Farm laws: Potential for positive outcomes

  • Blog Post Date 15 October, 2020
  • Perspectives
  • Print Page

Siraj Hussain contends that while the farm laws may have medium- to long-term benefits for Indian agriculture, following parliamentary processes for their passage and efforts to build consensus would have inspired more confidence in their objectives.

The enactment of the three farm laws introduced by the central government – namely the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 (FAPAFS), the Essential Commodities (Amendment) Act, 2020 (ECA), and the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 (FPTC) – has resulted in huge turmoil in the agricultural and political economy of India.

The FAPAFS seeks to regulate contract farming and its impact will not be felt in the immediate future as contracts between farmers and businesses are voluntary and have so far been confined to the seed production and poultry sectors. Expansion of contract farming will take time as the quality specifications required by organised businesses like exporters, processors, and e-commerce players are demanding and most farmers are not used to these when they sell their produce in AMPC (Agricultural Produce Market Committee) markets (mandis). Moreover, even these players have so far found it more expedient to purchase produce from mandis, warehouses, or cold stores at market rates prevailing in mandis. In case of perishables, there are wide fluctuations in prices and businesses will also be reluctant to commit themselves to a price in advance. About 65% of broiler production in India is under contracts between farmers and aggregators. However, a University of Michigan study shows that the net realisation of producers under contract is lower than that of independent broiler producers. Yet, producers prefer a contract system as investment and production risk is borne by aggregators. Contract farming may gain better acceptability among farmers in case of commercial and high-value crops since exports have to meet the much higher food standards of importing countries. 

The changes envisaged in the ECA have long been demanded by businesses as well as farmers. Due to fear of sudden imposition of restrictions on stock, movement, and export, the private sector was hesitant to invest in the supply chain. Keeping food inflation in check has been the priority of all governments even if the resultant decisions adversely impacted farmers. However, while this was still under in consideration as a bill in the Rajya Sabha, the government banned the export of onions. The condition of a rise in retail prices of perishable produce by 100% in the previous 12 months or in the last five years was not met. If the idea behind the ECA is ignored again through reduction in duties or through income-tax raids and enquiry by the Intelligence Bureau, businesses may well conclude that the ECA, 2020 was only a reform on paper.

Of the three enactments, it is the FPTC that has caused most consternation, especially in states that invested in developing a robust mandi system. These are also the states that have provided food security to India by procuring major shares of wheat and paddy at MSP (minimum support price) to meet the requirement of the PDS (public distribution system). Since the promulgation of FPTC as an ordinance on 5 June 2020, there has been turmoil in Punjab and Haryana. Anyone with a PAN (Permanent Account Number) card is now allowed to buy agricultural commodities outside the physical jurisdiction of APMCs, now called the ‘trade area’. Moreover, these transactions do not attract market fee or other charges applicable to trade within mandis. There is no reporting requirement of such transactions and the entire business will be completely unregulated. Moreover, anyone is allowed to operate an online portal for trading without any linkage to e-NAM (National Agriculture Market). The FPTC will therefore have an immediate impact on agri-businesses across India. And this is the reason for fear in the two northern states of Punjab and Haryana in which all three major players – state government, commission agents, and farmers – are fearful of the provisions of the Act.

Even after the Goods and Services Tax (GST) regime kicked-in in 2017, Punjab levied a market fee and rural development fee of 3% each, over the MSP. In addition, the commission of arhtiyas (commission agents) was payable at 2.5% of MSP in the states of Punjab and Haryana. Thus, in 2019-20, the marketing boards of Punjab and Haryana earned about Rs. 16.4 billion and Rs. 35 billion, respectively. A major share of this income came from the Centre from the procurement of wheat and paddy. The state governments fear that if the Centre mandates procurement of wheat and paddy outside the AMPC mandis, they will lose a significant amount of revenue, which is used for maintaining rural roads, warehouses, and mandi infrastructure. The second stakeholders who will be directly affected by the FPTC are the commission agents – who, as mentioned before get 2.5% of the MSP as commission in the Punjab and Haryana. The services provided by them to farmers in APMCs have not improved over the years and yet their commission has gone up year after year, as it is linked to MSP. Punjab procured 16.3 million tonnes of paddy in the Kharif marketing season1 2019-20, and 12.71 million tonnes of wheat in Rabi marketing season 2020-21. Farmers were paid Rs 543.27 billion as MSP and the arhtiyas (commission agents) earned Rs 13.58 billion as commission. Haryana procured 6.41 million tonnes of paddy and 7.4 million tonnes of wheat. Farmers were paid Rs 262.02 billion as MSP. On this the arhtiyas received a commission of Rs 6.55 billion. Hence, it is no surprise that they are at the forefront of opposition to the FPTC. 

