The Market Reform that Farmers Don’t Need

January 25, 2021

This is a set of background notes for the Kisan Sansad, 23rd-24th January, 2021 Delhi

Introduction

Agriculture is listed in the state list of the Seventh Schedule of the Constitution. The Modi government is reinterpreting an entry in the concurrent list to usurp the powers of the state governments to make laws related to agriculture. The Supreme Court is yet to hear and decide on the matter of constitutionality of laws made by the government on agricultural marketing without involving the state governments.

The proceedings in Parliament did not allow the members of opposition to participate in the discussion. Deliberations were regrettably vastly inadequate in highlighting the potential ramifications of the bills. The Union government failed to use the parliamentary discussion to reveal and clarify its larger vision for Indian agriculture.

A seismic shift

Until recently, the central government was pushing so-called agricultural market reforms through the “Model Acts” which is left to state governments to adopt and implement. In 2017 and in 2018 the government brought two such “Model Acts”: The Agriculture Produce and Livestock Marketing, (Promotion and Facilitation) Act 2017 and The Model Agriculture Produce and Livestock Contract Farming and Services (Promotion & Facilitation) Act, 2018 which contain many provisions which are now in the central laws.

In November 2019, the parliament was informed that as far as the APLM Act is concerned only Arunachal Pradesh had adopted the Model APLM Act fully, while Uttar Pradesh, Chhattisgarh and Punjab had adopted selected provisions of the Act. In May this year, the Agriculture Ministry Secretary wrote to States to bring ordinances to implement the Model Acts. Madhya Pradesh and Gujarat dutifully made amendments in their laws on the basis of the Model Act. The Model Act on contract farming was adopted by one government — the Tamil Nadu government in 2019.

Complete bypass of the states

If state governments want to implement these reforms, they can do so through the adoption of these model acts in their respective state assemblies with whatever modifications they want. However, to coerce the states to adopt these model acts, the central government got the Fifteenth Finance Commission to introduce performance-based grants which the states could avail only if they passed the APLM Act and the Model Land Leasing Act.

The central government has gone a step further in usurping the rights of the states by enacting the national laws to impose its pro-corporate agenda on the entire country in one go. The farmers were not consulted, the state governments were not consulted, it would seem it is only the agribusiness corporates like Adani and Ambani who were consulted since it is their interests the government is pushing these laws. It is an open secret how Adani is being helped in the acquisition of land and bank loans at concessional rates. This is why the farmers have specifically mentioned the benefits for Adani and Ambani.

The new central laws are pushing for much more benefits to corporates compared to even the model acts. Interests of the global MNCs are also involved in this conundrum. Advanced capitalist countries led by the US have been demanding access to agricultural production and markets. Through the ‘agriculture agreement’ of which India is a signatory the US, EU, Japan and Australia have been targeting India’s system of minimum support prices, public stockholding of food grains essential for the public distribution system.

While maintaining the facade of withstanding such pressures in the WTO, the domestic policies, including these farm laws of the Modi government, are major steps in the direction of placating the governments of advanced countries and the interests of the multinational agri-businesses like Cargill.

Farm laws, stated objectives and objections

The main stated objectives of these three laws (Farm Laws) are:

1) To provide an all India market for trading in agricultural commodities ( referred to by various names like food stuff, farm produce etc, avoiding the word agricultural commodities, in these Farm laws), permitting trading outside Mandi Committee markets under various state agricultural produce marketing laws( Mandi laws),

2) To provide for a framework of agreements between farmers on the one hand and (i) traders ( referred to as Sponsors in these laws) and (ii) other intermediaries providing farm services ( referred to as Aggregators in these laws) for sale and purchase of agricultural produce; and to de-risk agriculture,

3) Removal of limit on hoarding of agricultural commodities under the Essential Commodities Act, unless the prices rise by 50% or more over the previous 12 month average prices,

4) To facilitate electronic trading, digitalization and adoption of IT in the trading of agricultural commodities.

