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  • Writer's pictureAbhilasha Ravi

Digging Deeper: An Inquiry into the 2020 Farm Laws and MSP

Updated: Mar 14




In light of the recent farmer’s protests, there is a lot to be considered regarding the agricultural sector. All of this was set in motion about 4 years ago. In November 2020, thousands of farmers across Punjab and Haryana marched to the streets of Delhi in protest of the three contentious Farm Bills that were passed in September 2020. The objective of the Farm Bills was to allow the entry of private players into the agricultural sector and deregulate the market to allow better price discovery for farmers and reduce the financial burden on the exchequer. The farmers were protesting the bills under the conviction that these bills would dismantle the Minimum Support Price (‘MSP’) system and leave the farmers to be exploited by big, faceless corporations. As a result of the protests, the Farm Bills were repealed by the government in November 2021.


Problems in the current system

The Agricultural sector in India has been a cause of concern for a long time, employing 46% of workers while only generating 18% of the GVA . There is overwhelming evidence that per-worker income in the non-agriculture sector has increased at a much faster rate than per-worker income in agriculture. Workers engaged in non-agricultural activities earn a wage that is 36% higher than the wage earned by an agricultural worker. It has been argued that the reason for this gap is the failure of the government to include agriculture in the 1991 economic reforms. Ever since the liberalisation of the economy, non-agriculture incomes have been rising rapidly whereas agricultural income has been stagnant. This growing disparity has led to the inference that the growth India has experienced so far is accredited to the liberalisation, privatisation, and globalisation reforms during 1991. Scholars are recognising the importance of liberalising trade and incentivising private investment in the agricultural sector There is a consensus amongst neo-liberal politicians on the matter that agricultural reform is necessary to increase farmers’ incomes and accomplish India’s ambitious goal of a 5-trillion-dollar economy.


The primary issue that the new farm laws aim to address is the low per-worker income of farmers. This issue can be broken down into two causes- low price realisation in the farm produce markets and the slow pace of farmers’ diversification to non-food-grain crops.


Low price realisation is a common phenomenon amongst small and marginal farmers due to their low marketable surplus. Small and marginal farmers make up 86% of total farmers in India. They often need to travel 20-25km to sell their produce at the Agricultural Produce Market Committee (‘APMC’) Mandis, which is unviable for the low volumes of produce that they generate. Therefore, they are forced to sell their produce to aggregators/middlemen at prices that are much lower than the MSP. In practice, the MSP is not being realised by a large majority of the farmers. The existing MSP system is not benefiting those whom it seeks to benefit- India’s poorest farmers. In the current farm produce trading system, traders must have a license to buy produce from the farmers in the APMC mandi via an auction system and there are multiple levies on transactions. Direct sales from farmers to traders are not allowed. If farmers and traders wish to trade directly, charges and mandi cess must still be paid to the respective jurisdiction’s APMC, even without using the facility.


Diversification in agriculture is hindered by inadequate warehousing, agri-logistics, and small farmers' inability to gauge demand. About 63% of agricultural land is used for food grains, yielding 33% of crop output, while non-food grains are twice as productive. Challenges like perishability and storage issues hinder the shift, exacerbated by capital constraints and poor infrastructure. To break the low-income-low investment cycle, enhancing post-harvest infrastructure is crucial, necessitating private investment. Enabling farmers to estimate crop demand and produce accordingly is vital for fair pricing and overall agricultural improvement.


Intended Benefits of the Repealed Farm Laws

The Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 attempts to promote efficiency, transparency and competitiveness in intra-state and inter-state trade outside of APMC Mandi’s and outlines a framework for an electronic trading platform for farm produce. It was found that a large part of farm trade is unregulated and non-competitive, taking place outside of APMCs. The objective of this act is to legalise the sale and purchase of goods outside the APMC system and incentivise organised players to enter the market. This would subsequently lead to higher competition amongst buyers and the APMCs would be required to increase their efficiency to attract farmers. Ultimately, the farmers will have increased bargaining power, better market access and more remunerative prices.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 lays out a legal framework for agreements between processors and farmers. It protects farmers from the seizure of agricultural land in case of breach of contract and attempts to shield them from the risk of force-majeure conditions like drought, flooding, and pests. Farmers often have a poor understanding of the demand for farm produce while big corporations have a better capacity to estimate demand and predict prices due to the availability of macro data and expertise. Linking the farmers to these corporations via agreements (processors) will help improve the inventory management of agricultural produce. Through this Act, the linkage between producers, processors and exporters is strengthened. Ultimately, farmers benefit from reduced market risk and increased diversification into lucrative, non-food grain crops.