Farmers are the weakest among the three stakeholders, and they believe the FPTC law is the first step towards dismantling the procurement of wheat and paddy at MSP. Their fear comes from the Shanta Kumar Committee (2015) which suggested that the government should reduce its coverage under the PDS from 67% to about 40% of the population. The Economic Survey of 2019-20 argued for an even lower coverage of 20% under PDS. Farmers fear that pruning down the procurement and a possible move towards direct benefit transfer of food subsidy will eventually reduce the requirement of procurement of wheat and rice. Currently the PDS requirement is about 65 million tonnes while the procurement in 2019-20 was almost 90 million tonnes. Excessive procurement imposes enormous financial burden on the Centre. In the event of lower procurement in the high surplus states of Punjab and Haryana, farmers worry that there might be a crash in prices. The example of low market prices of most pulses, soybean, groundnut, and cotton in major part of the last four years accentuates their apprehension. 

The Centre has no doubt announced that procurement at MSP will continue but it is quite possible that officers of the Food Corporation of India (FCI) will fear objections from Comptroller and Auditor General of India (CAG) on procurement of wheat and paddy inside the APMCs. CAG may well calculate the taxes paid as unnecessary expenditure. Therefore, the Centre’s assurance on continuation of procurement of wheat and paddy at MSP should be backed by a written order from the Ministry of Consumer Affairs, Food and Public Distribution to continue procurement from APMCs and pay the notified taxes. In most other states, the APMCs are not as well-organised and the farmers are not used to realising MSP for even wheat and paddy. In these states, even wheat and paddy farmers sell to local traders at the farm gate itself. This is due to the long distance to mandis, lack of confidence that procurement centres will accept the quality offered, delay in receiving payment, and urgent need for money by farmers. In Bihar, where APMCs were abolished in 2006, the farmers sold maize this year at Rs. 900-1,100 per quintal while the MSP was Rs. 1,760 per quintal. Even in Punjab, farmers are currently selling their maize at Rs. 1,100-1,200 per quintal. Wheat and paddy farmers of Punjab and Haryana fear the same fate if open-ended procurement is substantially reduced. 

One possible result of FPTC may well be a push for diversification from paddy in Punjab and Haryana. Another impact may come in marketing of fruits and vegetables where organised trade, particularly e-commerce, is gaining market share, especially after the lockdown due to Coronavirus. Investment in pack houses, grading facilities, ripening chambers, and cold chain etc., may get a fillip if the government honours its commitment to not interfere in free trade.

Lastly, business in the ‘trade area’ will be completely deregulated and the government will have no information about private stocks. It is quite possible that big corporates may stock high-value crops like pulses and oilseeds, in which India produces less than its requirement. Investigation by the Income Tax Department did find evidence of cartels leading to a spike in the price of pulses in 2015-16. It is therefore important for the government to know the private stocks – this can be enabled by mandatory registration of warehouses under the Warehousing (Development & Regulation) Act, 2007. 

To sum up, in the medium to long term, these legislations may have a positive impact but it would have been better if the laws were referred to the Select Committee of Parliament and an effort was made to build consensus with the state governments. 


  1. Kharif crops are crops that are cultivated and harvested in the monsoon season while rabi crops are cultivated and harvested in the dry months (winter and summer).

I4I is now on Telegram. Please click here (@Ideas4India) to subscribe to our channel for quick updates on our content.

1 Comment:

By: Surwskumar

Govt. Has taken good step to promote free trade, Farmers, traders can sell their produce any where, market committee were levying market cess for even merchandise procured outside state that was cess paid , these were centres of corruption, farmers had to depend on mandi agents, now they can explore any area, they are also educated, these apmcs are impediments to free trade,

Show more comments
Join the conversation
Captcha Captcha Reload

Comments will be held for moderation. Your contact information will not be made public.

Related content

Sign up to our newsletter