The new farm laws are related to (1) agricultural marketing: The Farmers’ Produce Trade and Commerce (Promotion and Facilitation Act), (2) contract farming: The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act), and (3) about stocking of food commodities: The Essential Commodities (Amendment) Act.

The main purpose of this law of opening up markets to corporates is to retreat from government responsibility of public procurement of food grains. Further through the agricultural marketing act, the government wants to entirely deregulate the market and give concessions to private players to set up their own markets without paying any taxes or fees, giving anybody and everybody the “right” to buy directly from the farmers without any minimum price fixed.

State governments have no rights to levy taxes or fees on these private markets while those in the regulated mandis will continue to pay fees. This will obviously mean that the very existence of regulated mandis, where public procurement takes place at the minimum support prices, will get weakened and they will finally disappear.

ECA amendment: A license for hoarding and profiteering

As regards the objective of establishing an all India market in agricultural commodities, the fact is that there is already an all India market. In normal conditions, there are no restrictions on interstate trading of agricultural commodities. Just to give an example, in and around the NCR people are freely consuming the wheat grown in MP. Control orders under the EC Act are issued only when there is price rise or shortage of agricultural commodities.

EC Act has now been amended, by adding the new Section 3 (1A) which provides for imposition of limit on hoarding in the event of price rise by 50% or more over the previous year. Control orders under the EC Act provided for imposition of limit on hoarding earlier also. The only difference is that under the new law prices are allowed to rise to the extent of 49% over the previous year, before any limit can be imposed on hoarding. Obviously, the new law will permit price rise up to 49% over the previous year. It will hurt all consumers, and would be against public interest.

Amendment to Section 3 of the Essential Commodities Act completely removes all ceiling on hoarding of food grains. It is well known that during the harvesting season, prices of food grains dip because of sudden increase in supply. It, therefore, becomes possible to buy at low prices during the harvesting season, store huge quantities, and realize increased prices after the harvesting season. Monopolies, cartels and combinations can develop, with huge storage capacity.

These dominant combinations can push up and dictate prices after the harvesting season. Complete removal of ceilings on hoarding, is, therefore, obviously unreasonable and not in public interest. The Essential Commodities (Amendment) Act basically legalizes hoarding by considerably weakening provisions for regulation of the amount of stocks of food commodities that can be held.

Big traders and companies can use these provisions and, staying within the law, hoard food commodities to create artificial shortage and a rise in prices. Such volatility of consumer prices would hurt food security of all sections of people.

As regards, agreement between farmers and traders, the fact is that the existing laws like the Indian Contract Act 1872 and the Sale of Goods act 1930 have exhaustive provisions for agreements between farmers, traders and Aggregators. The system of Aggregators, who are intermediaries between the farmers and Sponsors, will degenerate into a new type of Zamindari system in the name of agribusiness and farm services.

One has to be careful with intermediaries. It is not in public interest to relax all limits on hoarding of agricultural commodities, and wait for a price rise of 50% or more, and only then impose limit on hoarding. As regards, electronic trading, digitalization and adoption of IT in agribusiness, the IT Act 2000 has elaborate provisions for promoting the use of IT in business and electronic governance. Section 4 gives legal recognition to electronic records. Section 6A authorizes government to require service providers to deliver efficient services to the public through electronic means.

S 10 A provides for validity of contracts through electronic means. Consequential amendments to provide for electronic transactions have already been made in the Evidence Act, the Contract Act and other laws. It was felt that this objective is already fully taken care of by existing laws, and there is no need for a new law to meet this objective.

Unregulated markets don’t ensure fairness in payment

Section 4(3) of the Farmers’ Produce Trade and Commerce Act allows sale and purchase of agricultural produce by traders outside the markets notified under State agricultural produce marketing laws, giving the traders up to 3 days for payment to the farmers. Existing State laws, like the MP Krishi Upaj Mandi Adhiniyam 1972, requires payment to the farmer on the same day, under S 17 of the Act, Mandis are markets with regulated entries and exits. So the trader cannot take away the farmers produce without payment.

