Let us delve into this topic which is in the headlines for last few months, purely from economics and agrarian lenses.

Background:

Over last several months, farmers, largely in Punjab and Haryana, have been protesting against the new farm laws. The three legislations are: Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 (FAPAFS), the Essential Commodities (Amendment) Act, 2020 (ECA), and the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 (FPTC).

FAPAFS regulates contract farming. Expansion of contract farming is essential but a long-term solution. Trust between farmers and corporates/processors/e-commerce players/exporters should strengthen in order for it to be a complete success. ECA was enacted in 1950s when the nation faced severe food scarcity. India’s situation with respect to food security has changed and the law is no longer required.  FPTC, the most controversial law of them, abolishes monopoly of the mandi system (i.e. Agricultural Produce Market Committee – APMC). It allows anyone with a PAN card to sell farm produce anywhere outside mandi, known as ‘trade area’. It does not order to close existing mandis. However, it gives farmers a choice to sell their produce in mandis or in trade area, wherever they get good price.

Issue 1: Fear of removal of MSP

MSP is the price assured by the government for procurement of the farm produce irrespective of the market price. MSP is the main factor that drives the cultivation decision. Its roots trace back to the Green Revolution, which was aimed at improving food security in India post the severe famines in 1950s. MSP became the sole incentive for farmers to cultivate a particular crop. Government largely procures wheat and rice, for public distribution system (PDS) or ration.

MSP is successful only if it is procured by the government at that price. Currently, the government has assured farmers that it (through Food Corporation of India) will continue to procure at MSP even after enacting these laws. Although neither of these laws abolishes MSP, farmers fear that this is a beginning of the end of MSP (Minimum Support Price) system. Prima facie, this fear is unwarranted, but moving towards free market system warrants removal of MSP and hence this fear cannot be ignored completely.

Issue 2: Bulk of agri-marketing already outside APMC

Around 86% of farmers own land less than 2 hectares, referred as small and marginal farmers. Their output is lower and network with nearby APMC is weak, therefore, they approach a local trader instead. Farmers are not allowed to sell their produce in different districts, even if the distance to the neighbouring-district mandi is lesser than the mandi within their district. Agriculture expert Siraj Hussain writes that along with long distance to local mandis, other reasons, why farmers sell at farmgate include lack of confidence that procurement centres will accept the quality offered, delay in receiving payment, and urgent need for money by farmers. Hence, many farmers do not rely on mandis and MSPs. Also, the track record of procurement at MSP is quite poor i.e. government has procured at prices lower than MSP at multiple occasions.

A Study of Agricultural Markets in Bihar, Odisha and Punjab by Shoumitro Chatterjee, Mekhala Krishnamurthy, Devesh Kapur, Marshall M. Bouton finds that most transactions in Punjab occur inside mandi, while in Bihar and Odisha they occur at farmgate. Also, in case of Punjab, despite strong mandi system, many transactions related to non-MSP crops (maize and potato) are carried out at farmgate.

Immediately after the announcement of agricultural reforms through Ordinances on June 5, mandi arrivals started declining. As per the Financial Express article, during the June 6-August 31 period, mandi arrivals dropped sharply. The fall was up to 49% for fruits, 57% for vegetables and 45% for grains. The law, thereby made mandis irrelevant ab initio. This reveals farmers’ preference.

Issue 3: Farming in Punjab and Haryana

We must understand some issues and characteristics of these states such as ecology, cultivation and procurement:

Rice cultivation: Rice is a rainfed crop. The western coast of India, parts of Kerala, Tamil Nadu, Chhattisgarh, Jharkhand and North-Eastern States are more favourable for paddy cultivation. However, cultivation in these regions is relatively lower than the north-western plains. The following chart makes the scenario even clearer. Ideally, paddy cultivation in Haryana, Punjab and Western Uttar Pradesh should be reduced while it must increase in more suitable areas. These regions have also faced environmental problems due to overuse of fertilisers, pesticides and groundwater

Procurement vs Surplus: While Uttar Pradesh (~12% of marketed surplus) and West Bengal (11%) have higher share in marketed surplus, being the top two rice producing states in India, their share in procurement was only 7% and 5% respectively, as seen from the chart below. States whose share in procurement is larger than share in marketed surplus (like Punjab, Haryana, Telangana, Andhra Pradesh and Odisha) have better procurement systems than the states whose share in procurement is smaller than the share in marketed surplus (like Bihar, Assam, Uttar Pradesh and West Bengal). The chart below that shows similar characteristics for wheat.

