The Benefits of the Farm Acts of 2020
Three Acts were passed by the Parliament of India and received the assent of the President in September 2020.
- Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020.
- The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020.
- The Essential Commodities (Amendment) Act, 2020.
Background
According to the Ministry of Agriculture, Government of India, the share of the workforce engaged in the agriculture sector (comprising of cultivators and agricultural labourers) was 54.6% in 2011. Even today, almost 50% of India’s population is dependent upon Agriculture and allied sectors for their livelihood. Yet Agriculture contributes only about 18% to India’s GDP. This is indicative of the low income from the farm sector and the inferior living standards of the Indian farmers.
According to the 10th Agriculture Census, 86.2% of India’s farmers have landholding of less than 1 hectares (which is classified as small landholding).
Exhibit: Split of farm landholdings in India
The average per capita income in the agriculture sector is meagre. The Situation Assessment Survey of Agricultural Households conducted by the NSSO in 2013 showed that the All India average monthly income of a farm household is only INR 6,426 while the monthly consumption is INR 6,223. Thus the average agriculture household is barely able to earn enough to meet the monthly expenditure.
Farmer suicides continue to remain a major concern in the Agriculture sector. The data from the National Crime Records Bureau show that 2.96 Lakh farmers had committed suicides between 1995 and 2013.
While several reasons can be attributed to the rural and farm crisis, but the unorganised agriculture markets remain a major cause of farmer distress.
The agriculture supply chain and logistics infrastructure is underdeveloped in India. The substandard infrastructure means that there are considerable losses during storage and transportation.
The aggregators, middlemen and agents play a major role in agriculture supply chains. They provide useful services in market making and getting the agriculture produce from the farms to the end consumers. However they charge high commissions and corner a large share of the final price that the consumer pays.
The RBI conducted a study in 2018–19 to evaluate the farmers’ share in the price paid by the final consumer. The study found that the farmers, on an average, get 28% share of the final price paid by the consumers for potatoes. The corresponding number is 33% for onions and 49% for rice.
Thus, under the current agriculture marketing system, the middlemen benefit at the cost of the farmers.
The functioning of the APMCs is inefficient and lacks transparency. In many cases, farmers are not issued formal receipts listing the details of price and quantity of the produce. The farmers are vulnerable to exploitation due to lack of transparency.
As many middlemen and agents double up as suppliers of credit to the farmers, most farmers are forced to sell their produce to the same agent from whom they have borrowed money, often at a price lower than the prevailing market price; thus leading to a vicious cycle of indebtedness.
The nominal protection coefficient for agriculture in India is approximately 0.87. Nominal protection coefficient shows the ratio between the price prevalent in the domestic market and the price in the world market. This implies that farmers can earn at least 15% higher incomes by exporting their produce. Moreover, the restrictions on the sale of goods to a limited market infringes upon the rights of the farmers to free trade.
The Government has plans to double farm incomes between 2015 and 2022. Apart from increasing farm productivity, market reforms are a major lever to realize this objective.
Objectives of the Farm Acts
Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020
- Create a new ecosystem where Farmers can freely sell their produce to any willing buyer outside the existing agriculture markets created under the State APMC Acts.
- Provide flexibility to farmers to sell their produce to any willing buyer at a price acceptable to the farmer.
- Facilitate free trade in agriculture in markets other than those notified under the APMC Act
The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020
- Establish a Framework for Contract Farming
- Allow farmers to sign agreements with large buyers for sale of agriculture produce at a pre-agreed price.
- Establish a dispute settlement mechanism: Three level mechanism has been proposed that includes the Conciliation Board, the Sub-divisional Magistrate and an Appellate Authority
The Essential Commodities (Amendment) Act, 2020
- Regulation of supply of essential commodities.
- Potatoes, Onions, Cereals, Pulses, Oilseeds removed from the list of essential commodities
- Restriction on stockholding removed on these items except in extraordinary circumstances like war and famine.
Exhibit: The Objectives of Farm Acts of 2020
Impacts
Benefits of the Acts
APMC Acts mandated the farmers to sell their produce at designated market locations (mandis). The middlemen played a significant role in these markets and often charged large commissions on every sale transaction. After the removal of this provision, the farmers can now sell their produce to any willing buyer at a price of their choice. This provides more flexibility to the farmers and enables them to get better remuneration for their produce by eliminating the middlemen.
Increase in Buyer side Competition: Better Remuneration
Farmers were allowed to sell their produce outside APMC designated markets before the passage of these acts as well. But the State Governments levied market fees on each transaction happening outside the APMC Market. The provision of fee has been removed with the passage of this act. It is expected that more markets will come up with the removal of duties due to lowering of the costs. The increase in the number of markets is expected to increase the competition among buyers of farm produce and will help to improve farm incomes.
The condition to procure a license for dealing in agriculture trade has been removed. Any person with a PAN card can buy/procure directly from the farmers. This will also increase the number of buyers and help increase remuneration for farmers.