Mandi Committees can seize the produce in default of payment by the trader, resell and recover the loss from the trader. Traders have to keep a security deposit with Mandi Committee, which can be used for paying the farmer, if the trader defaults. Under the new law the trader can take away the farmers produce and pay him within 3 days.

If the trader does not pay, the SDM has to settle the dispute through conciliation. Three days are enough for the trader to abscond with the farmers produce without paying him. Section 8 of the Act provides for settlement of disputes between the farmer and the trader through conciliation. Obviously, there can’t be any conciliation with a trader who has absconded. It is thus clear that the new law will encourage delay and default in payment to farmers.

Mandi Committees, like in MP, are elected bodies. Under S 11 and 12 of the MP Act, Chairman is directly elected by 10 directly elected representatives of agriculturists and representatives of traders. Mandi Committees have representatives of Zila Panchayat, Gram Panchayat, Coop bank, Coop marketing society, representative of MP, representative of MLA, etc.

Mandi Committees are thus decentralized democratic bodies, with participation of Panchayats and cooperative societies in tune with Part IX of the Constitution relating to Panchayats and Co-operative Societies. They control the agricultural market, ensure proper weighment, and prompt payment, delivery and price.

The new law dilutes this agricultural market by allowing trading outside the market, without any effective mechanism for prompt payment and correct weighing. Regulated agricultural market is necessary for: (i) for ensuring and managing buyer-seller meet and market competition. Competition helps both buyers and sellers in reaching a fair and competitive price; (ii) an established market is necessary for discovering market price, (iii) An organized market is necessary for ensuring fair weighing; (iv) a regulated market with controlled entry and exit helps in ensuring prompt payment, and preventing default in payment.

A regulated market, like the elected agricultural Mandi, also helps in dispute resolution and grievance redressal in a democratic and decentralized manner. The new farm laws provide a bypass to the democratically managed agricultural market, without providing an alternative established market. This is likely to confuse the determination of market price, and is not likely to be in public interest.

At on 31.3.2020, FCI’s debt was Rs 327865. The debt increased to Rs 366501 as on 30.11.2020. The debt was Rs 189864 on 31.3.2018. It increased to Rs 253162 on 31.3.2019. FCI’s debt has, thus, been increasing alarmingly. FCI’s storage systems are decaying and wasteful. Central govt has been suffering this mismanagement of the FCI, and a stage is reaching when the FCI collapses.

As we know the procurement of food grains at Minimum Support Prices (MSP) has been the backbone of the public distribution system (PDS). According to the Food Security Act 2013, 70% of rural population and 50% of urban population of the country is to be provided with wheat at Rs 2/kg, rice at Rs 3/kg and coarse grain at Rs 1/kg. Good health of FCI is a prerequisite of food security.

FCI’s storage has also been providing a buffer and preventing monopolies, combinations and cartels, and thereby protecting the general consumers also against food inflation. Collapse of FCI, and the ambivalence of the central government on continuing with the MSP system, does not augur well for the food security of India and for stable prices of food grains for the general public.

PDS depends substantially on procurement from Punjab, Haryana and western UP. Farmers in these states are, therefore, comparatively more apprehensive that procurement at MSP may also collapse with the FCI. Central govt has not issued any white paper to clarify the status and allay this apprehension, even after the farmer’s agitation; which is the least it could and should have done.

Lessons from Bihar from the abolition of APMCs

In 2006, Bihar had abolished the APMCs. The result is that farmers in Bihar have to sell their produce to private traders, on average get one third less than the MSP for paddy. In MP, there have already been multiple cases of farmers being cheated in transactions under the new act with no redress. The government’s suggestion now is that it could allow state governments to register traders and if state governments wished they could charge a fee.