Productivity: Now, the question is why do Punjab and Haryana cultivate rice and wheat in excess. While instrumental in alleviating food grain shortages, MSP has distorted the cropping pattern between wheat and rice on the one hand and other crops on the other. Punjab and Haryana increased area under cultivation through improved yields and procurement systems and government kept on procuring from them massively. Annual growth rate of area under rice is the highest in the regions of Punjab and Haryana (chart below).

Yields in Punjab for rice as well as wheat are the highest (charts below). Productivity of Uttar Pradesh, the top producers of both rice (2^nd largest rice producing state) and wheat (largest producer of wheat), is lower than all-India average productivity.

Crop Diversification: Then why these states do not diversify or why the government does not incentivise them to diversify. Farmers don’t want to take risk of growing a new crop as against the tried and tested crops of rice and wheat, which has a continuous buyer, the government, and an assured price, MSP. Commission for Agricultural Costs and Prices identifies maize, pulses and oilseeds to have a great potential for crop diversification. But these crops have low profitability compared to rice. The Commission recommends that the government must give additional incentives, including assured MSP.

Haryana government announced a scheme for crop diversification. But it is not a success yet due to multiple reasons. The government promised to pay Rs. 7000 per acre for diversified crops in two instalments, first of Rs. 2000 per acre on verification and balance after harvest. The government promised to procure the diversified crop at MSP. The scheme’s objective was not succeeded as it failed to attract registrations. Initially, farmers intended to cultivate around 1.27 lakh hectares of diversified crops, but after two rounds of inspection, the area was reduced to ~39k hectares. Government does not procure vegetables or fruits on MSP, so farmers tried cotton, bajra, horticulture crops, maize and pulses instead. They complain that the procurement was not at MSP as guaranteed. Also, many farmers have not yet received the money according to the scheme. On cultivating other crops, cost of storage and processing was additionally incurred along with risk of crop loss due to changing weather.

So, structuring a scheme, which is beneficial for farmers as well as easily implementable is a complex task, where all factors viz. weather, costs, actual procurement, actual price realised by farmers, opportunity cost of diversification and cost to the government comes into play.

Impact of less procurement: A rational solution to this is reducing dependence on these two states with respect to rice and wheat and increasing procurement from other states. However, it is easier said than done. All factors stated above such as productivity, efficiency, opportunity costs, prices paid to farmers and last but not the least – incentives; continue to haunt the current system. This apart, one has to also think about the incomes of state governments, commission agents as well as mandis, in order to overhaul the current system. Mandis levy cesses and fees on MSP, which is deducted from the farmers’ realisations. APMCs in Punjab and Haryana earned Rs. 16.4 billion and Rs 35 billion respectively because of levies on mandis in the last year. On the other hand, commission agents (arthiyas) earned commission of Rs. 13.58 billion and Rs. 6.55 billion as commission in Punjab and Haryana, respectively. Any action that reduces the procurement will impact their incomes. It is easy to demonise middlemen, but one should understand their role in the market. Economist Mekhala Krishnamurthy, in an interview, highlights that commission agents are an important source of credit to farmers. If the system is going to change and impact their livelihoods then farmers will try to protect the agents too. She adds, “Everything farmers recognise [mandi, agents, etc.], is being removed.”

Issue 4: State-wise heterogeneity and Federalism

Punjab and Haryana have strong mandi systems; Bihar has abolished APMC back in 2006, while the state of Odisha does not have APMC but instead has Regulated Marketing Committees (RMCs) which procure mainly paddy. Elsewhere, the experience varies from state to state and from mandi to mandi. Model APMC Acts (2003 and 2017) recommends many reforms that states should implement. Some states have been active, while others sluggish in reforming the agri-marketing systems (chart below). There was scope for more improvements. But FTPC might pause the state-led reforms.

