The agriculture reforms are progressive and structurally positive, given the state of agriculture in India and reflects the need of the changed times; from food-deficit to food-surplus, from need to protect farmer to providing farmer the choice, from production-centric to demand-centric. This is undoubtedly a ‘1991 moment’ for Indian agriculture and the rationale is that it will help
- Increase the farmer income as multiple layers of middle-men are disintermediated, cartelization at APMC is broken. An efficient supply chain helps reduce wastage and market/ demand driven cultivation improves farmer income. For eg: differential pricing for quality and specific variety
- Corporatize Indian agri by promoting contract farming as well as develop the food processing industry with some cluster specialization emerging. For eg: processed food is cheaper than fresh food globally, unlike in India, partly due to ability to store annual requirements during the harvesting period
To the government’s credit, it is also a meaningful shake-up – relatively holistic approach adopted by the government (multiple measures) – anything short of it would not achieve much. For eg: Fruits and vegetables have been outside the ambit of APMC in many states for few years and yet we have not witnessed any meaningful private sector investment and benefit to the farmer. However, constraints on storage under the Essential Commodities Act (ECA) and government action on stock-limit would have discouraged the private investment so far. Note there were 76,000 raids under ECA. Hence the hope from the holistic reforms.
Further, while private investment may take longer, Agri Infra Fund (to be managed by NABARD) is expected to support Farmer Produce Organization (FPO) with debt and equity and thereby facilitate the first round of investment
What has the Government done?
As part of the agri reforms, the Government has over the last few months passed three key Bills/Ordinance:
The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020: Deregulate agri-trading from the existing APMC system, end the monopoly of APMC and make inter-state trade easier
Amend Essential Commodities Act (ECA): Thereby reduce the fear of stock holding limits amongst agri-supply chain players
The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020: Provides a legal framework for agreement between farmers and buyers (food processor, aggregators) i.e. encourage contract farming
In addition, the Government has proposed:
Agri Infra Fund of Rs 1,000 billion to fund cold chain and post-harvest infrastructure and help setting up of Farmer Produce Organization (FPO)
Rebooting electronic National Agricultural Market (eNAM) as Platform of Platforms
Scheme of Rs 100 billion to help assist Micro Food Enterprise (MFEs) in modernizing technology and marketing efforts including building brands
Schemes to promote Animal Husbandry, Horticulture
The big question is whether the impact is marginal or significant?
The impact may possibly be closer to the success achieved by ITC e-choupal or Milk. The easier question to answer is that it is most likely to be medium-long term before these reforms bear fruits. We expect over the medium term
- Large number of FPOs to be constituted; In essence 10,000 or more FPO will replace the ~2,000 APMC mandis. The key difference is that FPO are expected to be more transparent as well as work with the farmer community on various advisory fronts (cropping pattern, precision farming etc). We are likely to have both – procurement from FPO as well as APMC run in-parallel for the medium term
- Corporates who are not sensitive to grade (eg: maize for starch or soya for solvent extraction) can look to procure from FPO even while the testing infrastructure may be absent/ inadequate at the FPO level. Companies who can expect premium pricing for agri produce based on quality/ consistency/ traceability etc may be initially interested in investing in supply chain or contract farming
- The initial investment will be led by small entrepreneur (rich farmer, Arthia etc) and FPO who avail of funding from Government schemes. Any meaningful private sector participation will only be in medium term
- APMC mandi tax and Arthia commission to reduce sharply. Punjab has reduced APMC tax from 2 per cent to 1 per cent, Haryana from 2 per cent to 0.5 per cent and Karnataka from 1.5 per cent to 0.35 per cent
Magnitude of Impact will depend on
- Success of FPO: FPO are envisaged to play a critical role in replacing the Arthia – APMC and help organize the farmers in order to deal with large corporates. While comparison with Co-operatives in Sugar/ Bank and even with Milk Co-operatives/ Self Help Group (SHG) inspire limited confidence, arguably greater role of farmer from the relevant villages and small size of FPO will ensure greater ownership and connect
- Ability to tie-in credit: Farmer’s dependence on the middleman for financing, which ties him to a symbiotic relationship with the trader may be practically difficult to sever. It is therefore important for FPO to be able to tie-up with formal institutions of credit
- Minimize ambiguity and inconsistency: Stock limits can be imposed in case of rise in prices of perishables by 100 per cent is not a wide range given the inherently volatile nature of some of the crops. For example, during Aug-Dec 2019, onion prices surged from ~Rs 15/ kg to >Rs 60/ kg
- Solving the Trust Deficit – Fear of the and by the Farmer: Corporate fears that in case of a dispute, it is always Avantagé Farmer. In case of dispute, the decision of District Collector cannot be challenged in Court; the intention was to ensure that it is not litigious, the amount in contention at an individual level is unlikely to be very large to merit a torturous court process
While the Farmers fear that they will not be able to negotiate with Corporates, organizing them into functioning FPO is critical to the success .
Misguided (farmer), vested (trader) or political (opposition parties)
Opposition parties led by Congress have protested these bills – it is largely politics and driven by vested interest
State government earn revenue from the tax at APMC (taxes vary between 2 per cent – 8 per cent) and risk part-losing
APMC are an important part of the political system of influence and risk losing their eminence
Traders (Arthias) risk being disintermediated: Farmers, particularly in the state of Punjab and Haryana are protesting as they fear that Government will step back from MSP-based procurement. Note that Punjab + Haryana account for 35 per cent and 65 per cent of state sponsored MSP procurement as compared to 15 per cent and 30 per cent share in production in paddy and wheat respectively pan-India
While the government has been procuring in excess of its requirements and would like to scale it down, this is de-linked from the de-regulation of agri-trading and the agri reforms
The case of Bihar, which repealed APMC Act in 2006, free market without regulatory oversight and monitoring did not help the farmer community cannot be extrapolated as there was no parallel mechanism of FPO that was sought to institutionalize farmer community and private sector was not keen to invest in a state such as Bihar
With this set of reforms (and they are genuinely reforms in this case), the government has sought to roughshod the states while on the other hand, opposition parties have displayed opportunism similar to opposing Land Acquisition reform in 2014
Along with the vexed issue of state revenue under GST in a COVID year, the politics around the passage of these Farm Bills has impacted Centre-State relations (in non-NDA State government) besides rekindling the debate around co-operative federalism and Centre seeking to usurp power/ role of State governments
Fundamental problem of Indian agri has been that farming is unviable – we will need to do much more – increase yields (eg: Genetically Modified seeds/ Hybrid seeds), change cropping pattern (eg: horticulture), improve irrigation, provide supplementary sources of income (eg: livestock rearing) – and as some experts would say, the key way to increase farmer income is by reducing the number of farmers. While the agri reforms may create opportunities in traditional business, a more economically viable farming ecosystem along with enabling regulatory environment will accelerate the growth of agri start-up ecosystem. From a timing perspective, agri-reforms in a bumper harvest period (and therefore average price < MSP) may be incorrectly attributed to these reforms.
The Government has sought to kickstart a fragile virtuous cycle but success of factors are arguably mutually dependent. Unfortunately, strong opposition by State governments may hold back investment by private sector thereby adversely impacting if not, derailing the reforms.