A 1991 moment for agriculture

Ravi Krishnan and Ravi Ananthanarayanan

A couple of days ago, these pages had ruminated whether the economic package that would be announced by the government would be a 1991 moment for Narendra Modi. The 1991 balance of payments crisis had set off reforms of Indian industry and manufacturing, and the rest, as we know, is history.

After today’s announcements, the answer is here. At least for agriculture reforms, this is a watershed moment. The three reforms the finance minister announced on Friday are aimed at freeing pricing, production and trade of agriculture and help the sector realise its potential. These reforms will enable farmers to escape from the clutches of middlemen and trader cartels, open new channels and foster competition in the supply chain, and provide some stability to an occupation beset with volatility.

First, the government will amend the Essential Commodities Act (ECA) and deregulate a lot of agriculture produce. It will now impose stock limits only under exceptional circumstances such as national calamities, famines and so on. The ECA has been a mechanism to protect consumers from price gouging by traders at times of scarcity. It was introduced in 1955 when India was not self-sufficient in food production. Now, of course, the country has large buffers of food stock. Removing stock limits for processors and others in the agriculture value chain will bring in more investments. That’s because it will remove the uncertainty that industry faces. Companies can now plan production and sale without the fear of getting hit by, say, a sudden reduction in stock limits. Exports will become viable.

Second, New Delhi will enact a new central law that will remove all barriers to inter-state trade and introduce a framework for e-trading of agriculture produce. Currently, farmers in most states are bound to sell their produce only in mandis. Of course, some inter-state trading happens even now, but with some permissions required to transport agricultural produce to other states. The government wants this to be completely free. If inter-state barriers are removed and buyers can go directly to the farmer, bypassing the APMCs, then farmers can easily enter tie-ups with large companies, exporters or retailers. If a legal framework can hold the buyer to an obligation to pay for the produce and the farmer to supply as per contract, then this could take off.

Third, the government will come up with a legal framework to enable farmers better engaging with processors, aggregators, large retailers, exporters  and so on in a fair and transparent manner. This would also include aspects of risk mitigation, assured returns for farmers and quality standardisation. While details are rather vague, one would think – going by the tenor of the reforms – that the government will perhaps allow contract farming in more crops or a better framework for futures trading in agriculture products.

Overall, the reforms are aimed at overhauling the farm supply chain to make it more efficient, and remunerative for the small farmer, while ensuring that consumers too aren’t short changed. While that is necessary, remember that agricultural reform is akin to deepening the corporate bond market in India in the sense that everybody knows it needs to be done, but governments have been unable to do so. That’s why, if the government is able to push through these reforms, it could be a game changer.

As with any other major reform, the government has to surmount many obstacles, not the least of which will be in the form of a strong middleman lobby. Take the agriculture marketing reforms, for example. In 2016, the Centre had come out with a model APMC act which many states were reluctant to adopt. While bypassing the middleman will benefit both producer and consumer, remember that not all farmers produce in quantities enough to make a truckload, so they will depend on a trader then. The extent of small farm holdings make it difficult for large suppliers to deal with several farmers. Access for farmers to the last leg in the chain will remain a problem that's not easy to solve. Conversely, organised retail in India is not big enough to absorb the production of very large farmers.

Moreover, remember that India already has an e-National Agriculture Market (e-NAM), but it hasn’t met with much success because it isn’t backed up by enough quality control and a dispute resolution mechanism. Then, there is the barrier in the form of state governments who give considerable benefits to farmers such as concessional power and in turn, may want that the produce is available for consumers within the state. Every state also has its own licensing mechanism and taxes which need to be taken into account. A lot will depend on how this law is implemented.

Even with the ECA, note that the commodities mentioned are a large portion of an average household's budget. The risk of deregulation is that consumers will feel the pinch if prices spike because stock limits can be imposed only in very exceptional circumstances. The logic may be that those with ration cards can be protected while the rest can afford to pay. The risk here is that the middle class will feel the pinch when prices increase. The main problem this enactment can face is resistance from states and the reaction of consumers when there's a sharp spike in prices and the government's hands are tied.

To sum up, the government will have to expend a lot of political capital in pushing these reforms through. Agriculture is a state subject -- although the finance minister did say that inter-state trade is a central subject -- and perhaps a constitutional amendment might be needed. However, this government has pulled off such a feat at least one other time – when it implemented a nationwide goods and services tax. A nationwide market for farmers might just allow the government to fulfill its promise of doubling farmers’s income by the time of the next elections.