Separating The Wheat From The Chaff In India’s Farm Policy

The recently enacted farm laws should have brought joy to the farming community. On the contrary, the farmer agitations against them are growing and gaining ground.

The basic premise of the three Acts is that by opening competition in agri-markets, providing stability in the trading policy environment, and offering a framework for contract farming, farmers will be better off and will be able to realise better prices. Then why are farmers agitating? This article looks to answer that question.

It Was Time For Change

Let us start by seeing why these reforms are needed. An ICRIER-OECD study researched data on 19 agricultural commodities that represent about 70% of the country’s total agricultural value of output. Data was studied across 17 years since 2000-01. Upon comparing the wholesale prices of these commodities (in highest producing states of India) with their corresponding quality-adjusted international reference prices, it was found that for most crops and most years, the price gaps were negative i.e. the prices of Indian crops were much lower than the corresponding international reference prices.

Using these price gaps and budget data on farmer support programs, including agricultural subsidies, the study also arrived at a producer support estimate or PSE. This estimate was negative in all years! This simply meant that producers in the country were not supported but instead were taxed. But how can that happen as farmers in India are provided massive support through various subsidies and subvention schemes? Apparently, the losses incurred by farmers from selling at lower prices were much greater than the gains they received from the government support schemes – including subsidies like fertiliser, power, irrigation, credit among others.

Now the question was about the negative price gap. Even after adjusting for quality difference, why were the prices of most Indian crops consistently lower than their international counterpart and that too for 17 years? Research showed that the average prices remained low due to, inter alia, three reasons:

1. The restrictive role of government trade policies;
2. Infrastructural deficits in the agricultural value-chains; and
3. Lack of an aggregation mechanism for the produce.

All these problems were correlated. Because the government would impose restrictions on trade, private participation was discouraged. Low participation meant a lower incentive to invest. Government investments were small and inadequate and the average farmer was small and lacked resources, therefore the sector suffered from infrastructural gaps.

To correct the system, the most important recommendation was to open agricultural markets and trade; create a stable, predictable, and conducive environment so that a farmer was free to sell his produce to anyone at any time. To encourage buyers and investments, a stable and predictable trade policy environment was required. The recently enacted three farm Acts offer a roadmap for resolving these problems.

Where Agitating Farmers Are Correct

Agriculture is a state subject. Passing an Act without taking state governments on board and without onboarding farmers or their representatives, howsoever well-intentioned and revolutionary they may be, these Acts will lack immediate acceptance by anyone involved.

Besides, a known devil is always better than an unknown angel. APMC markets—for all their inefficiencies and corruption—are functioning. Farmers in states like Punjab, Haryana, and Madhya Pradesh have the comfort and assurance of known buyers. Unless the new system is able to establish its benefits, the discomfort and uncertainty will prevail pushing farmers away from being subjected to these risks.

Gaps In The Laws That Government Could Review

There are some gaps in the laws too. I highlight two here.

The most important gap in the Acts is a missing mechanism of evaluation. Under the existing system, APMCs are mandated to report the price and arrival data of crops on a daily basis. Using this data, researchers evaluate the gaps and inefficiencies in the markets and inform policymakers to take required and timely actions. Though the data is not real-time as it has a reporting lag and there are reporting errors, at least there is data. Under the new acts, “the Central Government may, through any Central Government organization, develop a price information and market intelligence system...” The absence of this system will create a huge void in the markets. With no mechanism to evaluate and monitor, it is will tough to establish the efficacy of the new system. Besides, such lack of transparency may, in fact, lead to unsolicited speculations in the markets, adversely impacting particularly the farmers.

The second gap is about the global trade policy environment. Even though India has been a net importer overall, it has been a net exporter of agricultural commodities. The scope of global agri-exports is an important motivation for both farmers and buyers. With the policy governing global trade of agricultural commodities out of the purview of these three farm Acts—as it comes under the Foreign Trade (Development and Regulation) Act, 1992—there is a high chance of policy mismatch. By putting export bans or restrictive trade policies (like minimum export prices or MEP, export taxes etc.), markets avenues will be restricted, thus adversely impacting the incentive to invest by farmers or buyers. It may be important to note that since June 2020, when the bills were promulgated, a complete ban on onion exports was imposed by the government.

What Farmers Should Consider

Minimum Support Prices are not a solution to every problem. The Food Corporation of India is the nodal agency of the central government to undertake procurement operations under MSP. The system of procurement has existed for decades in the country, but it still continues to be saddled with large wastages, inefficiencies, and corruption. Besides, no one says that MSP is a benchmark price.

MSP is the story of less than one-third of India’s agricultural value of output. More than two-third is subject to open markets already. Think about fruits, vegetables, milk, meat, eggs – none of them have MSPs announced on them.

On contract farming, if there are stories of distress, then there are larger and growing stories of success like ITC’s e-choupal that successfully supports millions of farmers today. In the case of the poultry industry, contracts between the aggregator and the small and marginal farmers, in states like Haryana for example, have successfully revolutionised the sector and helped farmers prosper.

Today an average farmer suffers as much in a bumper year, as he suffers in a bad crop year. Due to a lack of storage and processing facilities, a bumper year witnesses lower value realisation by farmers. In a bad year, he suffers due to low yields and his losses multiply when the expectations to get a better price for the produce are squashed by the government that—in its efforts to stabilise prices for the consumers—resorts to trade restrictions and import of cheaper products. These three farm Acts are well-positioned to correct this inherent consumer-bias in policies.

The Way Ahead

The government has to walk a thin line where it has to simultaneously ensure remunerative prices and a conducive market environment for its farmers and also ensure the availability and affordability of food for all at all times.

Farmers in the states of Punjab and Haryana have undisputedly helped the country achieve food security at the macro-level. These farmers stood with the country when it was needed most. We should empathise and support them now. The government should initiate all efforts to bring convergence and consensus with the farmers. A strong grievance redressal mechanism can go a long way in supporting farmers through the change. The role of a market information system will be critical in this regard. Every effort should be made to improve farmers’ negotiation power. Efforts to aggregate them as famer-producer organisations or FPOs should be strengthened.

Pre-empting implementation lags and gaps may be required and a strategy to address them proactively will go a long way. The government should continue to invest in rural infrastructure like roads, electricity and the like.

There is no magic pill where the implementation of provisions under these Acts will immediately revolutionise the agricultural markets. It will be a long-drawn process and the centrality of empathy towards the farmers combined with cooperation and handholding will be critical.

Shweta Saini is an independent research scholar on agriculture.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.