India is the world’s second largest agricultural producer with an estimated output of $396 billion per annum, or roughly 7.5% of global agricultural output (2018). It employs 44% of India’s workforce, accounts for 16.5% of the country’s GDP and 12.25% of its merchandise export. But the sector is beset with multiple challenges.
In an attempt to liberalise and modernise the farming sector, the Narendra Modi-led government passed three controversial farm bills amid much opposition in parliament and on the streets. The new laws have been met with a backlash from farmers, and faced strong political opposition.
To understand what ails India’s agriculture sector and what these bills are about, Unravel spoke with Prerna Sharma Singh, co-founder and head – agriculture, food and retail at Indonomics Consulting. Ms Singh, an expert on India’s agrarian economy, spoke about the problems in India’s farming sector, and how these bills help address some of them.
Unravel: What kinds of challenges are Indian farmers faced with?
Prerna Sharma Singh: Indian farmers have to deal with (uncovered) marketing risks due to limited coverage by the existing procurement system. The price floors or minimum support prices are announced for 23 crops but assured procurement is available to only a few crops – primarily wheat, rice, cotton, sugarcane; and of late, the government has started buying small quantities of pulses.
This is resulting in over production of cereals (and sugar) rather than protein-rich foods such as pulses, poultry and meats, and horticultural items such fruits and vegetables, although demand for the latter categories is growing at faster rates due to rising disposable incomes and changing consumer preferences.
Second, in crops without assured and effective procurement, there are wild fluctuations in production – for instance, a deficit year (when prices surge) is followed by a surplus year when prices correct sharply. This happens because Indian farmers decide what crops to cultivate, taking signals from market prices of the previous season rather than basing their cropping decisions on market demand as there’s no system of demand forecasting. In both cases, demand and supply mismatches are quite common and farmers’ earnings see little change.
Up to 20% to 30% of India’s perishable output is wasted due to low processing (not more than 3%-4% of the fruits and vegetables are processed in India, compared to 65% in the US) due to seriously inadequate post-harvest infrastructure, especially cold chains. More than 75% of India’s cold chain space is occupied by potatoes alone, with little space left for other perishables.
This results in farmers often selling fruits and vegetables at throwaway prices. And often, it is just thrown away. A substantial portion of perishables often rot while being transported to mandis (markets). Someone has to pay for this substantial wastage, and that results in a large gap between farm gate (the price at which farmers sell their produce) and retail prices of farm produce.
That is not all. The benefits of government policy are limited to a few states (Punjab, Haryana, Uttar Pradesh and Madhya Pradesh) and largely benefit rich farmers with marketable surplus.
The Essential Commodities Act empowers the central and state governments to regulate the production, supply and distribution of designated essential commodities such as cereals, pulses, oilseeds, onion, potato and sugar. To regulate such activities, government agencies often impose stock limits, minimum export price (MEP) or ban futures trade and export. All of this discourages private sector participation in the agricultural value chain.
This context is important in analysing and understanding the farm bills.
Unravel: What are the farm bills?
Ms Singh: There are three reform bills focusing on three broad areas – overhauling agricultural marketing, facilitating contract farming and relaxing the draconian Essential Commodities Act 1955. Following the passage of the Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Bill 2020, farmers will be allowed to sell their produce wherever they want – either within the Agricultural Produce Market Committee (APMC) market yards or outside the APMC market without paying any state taxes or fees that could be as high as 8.5% of the value of the farm produce.
- Agricultural marketing reform: Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Bill 2020
- Facilitating contract farming: The Farmer (Empowerment & Protection) Agreement of Price Assurance and Farm Services Bill 2020
- Amending Essential Commodities Act, 1955: The Essential Commodities Act (Amendment) Bill 2020
The marketing reform bill aims to provide an alternate and more cost-efficient marketing channel for buyers and sellers. That is likely to eventually drive out intermediaries and middlemen, and reduce the gap between farm gate and retail prices of farm produce. This doesn’t close down APMCs or end the system of price floors.
In a strict sense, APMC regulations don’t allow farmers to sell outside of allocated APMC mandis, and there have been restrictions on inter-state movement of produce that reduces their net price realisation. This bill that allows out-of-mandi transactions actually changes things for favoured crops, especially rice and wheat.
The Farmer (Empowerment & Protection) Agreement of Price Assurance and Farm Services Bill 2020 will enable farmers to enter into contractual arrangements with bulk buyers such as food processors, large retailers and exporters for supply of farm produce at pre-agreed prices. Thus, it will minimise marketing risks. This is important especially for perishables – fruits and vegetables where there is no assured government or private procurement, and wastage is very high – as high as 20%-30% of the total output. This arrangement minimises price risk for both parties. It will also reduce the cost of borrowing by expanding financing options. Indirectly, it will help address the problem of land fragmentation by inducing farmers to form Farmer Producer Organizations (FPOs) or co-operatives or simply lease their land to someone who can do the farming better. This will increase investment in agriculture and improve productivity, which remains very low for most crops.
