On May 15, Union Finance Minister Nirmala Sitharaman announced a third tranche of measures to make India and Indians atmanirbhar or self-reliant. This tranche focused on agriculture and highlights of the announced measures were the three administrative and governance reforms.
In collaboration with the Organisation for Economic Co-operation and Development (OECD), at the Indian Council for Research on International Economic Relations (ICRIER), we concluded an exhaustive study where farmer support ecosystem and related policy environment in India were extensively studied and analysed. The study, undertook analysis of 19 years, since 2000-01, for commodities covering about 67 percent of Indian agricultural value of output, and found that (i) while on one hand, the farmers were supported by government through elaborate input subsidies, on the other (ii) the farmers were taxed due to, inter alia, government’s restrictive trade and marketing policies.
Upon aggregating the two impacts (positive from subsidies and negative from taxation), the net impact on the farmer was found to be that of taxation, which implied that even after giving high subsidies, the government was unable to compensate farmers for the loss the latter incurred due to restrictive government policies. The policies causing the biggest loss/damage to farmers were, inter alia, the Essential Commodities Act, 1955, and the Agricultural Marketing Produce Committee Act 2003.
In this third tranche, Sitharaman promised reforms in both, and in addition, she presented a bright future for contract farming in India.
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…on the Essential Commodities Act 1955
The Essential Commodities Act (ECA) gives power to central and state governments to control production, supply, distribution, etc. of essential commodities for ensuring smooth supplies, equitable distribution to all and access at affordable prices.
It has been hugely criticised because, inter alia, its provisions are generally invoked in situations of price rise when the government machinery comes heavily on traders and stockist, who as a consequence refrain from creating stocks in future. This taxes a farmer because in case of a bumper crop, the price crash is much worse because traders do not come forward to purchase excess crop. Also, the ECA provisions have been invoked historically in a way that reflects the government’s inherent consumer-bias. This is because the ECA provisions are invoked when prices are rising or are expected to rise (and thus protect consumers), however, there is no provision that checks the free fall of prices for farmers.
Under proposed reforms, the FM will amend the ECA by (i) deregulating cereals, edible oils, oilseeds, pulses, onions and potato, (ii) removing stocking limits on processors and value-chain participants, and imposing them only under exceptional circumstances. These are welcome steps; only that these ‘exceptional circumstances’ will have to be clearly defined, and closely monitored.
…on the Agricultural Produce Marketing Committee Act 2003
The existing Act notifies agricultural commodities produced in a region and provides that first sale in these commodities be conducted only in designated APMC market yards (mandis), by authorised commission agents/licensees. Mandi fees, taxes, charges and levies are imposed on trades conducted in these mandis.
The APMC’s biggest criticisms include: (i) it has created fragmented markets where freedom of farmers to sell their produce is curtailed as they are forced to sell only through commission agents or traders authorised by the APMCs; (ii) the APMC traders monopolise trade and their price discovery mechanism is non-transparent, and often leads to lower price realisation by farmers; (iii) mandi fees and other charges/taxes are high and are mostly borne by farmers where traders/agents deduct these charges from farmer’s payments, and; (iv) these excessive mandi fees and charges put cost burden on entire value-chain.
Sitharaman proposes to create a central law in this regard that will provide barrier-free inter-state trade and a framework for e-trading of agriculture produce. This is a long haul reform as agriculture is a state subject and there are huge and deep-rooted network of APMCs in major agricultural states. How does the Union government propose to create this central law that perhaps is likely to bypass state APMC laws, will have to be seen. There are provisions in the Constitution in that regard, but will the Centre use them to over-ride state APMC laws or will it co-move with states coercing them to reform? Time will tell.
The FM also shared about promoting contract farming as a way to “offer alternate marketing channel to farmer that will ensure predictability of future farm prices for farmers”. Under this Act, a farmer or a farmer group can enter into a future contract to sell with a buyer. This is a good initiative.
Overall, these were long due reforms which were restricting the realised potential of Indian farmers and farming.
While it is imperative to commend Prime Minister Narendra Modi and Sitharaman for committing to undertake these reforms, it is equally important to remember that these reforms form part of a larger farming ecosystem and unless simultaneous changes are brought in other aspects, these reforms may fall flat.
For example: unless the farmers are mainstreamed and have access to institutional credit (as per NABARD’s NAFIS, only about 30 percent of agricultural households took institutional credit in 2015-16), their dependence on traders/arthiyas, etc. for meeting credit needs will continue and this will limit avenues of sale for the farmer.
Additionally, repealing the APMC will not automatically result in higher price realisations for the farmers as can be seen in case of Bihar. Besides, the problem of aggregation and small holder landholdings persists, and requires land-related reforms.
In times of COVID-19, it is the perseverance and commitment of the Indian farmer that has ensured uninterrupted supply chains for most food crops. It was only opportune for the Modi government to support their growth growing forward.
While all reforms are commendable and are likely to take care of growth going forward, we only wish the Modi government did something to support farmer’s current fragile economic situation, in which regard, an increased unconditional DBT to all farmers, including tenant farmers and sharecroppers, will go a long way.Shweta Saini is Senior Consultant (External), ICRIER. Views are personal.