Farm laws: Design leaves much to be desired

  • Blog Post Date 13 October, 2020
  • Perspectives
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Sukhpal Singh

Indian Institute of Management Ahmedabad

Sukhpal Singh examines the potential implications of the farm laws in view of the existing mechanisms of agricultural marketing, and highlights certain design flaws.

The stated purpose of the new farm laws enacted by the central government on agricultural markets (a subject that falls in the domain of states) is to create a one nation-one market system and provide choice to farmers for selling their produce with better price discovery besides attracting private investment in the agricultural markets. But the laws have attracted serious opposition from farmer unions and many political parties despite the government claiming and highlighting various benefits of the reform at various levels. In this context, it is crucial to discuss the major aspects of these new pieces of legislation on regulation and promotion of agricultural produce markets (Agricultural Produce Market Committee (APMC) Bypass Act and the Contract Farming Act), and amendment to the Essential Commodities Act (ECA), 1955.

APMC Bypass Act, 2020

So far as the APMC Bypass Act or Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 is concerned, it intends to promote efficient, transparent and barrier-free inter-state and intra-state trade of farmer produce outside the physical premises of markets or deemed markets notified under various state APMC legislations, and intends to provide a facilitative framework for electronic trading. Previously, under the state APMC Acts, there was a notified market area from which all produce was to be transacted within the designated APMC yards and sub-yards. Alternatively, buyers had to seek permission – under the amended APMCs as per the model APMC Act, 2003 and later the Model Agricultural Produce and Livestock Markets (APLM) Act, 2017 – from the local APMC for buying outside the mandi but the produce was still subject to the same taxes and levies as the produce transacted inside the market yard. It creates a new ‘trade area’ outside the APMC market yards where any buyer with a Permanent Account Number (PAN, an income tax ID in India) can buy directly from farmer-sellers and the state government cannot impose any taxes on such a transaction. Here too, recent action by the state government of Haryana to stop farmers from the neighbouring state of Uttar Pradesh from selling paddy at MSP (minimum support price) in Haryana, shows that inter-state barriers are not so easy to remove by regulation unless states come on board. Similarly, the Food Corporation of India (FCI) still buying from APMC mandis in Punjab through arhtiyas (commission agents) gives a message that is contrary to the spirit of the Act.

More significantly, it includes a trader-trader transaction within a state or across states, also as farmer produce. How can this be justified, as once the primary transaction is completed the farmer is no longer involved in the transaction and it stops being farmer produce? This is similar to Farmer Producer Organisations (FPOs) asking for exemption from income tax on the basis that they deal with their member farmers’ produce who are exempted from paying income tax. Further, the way ‘trader’ is defined is shocking as it includes a retail consumer/buyer in the definition and would require everyone to have PAN to buy vegetables from farmers’ markets for their kitchens. 

Why are farmer protesting only in some states? Would APMCs die out?

There is a misperceived linkage being established between the new APMC Bypass) Act, 2020 and the MSP system in that the MSP would not remain in force once this Act comes into play. It is important to recognise that MSP and procurement at MSP are policy constructs and not legally binding unlike the APMC Bypass Act, 2020. The farmer unions’ demand that MSP should be made mandatory for all buyers of farm produce is illogical because the farm produce prices in most cases are market determined as the government procures only a small part of the produce. Therefore, making MSP mandatory would be detrimental to the entire private trade in agricultural produce. The MSP is a promise made by the central government and should not be imposed on other buyers who go by the demand-supply situation. This was clearly shown in Maharashtra recently when the state government attempted to amend the APMC Act to make MSP mandatory for all buyers, which sparked off trader strikes and had to be withdrawn.

The fear being expressed by farmers and their unions about MSP arises from the uneven playing field between the trade area and the APMC as there would not be any taxes in the trade area whereas there are significant buying costs in APMC purchase that can be as high as 8.5% in Punjab including 2.5% commission for the arhtiyas. Therefore, due to lower buying cost, the traders and even agents may move out of the APMC market yards and start buying from the new trade area (non-APMC area). The agencies of the central government can also proactively shift (as is being planned, as per media reports) to the new trade area to buy directly from farmers. This would still give access to MSP for farmers but the arhtiyas may suffer as then they would not be able to charge a hefty commission that increases along with every hike in MSP. This would effectively kill the APMC market.

