The agricultural landscape in India is distinct from what exists across the world. About 86% of the farmers in India have a landholding size which is less than 2 hectares. 50% of the Indian population depends on agriculture for their livelihood. Small and marginal farmers are in perennial debt. They borrow money from arthiyas, who are the middle men/brokers/traders at high interest rates, buy inputs through the borrowed money and also sell their produce to them. The arthiyas deduct the loan amount from the value of the produce and then give the farmer the remaining amount. Arthiyas thus play a very important role in the farmers’ life.
Agricultural produce market committee (APMC) mandis are the regulated market yards for agricultural produce. They are present in majority of the taluks across the country. APMCs were established in the 60s to prevent exploitation of farmers by intermediaries. Regulation of agricultural markets in India is under the state government. Hence each state has its own APMC Act to regulate physical trading of agricultural commodities. According to the APMC Act, first sale of the commodities produced in the region have to be done under the aegis of APMC through licensed agents. APMC collects market fee, license fee, etc., from the market participants.
Farmers sell their produce to the arthiyas /middle men or the licensed agents at the APMC mandis. Arthiyas sell the produce through auctions to the wholesalers. Over the years, cartelization and political influence resulted in several inefficiencies in the mandis. Transparency and price discovery remained a question mark .Despite the inefficiencies, farmers had to sell their produce at the APMC mandis or pay a market cess if they sold it at farm gate.
Though India opened up the economy in 1991, the agricultural sector continued to be regulated. Several reforms including Farm bills were introduced this year.
Farm Acts 2020: What do they contain?
Having received the President’s approval, the Farm Bills that were passed in the Indian parliament, have become Acts. They are “Farmers’ Produce Trade and Commerce (Promotion & Facilitation) Act 2020,” “Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act 2020” and “Amendment to the Essential Commodities Act”.
Farmers’ Produce Trade and Commerce (Promotion & Facilitation) Act 2020 will allow agricultural produce to be sold and marketed outside APMC mandis. Removal of earlier restrictions imposed by the APMC Act will create alternate market places for the agricultural produce. Farmers, traders and value chain participants will have access to multiple markets. They can choose to sell their produce at APMC mandis or to private players. Farmers will benefit from decreased marketing costs and higher price realizations. APMC mandis will continue to operate. The e-trading platform (eNAM) inside the APMC mandis will continue to operate. Trading opportunities outside the APMC mandis will result in competition between APMC mandis and private players. There will be opportunities for private players to set up market places and e-trading platforms for agricultural commodities.
Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act 2020 will allow farmers to enter into contracts with private players, exporters and processors. By entering into contracts, farmers will have access to higher quality inputs, cultivation methods and practices. This will also reduce the market risk and price risk for farmers. Dispute resolution mechanisms arising out of conflicts due to contract farming have also been outlined in this Bill.
Amendments to the Essential Commodities Act ensure that stocking limits will not be imposed by the government on the private sector. However, the government may intervene in case of natural calamities like flood, drought, etc. Commodities like cereals, pulses, oilseeds, potato and onions are also removed from the list of essential commodities. Farmers suffer huge post-harvest losses due to lack of adequate storage facilities, especially during bumper harvests of perishable commodities. These changes are expected to increase private investment in warehouses and cold storage facilities and improve efficiency of the value chain.
The Farm Acts are expected to widen the choice of farmers and other participants in the Indian agricultural value chain. There have also been several concerns regarding these Acts. Are they valid?
- Traders and arthiyas will lose money/States will lose revenue: The Acts pave the way for alternate markets. If agricultural commodities are sold outside the APMC mandis, the traders and arthiyas will lose out on commissions. Revenue through mandi fees and market cess is also expected to decrease if trades happen outside the mandi area.
- Will big corporates take over small holding farmers? Corporates will not take over farmers. They will enter into contracts with the farmers. Until now, farmers were entering into unwritten contracts with corporates, processors and other value chain participants. Now it will be legally permitted. In some states like Tamilnadu, legislations permitting contract farming is already in place. The redressal mechanism for disputes arising due to contract farming will be at the sub divisional magistrate level. Clear time lines have also been outlined in this. However, sceptics feel that small holding farmers will not have the power to fight big corporates if the contracts are not fulfilled. To overcome such concerns, small holding farmers can become a part of collectives like farmer producer organizations (FPOs) before entering into contracts with corporates. This will also increase their bargaining power considerably.
- Will commodities get hoarded? The Bill allows intervention by the government during natural calamities or in case of excess price hike. It remains to be seen whether this Bill will actually result in hoarding or whether farmers and other value chain participants will be able to hold on to their stocks in anticipation of better price.
- The issue about MSP (Minimum support price): MSP or changes regarding MSP have not been mentioned in the three Farm Acts. The government has also clarified that there will be no change in the existing MSP structure. Though 23 crops are covered under MSP, only about 6 % of India’s farmers actually benefit from it. Hence MSP is not of much relevance to a majority of farmers. Beneficiaries of MSP have largely been rice and wheat farmers from Punjab and Haryana. In Punjab, most of the rice and wheat produced by the farmer is bought at MSP by FCI at APMC mandis.
The state collects mandi tax, rural development cess and arthiyas also earn commission on transactions that happen at APMC. There will be huge revenue loss if transactions happen outside the mandi. Hence farmers, traders and arthiyas in Punjab and Haryana are against the new farm bills. The state collects mandi tax, rural development cess and arthiyas also earn commission on transactions that happen at APMC. There will be huge revenue loss if transactions happen outside the mandi. Hence farmers, traders and arthiyas in Punjab and Haryana are against the new farm bills.
- Possible impact at ground level
Agricultural markets have opened up. There will be competition between APMC mandis and private markets. Due to increased competition, mandi taxes /market cess are likely to come down. There will be competition between private players to source best quality produce.
There will also be competition between states to attract private sector participation in the agricultural landscape. States that provide a favorable environment will have better investments in agribusiness and will emerge as major players. Different business models will emerge. Innovative models that are inclusive are likely to survive. Farmer collectives will also increase. State governments will also give incentives for collectives. Formal credit requirement by the farmers /farmer’s collective will increase. There will be a huge opportunity for NBFCs and banks in this area. Entrepreneurs will also find ample opportunities to participate in the agribusiness value chain.
The landscape of the Indian agricultural sector is expected to change considerably. New models are likely to evolve. Farmers are the backbone of the Indian economy. Instead of considering farming as an activity, there is an opportunity for this sector to be finally treated as a business enterprise.