The farm sector reforms will end monopolies and give neglected states a level playing field
A farm on the outskirts of Amritsar (Photo: AP)
THERE WERE DRAMATIC scenes in Parliament last week. On September 17th, Lok Sabha passed two farm sector reform Bills based on ordinances issued in June. That night, Harsimrat Kaur Badal, the lone Shiromani Akali Dal (SAD) member in the Union Cabinet, quit as Minister of Food Processing Industries. The SAD’s future in the National Democratic Alliance (NDA), as one of the oldest alliance partners of the Bharatiya Janata Party (BJP), was now under a cloud. Two days later, on September 20th, there was uproar in Rajya Sabha when the Bills were passed by voice vote in the Upper House. The opposition cried death of democracy.
The crescendo of voices rose suddenly, within days of the Bills being introduced in Parliament. This gave the opposing voices something of a synthetic quality to them as if this were an issue handy to beat the Government with. When the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020; the Essential Commodities (Amendment) Ordinance, 2020; and the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 were issued on June 5th, there was not even a hint of protest in the air. Over the next two-and-a-half months, there were murmurs of protest in Punjab and Haryana but nothing of the kind seen since September 10th.
Thereafter, protests along National Highway 1 north of Delhi became routine. Farmers in swanky new tractors—very often without number plates—seem to have driven off straight from showrooms to protest sites on bridges, highways, roads and in front of office buildings. In Punjab, there is near unanimity across the political class against the Bills. The reasons are understandable but somewhat complex as these are entangled with the state’s history since the mid-1960s. Something similar is at work in Haryana, even if at a significantly toned-down level. Elsewhere in India—across Uttar Pradesh (UP) and Bihar and from Madhya Pradesh (MP) to Chhattisgarh—there is agrarian peace. There are, to be sure, protests here and there but these are nothing compared to the new ‘Punjab Problem’.
The three Bills that have been passed by both Houses of Parliament open up the traditional system of trade in agricultural commodities for competition from the private sector. India’s food trade system—basically in commodities like wheat, rice, fruits and vegetables—revolves around the Agriculture Produce Marketing Committees (APMCs). These committees, created under various state laws, organise market yards where sale and purchase of these commodities take place. Over time, these APMCs became near- monopolies. Today, they levy market fee, brokerage charges and other imposts. All this is backed by state laws. As a result, there are significant frictions in agricultural markets that have a bearing on a number of economic variables like inflation, returns to farmers, agricultural growth and so on. Reforming the farm sector by allowing private sector firms to invest in the farm economy along with contract farming has always been on the agenda of parties across the political spectrum. But in India’s competitive politics, these reform efforts get derailed in the search for immediate political gains.
To cite an example, in its manifesto for the 2019 General Election, the Congress promised to repeal the APMC Act (item 11 in the ‘Agriculture, Farmers, and Farm Labour’ section); repeal the Essential Commodities Act, 1955 (item 21 in the same section) and modernise the sector by constructing warehouses, cold chains and food processing facilities (item 14). Similarly, back in December 2012, party leader Kapil Sibal, during a Lok Sabha debate on allowing Foreign Direct Investment (FDI), had rhetorically asked “What is the purpose of this policy? The farmer should get a higher price than he gets in the market, in the mandi. The farmers should get a higher price.” And much like the uproar in Rajya Sabha on September 20th, he too was shouted down by the Opposition that December. Most other parties remain wedded to a statist outlook, changing their stance only when it suits them.
All of this was forgotten last weekend. The Congress, along with other opposition parties, vehemently denounced the Bills as ‘anti-farmer’ legislation.
The BJP Government did not repeal the old laws but merely opened them to competition. There are multiple reasons for that. For one, there is a question of choice: the party wants to keep APMC markets as there may be many farmers who want to continue selling their produce there. For another, there is the inherent danger of monopolisation in case of a single trading option, as the APMC system shows so vividly. Competition afforded by greater participation of private trade—shorn of the handicaps it currently faces—and letting the APMCs face the private sector have the potential to fetch better returns for farmers.
This, however, is not how the three Bills have been interpreted by commentators and politicians alike. The reasons are not far to seek: the APMCs have thrived in a statist environment without any competition from the private sector. Large companies—with money to invest in the modernisation of Indian agriculture—are routinely disparaged as “big corporates”. The opportunistic nature of this politics can be seen from the way the Bills’ aims are sought to be defeated. Many Congress leaders insist that it be written in the text of the Bills that private sector buyers who purchase directly from farmers will have to pay Minimum Support Prices (MSP) otherwise they will be prosecuted. This is as good as keeping the old system alive by subterfuge.
But none of this has swayed the Government in any way. It has held steadfast to this reform programme in the teeth of special interests. These interests, not surprisingly, are the strongest in Punjab, the locus of the current protests.
