A Game of Incentives: The Case of the Three Farm Acts

Editor: Paavi Kulshreshth
December 21, 2020

More than two months have passed since the three farm bills – (i) Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020; (ii) The Farmer (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020; and (iii) The Essential Commodities (Amendment) Bill, 2020 – turned into acts. While some have deemed the policy shift as agriculture’s 1991 moment, others have dismissed it as anti-farmer or pro-corporate. Sustained farmer protests against the Centre, witnessed primarily in Punjab and Haryana, have gone as far as to demand that the Acts be repealed altogether. However, not all farmers have responded to the policy shift alike. While Punjab and Haryana farmers participated in the ‘Delhi Chalo’ agitation, the Shetkari Saghtana – a farmers’ union from Maharashtra – rallied in support of the Acts.1 To put things into perspective, below are some common arguments for and against the farm acts. 

For the Acts

  • The acts provide greater freedom and choice to the farmers on where and to whom they can sell their produce.
  • They will improve agri-market competition and hence ensure better prices for farmers. 
  • They will attract private investment in warehousing, thereby improving the supply and value chain.

Against the Acts

  • The reforms will bypass the APMC mandis and the government will slowly stop public procurement (replacing PDS with direct cash transfers). This will also do away with MSP. 
  • Outside the APMC mandis, farmers will be cheated by private buyers and they will not get a fair price. 
  • Big corporates might exploit farmers through dubious contracts and take away their land. 

As is evident, there are good arguments on both sides. However, it is interesting to note that arguments floating against the Acts lean towards implementation, whereas arguments that speak for the Acts take on a principle standpoint. Freedom, competition, and aligned incentives are some of the economic principles which the Acts intend to reinforce in the agriculture sector. While implementation concerns regarding these principles are inevitable given implementation failures of the past (demonetisation, GST, Adhaar, etc); for the sake of analysis, it is better to delink the policy reform from implementation and look at these two aspects separately before we join them back again. To arrive at a shared understanding of both opportunities and challenges that may emerge from the central acts, the arguments and the counterarguments must speak to one another. Prior to any analysis, however, understanding the purpose of APMC mandis, MSP, and public procurement is crucial.

What is the Purpose of APMC Mandis?

The history of mandis takes us back to Sir Chhotu Ram, a renowned political leader from pre-independence era Punjab.2 Back in those days, the sale of produce happened directly on the farm where the farmer met the trader. The farmer had no way of knowing if the price offered by the local trader was fair or not. To curb exploitation of farmers, Sir Chhotu Ram played an instrumental role in getting the Punjab Agricultural Produce Markets Act passed in 1939, which allowed for the formation of market yards or mandis in notified areas. These mandis, in turn, allowed for price discovery. Farmers would bring in their produce, understand the supply pattern, and witness the actual demand for their produce by the traders. The price of the produce was fixed through a transparent open-cry auction. Thus, these mandis (at least in theory) allowed for price discovery and realisation.

The reality of the mandis although was quite different. They neither helped in price discovery, nor did they enable fair and better prices for farmers. Today, the APMCs have a similar tale to tell. The state-run mandis are far from perfect with cartels of traders and commission agents working their way around regulations.

What is the Purpose of MSP and Public Procurement?

The central purpose of price support, when it was introduced in the 1960s, was to spur production and adoption of new technologies under the Green Revolution. A support price would mean little without assured procurement. Hence, the Food Corporation of India (FCI) was set up to procure grains at MSP and manage the Public Distribution System (PDS). MSP and public procurement have since achieved twin goals of an assured price for farmers and an affordable price for consumers. Farmers could, however, sell their produce to other buyers or traders if they got a higher price. Today, the costs of MSP and public procurement far outweigh its benefits. Only 6% of all agricultural households have benefitted from MSP.3 Of the 22 crops for which MSP is announced every season, only two – rice and wheat – are procured consistently at MSP; predominantly from the states of Punjab and Haryana.4 MSP distorts market signals and incentivizes farmers to only grow crops that qualify for a support price, as opposed to those demanded by consumers. It disincentivizes crop diversification as an assured market price for certain crops hinders risk taking ability of the farmer. The farmer is entirely dependent on the government’s announcement of MSP every season and ignores the larger, changing market signals. In a state like Punjab, with an alarmingly receding water table, growing a water-gruelling crop like rice is clearly unsustainable.5 In the years to come, this will result in many farmers making distress exits. Hence, it is fair to say, MSP has made farmers more vulnerable than secure.

Figure 1: State-wise procurement of rice and wheat. Punjab and Haryana are among the highest producers. Source: Agriculture Statistics at a glance 2019
Figure 1: State-wise procurement of rice and wheat. Punjab and Haryana are among the highest producers. Source: Agriculture Statistics at a glance 20196

Public procurement, especially open-ended procurement, is a huge fiscal burden on the government. The government procurement agency, FCI, has tripled its debt in the last 5 years. It borrows primarily from the National Small Savings Fund (NSSF), which constitutes postal deposits and social security schemes like public provident fund, senior citizens’ savings scheme, etc.7 Reasserting operational inefficiency, the FCI has also consistently maintained 2-2.5 times the buffer stock limit in the period 2013-2019.8 One must not bite off more than one can chew seems befitting as the government tries to breakout of a position where it can neither guarantee MSP nor procurement.