The area outside the mandi, called as ‘trade area’ will be deregulated, and take state governments out of the picture but give central government the authority to make laws for all trade areas across the country. Without adequate consensus and poorly drafted legislation, the matters might get complicated and reverse the current decentralised, (over-) regulated but inefficient system to a centralised, deregulated but (again) inefficient one. The government could have implemented changes by creating a Model law (or amending existing Model APMC Act) similar to RERA (RERA was implemented by almost all states) by adding features of FTPC in it. Economist Mekhala Krishnamurthy suggests establishing a GST Council-like structure under the new laws in order to build state-wise consensus for policy decision.

Final Thoughts

Although current discussion is more focussed on overhauling mandi system, there are equally challenging and important areas which deserve equal attention. Even within mandi system, there are multiple issues, not mentioned above, like political interference, caste networks, technological penetration, climate change, relationships with traders, trust issues with corporates, basic and financial literacy, progress of farmers producer organisations (FPOs), etc., that affect agricultural marketing. Tackling them requires another set of reforms that could take another decade to roll out.

Almost all experts agree that farmers need freedom from the state intervention. It has been proved numerous times that despite all the state support and subsidies, farmers are net taxed. Farming is a loss-making business and over-regulation has not allowed farmers to come out of poverty and/or agriculture altogether.  Reliance on mandis and MSPs is not a long-term solution. We have to get rid of them and these laws kickstart that process.

Farmers, even from Punjab and Haryana, understand the need of reforms. But they are marginal, risk averse, and entangled in the current system, with hardly any space to innovate. These reforms should have been communicated in advance with adequate time and incentives to bear the shocks of disruptions. But the central government passed these laws without adequate discussion in parliament and without consulting the concerned stakeholders. Currently, they are put on hold on account of protests for 18 months (i.e. until 2022).

States should actually use this time to implement recommendations of Model APMC Acts and reform the current structure, especially Uttar Pradesh, West Bengal and other low productivity states. These reforms along with various monetary or non-monetary incentives for farmers can act as transitionary arrangements towards the FTPC-like market structure, as proposed. The central government should also use this time to build consensus across political parties, states, traders and farmers’ bodies. It can also compensate states for loss of revenue just like it did for GST.

However, the political economy of Indian states would rather enjoy low-hanging fruits and try populist measures or narrative building (either for or against the BJP government) instead of implementing actual reforms. The path of agri-reforms, thus, remains unclear as of now as the states will not spend on a system which is bound to collapse once the new laws are implemented (if at all by 2022/23), while the central government might keep on holding these reforms as preparations for 2024 elections become underway.

Sources and Further Reading:

1. I recommend reading Vivek Kaul’s article for further understanding on political economy aspect of protests.
2. Follow these experts whose material I had used in this article: Ashok Gulati, Siraj Hussain, Shoumitro Chatterjee and Mekhala Krishnamurthy.
3. Listen to these podcasts: Ideas of India: Agricultural Policy, The Seen and The Unseen Episode 1, Episode 86 and Episode 211
4. Watch these videos: Are the farm laws needed at all? Mekhala Krishnamurthy, Shekhar Gupta on political controversy and hypocrisy, Hits and Misses of farm laws (Off the Cuff – The Print)
5. A Study of Agricultural Markets in Bihar, Odisha and Punjab – Center for the Advanced Study Of India, University of Pennsylvania, Shoumitro Chatterjee, Mekhala Krishnamurthy, Devesh Kapur, Marshall M. Bouton
6. From Annadata to Farmpreneur, by Centre for Civil Society (September 2020)
7. Price Policy for Kharif Crops: The Marketing Season 2020-21
8. Price Policy for Rabi Crops: The Marketing Season 2021-22
9. Opinion pieces by Jean Dreze, Siraj Hussain (Ideas for India and Indian Express) and Shekhar Gupta
10. News articles on Haryana’s crop diversification (The Print) and APMC losing trade share (Financial Express)