AMEND AND REINTRODUCE THE INDIAN AGRICULTURE ACTS 2020
POLICY BRIEF
Executive Summary: The Indian Agricultural Act 2020 was passed by the Central Government with the aim of helping the growth of the Indian agriculture sector. The legislation brought a necessary reimagination of the sector which has been declining for the past three to four decades. The decline of the agricultural system was a major cause for concern for a large amount of the population that depended on it. Repealing the laws under the pressure of protests was a wrong and hasty decision. Rather, the government should have considered the farmers’ demands and amended the original laws to effectively address their issues. Bringing amendments such as Implementing Minimum Support Price (MSP) in state and private markets will be more effective in addressing the farmers’ concerns as compared to repealing the laws altogether. The government needs to bring back the Indian Agriculture Act while simultaneously adapting the MSP system to resolve farmers’ concerns and tackle some of its present limitations.
The Indian Agricultural Sector is vital to the Indian economy. It generates income for nearly 70% of the population that resides in rural areas (World Bank). India’s food security depends on the agricultural sector for growing crops and agricultural produce that fulfill the demands of a growing population with increasing incomes. In addition, India is a global agricultural powerhouse. According to Food and Agriculture Organization (FAO) of the United Nations, “India is the world’s largest producer of milk, pulses, and jute, and ranks as the second largest producer of rice, wheat, sugarcane, groundnut, vegetables, fruit, and cotton”. Large-scale production of crops helps India sustain their self-sufficiency for food, while also contributing to India’s GDP through exports. However, the agricultural sector in India has been experiencing a steady decline since the 1970s.
Figure 1 portrays the declining contribution of the Agriculture Sector to Total GDP. While this indicator could have decreased due to rising incomes in other sectors, the decreasing incomes of people employed in agriculture is also a major factor. In 2000, 60% of the Indian population worked in agriculture, which has since fallen to 43% in 2018–2019 (Lerche). The decreasing incomes has led farmers to seek alternate jobs, further declining the population employed in the agricultural sector. Considering India’s economic dependency on agriculture to meet its goal of preserving self-sufficiency in food, the declining number of people employed in that sector has been detrimental.
To address these issues, the Central Government passed the Indian Agricultural Laws (also called Indian Farm Bills) in 2020. These bills provided the necessary reimagination of the agricultural system through two major components: (1) the Farmer’s Produce Trade and Commerce Act which establishes nation-wide private markets for the trade of agricultural produce; (2) the Farmers Agreement on Price Assurance and Farm Services Act which allows farmers to enter into pre-harvest contracts with buyers (Shankar). However, these Farm Bills were met with an immediate backlash, with the Indian farmers leading nationwide protests against them. The protests lasted for over a year until the Central Government announced that the Agricultural Acts will be repealed. The decision was reactionary to the domestic and international outcry in support of the farmers’ situation, but it was not the most feasible option. Rather than repealing the laws completely, amending the original laws to actively tackle the limitations pointed out by the farmers would have been a more effective long-term solution. In order to comprehend this, we need to assess where the Bills went wrong, where did they work and what aspects need to be reevaluated.
What did the Bills do right?
The bills took a step in the right direction by implementing national markets and allowing farmers the freedom of choosing their buyer. For the first time, agricultural goods could be traded outside of the Agricultural Produce and Market Committee’s (APMC) markets under this law. Farmer’s income could substantially increase with their ability to capture a greater share of the supply chain (Gulati et al). When farmers have the freedom to access multiple market sites and choose the best buyer, their bargaining power increases. Not only do they have more control over the selling price, but they also achieve greater power to control other crucial aspects such as lower commissions and faster payments. This helps in widening the agricultural market, while simultaneously working towards the elimination of swindling middlemen from agricultural marketing. Moreover, there was no provision for additional charges such as market fees, taxes, or commission for agents when farmers sell their yield in private markets, which were all requirements for selling in APMC markets. It meant that the farmers would receive the entire payment for their crops and not lose income to any middlemen in the state markets, making private markets more competitive than the APMC markets. Increased market competitiveness would result in better rewards and prices for the farmers’ produce. In theory, allowing farmers to trade freely was a very beneficial legislation.
