In the first part of this conversation, we spoke with Prerna Sharma Singh, co-founder and head – agriculture, food and retail at Indonomics Consulting, about India’s controversial farm bills and their impact on India’s agriculture sector.
India’s farming sector is rife with a wide array of problems, including but not limited to demand-supply mismatches, the small size of landholdings, poor irrigation facilities, high levels of farmer indebtedness and woefully inadequate post-harvest infrastructure. There are question marks over whether the recent reforms do enough to address these persistent problems. Ms Singh says India’s farming sector has many hurdles to overcome, but these reforms are a big step forward as greater private sector involvement should help overcome many of these issues.
Unravel: One of the bills lays the ground for contract farming at pre-agreed prices. Given the small size of landholdings in Indian agriculture, is this viable?
Prerna Sharma Singh: Undoubtedly, it will be difficult for large corporate buyers such as FMCG companies to enter into contracts with small farmers (each with less than 2 hectares of land) who comprise as much as 86.2% of the total.
That is where traders as aggregators or facilitators can play an important role as they tend to have strong linkages with both sellers and buyers. Traders or middlemen are often accused of exploiting farmers by buying farm produce cheap from them and then selling at higher prices, and lending farmers money at exorbitant rates of interest. However, they are an important participant in India’s agricultural value chain and provide finance, market information and facilitate sale of farm produce.
Moreover, cooperatives, and Farmers Producer Organisations (FPOs) can be very helpful in dealing with small-sized farms. While they have a mixed record and there is no doubt about their challenges, they have the potential to transform Indian agriculture. I’m of the opinion that they can be helpful in organising farmers and improving their bargaining power. FPOs can organise smaller famers into common single entities and negotiate on their behalf with corporate buyers as well as vendors supplying key inputs such as seeds, fertilisers and agrochemicals. That will make it easier for corporate buyers to get into contract farming arrangements. FPOs can also help improve bargaining power of farmers vis-à-vis large buyers. The Indian government has made a budgetary allocation of INR44.96 billion to create 10,000 FPOs. That’s a move in the right direction as FPOs can help overcome many challenges associated with small sized land holdings in the country.
Unravel: There will now be no state control over how much cereals, pulses, potatoes and onions can be stocked by traders/ producers. Will this not potentially result in greater price volatility?
Ms Singh: Let me give an indirect answer to this question. First, there is no conclusive evidence that imposition of market-distorting stock limits permitted by Essential Commodities Act (ECA) 1955 helps in checking price volatilities. The official Economic Survey 2019-20 points out that stock limits on dal (lentils) in 2006, sugar in 2009 and onions in September 2019 spiked the volatility of the wholesale and retail prices instead of smoothening them. Second, the central government has only relaxed ECA by amending certain provisions of the ECA. It has not abolished it completely. Rather it has removed the arbitrariness in the law and clearly defined under what circumstances it can be revoked. Thus, if there is a 50% surge in the retail price of food grains or 100% in case of perishables over immediately preceding 12 months or average of last five years (whichever is lower), all the ECA restrictions such as stock limits, and bans on exports and futures trading can be imposed.
Rather than relying on market-distorting measures like imposition of stock limits or ban on exports, India needs to deepen futures markets in agricultural commodities. That will help both buyers and sellers to manage price risks through the market mechanisms without the need for government intervention, as the current system of minimum support price (MSP) and assured open-ended procurement cannot be extended to all 23 crops – since that is neither financially nor logistically feasible. MSP + Assured procurement is only available for rice, wheat, cotton and sugarcane, and this system is still already a mess. For instance, sugar mills are mandated to buy all cane supplied to them at prices fixed by the government – there is a sugar glut and sugar mills are bleeding, while farmers are not receiving timely payments.
There are provisions in the new contract farming law that if contracting farmers are getting better prices in the open market they can renege on contractual obligations while buyers can’t do that even if they are getting lower (than contracted) prices. These reform bills are simply increasing the options for farmers.
Moreover, India also needs a robust demand-supply forecasting system to deal with under and over-supply of specific crops. As of now, farmers take signals from the previous year’s prices to decide what to produce in what quantities rather than based on estimated market demand. This has to change.
Unravel: In theory, this reform helps farmers by allowing them to sell directly to private sector players. But how can small farmers compete? Will contract farming not exclude small farmers?
Ms Singh: Yes, after the passing of the farm bills, any farmer—including the small and marginal ones—can sell directly to any buyer from anywhere. Having said that, it’s worth mentioning that most of the small and marginal farmers (with less than 2 hectares of land) have limited marketable surplus and practice subsistence farming. The only way for them to engage in contract farming agreements is by joining hands with each other and forming FPOs or cooperatives, to benefit. Besides, they can join hands with local aggregators too. Poultry farming is a successful example of how small farmers have been benefiting from joining hands with aggregators who provide all kinds of support, including supply of feeds and medicines.
