COVID-19 brings opportunity for agricultural reforms in India

India’s pandemic relief package includes great reforms to their agricultural markets, showing how the country is using COVID-19 as an opportunity for investment in better systems.

Published: 11 Nov 2020
Author: S. Mahendra Dev
Type: Insight

In May, the Indian government announced a COVID-19 economic relief package called Atmanirbhar Bharat (Self Reliant India) totaling about USD $270 billion, equal to 10% of the country’s GDP. Among the package’s main components are a set of changes to laws governing agriculture markets—in other words, the government has used the COVID-19 crisis as an opportunity to push through significant agricultural reforms that will have many medium- and long-term impacts.

It is an important moment for Indian agriculture. Agricultural economists and other stakeholders have been advocating agricultural market reforms for decades, and particularly since the 1991 passage of a broad economic liberalization that triggered three decades of strong economic growth in India, but mostly left out agricultural markets. What are the reforms, their potential impacts and obstacles, and will they trigger agricultural growth—creating another “1991 moment”?

The three major reforms, which became law in September, include:

  • Reforming India’s Agricultural Produce Market Committees (APMCs), state boards that tightly control sales. The new law eliminates interstate trade barriers and allows e-trading, opening up options for farmers to sell their produce beyond the previously mandated APMC yards (mandis) and seek better prices.
  • Creating a legal framework for contract farming, allowing farmers to contract with buyers on prices and quantities before planting, better ensuring incomes.
  • Limiting the reach of the Essential Commodities Act—which allows the government to control prices and impose stock limits of certain “essential” items—exempting important products including cereals, oilseed, onions, potatoes and pulses. This creates an incentive for private sector investment in supply chains.

Benefits for farmers, including smallholders

The APMCs were widely considered an exploitative system that did not help farmers get remunerative prices. The system was dominated by traders, middlemen, and politicians. Traders and middlemen were able to shut down competition by forming cartels, and farmers had little bargaining power on prices. The mandis also charge commissions and taxes, and state governments impose their own taxes.

The new law seeks to offer greater choice to farmers to sell their produce wherever they can get the best price. It limits APMC jurisdiction to the market yards; elsewhere, farmers are free to sell directly to any trader, processor, retailer and exporter. Outside the mandis, there is no obligation to pay any state APMC market fees or taxes. Thus, buyers can transfer the benefits of trading in non-APMC area to farmers. In addition, the new freedom for buyers should lead to more private investment in agriculture infrastructure and marketing.

Under the contract farming law. farmers can now sign contracts with processors, aggregators, wholesalers, large retailers, and exporters at mutually agreed crop prices. Farmers can withdraw from a contract at any stage without penalty, while corporate buyers will have to pay the agreed price and a penalty for breaching a contract. Farmers must be paid within three days of signing a contract. A dispute mechanism is also included, requiring a resolution within a fixed time frame.

What about smallholders? Small and marginal farmers (86% of India’s total) can’t compete with large corporate enterprises in bargaining. The real hope is in farmer producer organizations (FPOs), that allow members to negotiate as a group and can help small farmers in both input and output markets. The government is planning to set up 10,000 FPOs across the country.

The Essential Commodities Act, passed in 1955, was outmoded and hurting farmers by discouraging private investment in storage. The new law removes stockholding limits on several commodities except under “extraordinary circumstances” such as war and natural calamities. The amended law is intended to attract corporate and foreign investment in food supply chains, particularly cold storage and warehouses, by addressing fears of excessive regulatory interference. Both farmers and buyers will gain as supply chain improvements will bring more price stability. Better storage facilities will also reduce food loss and waste.

Is it a 1991 moment for agriculture?

The three new farm laws have provoked some extreme reactions. Some say that they are a much-delayed 1991 moment for agriculture and will have broad benefits for farmers and consumers, while others condemn the changes as benefiting corporations and threatening small farmers’ livelihoods and independence.

In my view, the farm bills are important reforms aimed at addressing longstanding problems of India’s farmers. Yet the truth in terms of the impact on farmers is unlikely to be either as positive or negative as proponents and opponents claim.

