India's agri reform: Will the new farm bills benefit its farmers?

Given that around 86.2 percent of farmers in India are small or marginal, all the activities require capital that they cannot afford without the middlemen. The bills in no way tries to create alternate credit mechanisms to aid farmers, writes Akshat Singh for South Asia Monitor

Akshat Singh Oct 20, 2020
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“If it was really a revolution, they wouldn’t be calling it one,” quips Barun Mitra, founder, and director of the Liberty Institute, a non-profit, independent public policy research, and advocacy the organization, in a recent interview where I asked him to compare the recently agricultural reforms with the 1991 industrial liberalization program. Mitra, an expert on land reform and agricultural policy, is one of the few experts who have questioned the ‘liberal-free market’ credentials of the three agricultural bills.

The mainstream proponents have hailed the reforms as not only necessary but essential for pushing the farmers of the country out of the poverty trap that they have long been banished to. Thus, while the debate surrounding the bills has been forced into a binary between those on the economic left and right, the truth may be more nuanced.  

Farm bill - can it benefit farmers

Specifically, the complete obliteration of federalist structure (agriculture and (Agricultural Produce Market Committee) APMCs are a part of state list), as well as the parliamentary procedure that preceded the enactment of the bills, is enough to raise certain eyebrows. How a bill that is so obviously pushed through without sufficient stakeholder consultation through the support of corporate behemoths, can benefit the farmers? The answer is simpler than one would think: It will not.  

To ensure that preconceived biases do not color this assessment, it is essential that we look at the three bills - The Farmers’ Produce Trade and Commerce (Promotion and Facilitation), the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services and the Essential Commodities (Amendment) Act - through the modicum of some basic liberal market structures and then see how (and if) the current legislations fit the frame. 

To make the analysis holistic, it is necessary that the frame considers the country’s institutions (including the regulatory framework, dispute settlement mechanism, etc.) as well as the societal norms (such as market participation, rent-seeking). The ‘Index of Economic Freedom’ is one such framework.  

The Index of Economic Freedom was formulated by the Heritage Foundation and the Walls Street Journal in 1995 and since then publishes an annual rank of countries on four parameters: 

i. Rule of law (property rights, judicial effectiveness) 

ii. Government size (government spending, tax burden, fiscal health) 

iii. Regulatory efficiency (business freedom, labor freedom) 

iv. Open markets (trade freedom, investment freedom) 

Thus, through covering a wide ambit including state-backed processes as well as individual processes, the index provides a holistic view of how ‘free’ a market really is. 

It is my hypothesis that once viewed under the light of these subheadings, we will be able to see the legislations in a new light and debunk the messiah liberal claims that they make.  

Rule of law: The day of judgment 

This essentially means that no party by virtue of their existing position should be able to unfairly bias decision making.  

This tenet came under fire when one look at Articles 14 and 19 of The Farmers (Empowerment and  Protection) Agreement on Price Assurance and Farm Services Act, 2020i. The article talks about dispute settlement mechanisms in case of a disagreement between two contracting parties (in this case farmers and procuring companies). The mechanism is three-tier - beginning from a stakeholder-appointed reconciliatory committee, followed by judgment from the Sub-Divisional Magistrate and finally, the District Magistrate (DM) or Additional DM is the final appellate authority, wherein the latter two are given the jurisdiction of a civil court. 

In this regard, the creation of a parallel legal mechanism for dispute settlement is uncanny. Moreover, the intervention of the judiciary is explicitly prohibited as per Article 15 of the Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020. Even if we ignore the substantial increase in the scope of powers of the SDMs, there is no evidence that they have ample training to assess and give judgment on such cases. While many would argue that separate tribunals are given judicial powers in specific domains (such as the National Green Tribunal), these usually consist of experts in that specific domain. Furthermore, the intervention of the upper courts is never prohibited.  

It is not farfetched to argue that the incentives of district administration are often warped. Who is to say that SDMs, would not be unduly influenced by larger corporations to make biased judgments in their favor? While the judiciary is also prone to rent-seeking, the appellate structure and the integrity of the judiciary makes it far more impregnable. On the other end, unlike community-led dispute settlement mechanisms, the SDMs would also have no ‘socially’ imbibed pressures to give fair decisions- especially when they know that they would be transferred sooner or later. It would only then make sense to maximize rent in random one-off transactions such as cases between larger corporations and farmers.  

Government size: A new master 

The bills claim to severely reduce government size, by encouraging private enterprise and only Limiting the government to when crucial. This is done through the prohibition on state governments from charging additional fees, taxes from traders. Given that the fees collected by the state government are crucial for the maintenance of the APMCs and by extension the distribution of MSPs (Minimum Support Price), this will be a severe blow to the state procurement capacity. While the only six-eight percent of farmers (and five-six percent of agricultural operations) rely on MSPs, the blow is meted out to agricultural pressure groups and state governments. By appropriating decision making, the center has viably pushed the state governments off the high table. Any corporate stakeholder then must lobby the center. 

Moreover, this has huge political economy effects on states such as Kerala and Chhattisgarh, which have successfully been able to pay the farmers an amount much higher than the center mandated MSP. Once the states, lose out on the mandi fees, they will not be able to pay out the expenses. Thus, creating a parallel market is in effect a death warrant for APMCs and by that extension, the state’s controls on agriculture.  

