Indian Agricultural Reforms 2020: Explained
The GOI recently passed three Acts to reform the age old agri-sector. Here's a detailed, jargon-free piece on the what and why of this. Read on :)
Ever since Independence, the agricultural sector has been the biggest employer in India, where 45 crore kisans feed 130 crore Indians daily.
Decades have passed, countless reforms and revolutions have come and gone.
What remains is the plight of Indian farmers. Today, they have been reduced to nothing but a vote bank. Economically destructive (and highly populist) measures, such as loan waivers, have been deployed as a fool-proof tactic to sway the emotions of this gullible vote bank.
“Jai Jawan, Jai Kisan” has just been reduced to a hollow-sounding slogan.
And, government regulations, instead of helping, have made their situation worse.
How?
The Plight
Since time immemorial, farmers have had to accept whatever price the buyers demand (and this is not a typical demand-supply mismatch - here, the farmers have absolutely no clue about what price should be charged for a commodity). Imagine working on making something, putting in so much labour into it, and not even getting to price it on your own - to depend on someone else to tell you the price.
When you can’t determine the price of your own goods, you rely on someone to come in and help you out. That someone, for the farmers, had been the government for a long, long time (in fact, ever since British Raj).
They put their trust in a system that cared only for one thing they really owned - their votes.
The clueless farmer today earns a paltry sum of Rs. 1,07,172 per annum. Not per month. Per annum. Half of us can’t even imagine living off such low income.
And of the Rs. 107K that they earn annually, only 43% of it comes from agricultural activities. The rest comes from manual labour work or other government incentive schemes.
Result: Farmer retreats from farming, and in the worst-case scenario, commits suicide. Just like that; human lives lost because of our flawed economic models of “growth and development.”
According to World Bank Data, more than 20% of the farmers leave farming in search of other jobs.
Every year, for the past 25 years, more than 10,000 farmers have committed suicide.
The need of the hour was to give back the economic freedom that our green-warriors deserve. Give them an opportunity to lead a life of dignity and abundance.
But how?
Long pending reforms
If the sector had to progress, urgent reforms had to come in.
And in they came.
The Modi Government has brought in one of the biggest reforms in the agricultural sector.
The Indian Parliament, amidst severe uproar from the opposition, finally gave farmers back their economic independence. To do so, these laws were passed:
1. Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020,
2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, and
3. The Essential Commodities (Amendment) Act, 2020
Since the bills have been passed, enough drama has ensued both on the streets and in the houses (lower and upper). And why not? After all, this is about the no.1 vote bank in the country. So, what’s all the fuss about? These reforms are good, right?
Well, let’s find out.
For the farmer to sell his produce, the Government had created regulated markets (called mandis) so that farmers get:
1. Fair prices for their produce, and
2. Ease of moving their produce from farms to main markets.
To ensure fair prices, the Government introduced a Minimum Support Price (MSP). No one could buy certain declared crops below this price. And these operations were overseen through an “Agricultural Produce Market Committee (APMC).” As the name suggests, the committee was formed to help the farmers “market” or sell their produce (at the right price, to the right place).
While the intent was good, the implementation sucked. Period. The system gave the power in the hands of “mandi-operators” who started exploiting the farmers. Cartels were abundant, and corruption found a new breeding ground.
As a result, only 6% of the farmers get to sell their produce at the MSP. Proof enough that the system was flawed?
Another problem that the farmers faced was that the ones they dealt with were far more economically powerful than they were. Even more so if they were producing perishable goods. Once these goods left the backyard of the farmer, they were at the mercy of transporters and their customers. More often than not, the larger buyers would coerce the farmers to lower the price or sell the products elsewhere.
Time became Enemy No. 1 for the farmers.
Now, since the farmers themselves were not certain of how much they could make, the formal banks were not comfortable in extending loans to them. The bankers, above anything else, love predictable cash flows. Hence, the farmers had to turn to loan sharks - moneylenders and zamindars, who shamelessly charged ~40% interest per annum.
Huh, enough about the problems, nai? Here’s how the government plans to solve them.
Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020
As the name suggests “Agreement on Price Assurance,” this act focuses on getting assured prices to farmers through Contract Farming.
Farmers can now enter into contracts before the farming process even starts. The contract will protect and empower farmers to engage with agri-business firms, processors, wholesalers, exporters, or large retailers for farm services.
These forward contracts will serve a dual purpose.
First, they will act as a guarantee for the price.
Second, this will help the farmers raise loans from banks at cheaper rates. Banks will be happy to extend loans as the risk of the farmer not finding a buyer will drastically reduce.
Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
The farmers will now have the freedom to sell to anyone and anywhere, beyond the physical premises of the registered mandis. They can do whatever they want to with their produce.
With no restriction on inter-state and intra-state trade of farmer’s produce, a farmer owning land in Chandigarh can contact a buyer from Karnataka and sell his produce directly to him. He gets the best bargain for his produce and pays no commission and taxes (which was compulsory when selling in the APMC).
The Essential Commodities (Amendment) Act, 2020
The Essential Commodity Act was passed 65 years ago when India was conceptualized in the era of food shortages. Hoarding and black marketing were rampant. But today, we live in a period of food security (where we produce more than we can immediately consume), and the farmers deserve to get the best prices and ensure their prosperity.
The farmers will now have the power to control the production, supply, distribution, and trade of their own produce. The deregulations will also help the farmer decide how much he wants to sell and how much to store for the future. No stupid restrictions whatsoever.
All in all, it looks as if the farmers have finally attained freedom from mandi-raj, and can take control of their crops, and hopefully their future.
But, sounds too good to be true, doesn't it? Yep. There's a flipside to this. Let's see.
The Problem Persists
The reforms focus more on how to enable price discovery and sale of farmers' produce.
The other issues, which include the infrastructural development like better irrigation, transportation and warehousing systems and penetration of formal financial institutions, have been overlooked in these reforms.
However, even for the sale of farm produce, the reforms might not have the desired results.
Here’s why.
86% of the farmers are small or marginal farmers (owning up to 2 hectares of land). They don’t have any bargaining power whatsoever.
So, they might not be able to get the best bargain for themselves when entering into contracts (even forward contracts) with private players.
With the not so great transportation infrastructure in India, these small farmers may not even think of selling to distant buyers.
Also, now with no restriction in storing food commodities, there may be an opportunity for bad players to hoard foodgrains, which may eventually give rise to black markets and huge price fluctuations.
However, the biggest concern among the farmers is that the MSP system might eventually end.
Well, declaring MSP is not a legal compulsion. They are just notified by the Government.
And to get this price, the product has to be sold via mandis. If there are no mandis, ultimately, there will not be an MSP.
All things considered, at least on paper, the reforms aim to truly liberate the farmers.
With the private players entering the market, they will bring in much needed technological advancements and international best practices in the agri-sector.
While the intent has always been right (even with APMCs), a lot will depend on the implementation, the States’ willingness to make this successful, and balancing the economic incentives for all the players.
Could “Atmanirbhar Kisan” be a reality soon? Or will "Jai Jawan, Jai Kisan" just remain a hollow slogan?
Food for thought.
ReadOn.
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This piece has been extensively researched by Pranav, and exquisitely drafted by Divya Parakh. Numerous hours were spent to understand how this sector works and to present both sides of the story.