The more problematic aspect for arhtiyas is that they interlink the handling of produce with cash/kind credit for various purposes and recover their loans from sales proceeds by farmers in the APMC market. In fact, in Punjab, the payments for farmer produce have always been made to the arhtiyas and not to the farmers even by the FCI and Cotton Corporation of India (CCI which is reported to have started buying directly from farmers this season) and this has been an issue for two decades. The state government has not allowed the central agencies to pay directly to the farmers for various political economy reasons like the power of the arhtiya lobbies and the fact that many of the arhtiyas are also large, powerful farmers. Of course, the arhtiyas may get into a new role of being facilitators or agents of corporates in the new trade area but they would not be able to interlink credit and produce/input markets as in an APMC mandi and would have to be satisfied with lower commissions. However, it still may not mean that the buyers in the new trade area would pass on even a part of the lower buying cost to the selling farmers as higher purchase price for the produce. 

The expectation that this would bring new investment in agriculture is misplaced if one goes by the experience of states like Kerala which never had an APMC Act, or Bihar which repealed the APMC Act in 2006, or Maharashtra which delisted fruits and vegetables from APMC in 2018. It is important to note that laws cannot replace policy. Therefore, a policy must be in place to get the agricultural sector going. New investment would need incentives, and not just ease of doing business.

Will it help small and marginal farmers?

Disintermediation of farm produce market, which means removing the arhtiya, was long overdue. Madhya Pradesh had done this in 1985 itself. The MSP regime has been very unfair to some farmers and some states and mostly benefits a few crops like wheat and paddy and cotton in Punjab, Haryana, Madhya Pradesh, Telangana, Chhattisgarh, Uttar Pradesh and Odisha. These farmers total only 12.4 million, which is not even 10% of India’s farming households because most of them are double-counted as they grow both wheat and paddy. Most of the small and marginal farmers in these and many other states are left out of the MSP net. The system of arhtiyas in some states like Punjab and Haryana should be abolished by the APMC Act amendment and their place can be taken by FPOs like Primary Agricultural Cooperative Societies (PACS), other co-operatives, or producer companies as is the case in states like Bihar, Madhya Pradesh and now even Uttar Pradesh where FCI and state agencies procure from villages without going to APMC mandis. It is only then that small and marginal farmers can hope to exercise the choice of channels to benefit from direct purchase in the trade area or from competition in the market. Of course, this requires better access to institutional credit for these small and marginal farmers. 

Contract farming, crop diversification, and small farmers 

It is important to recognise that contract farming has been in practice in India since the 1960s in the seed sector, and in other farm produce in many states like Punjab and Haryana since the 1990s with PepsiCo undertaking tomato and potato contract farming. Further, contact farming has been permitted in most states as per the Model APMC Act, 2003 of the Ministry of Agriculture and Farmer Welfare, and later under the Model Agricultural Produce and Livestock Produce Marketing (Promotion and Facilitation) Act, 2017. Tamil Nadu was the first state to pass a separate Act for contract farming in 2019 under the Model Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act, 2018, and Odisha has recently done the same. 

For buyers, contract farming is the only other option after buying from APMC or private wholesale markets and direct purchase, as the corporate farming option is simply not available in India due to the state-level Acts that prevent non-agriculturists from owning or leasing agricultural land. 

Contract farming has also been attempted or used in many situations as a mechanism by the state to bring about crop diversification for improving farm incomes and employment, for example in Punjab during the 1990s and early 2000s, but without any success. There is no doubt that contract farming generally benefits farmers who can participate in it vis-à-vis selling in the existing open market (wholesale) or direct purchase channels, though it generally involves higher cost of production and higher investments. However, the exclusion of small-holders remains a key challenge as contracting agencies prefer larger farmers to reduce their transaction costs, with a few exceptions in some regions and some crops. Sometimes, small farmers also self-select out of contracting farming when large farmers are part of these systems. This bias in favour of large and medium farmers is perpetuating the practice of ‘reverse tenancy’ in regions like Punjab where resourceful medium and large farmers lease land from marginal and small farmers for contract production.