The widely-held impression that farmers had to sell only to APMCs is incorrect. In fact, only 25% of produce transactions were conducted in APMC mandis. Thus, even before these bills were introduced, private traders outside the mandis handled three quarters of India’s farm produce sales. In addition, several state governments have already passed similar reforms. Nineteen states already allow direct purchases from processors and bulk buyers. Kerala and Bihar, meanwhile, do not have APMCs. In addition, several states have allowed contract farming, though often this is done through oral contracts without a firm legal framework. Thus, the national reforms are part of a continuous process initiated at the state level. This seems like something less than a 1991 moment, at least for the first two bills.

The amendment of the Essential Commodities Act is a significant national reform and thus somewhat closer to a 1991 moment. And in general, the current reforms are national, passed by the central government and more freedom is given to farmers and traders outside the APMC system.

Concerns and uncertainties

Given the strong resistance to agricultural reforms, many concerns and uncertainties remain about the potential impact of these agri-market reforms. Here are a few:

  • Protests. Some farmers, in Punjab, Haryana, and elsewhere, have begun protests of the new laws. They worry that the existing minimum support price (MSP) and procurement system will be eliminated—though the government says it will continue. Another concern is that the changes—particularly on contract farming—will lead to corporatization, leaving farmers at the mercy of large agriculture companies and retailers. Finally, the changes in the APMC system will weaken it, leading independent buyers to reduce the prices for cultivators.
  • Risk of corporate cartelization. It unclear whether the reforms will entice large corporate enterprises to quickly enter the agricultural marketplace. If they do, is possible they may form cartels and crowd out competition from small farms. Some state regulation or regulatory oversight may be needed that does not reduce buyers’ and sellers’ freedom to operate. 
  • Middlemen will still play a role. Note that even in the new market environment, middlemen, traders, and commission agents likely won’t be eliminated, as corporations prefer to deal with middlemen in order to aggregate orders, rather than purchasing directly from individual farmers.
  • Farmers still face some limited choices. Interlinked credit markets in several parts of the country still govern how farmers sell to input dealers and traders: Moneylenders or input dealers provide credit or inputs in exchange for produce. In such situations, farmers still have little choice even with the new farm laws.
  • An uncertain track record for state reform. After Bihar abolished APMCs in 2006, studies have shown an increase in food price volatility in the state. Thus, policy changes alone may not be enough to reform the agriculture market system.
  • Infrastructure may be a prerequisite, rather than a benefit, of reform. Some suggest that reforms may not work without more concerted development of private markets and particularly infrastructure outside of APMCs. In other words, infrastructure is a pre-condition for success—another lesson from the experience of Bihar, which lacks a robust independent market infrastructure.
  • Will smallholders benefit? This is also still unclear, and depends on a number of other agricultural policies including on institutional credit, on targeted input subsidies, and the success of FPOs.
  • Will e-trading take off? Lack of internet access remains a problem in many of India’s rural areas. Without internet connectivity and market intelligence for farmers, transaction costs associated with selling in places outside the local market are higher than the value of the produce.
  • Will the government follow its own laws? In September, the government imposed an export ban on onions as supplies fell and domestic prices rose; this is inconsistent with Essential Commodities Act reforms.

We must wait and see whether this a genuine 1991 moment—or not. But India’s agricultural reforms are clearly a step in the right direction. Farmers have more choices and opportunities to find better prices. While there are many potential obstacles to be addressed, the most crucial effort is developing the country’s marketing infrastructure. The government has announced a agriculture infrastructure fund of $13 billion for this purpose. The central and state governments (which govern interstate commerce and agriculture and markets, respectively) must also work closely together for the success of these reforms. Farmers, particularly smallholders, may find the ongoing changes confusing. Government agencies should stress transparency and communication, and explain how the reforms work and their potential benefits.

S. Mahendra Dev is Vice Chancellor of the Indira Gandhi Institute of Development Research in Mumbai. The analysis and opinions expressed in this piece are solely those of the author 

Originally published:

Tags: India

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