Figure 2: FCI Stocks as a percentage of buffer norms. Source: Financial Express
Figure 2: FCI Stocks as a percentage of buffer norms. Source: Financial Express8

How do the Arguments on the Farm Acts Fare?

From a principle standpoint, liberalizing agriculture has been long due. Farming is one of the riskiest yet least profitable businesses. The Essential Commodities Act has restricted any form of investment in storage infrastructure through arbitrary stock limits, leaving the farmer fearful and confused. The new Essential Commodities (Amendment) Act addresses these shortfalls and allows for such limits only in certain extraordinary conditions. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act legalizes selling of produce outside the notified APMC yards without market fee and the purchase of produce without a license. Inter-state transactions are allowed. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act gives the legal power to private entities to enter contracts with farmers directly before the start of production. The counterargument that ‘just because contract farming is allowed, it doesn’t mean a noble corporate will be willing to buy from the farmers at a higher price,’ is a compelling yet invalid one. No reform is readymade. Within a federal structure like that of India’s, implementation of any reform involves a lot of coordination from multiple stakeholders. Hence, whether a corporate is ready to buy from the farmers at a higher price depends on its incentives and the ease of doing business. Consequently, the idea of contract farming itself cannot be countered this way.

Game-Changing for the Ecosystem

Incentivising desired actions of various actors with a checks and balances mechanism is the purpose of sound public policy. In this regard, the three Acts have essentially changed the rules of the game. Hence, these reforms must be judged not only on whether they help the farmers but also on the incentives they create for different players in the agri-market ecosystem. 

A valid concern today would be that of transportation; even if farmers can sell anywhere, would they be able to? It is only by creating the possibility to sell anywhere, we send a signal to corporates and startups to address the new challenge innovatively. Similarly, efficient storage solutions would be sought after by traders. FPOs would need to be strengthened and given visibility. Agri-tech companies will play a crucial role in every aspect, from input assistance to processing and marketing. Corporates that wish to enter contract farming may have certain demands regarding the quality of the produce and monitoring of crops. This would create new opportunities for agri-tech companies. What was once unthinkable would now become doable. 

Presently, the entire ecosystem needs to overcome the inertia generated from the controversial nature of these reforms. This will depend greatly on how states adopt and implement the Acts. States must critically look at the winners and losers, and draft measures to balance both sides. Although no interest group has displayed public support for the Acts yet, it is up to the state governments to meet with FPOs, agri-tech businesses, and retail chains to initiate discussions on how to yield long-term benefits from the reforms.

In the end, implementation is everything. Hence, the urgent action at the moment is for states to strategically invite investments, create an environment where the farmers are able to trust private players, and one where private players are allowed to operate without stigma. If the state governments do not take on the role of the facilitator, these reforms are likely to turn into a wasted opportunity.

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

References:

  1. Phadke, M. (2020, October 9). Not all farmers are against Modi’s new farm laws, this group in Maharashtra is celebrating. The Print. https://theprint.in/statedraft/not-all-farmers-are-against-modis-new-farm-laws-this-group-in-maharashtra-is-celebrating/519382/
  1. Damodaran, H. (2020, September 27). The men behind APMC, MSP and Procurement. The Indian Express. https://indianexpress.com/article/opinion/columns/the-men-behind-apmc-msp-and-procurement-6617277/
  1. Shanta Kumar Committee. (2015, January). Reorienting the Role and Restructuring of Food Corporation of India. Food Corporation of India, Govt. of India. https://fci.gov.in/app2/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English.pdf
  1. Development Monitoring and Evaluation Office. (2016, January). Evaluation Study on Efficacy of MSP on Farmers. NITI Aayog. http://niti.gov.in/writereaddata/files/writereaddata/files/document_publication/MSP-report.pdf
  1. Bajwa, H. (2020, January 23). Punjab sounds alarm as water table recedes fast in 109 administrative blocks. The New Indian Express. https://www.newindianexpress.com/nation/2020/jan/23/punjab-sounds-alarm-as-water-table-recedes-fast-in-109-administrative-blocks-2093203.html
  1. Ministry of Agriculture and Farmers Welfare. (2020, March). Agricultural Statistics at a Glance 2019. Directorate of Economics and Statistics, Government of India. https://eands.dacnet.nic.in/PDF/At%20a%20Glance%202019%20Eng.pdf
  1. Nair, R. (2019, October 7). In 5 years of Modi rule, Food Corporation of India’s debt tripled to Rs 2.65 lakh crore. The Print. https://theprint.in/economy/in-5-years-of-modi-rule-food-corporation-of-indias-debt-tripled-to-rs-2-65-lakh-crore/301887/
  1. Financial Express. (2019, May 6). Height of inefficiency! Govt’s foodgrain stocks 2.7 times the buffer norm. Financial Express. https://www.financialexpress.com/economy/height-of-inefficiency-govts-foodgrain-stocks-2-7-times-the-buffer-norm-highest-in-six-years/1568992/

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Swarna
Swarna
29 days ago

Very nice article to judge on pros and cons of the act

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