound to sell their produce only to licencees in Agricultural Produce Market Committee (APMC), under the state administered laws. This has created state-level institutional monopsonies through collective cartelisation of licence-wielding agents in the food market.
By announcing a new law to end this exploitation, the Union government has shown its intention to reform. However, this reform follows the lead taken by states already, perhaps in tune with the BJP party line. A day before Sitharaman made this announcement, the BJP-governed Karnataka Cabinet cleared an Ordinance to dismantle its APMC law, thereby allowing farmers to sell their produce to a wider array of buyers, and reducing if not eliminating the middle men.
Earlier, on 4 May 2020, the Madhya Pradesh government opened up the sector by allowing farmers to negotiate directly with individual or bulk buyers and are not bound to sell their produce in mandis. Two days later, on 6 May 2020, the Uttar Pradesh government through an Ordinance decided to allow farmers there to sell 46 fruits and vegetables directly without bringing them to mandis. On 12 May 2020, the Gujarat government cleared the Gujarat Agricultural Produce Markets (Amendment) Ordinance 2020, which allows private entities to set up their own market committees or sub-market yards that can compete and offer the best possible remuneration to farmers for their produce.
These are good moves and the political opposition, as in the case of Karnataka, will backfire. It is not good optics to get in the way of farmers getting better prices or greater flexibilities. The entire edifice of social relations may change. Often, the agent or aardti, is the village moneylender, and the ecosystem is more complex than a simple transaction. Farmers may continue to go through agents of APMC. But the point is that they have an option. If organised retail grows, large companies would be able to buy produce directly from farmers, at scale, possibly at a higher price, and offer it to consumers at lower prices, thereby removing the middleman premium from the value chain. With technology in place, it could enable some farmers to sell their produce directly to consumers. We should allow market forces to allow this to play out.
While we laud the government for displaying its reforms intent in writing, the road to execution could be long. The Ordinances that State governments have drafted, will, at some point, need the legal stamp from Legislative Assemblies, as will the forthcoming Union law by Parliament. These may not be difficult hurdles, but will need to be cleared. Once the BJP-governed states begin to execute these reforms and farmers begin to see greater remuneration for their produce, it could create a demonstration effect of prosperity and the accompanying political pressure on leaders of other states to deliver similar reforms. But let us not gallop on the horses of hopes and wait to see how fast these reforms move forward.
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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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