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India’s New Agricultural Bills — An Assessment

Sanjeeb Bikram Sah

March 3, 2021

18 MIN READ

India’s New Agricultural Bills — An Assessment
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On September 27, 2020, the President of India gave his assent to the three farm bills, namely, the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 (FPTC), the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 (FAPAFS), and the Essential Commodities (Amendment) Bill, 2020. 

The agricultural bills aim at removing market limitations and barriers and intermediaries apart from promoting the participation of the corporate sector in procurement and storage of agricultural produce to ensure better price discovery and price recovery to make the farming occupation more remunerative. This is in chime with the Indian government’s commitment to double farmers’ income by 2022. 

The advantages of all the three bills passed by the government of India can be briefly summarized as below:

A. Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020: 

The erstwhile Agricultural Produce Market Committees (APMC) act had led to the centralization of markets, hampering competition and participation of intermediaries on a larger scale with arbitrary commissions, market fees and monopoly of associations at the cost of the farmers’ welfare and development of the agricultural sector.

The bill removes items such as cereals and pulses from the list of essential commodities and attracts FDI in the production of such crops as the investors would now not have to worry about excessive regulatory interference in business operations. 

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 would help in realizing the goal of “one country, one market” that intends to give opportunities to farmers to sell their produce in any market in any part of the country, even without the involvement of Mandi System and state-regulated markets under the APMC.

Gita Gopinath, Chief Economist of the International Monetary Fund, said that these laws will help widen the market for farmers and allow them to sell to multiple outlets besides Mandis without having to pay tax. She said, “And this has the potential to raise farmers’ income”.

Other eminent economists have also supported this idea. The benefits accruing to farmers would arise due to the following advantages flowing from the bill:

The bill envisions ‘One India, One agricultural Market’ promoting barrier-free inter-state and intra-state trade with provisions of electronic trading. It goes on to address the issues of regional disparities and price stability in the agricultural market in the long run.

The bills will bring the required private investment in agricultural marketing, processing, and infrastructure. In the long run, this bill is expected to boost agri storage infrastructure even in smaller locations.

Under the Bill, the farmers are allowed to sell their produce in any market that gives them a better price.

The farmers would not have to pay additional taxes to regulated markets (APMCs) or commission to intermediaries.

The farmers will no longer be subjected to any market fees or levy by the state, traders, and electronic trading platforms for the sale of their produce conducted at an ‘outside trade area’. 

It will ensure that the farmer gets a bigger share of the price paid by the consumer and will, therefore, improve their agricultural incomes.

It aims to create market linkages, post-harvest services, or digital farmer platforms which would enable direct interfacing with farmers to reduce intermediaries for better price realization of crops.

B: The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 (FAPAFS):

This bill aims at realizing forward linkages to the agricultural sector by allowing participation of the corporate sector in sort of corporate farming. 

It formulates a legal framework on the agreements that enable even small and marginal farmers to engage with agri-business companies, retailers, exporters for service and sale of produce at a pre-agreed price while giving them access to modern technology and better farming inputs. 

The agreement between the farmers and the corporate participants would be limited only to contract about crops and the latter would have no land rights as it will remain vested with farmers only.

In case of failure to execute the agreement from either side, if a dispute arises, the act also provides for a three-level dispute settlement mechanism to ensure transparency and fairness in business.

The provision is in favor of farmers as the risk of market unpredictability is transferred majorly to the sponsors. 

The bills also bring in a slew of benefits for agrotech startups and organized players who connect farmers to agribusinesses, food processors, and exporters; agri-warehousing companies and cold storage providers; supply chain and logistics operators that ensure transparency and timeliness; online agri trading marketplaces, and practically anyone in the agri value chain that works towards eliminating inefficiencies in ‘farm-to-table’.

C: The Essential Commodities (Amendment) Bill, 2020:

The Essential Commodities (Amendment) Bill, 2020 was necessary when India was not self-sufficient in food production to ensure uninterrupted supply to consumers.

