The laws enacted by the Modi government lay the framework for allowing farmers to sell produce directly to corporates, but farmers fear that this may be an excuse to pull off the Minimum Support Price (market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices) safety net from under their feet

 Since 26th November 2020, the borders of Delhi have been witnessing a huge agitation being carried out by farmers, most of them from Punjab and Haryana. The three laws introduced by the Government, on paper at least, seem well intentioned. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 – allows farmers to bypass the Agricultural Produce Market Committee (APMC) and sell the produce directly to a big company, warehouses, cold storage chains, or even set up shop to sell directly to consumers.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020 allows for contract farming, for a farmer to get into a contract with a buyer to cultivate specific products for a specific price. This ensures that farmers know the price they will get even before cultivation starts.

The Essential Commodities (Amendment) Bill, 2020 allows buyers to purchase and stock commodities without getting called a hoarder and being vulnerable to penal action.

The changes in law facilitates the entry of big retailers and exporters in the market. The Government would like to withdraw from the business of procuring foodgrains and eventually hand over the assets of Food Corporation of India (FCI) to these private corporates. While it makes sense from the Government’s point of view, the implications of such a move are by no means certain in the long run.

Why are the farmers upset?

The farmers of Uttar Pradesh, Punjab, and Haryana are angry with the provisions of these Bills as they are afraid that these Bills may be the platform that the government (at the Centre) is setting up for the replacement or scrapping of the otherwise robust support system prevalent in their states for the purchase of their crops. They fear that the Minimum Support Price (MSP) guarantee that was their safety net since the Green Revolution of the 1960s kicked in, maybe snatched away from under the pretext of giving the farmers more playing ground and better platforms.

The state-government driven crop produce procurement infrastructure in these areas is very good. Procurement through the Food Corporation of India at promised MSP to farmers, which is declared before every agriculture season, encourages farmers to focus on taking more yield. 23 agricultural crops have MSPs, though the governments primarily buy only rice and wheat. Farmers fear the two recent bills as they feel these agriculture reform processes will kill the government procurement process as well as the MSP. And why d we see most protesters from Punjab and Haryana? That is because they are the biggest beneficiaries of this safety net.

Why has the Centre not reached out?

The Central ministers and Prime Minister Narendra Modi have tried reassuring the farmers that the government has no plans to end the government procurement system nor the MSP policy. But fear, misconceptions persist and the two sparring parties have not had meaningful negotiations.

The farmers of Punjab and Haryana

As per certain reports, nearly 89 per cent of the rice produced by the farmers in Punjab is procured by the government. In Haryana, it is 85%. farmers in Punjab and Haryana face no price risk and price risk and are in fact incentivised to grow paddy and wheat. But the nation has been facing a shortage of pulses and the wheat and rice instead have been a surplus in FCI’s godowns.

Also, rice is a water-intensive crop and farmers from areas with water shortage too grow it as there is an MSP assured in the end. Continuous adoption of rice-wheat cropping system in North-Western plains of Punjab, Haryana and West Uttar Pradesh has resulted in depletion of ground water and deterioration of soil quality, posing a serious threat to its sustainability,” says a government study. Also, these Farm Bills are encouraging farmers to strike deals with large corporates, and farmers do not trust corporates.

What are the big concerns

Even as the farmer protests against the three new agriculture-related laws have gathered momentum, one thing seems obvious: Much of the opposition really is just to one of the three laws.

Even in that one – the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act – there are only some contentious provisions, which, although key, can still leave doors open for negotiation.

The other two laws

Consider first the two laws that ought not to be serious cause for farmer angst. The Essential Commodities (Amendment) Act is about doing away with the Centre’s powers to impose stockholding limits on foodstuffs, except under “extraordinary conditions”. These could be war, famine, other natural calamities of grave nature and annual retail price rise exceeding 100% in horticultural produce (basically onions and potato) and 50% for non-perishables (cereals, pulses and edible oils).

Given that stock limits apply only to traders – the amendment exempts processors, exporters and other “value chain participants” as long as they don’t keep quantities beyond their installed capacity/demand requirements – it shouldn’t concern farmers at all. Farmers, if anything, would gain from removal of stocking restrictions on the trade, as it potentially translates into unlimited buying and demand for their produce.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act has to do with providing a regulatory framework for contract cultivation. This specifically concerns agreements entered into by farmers with agri-business firms (processors, large retailers or exporters) ahead of any planting/rearing season for supplying produce of predetermined quality at minimum guaranteed prices.

Again, there is little rationale for objecting to an Act that merely enables contract farming. Such exclusive agreements between companies and farmers are already operational in crops of particular processing grades (the potatoes used by beverages and snacks giant PepsiCo for its Lay’s and Uncle Chipps wafers) or dedicated for exports (gherkins).  The processors/exporters in these cases typically not only undertake assured buyback at pre-agreed prices, but also provide farmers seeds/planting material and extension support to ensure that only produce of desired standard is grown. The point to note is that contract cultivation is voluntary in nature and largely for crops not amenable to trading in regular APMC (agricultural produce market committee) mandis.