Article 2.2 of Essential Commodities Amendment Ordinance points to another problem. While price regulation during wars and famines is commonplace, the addition of ‘extraordinary price rise’ as an extraordinary circumstance just makes for a circular argument. The ‘extraordinary price rise’ clause is defined as a 100 percent price rise for horticultural and 50 percent price rise for agricultural commodities. When one realizes that a 100 percent rise in a market cycle is considered normal in the case of products such as onions, we can understand the extensive discretionary power that the center has awarded itself. This in turn severely disincentivizes traders
and producers to invest in storage capabilities- who is to tell when the big brother may just prohibit them from storing anything in it?  

Regulatory efficiency: The old new middleman  

Another ‘revolutionary’ objective of the bills is aimed at doing away with the tyranny of the ‘evil’ middlemen. While there clearly is market inefficiency caused by middlemen, we must remember that they often add value by acting as aggregators, informal lenders, and transporters for small farmers. Given that around 86.2 percent of farmers in India are small or marginal, all the activities require capital that they cannot afford without the middlemen. The bills in no way tries to create alternate credit mechanisms to aid farmers. 

Furthermore, Article 10.1 of the Empowerment and Protection Act clearly provides for the accommodation of ‘aggregators’. The term is vaguely defined as any Agri entrepreneur who has a PAN card and is included in the contract. This essentially implies that the middlemen can still carry on aggregating if they supply to a larger company. While this was already being done even till now, the prohibition of larger companies to enter the market directly gave the middlemen considerable negotiating power. It makes economic sense from a supply chain perspective for a larger company to employ an existing player to aggregate for them.  

Thus, in essence, the acts do not do away with the middlemen; it just centralizes them under their new corporate overlords. This is problematic, as the markets now become more prone to anti-competitive practices as larger players with better capital and linkages start exerting more power. The previous decentralized model gave an effective warranty against this. 

Open markets: Open to who?  

Market freedom implies providing stakeholder’s inter-functional as well as inter-sectoral mobility. This means that if a farmer wants to become an agro-trader, it must not be difficult for them to do so. If they want to leave farming altogether, that should also be possible. However, the acts banish the farmers to their existing condition. While there are still no provisions to allow for ways conversion of land usage (a redundancy from the age where insufficient food production was a genuine fear), it essentially impedes on the farmer’s ability to choose their livelihoods. While several farmers have valuable land assets, their prices are severely undervalued in comparison with their commercial use brethren.   The bills also impede on inter-functional mobility. Article 8 of the Empowerment and Protection Act prohibits the sale of farming land to the other contracting party. Furthermore, it also does not allow companies to build infrastructure on the farming land and if built through contractual agreements, the building must be razed at the end of the crop cycle. 

The paternalistic viewpoint which limits the ‘poor farmer’ to being a gullible signatory is embarrassing. It reeks of colonial-era rules which tried to ‘educate’ the poor Indians. The clause limits the farmers from engaging in any entrepreneurial venture with the corporates while also forcing them to farm (by not allowing for land use conversion). For those who may dare to venture out and build storage by themselves, Article 2.2 b. of the Essential Commodities Amendment Ordinance, which gives government discretionary powers to limit stockpiling.  

Thus, all in all, while the bills provided for a much-needed movement from the status quo, the direction of the shift is yet to be seen. One can say that it is downhill from here. It is then a good thing that we had not climbed much high, to begin with.  

(The writer is Research Associate,  Society for Policy Studies (SPS). He can be contacted at akshat.singh@spsindia.in)

References: 

Foundation, Heritage. “About The Index,” 1995. https://www.heritage.org/index/about.  

Ministry of Agriculture, THE FARMERS (EMPOWERMENT AND PROTECTION) AGREEMENT ON

PRICE  ASSURANCE AND FARM SERVICES BILL, 2020 § (2020).  

https://www.prsindia.org/sites/default/files/bill_files/Farmers%20%28Empowerment%20and%20protection%29%20bill%2C%2
02020.pdf.  

Ministry of Agriculture, THE FARMERS’ PRODUCE TRADE AND COMMERCE (PROMOTION AND
FACILITATION)  BILL, 2020 § (2020).  

https://www.prsindia.org/sites/default/files/bill_files/Farmers%27%20Produce%20Trade%20and%20Commerce%20bill%2C%2
02020.pdf. 

Online, FE. “Few Farmers Really Worry about MSP.” The Financial Express. The Financial

Express, September 24, 2020. 

https://www.financialexpress.com/opinion/few-farmers-really-worry-about-msp/2089993/. 

When the Cost of Crops Varies Statewise, Why Is There a Common MSP for the Entire Country? - Gaonconnection: Your  Connection with Rural India.” Gaonconnection, February 10, 2020. https://en.gaonconnection.com/when-the-cost-of-different crops-varies-from-one-state-to-the-other-why-is-there-a-common-msp-for-the-entire-country/.  

Ministry of Law & Justice, THE ESSENTIAL COMMODITIES (AMENDMENT) ORDINANCE, 2020 §

(2020).  http://egazette.nic.in/WriteReadData/2020/219748.pdf.  

Bera, Sayantan. “Small and Marginal Farmers Own Just 47.3% of Crop Area, Shows Farm Census.” mint, October 1, 2018. https://www.livemint.com/Politics/k90ox8AsPMdyPDuykv1eWL/Small-and-marginal-farmers-own-just-473-of-crop-area show.html

Ibid 
Ibid 
Ibid

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