Unravel: What are some steps that can be taken to increase farm productivity?
Ms Singh: There are multiple factors responsible for low farm productivity (defined in terms of how much farm crop can be produced from a given land area). First, pre-dominance of small-sized farms makes mechanised farming uneconomic. Second, not more than 45% of the gross cropped area is irrigated. The rest is dependent upon unpredictable monsoons. A good monsoon raises production and productivity of any farm land, while a bad monsoon season can push them down. Third, unbalanced use of fertilisers or over-use of subsidised urea not only keeps output lower but also degrades soil, thereby affecting future productivity of the land. Fourth, there are usual suspects: deficient investment in agriculture, faulty crop mix, losses from crop diseases and pest attacks, and lack of quality seeds.
However, if we measure productivity in terms of monetary value realised from a given farm land, things are even more complicated. In addition to the factors mentioned above, there is very high wastage of farm produce because of inadequate post-harvest infrastructure, especially in case of perishables. As a result, the net realisation for a farmer is lower even when crop condition is good enough. Lower net realisation also results in farmers willing to invest less in farming, especially when getting institutional finance continues to remain cumbersome. Some of these problems will be addressed automatically after the implementation of the farm bills 2020, as the bills are likely to bring in private investment in the creation of post-harvest infrastructure that will help cut wastage. A valid contract with large buyers (as part of FPO, for instance) will make it easier for farmers to get bank loans. That will facilitate investment in agriculture going forward. However, the farm bills don’t address many other problems, for instance, unbalanced use of fertilisers. Dealing with that calls for bringing urea under India’s Nutrient-based Subsidy (NBS) regime. That will reduce the relative price gap between urea and non-urea fertilisers and promote a balanced fertiliser-mix. I think FPOs can play a big role in improving farm level productivity. Further, relaxing ECA will reduce the intervention of the government when it comes to exports and that will benefit farmers because of steadier growth in exports.
Unravel: Is the government doing anything to address the issue of farm indebtedness? Farmers cannot access collateral-free credit and they find themselves in the clutches of moneylenders in the informal market. Shouldn’t that be addressed more urgently?
Ms Singh: All governments have been trying to reduce farm indebtedness but without much success. Farmers still rely on exploitative moneylenders and traders as getting (cheaper) institutional/ bank credit is cumbersome or not possible given the lack of collateral. Following the introduction of contract farming and deepening of the futures market, getting bank finance will be easier for farmers. The focus of the Indian government is to reduce the cost of bank finance for farmers. However, in my view, a major worry for farmers is not as much the ‘cost’ of credit but the ‘access’ to institutional credit which is anyway far cheaper than credit from moneylenders. The recent bills do not directly address this. Micro-financing institutions (MFIs) are improving access to institutional credit and the government should support them in this endeavour.
Rather than relying on market-distorting measures like imposition of stock limits or ban on exports, India needs to deepen futures markets in agricultural commodities. Moreover, India also needs a robust demand-supply forecasting system to deal with under and over-supply of specific crops.
Unravel: The three bills will allow a greater role of the market in India’s agriculture sector. But do you think they will improve the lives of farmers?
Ms Singh: One of the major risks of farming is marketing farm produce and dealing with price volatilities, especially for perishables. Such risks can be minimised through contract farming agreements. I’m positive about the likely benefits of contract farming. One of the major criticisms of contract farming is that farmers will have lower bargaining power vis-à-vis large corporate buyers which might happen, and that can be used to force farmers to accept lower (than MSP) prices. However, the government knows this. So, there are provisions in the new contract farming law that if contracting farmers are getting better prices in the open market they can renege on contractual obligations while buyers can’t do that even if they are getting lower (than contracted) prices. These reform bills are simply increasing the options for farmers. Relaxing ECA will strengthen the futures market (and that again will help cover price risks) and boost farm produce exports.
Unravel: Globally, we have seen that the corporatisation of agriculture has in fact depressed farmer incomes. What is to protect the farmers from falling at the mercy of large private players?
Ms Singh: Yes, that’s not incorrect. But existing Indian regulations have not ensured higher margins or higher incomes to farmers either, except in the case of a few crops such as wheat, rice and sugarcane. The growers of horticultural products in India are not protected from either price risk or income risk although India needs to promote non-cereal crops more as the demand for them is growing at faster rates than those for cereals. What Indian farmers need the most is surety of income rather than high margins. MSP + Open-ended assured procurement is the best option but it can’t really be extended to all crops, especially perishables. The next best option is to increase reliance on market instruments – the futures market, contract farming and diversification of crops and markets. That will help minimise farming risks without the need for expensive and unsustainable government intervention.