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The Dire Necessity of India’s New Farm Laws

17 Dec 2020
Tending the Crop in Uttarakhand, India. Source: Gavin Edmondstone

India has recently enacted three agrarian bills to stimulate its agriculture. The logic behind these laws, and the controversy that has surrounded their implementation, is deserving of attention.

Household-based farming has been the mainstay of Indian agriculture for centuries. At the present point in time, agricultural operations face two main problems: (i) low land yields compared to low-, middle-, and high-income countries; and (ii) the preponderance of subsistence farming. At the same time, the structure of India’s agricultural markets is antiquated.

Agriculture is a state subject under the Constitution of India, so there exist a multitude of regulations governing the sale and purchase of farm produce. Some of these cover income protection for farmers, as many of them operate tiny farms. In 2010-11, 67.1 percent of land holdings were less than one hectare in size, and large holdings (10 hectares and above) accounted for no more than 0.7 percent of all farms. In the ten years since then, farm holdings have likely become even smaller. However, particularly in the areas which benefited considerably from the Green Revolution, there are some rich farmers. They are rich because agricultural income is not taxed in India. Hence, Indian agriculture faces complex problems of inefficiency (small sized farm holdings) and inequity as there are large disparities in farm incomes across the country.

Between 2002-03 and 2015-16, real incomes of average farming households in India grew at a compound rate of 3.7 percent, whereas there was a growth in excess of five percent for aggregate per capita income. It is no wonder then that according to one estimate from 2004-05, 40 percent of farmers did not wish to farm, but stayed in agriculture because they had no other alternative.

Indian agricultural marketing has been governed by archaic laws which have stifled progress and led to stagnant farmer incomes, particularly those of small farmers in the east of the country. New agrarian laws are designed to address these anomalies. This is largely within the purview of the states, but the central government has the responsibility, under Article 301 of the Constitution, of ensuring freedom of trade and commerce across the country.

States have the right to regulate trade within their borders under the Agricultural Produce Marketing Committee (APMC) Acts. Under this arrangement, mandis (organised markets) exist for farmers to sell their produce. Traders and intermediaries require a license to operate in these mandis after paying a fee to the APMC. Although the intention of the APMC was to protect small farmers when selling their produce, the end result in many cases was that farmers became dependent on these intermediaries. The nexus between traders and commission agents have kept prices low for farmers, whereas these intermediaries make good profits when finally selling produce in retail markets.

At the same time, the Essential Commodities Act 1955 (ECA) bestows the central government with powers to impose restrictions on storage and movement of certain “essential” commodities by private parties, mainly to protect consumer interests. However, subject to state notifications, state governments have been left free to set stocking limits. The ECA has had the devastating effect of stifling private investment in post-harvest storage, warehousing, and processing, especially because these controls are implemented somewhat arbitrarily. As a result, often commodities change hands five to six times before they are sold to the end consumer. Also, fragmented markets lead to the perpetuation of local scarcities because price signals for surplus areas to supply deficient ones are weak or missing.

It was against this background that the government of India enacted three laws in September. The first eases restrictions governing the purchase and sale of farm produce.  The second relaxes restrictions on stocking under the ECA, and the third allows contract farming on the basis of written agreements. The three bills form an integral unit and should be viewed as such. These bills are intended to enable private players to invest in agri-food supply chains more easily, and increase efficiency along the supply chain so gains could be passed to farmers in the form of better harvest prices and lower input costs. Thus, these laws ensure lower inequality – both personal and regional.

Entrenched regional inequality has been a pressing policy issue for India ever since the mega industrial and trade policy reforms of 1991. In terms of their reform potential, the new agricultural laws have rightly been compared to these mega reforms of 1991, but applied primarily to the agricultural sector.

The freedom to sell commodities outside the APMC is a game-changing step. The APMC mechanism remains for those farmers who want to use it, but for those who would like to explore better sales prices, this reform could mean a large increase in income. One estimate suggests that removing interstate barriers to trade can increase farmer prices by 11 percent.

As well, the digitising of farm produce sales through e-mandis aids the discovery of the best prices by farmers in even remote parts of India. This freedom to sell produce countrywide will benefit small farmers the most, since they have usually been most vulnerable to the machinations of intermediaries. It is no wonder, therefore, that so-called farmers’ agitation (henceforth agitation) has little or no support from small farmers.

The farmers who are involved in agitation are primarily from the prosperous state of Punjab. The rest are middlemen and intermediaries who lose out under the new laws as farmers can sell directly to consumers. Indeed, it has been reported that the agricultural minister in the previous government came out in favour of liberalising agriculture and permitting the entry of the private sector in Indian agriculture.

But what of the agitation? The difficulty with the agitators’ position is that they cannot provide any meaningful rationale for their opposition to the laws.  The government has already stated that the MSP and the APMC will stay, and the farmers are free to continue working with them if they want. Contract farming will eventuate only if all parties involved agree to do so. Therefore, the fear that large corporate houses will take over farmers’ agricultural land is completely unfounded. The agitators cannot provide a single cogent argument that says that farmers will lose out with the reforms. The government has had several rounds of discussions with the agitators and has been more than willing to allay any fears of the agitators. Since they do not have a cogent argument against the laws, the agitators have resorted to gross obstinacy and are asking for a repeal of the laws, nothing less! Why one would withdraw laws which have been duly passed by Parliament after considerable discussion is, of course, difficult to understand.

Intermediaries and middlemen will lose out as a result of these laws, but that has always been a key operating principle of the Modi government. Middlemen and intermediaries have been losing out since the Modi government came to power in 2014. The new agrarian laws are the latest step in this incessant drive.

Raghbendra Jha is a Professor of Economics at the Australian National University and Executive Director of the Australia South Asia Research Centre, Arndt-Corden Department of Economics.

This article is published under a Creative Commons Licence and may be republished with attribution.