Transforming India’s Agriculture Sector for Achieving Global Competitiveness

Introduction

The agriculture sector contributes around 18% in Indian GDP and approximately 60% of the population directly or indirectly depends on it[2] (GOI, 2021). Usual breakage of promises by the elected parties resulted in complete neglect of the agriculture sector. Agriculture input prices rose sharply in 2014, while output prices remained stagnant and resultantly farmers’ income declined—created a very alarming situation for the farmers. Government promise of a minimum support price (MSP) was never fulfilled, which further aggravate the grievances. Further, mobility of cash crops (vegetables and fruits) were controlled through market act and it restricted farmers to sell their produce in the designated markets. Hence, prices received by the farmers were not based on supply demand situation.

The nightmare for farmers did not end here, rather the horrible night lasted longer as Narendra Modi’s government announced demonetization scheme in November 2016. This scheme abruptly withdrew 86% of the currency from circulation overnight. Because of shortage of replacement currency, the small and micro enterprises in farm and market town collapsed, millions of daily wage workers and paid in cash workers lost their jobs. In subsequent periods after 2016, farmers unite themselves for protest and march against the state failure to protect farmers. Unfortunately, their voice was unheard, and the government did not take any significant step to help farmer out of crisis until 2020.

Background

General election of 2019 in India marked another victory for BJP and Narendra Modi became the prime minister. This time BJP government rather ignoring agriculture sector introduced splendid reforms which appeared as three farm bills 2020. These bills intended to empower, protect, promote and facilitate Indian farmers by liberalizing the marketing structure of agriculture produce and by giving farmers direct access to consumers. Based on economic theory, we believe these historical changes will entirely transform the agriculture sector on modern lines. This point of view coincides with the opinion of the IMF, as expressed by Gerry Rice, IMF Director of Communications. (The Hindu, 2021)

The Three Bills

The first bill is about empowerment and protection and titled “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020” (GOI, 2020a). The bill is about protecting the farmers’ interest through a legal agreement. This bill helps keep farmers safe from being cheated by any company or sponsor. Such as the case if the company or sponsor changes or reduces a price they had previously agreed to with a farmer to exploit him. This bill protects the farmer against such possibilities through price assurance. The buyer will tell the farmer about the quality of product, time of delivery, etc. So they term it as “contract farming”. The buyer is bound to pay an already agreed upon price to the farmer. Hence, contracts offer producers greater price and income stability by providing a guaranteed market price.

The Farmer’s Empowerment and Protection Agreement

The primary aim of this act is to reduce farmer’s risk by providing legal protection to contract farming through legal framework. The government believes that this act will transform Indian agriculture and attract private investment. Buyers often agree to support the farmers through supplying inputs, assisting with land preparation, providing production advice, and transporting produce to its premises.

The farmers believe that powerful corporate investor would legally dominate and may put the liability clauses on them, but in the presence of a strong and fair judicial system it will not be easy to blame farmers in every case. The farmer community is closely interlinked, and any bad repute about any corporate investors may kick the firm out of business forever. Hence, firms will not take the risk to lose its future businesses with farmers and with its customers to whom they were going to supply the produce.

The Farmers’ Promotion and Facilitation Bill

The second bill is about the production, trade and commerce and titled “The Farmers’ Produce, Trade and Commerce (Promotion and Facilitation) Bill, 2020” (GOI, 2020b) and deals with inter- and intra-state trading of farm goods outside the mandi and through the Agricultural Produce Market Committee (APMC). The aim is to promote the concept of “one India one Agri market”. So according to this bill, farmers can trade directly with private cold storage facilities, warehouses, private units, etc. If they sell their produce outside the mandi, then they will lose the cushion of the minimum support price (MSP) because for MSP, products need to go through APMC. Although farmers have a serious concern about the elimination of the safety cushion of the MSP, but most of the time it is not even offered. Also, if large farmers want to have state protection through MSP, then they have to trade with APMC notified or APMC licensed traders.