This aspect is already there in the Model Act 2017. What then is the requirement for a central law? It is clear that private players will take over the market. In the absence of a legal guarantee of a minimum support price, farmers will be at the mercy of these big traders. At present there are about 2,477 principal regulated markets based on geography (the APMCs) and 4,843 sub-market yards regulated by the respective APMCs in India.

The Swaminathan Commission had suggested setting up of more markets in a range of up to 80 sq km compared to the distances of around 500 sq km today. This is a “reform” which would help farmers if the government would set up more regulated markets. But the government wants to cut down on procurement and refuses to set up more regulated markets where procurement can take place.

Contract farming law strengthens corporate power

The Farmers (Empowerment and Protection) Act more easily referred to as the ‘Contract Farming Act’ aims to provide a framework for written agreements between farmers and sponsors without mandating them. It allows ‘Sponsors’ to engage with farmers via written contracts, if they choose to use such contracts.

Unlike the APMC Bypass bill, the contract farming legislation has a longer history of extensive consultations with stakeholders. Yet, bewilderingly, the 2020 bill seems to have broken with the past by abandoning the 2018 proposed model contract farming act in favour of a national legislation.

This law permits contract farming with minimal obligations of the corporate towards farmers. A second significant departure is the expansion of the scope of the bill to include farm services, i.e., “supply of seed, feed, fodder, agro-chemicals, machinery and technology, advice, non- chemical agro-inputs and such other inputs”. The Contract Farming bill explicitly excludes land leasing and forbids the Sponsor from erecting built structures on farm land.

The bill also provides for timely payments by the Sponsor to the farmer. As with the APMC Bypass bill, this bill frees downstream players in the supply chain from state APMC regulations, enabling them to undertake written contracts freely across the country, outside the purview of any ‘State Act’ or ECA (II.7.1 & 2).

Ignores lessons from the past Indian practice

It is important to recognize that contract farming has been in practice in India since the 1960s in the seed sector. Even in the case of other farm produce it has been practiced 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.

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.

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).

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.

The Contract Farming Act has opened agriculture production to corporate control through the system of contract farming. It provides a completely deregulated environment in which big agribusiness companies will be able to coerce farmers to enter into contracts for the supply of agricultural produce on terms that may be unclear and unfavourable to farmers.

The act does not have any mechanism whatsoever for ensuring that farmers get fair and remunerative prices, that the terms of contracts are fair and unambiguous, or to ensure that the contract enforcement is not selectively used to exploit farmers. Both the Agricultural Marketing Act and the Contract Farming Act specify mechanisms for settlement of disputes between farmers and traders/companies which are designed to keep farmers in a very weak position while critical powers have been given to the bureaucracy.

Elected local bodies and gram sabhas have no role in the dispute settlement and organisations of farmers have no space for providing support to farmers. The law also bars farmers from approaching the civil courts in case of disputes. On this aspect the response of the government is that the right to go to court can be included. However, the government is not prepared to stand guarantor to support the kisan.

The experience of potato growers in Punjab who entered into contracts with MNCs was terrible, and they were exploited. Can an apple farmer in Himachal Pradesh fight Adani Fresh by spending the rest of his life in court if the agreement is violated? The so-called amendment suggested by the government does not guarantee any protection for the farmer. The protection can only be provided by a government guarantee and a minimum support price.

Truth of MSP claims

The government is claiming that procurement of food grains at MSP will not be affected, and that the government is prepared to give a written assurance that MSP will continue. Government has implemented Swaminathan Commission recommendations on MSP. The truth is that when even a guarantee underwritten by law on the share of GST compensation to the states was blatantly violated by the central government, what worth is a written assurance?

If the government is truly sincere about MSP guarantee, what prevents it from bringing it into the law? All farmers are demanding a law on MSP. Leave alone legal guarantee of procurement at MSP. The government is lying about its MSP claim that it is in accordance with the Swaminathan Commission recommendations of 50 per cent over the cost of production.

There are different types of cost of production. The A2 cost is just paid out cost. The A2+FL cost is the sum of A2 and the imputed value of family labour. The C2 cost is the total cost of production, which includes the paid out cost, imputed value of family labour, the interest on the value of owned capital assets and the imputed rental value of owned land.