Now there are many crops in which India has become self-sufficient. The bill is now proving a hurdle in letting the agriculture business prosper because it restricted items that could be procured in the open market and stocked for various uses including staggered sales to keep prices of the produce remunerative and also to use agricultural produce in agro-based industries including food processing. The new bill has the following advantages:

The bill removes items such as cereals and pulses from the list of essential commodities and attracts FDI in the production of such crops as the investors would now not have to worry about excessive regulatory interference in business operations. 

The agricultural reforms in India are also necessitated because the farming occupation has increasingly become unremunerative as the cost of cultivation has risen while farm gate prices of agricultural products remain very low.

It will also do away with the imposition of stock holding limits on such items except under ‘extraordinary circumstances’ like war or famines or shortages for any reason. 

The bills will bring the required private investment in agricultural marketing, processing, and infrastructure. In the long run, this bill is expected to boost agri storage infrastructure even in smaller locations.

Analysis

The recent international outcry on three agricultural bills is based on half-truths and a lack of understanding about the urgencies of the Indian agriculture sector which is facing a plethora of problems due to lack of reforms.

Gita Gopinath has emphasized that agriculture is one of the areas where India needs holistic reforms. The same has been highlighted by many eminent economists as well.

In fact, in the process of economic reforms that started in 1991, the Indian agriculture sector lagged behind, and the first-ever time India announced its new agricultural policy of India in the year 2000.

The new agricultural policy 2000 had talked about giving industry status to agriculture and taking initiatives for corporate farming for achieving a growth rate of 4% per annum on a sustained basis by increasing production and productivity. The new bills passed by the government are in line with the new agricultural policy. 

The increased role of intermediaries in the present marketing system is neither beneficial for farmers nor consumers.

The commission agents pay a very low price to farmers and charge a higher price for the product while selling it to wholesale markets.

Thus, intermediaries get a major share of benefits by trading agricultural produce. The existence of intermediaries as well as various charges imposed on farmers by the regulated markets leads to higher prices of agricultural produce which consumers had to pay eventually in the market.

The involvement of the corporate sector would also ensure the setting up of agro and food processing industries which is highly unexploited in India as compared to the potential.

The agricultural reforms in India are also necessitated because the farming occupation has increasingly become unremunerative as the cost of cultivation has risen while farm gate prices of agricultural products remain very low.

In some regions of India, farmers were compelled to take extreme steps like suicide because of increasing indebtedness as their incomes did not cover their cost of cultivation, especially when crops failed due to vagaries of nature.

Given the opportunity, more than 40% of the Indian farmers showed a willingness to change their occupation (NSSO). All these add to the urgency of reforms in the agricultural sector which the Government of India is pursuing in the right earnest.

The urgency of reforms in the agriculture sector is also felt because of the Green Revolution that led to the commercialization of agriculture in India and increases in farmers’ income and laborers’ wages, apart from making India self-reliant in food grain production, has come to a plateau.

In the first instance, the Green Revolution remained limited to certain areas and crops limiting its benefits to a few regions and farmers.

Secondly, the green revolution’s contribution to growth in farm productivity has waned and more or less remained static which results in low income to farmers and lowers marketable surplus due to lack of capital and market incentives.

The new bills aim at taking Indian agriculture to the next round and next level of commercialization through market reforms so as to ensure broadening of the market, the participation of the corporate sector and removal of restrictions in procurement and stocking of the farm produce.

The engagement of the corporate sector and service providers will not only address the problem of falling capital formation in Indian agriculture but would also facilitate better marketing of the agricultural produce to increase farmers’ income as well as create more employment, especially in view of the existence of huge disguised unemployment in agriculture.

The government of India is not averse to provide subsidies to the farming sector but it wants to reorient it towards the creation of infrastructure and durable assets in the rural areas in order to improve agricultural productivity and create more non-farm employment opportunities in the rural areas.

The involvement of the corporate sector would also ensure the setting up of agro and food processing industries which is highly unexploited in India as compared to the potential.

Only 10% of the food produce is processed in India because of the absence of proper backward and forward linkage between farmlands, agro-industries and markets. These laws will ensure that these backward and forward linkages work in the interest of all the stakeholders.