Finally, the Essential Commodities (Amendment) Act 2020 removes food commodities from the purview of the ECA and hence does away the risk of imposition of stock holding limits for bulk buyers. It prunes down the arbitrary bureaucratic power to impose bans on exports or futures trading in agri-commodities. The amended act clearly defines under what specific circumstances, government can impose stock limits or ban exports of future trading: If there is a 50% price surge in case of food grains or 100% in case of perishables, all the ECA restrictions such as stock limits, ban on exports and futures trading, can be imposed. Increasing regulatory certainties will boost investment in the supply chain and warehousing by private investors, and help reduce post-harvest wastage.
Unravel: Why are they contentious? And why are there protests?
Ms Singh: It’s easy to understand why middlemen are opposed to these bills as they cut them out of commission on the sale of farm produce in APMCs. Some states are opposed to these reform bills as they’re losing a major source of revenue, particularly states such as Punjab (which collects as much as INR50 billion) and Rajasthan. Punjab state assembly has passed a series of amendments to nullify the impact of Central legislations on its revenue. Rajasthan has also passed an order that designates all warehouses of Food Corporation of India (FCI) and state warehousing corporation as mandis, thereby retaining its powers to charge mandi fees.
Unravel: But why are farmers protesting the reform bills if they are supposed to help them? What kind of farmers are opposing?
Ms Singh: More than 85% of wheat and paddy grown in Punjab, and 75% in Haryana, are procured by the Food Corporation of India (FCI) at minimum support prices. It’s interesting to know that it’s mostly the rich and wealthy farmers—with marketable surplus benefits from assured procurement—who don’t want to let go of it, even if there are serious fiscal and environmental costs of continuing with the existing arrangement. Over 86% of the farmers are small and marginal (with land <2 hectares) who practice subsistence farming. Only 6% of the Indian farmers benefit from the minimum support prices and the Assured Procurement Arrangement. It is they who are protesting against the farm bills, fearing they will lose out under a changed regulatory regime as buyers will move to a cost-efficient marketing system outside the APMC mandis or market yards.
Unravel: Farmers in India have been protected from market forces for decades. Do these bills change that?
Ms Singh: This is not entirely correct. Only farmers growing rice, wheat, sugarcane and cotton are protected from market forces. The rest, particularly growers of perishables, have been exposed to market forces, although there have been multiple restrictions on them. In a strict sense, APMC regulations don’t allow farmers to sell outside of allocated APMC mandis, and there have been restrictions on inter-state movement of produce that reduces their net price realisation.
This bill that allows out-of-mandi transactions actually changes things for favoured crops, especially rice and wheat, and not much for the other crops. Now, APMCs will have to compete with more cost-efficient private markets that are likely to come up. Even government procurement may move towards states with more efficient APMCs – for instance, low tax states such as Madhya Pradesh.
These bills will unshackle the country’s farm sector from the clutches of archaic government regulations that don’t make sense, rein in exploitation by middlemen, and enable farmers to get a higher share of retail prices without the need for market-distorting government intervention.
However, removing inter-state movement of farm produce and allowing bulk buyers such as retailers and food processors to buy directly from farmers will benefit all kinds of crops and their growers. Nevertheless, the new reform bills will be immensely beneficial for horticultural produce by encouraging investment in cold chains, processing and increased sales through organised retailers or contract farming, that will improve margins for growers and bring surety of income from reduced marketing risks.
Unravel: So, farmers should be happy because they can sell their produce at market price directly to businesses, supermarkets and grocers?
Ms Singh: Yes. But, of late, there has been a glut in most agricultural commodities, owing to which many farmers have had to sell below their price floors or minimum support prices. As such, market prices are not attractive for many, particularly the producers of rice or wheat. But for perishables, assured procurement by bulk buyers, food processors, grocers and exporters—even at slightly lower market prices—will improve net realisation as there will be less post-harvest losses.
Unravel: What is the view of organised retailers and FMCG companies?
Ms Singh: They seem happy as all restrictions on them of buying directly from farmers have been done away with. They can also get into mutually beneficial contract farming arrangements, and they won’t face arbitrary government actions such as stock limits or export bans.
Unravel: In the long run, are these reforms beneficial for India’s farm sector?
Ms Singh: Yes, these bills will unshackle the country’s farm sector from the clutches of archaic government regulations that don’t make sense, rein in exploitation by middlemen, and enable farmers to get a higher share of retail prices without the need for market-distorting government intervention. The bills will reduce price risks in perishables and will incentivise farmers to produce what is demanded by the market, which will result in less supply and demand mismatches.
Unravel: And one last question. Are there any genuine concerns over the bills?
Ms Singh: There are. These are issues related to the sanctity of a contract under the contract farming bill. A buyer cannot renege on the contracted price and quantity even if open market prices go down. But, sellers/ farmers can walk out of a contract if they are getting better price terms – for example, when there is a crop loss that reduces supply and thereby pushes up prices in the open market. In my view, this is unfair to the buyer as a contract farming agreement should minimise price risks for both parties.
However, this provision has been included to protect farmers from exploitation by corporate buyers.
The second part of this interview can be read here.
Prerna Sharma Singh
Prerna is a senior agri-business specialist with over a decade of experience in agricultural and food policy research and advisory. She's a fellow of the prestigious International Visitor Leadership Program (IVLP) and has been advising leading Indian and multinational companies about demand, supply and price trends in India's agricultural and food market. Prerna is head of agriculture and food verticals at Indonomics Consulting Private Limited and one of its board members.