There is hardly any domestic market for gherkins, just as the milk in mandis either. The produce sugar mills and dairy plants source from them is practically contract farming. An Act that formalizes contract cultivation through a “national framework” and explicitly prohibits any sponsor firm from acquiring the land of farmers – whether through purchase, lease or mortgage – should actually be welcomed.

The contentious one

That leaves the only law – the FPTC Act, for short – which is a bone of contention. It permits sale and purchase of farm produce outside the premises of APMC mandis.

Such trades (including on electronic platforms) shall attract no market fee, cess or levy “under any State APMC Act or any other State law”.

At issue here is the very right of the Centre to enact legislation on agricultural marketing. Article 246 of the Constitution places “agriculture” in entry 14 and “markets and fairs” in entry 28 of the State List. But entry 42 of the Union List empowers the Centre to regulate “inter-State trade and commerce”. While trade and commerce “within the State” is under entry 26 of the State List, it is subject to the provisions of entry 33 of the Concurrent List – under which the Centre can make laws that would prevail over those enacted by the states.

However, some experts make a distinction between agricultural “marketing” and “trade”. Agriculture per se would deal with everything that a farmer does – right from field preparation and cultivation to also sale of his/her own produce. The act of primary sale at a mandi by the farmer is as much “agriculture” as production in the field. “Trade” begins only after the produce has been “marketed” by the farmer. Going by this interpretation, the Centre is within its rights to frame laws that promote barrier-free trade of farm produce (inter- as well as intra-state) and do not allow stockholding or export restrictions.

But these can be only after the farmer has sold. Regulation of first sale of agricultural produce is a “marketing” responsibility of the states, not the Centre. Farmers, for their part, would want no restrictions on the movement, stocking and export of their produce.

Maharashtra’s onion growers have vehemently opposed the Centre’s resort to ban on exports and imposition of stock limits whenever retail prices have tended to go up. But these restrictions relate to “trade”. When it comes to “marketing” – especially dismantling of the monopoly of APMCs – farmers, especially in Punjab and Haryana, aren’t very convinced about the “freedom of choice to sell to anyone and anywhere” argument.

The reason for this is simple: Much of government procurement at minimum support prices (MSP) – of paddy, wheat and increasingly pulses, cotton, groundnut and mustard – happens in APMC mandis.

 In a scenario where more and more trading moves out of the APMCs, these regulated market yards will lose revenues. “They may not formally shut, but it would become like BSNL versus Jio. And if the government stops buying, we will be left with only the big corporates to sell to,” said a Panipat (Haryana)-based farmer.

What could be negotiated

If the protesting farmer union leaders were to sit down at the negotiating table, the government can possibly get them to agree to drop the demand on repealing all the three laws. Their problem is essentially about the FPTC Act and its provisions that they see as weakening the APMC mandis. There is also disquiet on the dispute resolution mechanism for transactions outside the mandis. The Act proposes these to be referred to offices of the sub-divisional magistrate and district collector. “They aren’t independent courts and cannot deliver us justice, leave alone guarantee timely payment,” alleged the same farmer. These may be just fears, but they aren’t small. From the government’s standpoint, the elephant in the room would be if the farmers insist on an additional demand: Making MSP a legal right. That would be impossible to meet, even if the three farm laws were to be put on hold.

Why MSP is not a solution

A key debate after the enactment of three farm-reform laws and the subsequent protests is around the issue of federally-fixed minimum support prices (MSPs), a system guaranteeing farmers assured prices for their produce through procurement. MSP is an obligatory, not a statutory exercise. Farmers have demanded a legislation to prohibit sale of any farm produce below these minimum prices. If the government agrees to this, it is likely they will end their protests against the three new farm reforms.

But a law making MSPs the legal floor price defies economic logic. The government sets MSPs for 23 crops, but it is effective only in case of rice and wheat because it buys only these two commodities in sufficiently large quantities. MSPs are an assurance that the government will intervene if market rates fall below that threshold, thereby helping avoid distress sale. This policy was salutary when India faced acute food shortages. Farm policies to deal with surpluses will fundamentally have to be different from measures adopted to overcome a previous era of scarcity. A law barring purchases of the other 21 crops below MSPs by any private trader will also, immediately, fuel high inflation. Every one percentage point increase in MSPs leads to a 15-basis point increase in inflation. Higher MSPs could also upend the Reserve Bank of India’s inflation targets, hurting economic growth. An MSP mechanism that ignores demand and global prices creates market distort-ions. If it is not profitable for traders to buy at MSPs, then the private sector will exit the markets. In such a scenario, the government cannot be a monopoly buyer. Mandatory MSPs will render India’s agri- exports non-competitive because the government’s assured prices are way higher than both domestic and international market prices.

MSPs have also incentivised foodgrains over other crops, giving rise to imbalances of water and land resources and shifting land away from crops such as pulses and oilseeds, necessitating costly imports. Surplus cereals can’t be exported without a subsidy, which invites the World Trade Organization (WTO)’s objections. WTO rules cap government procurement for subsidised food programmes by developing countries at 10% of the total value of agricultural production based on 1986-88 prices in dollar terms. There is no argument that farmers need support, but policies that are less distortionary are in the interest of both farmers and consumers.