There is no doubt that when any reform of an old system is pursued, there will be temporary dislocations that may harm those stakeholders who are vulnerable, in India’s case 86% of Indian farmers who own less than one hectare of land.

Gita Gopinath like many other economists has cautioned thus “every time reform is put in place, there are transition costs one has to make sure and pay close attention i.e. not harming vulnerable farmers, to make sure that the social safety net is provided”.

The Government of India has many systems in place to save vulnerable farmers from the adverse effect of a natural disaster (Fasal Beema Yojna) or price fluctuations (MSP and maintaining a buffer stock through a farm produce procurement policy).

The government of India is putting lots of emphasis on providing institutional credit to farmers and its budget for the FY 2021-22 has a target of Rs. 1650000 institutional credit to the agricultural sector.

Besides, there is an interest rate subvention policy under which commercial banks provide loans to farmers at 2-3 percent lesser interest rate than what is charged from other borrowers.

The Prime Minister of India in his Parliamentary speech on February 08 emphatically assured the farmers that “the provision of Minimum Support Price(MSP) was in existence, is in existence and would remain in existence” to save the small farmers from any glut (drastic price fall) in the agricultural produce market.

There is already a system of providing MSP to 23 crops every year which acts as the floor price for these products beyond which their prices will not be allowed to fall.

In fact, MSP becomes the base price even for the open market prices. The government has done some reforms in MSP determination and it is open to any kind of suggestions for improvement within its budgetary constraints.

Subsidies incentivize farmers to use an excess of subsidized inputs and produce not only water-guzzling crops such as wheat, paddy and sugarcane which distorts cropping pattern but also subsidized chemical fertilizers which affect soil fertility and pollute water bodies.

The issue of farm subsidies has one dimension of helping the small and marginal farmers but the second dimension is also equally important that only 6% of the big farmers out of the total farming population of the country can reap the benefit of farm subsidies which leads not only to inequality but also poses a huge burden on the national exchequer without creating any asset or leading to capital formation.

The government of India is not averse to provide subsidies to the farming sector but it wants to reorient it towards the creation of infrastructure and durable assets in the rural areas in order to improve agricultural productivity and create more non-farm employment opportunities in the rural areas.

The moving average of farm subsidies has remained more than Rs. 100,000 crore in the last few years which can very well be redirected towards more productive capital formation in the agricultural sector rather than providing (input) consumption-oriented subsidies.

The subsidy reforms in India are politically sensitive but the rationalization of subsidies is long overdue.

The issue of subsidy reforms is needless to connect with the farmer’s agitation. Subsidies not only distort prices but also lead to wastage and lack of conservation of natural resources.

Subsidies incentivize farmers to use an excess of subsidized inputs and produce not only water-guzzling crops such as wheat, paddy and sugarcane which distorts cropping pattern but also subsidized chemical fertilizers which affect soil fertility and pollute water bodies.

Ultimately, the rationalization of subsidies will have a positive impact on the environment and income security for farmers. The Indian government has been pursuing the goal of rationalization of subsidies for the last many years and it is not new.

The International Monetary Fund has supported the three agricultural bills saying that they represent a significant step forward for agricultural reforms in the country.

The three agricultural bills have generated undue apprehensions due to the politicization of the issue.

As highlighted by the Prime Minister of India in his speech in Parliament, any discrepancy and apprehension pertaining to these three bills could very well be addressed by discussion among various stakeholders with the intent to find a solution and the government is open to it.

This is evidenced by 11 meetings that already government has had with the farmers’ leaders. There is no doubt that in the digital era, it is possible to make a mountain of a molehill as we have seen in the international reactions to farmers’ agitation in India which is not only ill-informed but ill-motivated to sully Indian democracy as anti-human rights, which is contrary to facts. It is a thriving democracy where there has been very alive interaction between citizens and the government on all the issues.

It must be noted that all reform-minded people are supporting the bills. The well-considered views and prospects of refining the bill are marred by the politicization of the issue.

The International Monetary Fund has supported the three agricultural bills saying that they represent a significant step forward for agricultural reforms in the country.

US President Joe Biden’s administration has also said (February 04) that it supports any reform that improves market efficiency and attracts investments for the benefit of the country.

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