Many analysts have painted a picture of doom engulfing Indian farmers at the hands of a government that has sold out farmers’ interests to ‘big corporates’. Such expressions lack any explanatory power. There are no giant agro or food corporations of the kind found in Western economies. What India does have is a clutch of retail companies and online aggregators
ONE CLUE TO THE vehemence with which the Bills have been opposed in Punjab and Haryana—as well as the muted reactions elsewhere—lies in the importance of the open-ended purchases of wheat and rice for the economy and finances of these states. This is especially true for Punjab, a fiscally hard-pressed state that ceased to be at the forefront of India’s economically developed states decades ago. The biannual affair when gigantic quantities of wheat and rice are purchased from the state injects huge sums of money into its economy, all funded by the Centre. It is a common mistake to assume that the cost of wheat (a rabi crop) and rice (a kharif crop) is just the MSP announced by the Centre, although that is the single-largest item in the bill. There are, in addition, costs of handling, storage and transport. But over and above these costs, the Punjab government imposes a Rural Development Fee (RDF) and a market fee for any purchases within market yards that fall under its APMCs. Each of these fees is levied at the rate of 3 per cent of MSP. As the MSP and the quantity of foodgrain bought by the Food Corporation of India (FCI) rise, so do these fees that go to the coffers of the state government. Conversely, any reduction in MSP or the quantum of purchases made by the Union Government reduces these sums flowing to the Punjab government. The result is an in-built incentive to keep arguing for ever higher MSPs and quantities purchased.
The quantities bought by the FCI—the gigantic government corporation that lies at the heart of India’s food economy—throw light on this situation. Until August 31st, the FCI had bought 12.7 million tonnes of wheat and 5.3 million tonnes of rice, a total of 18 million tonnes of foodgrain. This was for the year 2019-2020. During this year, Punjab produced 18.2 million tonnes of wheat and 8.7 million tonnes of rice. Thus, the Union Government ended up buying close to 70 per cent of the wheat produced by the state and 61 per cent of its rice output. This is an enviable scale of support to a state by the Centre. This record purchase by the FCI is matched (in the case of wheat) only in the case of MP. In contrast, during the same year (2019-2020), the country’s biggest producer of wheat, UP (output of 32 million tonnes) saw the FCI buy only 11 per cent of its output. If one looks at the data released by the FCI, it buys far meagre quantities from other states. This situation of almost exclusive purchases from Punjab and Haryana has become less skewed only in the last decade.
In 2019-2020, the MSP for wheat was Rs 1,840 for a quintal (100 kg) of wheat. Let us suppose just 1 quintal of wheat was purchased from Punjab by the FCI. The state government netted 3 per cent of MSP as RDF and another 3 per cent as market fee. At 6 per cent, the state government gets Rs 110 for every quintal of wheat purchased in an APMC market. If one calculates the money that flows to the state government through these fees, the sum is substantial. One does not have to exaggerate these sums but the fact remains that these are now part of the revenue calculations of a state that finds itself in a fiscal tough spot and where every rupee that comes to the government matters. If the monopoly of the APMCs comes to an end, this system will start eroding.
Historically, Punjab was an important source of food supplies for India after Independence. In terms of output, the state held the top rank for a long time and perhaps the only one where a substantial surplus was available for the Union Government to mop up. For three decades (1964-1994), Punjab served the needs of the country well. It became the single-biggest contributor to the Central pool of foodgrain. When the Green Revolution was initiated in the mid-1960s, India was a food-insecure country. Crop failures and volatility in output were common. It was important in such conditions to provide incentives to that group of farmers willing to produce more—and more importantly—part with their output to the government. Because of the relative scarcity of wheat and rice in comparison with what was needed for India’s consumption, these incentives—a package of cheap inputs like fertilisers, water and price and marketing support for output—were essential. Soon enough, bumper stocks were the norm in government godowns.
It is unlikely that farmers in Punjab and Haryana will see purchases by the government suddenly stop. But this system is rotting. It is expensive and has tied farmers to ecologically ruinous crops like rice in Punjab. Without competition, this state of affairs will continue.Punjab will continue to grow water-guzzling rice varieties and the Centre will continue to strain its finances
Somewhere in the mid-1990s the situation changed. Other states began generating their own surpluses, making it economically more sensible to buy in a decentralised fashion from different states. This would not only reduce transportation and handling costs that had become a substantial fraction of the economic cost of wheat and rice. These imbalances had become so large that in 2000, the Expenditure Reforms Commission (ERC) in its first report pointed out that purchases made by the FCI were ‘excessive’ and needed to be rationalised. But by that time India was in the middle of its ‘coalition years’. Prime Minister Atal Bihari Vajpayee was committed to keeping the SAD within the NDA flock. His personal relations with Parkash Singh Badal were one matter but there were deeper political rhythms that made it essential for being patient with the SAD. Punjab had a history of secessionist violence and had barely become a ‘normal state’ a decade earlier. Then, in spite of the ERC warning of systemic issues, the memories of the food shortage decades led to systemic inertia. Punjab was an expensive proposition but India kept up with its demands.