However, the bill allows barrier free trade outside the mandis because it does not allow state government to impose any levy tax on sale and purchase of farm produce outside the mandis. Clearly, this bill provides an opportunity for farmers to sell their produce at good prices outside mandis, and this was the demand of farmers for many decades (The Indian Express, 2021).

Some Considerations for the Second Bill

There are also few considerations, while considering the logistics and transportation cost, small farmers could hardly get courage to sell their produce in other states. But large farmers have better excess to markets, so we expect this to increase the disparity between large and small farmers. Farmers can sell their produce in the open market, which generates higher profits, but they lose the government rescue package of subsidy or price support. Hence there is a tradeoff between expected high prices outside mandis (private markets) and government rescue packages. However, the formation of farmers’ cooperative will not only solve the problem of small farmers’ reduced access to markets, but it may also increase their bargaining powers.

The Essential Commodities (Amendment) Bill, 2020

The third bill is about the essential commodities and tabled as “The Essential Commodities (Amendment) Bill, 2020” (GOI, 2020c) which is not new rather central government have made an amendment to Essential Commodity Act 1955 by clause (1) of article 123. The Essential Commodity Act basically controls the production, supply, distribution, trade and commerce of certain essential commodities. Illegally hoarding these goods in order to create artificial demand or black marketed adversely affects the normal life of the people like essential food, medicines, fuel, petroleum products, etc.

The existing act provides provision to add in or remove existing products from the list. For example, in March 2020 government added masks and hand sanitizer to make these commodities available in good quality and at low prices to the people in the wake of the pandemic. So the amendment is about removing certain commodities as essential from the list which includes cereals, pulses, potato, onion, edible oilseeds and oil. Government will only regulate their supply and prices in cases of war, famine, extraordinary price rise or natural calamities.

The farmer’s concern on this amendment is that frequent removal/addition of items from the list may eventually increase the prices. Because farmer believe it will increase farmers’ income on one hand, but without government regulations there is a high probability of hoarding and creating artificial demand hike to earn extra profit by the middleman. But a recent amendment imposes a restriction of not stocking these commodities to prevent hoarding and malpractice under certain conditions. So a 100% increase in the prices of horticulture products and 50% increase in the retail prices of non-perishable agricultural products. This amendment clearly addresses the farmers’ concern.

Concluding Thoughts

India’s government’s single point agenda is to enhance market efficiency. And it is attempting this by reducing it’s footprint and promoting free market in the country. These amendments help shorten the agriculture value chains of different commodities and allow producers to interact directly with consumers. This not only solves the problem of asymmetric information, but also helps eliminate lemons from the market. Further, it will reduce the financial burden (paid in terms of subsidy) of the government and improving the welfare of consumers and producers alike. But the welfare increase of consumers and producers will be at the cost of extra profit earned by the middlemen. Beside the monetary benefits, consumers will also enjoy higher-quality products. Reducing footprint of government will also save billions of rupees that were being spent on price support and export subsidy.

References

• GOI (2020a). Ministry of Law and Justice. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, (2020). http://164.100.47.4/BillsTexts/LSBillTexts/PassedLoksabha/Bill%20Farmers%20%20Empowermente%20(As%20passed_Eng).pdf
• GOI (2020b). Ministry of Law and Justice. The Farmers’ Produce, Trade and Commerce (Promotion and Facilitation) Bill, (2020). http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/113_2020_LS_Eng.pdf
• GOI (2020c). Ministry of Law and Justice. The Essential Commodities (Amendment) Bill, (2020). http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/111_2020_LS_Eng.pdf
• GOI India (2021). Statista Research Department, (2021) . https://www.statista.com/topics/4868/agricultural-sector-in-india/
• The Hindu (2021) https://www.thehindu.com/business/Economy/farm-bills-have-potential-to-represent-significant-step-forward-for-agriculture-reforms-in-india-imf/article33577480.ece
• The Indian Express (2021). https://indianexpress.com/article/india/indias-new-agri-laws-have-potential-to-raise-farm-income-social-safety-net-needed-imf-gopinath-7163612/