Contract farmers in various parts of India have faced many problems like undue quality cut on produce by firms or no procurement of produce, delayed deliveries at the factory, delayed payments, low price, poor-quality inputs, no compensation for crop failure or higher cost of production and even stagnation of contract prices over time, known as ‘agribusiness normalisation’. 

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 is nothing but a badly designed contract farming act. The use of the term ‘farming agreement’ itself is unusual as it is being confused with other arrangements like sharecropping or leasing agreements. Contract farming is primarily about the contract and farming is a part of it. The biggest perception problem is that it is being mixed up with corporate farming (corporates doing their own farming on leased or owned land) and it is definitely not that. The Act clearly says that the contracting agency cannot lay any claims on farmer’s land and cannot even lease it.  

Poor design of contracts and mandi linkage

The very basic aspects of contract farming like acreage, quantity, and time of delivery are not specified, which is a must for any law regulating it as these are mandatory aspects of such an arrangement whether with supply of inputs or otherwise. The government advertisement claims that a farmer can withdraw from the contract arrangement anytime without incurring any penalties. This is again not true and cannot be a part of the arrangement if contract farming has to succeed. The Act also leaves out many sophisticated aspects of modern contract farming practices like contract-cancellation clauses, delayed deliveries or purchase and damages therein, and ‘tournaments’ in contract farming where farmers are made to compete with each other and paid as per relative performance (banned in many countries).

It is rather unfortunate that the Act links bonus/premium price payment to farmers under a contact arrangement with APMC mandi price or electronic market price that must be part of the contract agreement. This is against the nature of contract farming. The price, like many other basic aspects of a contract, should be left to the parties to negotiate and cannot be tied to any other channel especially the APMC price. This is because the very rationale for bringing this legislation is to provide alternative channels to farmers and create competition for APMC markets as they were seen as not discovering the prices efficiently. Now, going back to the same mandi does not speak very well of the Act.

Regulation or facilitation?

The Act is more about facilitation and promotion of the contract farming mechanism rather than its regulation. That the Act goes all the way to facilitate contract farming is clear from the fact that it mentions that the Act for stock limits (ECA) would not apply to contract-farming produce. Why should a provision of another act be specifically mentioned in this one, when it has nothing to do with it directly or indirectly?

More importantly, the aspects of farmer empowerment and protection mentioned in the title of the Act, have been disregarded in its contents. Even the APMC Bypass Act has promotion and facilitation in its title, not regulation. Finally, the proof of any law is in its implementation but so far as the protection of farmer interest is concerned, these acts leave much to be desired in their design itself. 

How does the amended Essential Commodities Act fare?

The amended ECA provides for relaxation for the stocking of major cereal, edible oil, pulses, and onion and potato crops – though still not absolute freedom from ECA. Such absolute freedom can never be possible in a country like India where agriculture is governed by both producer and consumer interest at the same time – for example, even MSP is determined keeping in mind both producer and consumer interest. This relaxation allows larger stocks without limits for various users of farm produce like exporters, processors, and value chain participants in general. Still, the option of imposing stock limits for reasons of war, famine, grave natural calamity, and extraordinary price rise is retained. The amended ECA, 2020 places stock limits if horticultural produce prices rise 100% above previous year/five-year average price and non-perishables 50% above the last year price/five-year average price. The fact that these provisions can be defined in any way by the states was seen in the recent imposition of a complete export ban on onion exports (by Director General of Foreign Trade), with little regard for the provisions of the ECA on perishable produce. This kind of action does not give any confidence to investors about the consistency of regulation. 

These ECA relaxations sound good from the perspective of various value-chain participants but may not really help farmers directly. In fact, the ‘de-fanging’ of the ECA would be a windfall for trading companies who speculate on prices. Only some FPOs may be able to use it for storing their produce for better prices and processing/value addition. FPOs can benefit if they have warehouses and are into processing, storage, packing, transport, and distribution – any activity which adds value.

The consumer benefit of this relaxation is not a given as it may actually end up leading to larger hoarding, and therefore, higher consumer prices. A more important aspect of this ECA reform is to do away with export bans, which can indirectly benefit farmers in a real way by giving them stable export market access.

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