The Essential Commodities (Amendment) Ordinance, 2020 makes it easier for people and corporations to predict when it will be invoked by the Government. The specified criterion for invoking the Essential Commodities Act, 1955 in the event of a price rise is a 100% increase in the retail price of horticultural produce or a 50% increase in that of non-perishable agri-food stuff over the price prevailing in the preceding 12 months or average price of the last five years, whichever is lower. Moreover, it incentivises private investment into storage infrastructure and agri-logistics by easing the stock limits on direct participants of the value chain in agricultural production. Fostering private investment to improve storage and logistics infrastructure helps farmers get out of the low-income low-investment trap organically and sustainably without burdening the exchequer.


Criticisms of the Repealed Farm Laws

The primary fear of the farmers is that the APMC Mandi would be forced out of business due to fierce competition from private players with deep pockets, leading to the demise of the MSP. Singh and Bhogal (2021) argue that the competition between APMCs and private players would be on unequal grounds because trade in the private mandi will not be taxed whereas trade in the APMC mandi is taxed by the respective state governments. This puts the APMC mandis at a disadvantage over private mandis, that will subsequently command all the trade with higher prices and no cesses, leaving the APMC markets no choice but to shut down, thus causing the demise of the MSP. There is nothing in the 2020 Farm laws guaranteeing that private players cannot purchase crops below MSP in the absence of APMCs. Singh and Bhogal (2021) further argue that the levies on trade at the APMC mandi’s are an important source of revenue for the state governments which would be lost due to these laws. They allege that this is a direct attack on the federal rights of the states in agriculture.


The Modi Government’s argument for the deregulation of the agricultural sector is that private investment will lead to more remunerative prices for farmers. Anwar and Shakeel (2021) disagreed, stating that the pandemic has caused a situation where the private sector has been scaling back its investments while the government has to step in to provide support to MSME and workers. Thus, the Indian government’s move to depend on the private sector for investment in times of uncertainty is a huge misjudgement on its part.

Anwar and Shakeel (2021) also argue that while The Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 may succeed in removing some middlemen at the APMCs, the possibilities for new types of reintermediation are endless. Currently, the small and marginal farmers, who make up 86% of all farmers are highly dependent on aggregators/middlemen to sell their produce. Purchasing farm produce from multiple small and marginal farmers remains a tedious task, so there is no guarantee that the private players will not make use of intermediaries in their dealings. New intermediaries in the form of local and regional buyers, money lenders, transporters, and traders are highly likely to emerge, paving the way for more price manipulation.


Response to Criticisms

Chand (2020) contends that the real threat to APMC mandis is the excessive and unjustified charges they levy in the markets. It was found that 1.5% of the charges levied were enough to sustain mandi operations. The traders will not abandon the APMC mandi because they can buy farm produce in bulk and save up on the costs of entering individual transactions outside the market. Chand (2020) asserts that states that are concerned about farmers’ well-being should do away with these excessive charges and keep them at a justifiable level of 1.5%.

There have been attempts to persuade the states to reform their APMC system since the year 2000, and via the Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017 (‘APLM Act’). The reform was only seen in one state, Arunachal Pradesh. Faced with state resistance for 18 years, the Union government resorted to constitutional measures for nationwide agricultural policy and market reforms (Chand, 2020).


Conclusion

The farmers' call for an immediate repeal of the agricultural laws was premature. In the complex agricultural sector, involving all stakeholders, especially farmers, in discussions is crucial. The government had offered an opportunity for amendments, which could have been a constructive approach. Addressing farmers' concerns about exploitation by corporations can be achieved through strengthening unions and establishing grievance redressal forums. Increased government investment in APMC mandis can enhance competitiveness. The new farm laws, with farmer involvement, have the potential to revolutionize Indian agriculture.


References:

  1. Anwar, Mohammad Amir and Shakeel, Adnan (2021): “Taking the bull by its horns: the political economic logics of new farm laws and agrarian dissent in India,” Contemporary South Asia, Vol 29, No 4, pp 571-578.

  2. Singh, Pritam and Bhogal, Shruti (2021): “Interrogating the MSP Regime, Farm Laws and Agrarian Future in India,” Millennial Asia, Vol 12, Issue 3, pp 332-349.


About the Author

Abhilasha is a final year BA Economics student at the Jindal School of Government and Public Policy. Her areas of interest include Game Theory and Macroeconomics.

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