Allowing farmers to sell anywhere in India (One Nation, One Market) will enable them to get the best price for their produce; improving farm incomes.
Better Supply Chains
The removal of restrictions (no licenses) in the agriculture trade may promote start-ups in the agri-business sector and create new livelihood opportunities in the sector. These start-ups can work to address the challenges being faced in the agriculture supply chain at present.
The Act will also benefit the agri-warehousing companies, cold storage providers, supply chain and logistics operators.
Private investment in supply chains will lower the losses of agricultural products during storage and transit as is happening at present.
The proliferation of online agriculture trading markets, as is expected, will also bring investments in agriculture logistics.
Dispute Settlement
The Act provides that any dispute has to be settled within 30 days. The district administration shall be involved in the settlement of disputes. This will ensure the security of farmers’ interests and address the concerns regarding Capitalist corporations benefiting at the expense of poor farmers.
Access to better inputs and increased output
Contract farming will enable the farmers to access better technology and other agriculture inputs (like seeds) as the contracting agency has better access to these inputs which they can provide to the farmers. Improved inputs will result in an increase in the yields and better outcomes.
A study conducted by the University of Agriculture Sciences, Bengaluru in 2008 showed that the small farmers who engaged in contract farming obtained higher yields and realized greater returns on their investments. The study, conducted for production of Baby Corn in Karnataka, showed that while farmers engaging in contract farming earned INR 2.1 for every rupee of investment while non-contracting farmers could earn only INR 1.3 for investment of every rupee. Thus the returns were a contrasting 110% vs 30% for contracting vs non-contracting farmers.
The study also showed that small and marginal farmers may benefit more from contract farming compared to large farmers.
Addressing the Farm Crisis
Increase in farmers’ incomes can be the biggest driver in addressing the problem of rural poverty in general and farm distress and farm suicides in particular.
Many economic analysts including IMF Chief Economist Gita Gopinath and Indian Agriculture Economist, Ashok Gulati have welcomed these Acts as much needed reforms in India’s agriculture sector.
Adjusting the Crop Cycle
Besides the obvious benefits, the MSP has had some negative impacts especially on the cropping cycle in Punjab. The agro-climatic zone of Punjab is not conducive for the cultivation of paddy. But the farmers in Punjab and Haryana have been following the Wheat-Paddy cycle for several decades because the high MSP support to Paddy makes it more remunerative for the farmers. The cultivation of paddy has led to depletion of the water table and acidification of soil. Thus the MSP is distortionary for both market supply as well as crop cycle.
With the advent of private markets it is expected that commodities other than paddy might become more remunerative for the farmers and the crop cycle may become adjusted to the market demand.
Need for Cautious Approach
However before the implementation of the Acts, a cautious approach is necessary.
The farmers lack the wherewithal to deal with the big corporate houses. Uneducated and illiterate farmers may not be able to understand the intricacies of contracts.
In case of disputes, the farmers may not be able to compete with the financial might of the big corporations.
The dispute settlement mechanism proposes settlement at the level of district administration which are prone to corruption and may work to the detriment of the farmers.
The removal of market fee will negatively impact the finances of the States. The Central Government can consider compensating the States for the loss in the revenues.
The Government has assured that the MSP will not be discontinued with the advent of the private markets. Although the MSP has been in practice since the 1960s and the ambit of crops covered under the ambit of MSP has expanded over the decades, the MSP is not legally enforceable and has no statutory backing. The Government can assuage the fears of the farmers by providing statutory backing to the MSP.
While the agriculture reforms are welcome, the Government must undertake adequate steps to ensure that poor and marginal farmers do not end up losing more than they gain from the reforms.
A regulatory body can be set-up at a national level to set guidelines and monitor the implementation of contracts and also protect the interest of the farmers.
Way Forward
The farm laws are a welcome step towards reforming the agriculture sector. However these Acts alone might not be enough to address the farm crisis and rural distress altogether.
The Government must undertake several other steps. The agriculture sector contributes only 15% of the GDP while more than 40% population is dependent upon agriculture. So steps are required to reduce the dependence of the population on agriculture and create alternate livelihood opportunities in secondary and tertiary sectors correcting the income-employment asymmetry in the agriculture sector.
The per hectare yields in India remain significantly below those in the US or China. Investment in agriculture research is also much below in India compared to China.
The agriculture in the Western Economies is heavily subsidized by the Governments as well. In the long term the Indian Government may also have to continue providing support to the agriculture sector, but the Government of India should gradually shift to supply side support to the farmers/producers (e.g. money transfer for buying inputs like seeds/fertilizers) instead of demand side interventions which are distortionary (like MSPs impact on crop cycle and environment).
In the short term the Government can expand the procurement of agriculture commodities to include maize and other cereals in order to diversify the cropping cycles and reduce negative impact on the environment. In a nutshell, the impact of the Farm Acts is expected to be largely positive for the Indian Agriculture.