The Swaminathan Commission had suggested that MSP should be fixed at 50 per cent higher than the C2 cost of production. However, the Modi government has fixed MSPs at 50 per cent higher than the A2+FL cost of production. If MSPs were fixed at 50 per cent higher than the C2 cost of production, the MSPs would have been Rs 400 to 500 per quintal higher than at present. This is the approximate average loss suffered by the farmers for every quintal sale of their produce.

Bitter truth of APMC mandis

The other claim of the government is that the laws will not weaken the existing system of APMC mandis but will only provide alternative opportunities to farmers. There is no compulsion on farmers, and that they will still be able to sell their produce at MSP to government agencies. The truth is that the whole purpose of the law is to handover marketing to the private sector.

It needs to be kept in mind that if the trade shifts, as it is bound to, outside the mandis because of tax concessions, then investment in upkeep, maintenance and improvement of infrastructure of regulated mandis will stop. With the implementation of neo-liberal policies, we have seen how the most profitable public sector companies in numerous sectors have been starved of funds or have been drained of their own funds and have been made sick. FCI is itself an example of this kind of neglect.

This is also what will happen to the APMCs. In addition, in the absence of a guaranteed price, for the farmers, the “alternative opportunities” will be at the mercy of the corporates. Even today regulated markets are very few in most states. A vast majority of farmers today are forced to sell their produce at prices significantly lower than the MSP. Even though there is an MSP for 23 agricultural commodities, the government procures only rice and wheat, and that too in just in a few states, and most other farmers are forced to sell their produce at low prices.

Jumla of doubling of farmers’ incomes

The government claims that farmers’ incomes will be doubled. The truth is that this is only a jumla for this government. It the most absurd claim. There is no provision in the new laws to

ensure that the farmers get a “higher” price or even the MSP. The law on contract farming categorically states that the government will play no role in fixation of price. With increasing monopoly control of large corporations, farmers in distress will be compelled to agree to whatever price is offered by companies. The government is claiming that the new laws protect farmers against the threat of alienation from their lands.

The truth is that the Contract Farming Act has a clause which bars companies from including provisions for purchase/lease of land from farmers in contract farming agreement. Such clauses are toothless and cannot protect farmers against the threat of alienation from land. Economic distress is the most important cause of the alienation of farmers from their lands. If farmers are cheated by companies, selling the land will be the only option available to them since land is their most important asset.

The only protection against loss of land can be that a minimum return from agriculture is ensured. This can only happen if a remunerative MSP is a mandatory requirement of all contract farming agreements which is glaringly absent in the law.

New laws means lesser public investment

The government claims that opening agricultural marketing to the private sector would bring investment to agriculture. The private sector will bring new seeds and technology to farmers. The truth is that the government is not able to provide new varieties of seeds and technology for sustainable agriculture to farmers. ICAR and agricultural universities have been established for this purpose.

But they are being defunded. Agricultural research and extension services have been completely downgraded by the Modi government. Private companies are after super-profits, and high prices of seeds, pesticides, herbicides and other agricultural inputs provided by private companies is a major cause of agrarian distress. In fact, the government is threatening another version of a Seeds Bill as a second reform.

There is strong complementarity between public and private investment. If the government invests in regulated markets, this will attract private investment in storage, transport and other supply chain facilities. In absence of basic infrastructure, very little private investment takes place.

CONCLUSION

The three Farm Acts will weaken the mandis, shut down the FCI and end procurement. These would imply that the entire agricultural surplus that passes through the FCI and the mandis will be available for the multinational companies to handle. Thus, corporate firms would gradually increase their control of the entire value chain and ultimately dominate it. It is clear that the new farm laws enacted by the government are fundamentally flawed.

By enacting these laws, the central government has undermined powers of the states to enact laws related to agriculture and to make executive interventions in the interests of people.