Today, when all political parties and governments in the state remind everyone of the efforts of Punjab farmers to make the country self-sufficient in food, there is less patience with the claim. What were initially economic incentives to produce more foodgrain are today price-support mechanisms available mostly to farmers in Punjab and Haryana. This is the kind of support that a farmer in Bihar or Chhattisgarh can only dream of. The cost to Punjab has no doubt been substantial: it is an ecological hotspot now. With its water resources near depletion and soils dependent on synthetic fertilisers, the state stares at an ecological disaster. Political reasons ensured that its efforts to diversify its cropping pattern came to naught within a couple of years after being launched in 2003. It would be less than accurate to describe it as a land of kulaks. The Statistical Abstract of Punjab (2019) states that nearly 33 per cent of landholdings in the state range from less than 1 hectare to roughly 1-2 hectares. Another 33 per cent are in the 2 to 4-hectare range. Landholdings of such size are a losing proposition with the farmers tilling them sunk in perennial debt. Only 5 per cent of landholdings—57,707 out of nearly 1.1 million—can be truly said to fall in the kulak class (10 hectares and above).
The pitiable state of these small and marginal farmers can be gauged by visiting any mandi in the state during the rabi and kharif selling seasons. It is painful to describe the anxiety of these farmers as they persuade officials and grain commission agents to pick up their produce. A bit more moisture, an unseasonal rain and a few extra broken grains is all that it takes to reject what a farmer brings to the mandi. The Union Government, too, has its reasons to reduce such massive expenditures on these purchases. Yes, farmers in Punjab do manage to sell their crops and the state and Union governments do whatever they can to help these farmers. But to state that Punjab is a land of rich agriculturalists is a myth. Prosperity has come and gone from Punjab. Haryana is not very different.
Reforming the farm sector by allowing private sector firms to invest in the farm economy along with contract farming has always been on the agenda of parties across the political spectrum. But in India’s competitive politics, these reform efforts get derailed in the search for immediate political gains
IT IS UNLIKELY that farmers in Punjab, Haryana or elsewhere, where there is an FCI or a state agency purchasing network, will see purchases by the government come to a sudden halt in mandis. But it is also true that this system is now rotting. It is expensive and, more importantly, in the name of food security, it has tied farmers to ecologically ruinous crops like rice in Punjab and Haryana. There is ample production of rice in monsoon India and wheat in northern India (UP, MP, Punjab and Haryana) to quit worrying about it. Unless the present system is given competition, this ruinous state of affairs will continue. Punjab will continue to grow water-guzzling rice varieties and the Centre will continue to strain its finances to buy wheat and rice from a select few states.
Once the new system kicks in, it will change the situation—slowly for sure—in three ways. First, farmers will react to market signals to produce the kind of crops that are in demand. As India develops, the share of cereals in the food basket of an average citizen will decline and more nutritious items will see higher demand. Sooner or later, the message will reach farmers. Those in Punjab and elsewhere can be expected to produce different items. Second, there will always be a substantial fraction of farmers, especially many with marginal holdings (less than 5 acres), who will prefer to grow wheat and rice. They will continue to sell in APMC mandis. One can be sure the government will be there for them. A system that has evolved over the last 55 years will not be stopped in one, two or even five years. Third, what will happen is a greater spread of purchases by the FCI and other government agencies to those areas where a marketing and buying infrastructure was never created. Bihar and eastern UP are two strong candidates where this old, Punjab-Haryana-type system may take root. This will give much-needed income and price support to poor and marginal farmers in some of the poorest districts of India. This should have been done a long time ago. But this is like wishes having wings: a poor country can only afford that much extra bit of comfort for its farmers, even if that is just and fair.
Yet, in the days after the dramatic scenes in Rajya Sabha, many analysts and commentators alike have painted a picture of doom engulfing Indian farmers at the hands of a Government that is allegedly ‘neoliberal’ or has sold out farmers’ interests to ‘big corporates’. These expressions lack any explanatory power whatsoever. For one, there are no giant agro or food corporations of the kind found in Western economies. What India does have is a clutch of retail companies and online aggregators. These companies are least likely to be interested in going to farmers to buy wheat and rice directly. Rice millers who have converted themselves into sellers of branded rice have been doing that kind of trade for a long time. To begin with, they, and large flour millers, will be interested in the new system of direct buying. It would be doing violence to language to describe them as ‘big corporates’.
There are large companies like Pepsi who have done contract-farming for crops like potato in Punjab for a while. That system has worked in spite of the running propaganda against them for decades. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020 gives that system of buying and selling a legal framework. It will be a happy thing if this system expands in other states, with other companies showing some interest.
This new legislative framework will take some time to percolate to the ground and take root. But it is a travesty to describe the APMCs and the network of grain commission agents as a system that allows price discovery. Nothing could be farther from the truth. These were monopolies that lived off advantages available to no one else.