Additionally, the Farmer Agreement of Price Assurance & Farm Service Bill 2020 allowed the farmers to enter contract agriculture, wherein a contractual agreement is created between the farmer and the buyer before the sowing season. The contracts include a pre-determined price at which the buyer purchases the yield from the farmer. This benefits the farmer by providing price assurance, and therefore transferring market risk from the farmer to the buyer. Since the buyer would now bear the risk of non-ideal crop growth, they would have incentive to provide the necessary resources for a good crop yield. Resources such as higher-quality seeds, fertilizers, agricultural machinery, and equipment would no longer be a cost that the farmer is burdened with. Instead, it would be provided by the buyer to reduce the risk of an unfavorable harvest.
Where did the bills go wrong?
The Farm Bills were met with heavy protests from farmers all over the country almost instantaneously with the legislation being passed. The biggest mistake made in the legislation was not considering the situation of the agricultural sector in the long-term. The farmers believed that the new laws were introduced to support the privatization of the agricultural sector. Continued taxation of the APMC markets would disincentivize traders from selling and/or buying in the state mandis (markets), therefore breaking down APMC market system. In addition, the new laws’ lack of provision for Minimum Support Price (MSP) provided the farmers the stimulus to predict a shift of power in the long run. The MSP system defines a list of crops and the ‘MSP’ that they can be bought at by the government. Once the APMC markets are dismantled, the farmers would lose their bargaining power, forcing them to sell their crops in unregulated private markets where the relatively more powerful buyers would dictate the price. The lack of competitive markets would allow private buyers to take control of the agricultural sector and the farmers would ultimately end up receiving lower prices than the current MSP. They argued that instead of providing them with more choice and better prices, the legislation will leave them at the mercy of a few key players who will organize as cartels (Agarwal). The farmers would soon shift from price-setters to price-takers.
Apart from the possible long-term disadvantages of shifting from state-level markets to national markets, the Centre also witnessed heavy opposition to contract farming. However, the drawback here was not possible issues in the future, but rather historical failures. While contract farming presents an opportunity for farmers and buyers to work in coalition, historical experiences argued otherwise. According to Sukhpal Singh, professor and former chairperson at the Centre for Management in Agriculture at the Indian Institute of Management, “contract farming had resulted in negative impacts on smallholder communities through land acquisition, loss of control over land use decisions, increasing inequality, and even eventual outright loss of land” (Paliath). In sections of Maharashtra where contract farming for potato was administered, it resulted in “participating households being vulnerable to indebtedness and loss of autonomy over land and livelihood decisions” (Paliath). Other malpractices such as delayed payments, quality-based undue rejections and outright cheating were caused due to the imbalance in power between the private buyers and farmers. Past Experiences served as the justification for farmers to oppose the implementation of contract farming.
The Indian Agriculture Laws tried to introduce a necessary redefinition of an old system that was causing a decline in the current agricultural sector. Despite its flaws and widely negative response, repealing the laws under the pressure of protests was understandable, but not the right one. Incorporating amendments to the original bills while working towards the removal of weaknesses in the old agricultural system will be beneficial to the farmers as well as to the Indian economy.
Possible Amendment:
Implementing Minimum Support Price (MSP) in both APMC and private markets:
The government was implicitly paving the way for an MSP-free agricultural sector through the Indian Agricultural Acts 2020. The fear of an agricultural sector without MSP was a major issue outlined during the farmer’s protests (Agarwal). Minimum Support Price was utilized by the public agencies when purchasing agricultural crops through the APMC markets. However, there is no mention of MSP being adhered to in private markets. With the APMC being bypassed through the Farmer’s Produce Trade & Commerce Bill, MSP and the Public Procurement System (PPS) would follow the same path, thereby instigating a shift of agricultural trade from the public APMC markets to unregulated private markets. Having unequal market regulations are impractical and unethical, and there are two possible routes to solve this inequality: either implement MSP in both markets or eliminate MSP completely. