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Freeing the Farmer: Understanding Modi government’s reforms in agriculture

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Aditya gives a perspective on the recent agricultural reforms proposed by the Modi government. He analyses ‘Indian Farmer’ through different angles and perspectives.

Rajagopalachari or Rajaji as he was fondly known, was a noted freedom fighter and the only Indian to serve as the Governor-General of India. He once said, “Freedom should be the rule and control the exception.” Every party in this country has spoken of the welfare of farmers. Various schemes and measures to address agricultural distress have been tried across the country. However, most of them have failed quite miserably. This is because they never really addressed the real problems the farmers actually faced. An interesting example of this is that majority of Indian farmers still rely on informal credit and benefit very less from expansion of agricultural credit which is justified in their name. This happens as agricultural credit now mainly goes towards corporate activity in the farm sector.[1] The Indian farmer has to deal with some of the most controlled trade regulations in India. No other industry in India could be as regulated as agriculture is.

Many of these regulations may have served as important measures during times of scarcity at one point in time in our history. As many scholars have pointed out however, they have outlived their utility and serve to only cause distress to farmers. Why is it then, that these laws are still present in our statute books? The simple answer is, they offer politicians great control over agricultural produce prices and great control over farmers’ lives. This is seen from the example of the Essential Commodities Act (EC Act), which has been regularly used by politicians to enforce stock-holding limits to control price rise of certain commodities.

In this context, the announcements made by the Finance Minister on the 15th of May are monumental in the history of India. Behind the big numbers promising different measures and schemes, the three structural reforms through amendments and new laws could truly free the Indian farmer and cause a revolution in the field of agriculture.

Amendments in the EC act.

The Essential Commodities Act,1955 was enacted at a time when there were widespread food shortages in the country. To address this, the act gave wide powers to the government to intervene in the market in ‘public interest’. According to Section 3 of the act, the the government could declare a particular commodity an ‘essential commodity’ and could control the supply and prices of such a commodity. In the announcement, the government proposes to amend the act to make the agricultural sector more competitive and allow better price realisation for farmers by attracting investment. This is proposed to be done by deregulating production and sale of food products. This will help promote agricultural exports from India exponentially as the world becomes sceptical about Chinese food exports.[2]

What is more surprising is that the government proposes to curb its own powers by amending the act to impose stock limits only in exceptional circumstances like national calamities. Further, processors and value chain participants will be exempted from stock limits even when they are imposed. What this means, is that when a processor such as a mithaiwala who has stocks of sugar when stock limits are imposed will not be subject to raids by officials and will not be forced to hand over his stocks over the limit. This will greatly reduce the harassment faced by food processors at the hands of officials and will help reduce supply-chain shocks in the processed food industry.

Opening up agricultural Trade

Inter-state agricultural trade has always been fraught with many restriction and controls because of our history of scarcity. The second structural reform by the Finance Minister dealt with creating a framework through a central law so that farmers have more choices and to allow inter-state trade of agricultural produce. This announcement was done while underscoring the fact that farmers are the only group forced to sell their produce only to licence holders in mandis.

This has been the effect of the outdated APMC acts. It is an extremely anti-competitive practice which has led to large scale exploitation of farmers. Many of these licence holder middlemen have cartelised these markets by manipulating the ‘notified market area’ concept. An example of the same being, a farmer who has harvested Tomatoes in ‘X’ notified market area in Maharashtra can only sell the tomatoes only at the designated market of that area. Even if another area’s market is closer or has a better rate going for tomatoes, he cannot sell it in that market. The state of Maharashtra has 306 such APMC markets.[3]

Further, the government has also proposed the creation of a framework to allow e-trading of produce. The secretary later clarified that this will be different from e-NAM which operates within the framework of existing laws.

If the government can eliminate these anti-competitive practices, then it will be a truly great deed for farmers. However, a lot depends on the fine print. According to the seventh schedule of the constitution, ‘Agriculture’ is a state subject. (‘Inter-state trade and commerce’ is a central subject though.) Even if such a law is passed, implementation will come down to the state and will definitely be challenged by multiple states. This is because middlemen in the agriculture sector have deep political connections and lobbies that will resist any attempt to take their power away.

A second concern, is that middlemen and traders in the APMC markets already have strong bodies and control over these markets. The new law has to have component that will deal with these bodies and address their informal anti-competitive practices in the real world. The cartelisation of agricultural markets has to be actively broken. It will not be enough to just remove the legal backing of these practices. Otherwise, this law will be dead letter on arrival.

Contract Farming.

The licence regime in agriculture and the current system of APMCs has also discouraged contract farming. ‘Contract farming’ is when food processors contract directly with farmers to grow the agricultural produce they need. Contract farming has been suggested as an innovative solution to a lot of farmers because of its collectivised nature. Indian farmers have very small holdings and when you combine that with the uncertainty of returns, it becomes nearly impossible to move out of crops that give MSP or try new techniques for better yield. These issues can be addressed in an effective through contract farming in India. This is because contract farming in India by its very nature will be collective due to small land holdings. This gives contractors the freedom to experiment with new farming techniques at a smaller scale and later, farmers get access to these best practices as a part of these networks.

In the final announcement, Finance Minister Sitharaman proposed the creation of a facilitative legal framework for farmers to be able to directly engage with food processors, aggregators and large retailers to bring greater certainty of prices. This will give a great fillip to contract farming in the country by establishing a basic legal standard for it. This will go beyond removing the licence raj in agricultural procurement and will give protection to farmers in the future, if they choose to engage in contract farming.

Conclusion

These reforms by the government have one basic idea behind them. It is the idea that the Indian farmer should be treated like any other business owner and should have the freedom to choose. A freedom that the Indian farmer has been denied throughout the years, keeping him in shackles. Many of these structural reforms have been demanded for decades. However, India is known to change only during tough times and the government has utilised a crisis effectively to get past strong political lobbies which have kept Indian farmers distressed for long. The fine print is yet to be seen. However, the intention of this government is clear. If these reforms are implemented faithfully, then the Indian farmer will be truly free and will be on the path from distress to prosperity.

– Aditya Bharadwaj,

Guest Writer, Bharat Bhagya Vidhata.

References:

[1] https://scroll.in/article/913692/data-check-loan-defaults-by-corporates-have-cost-the-state-much-more-than-farm-loan-waivers.

[2] https://www.thehindubusinessline.com/economy/agri-business/indias-farm-exports-to-get-a-boost-with-deregulation-of-key-agri-produce-say-experts/article31594501.ece

[3] https://www.thehindu.com/news/national/other-states/all-you-need-to-know-about-maharashtras-struggle-to-amend-apmc-act/article26162434.ece

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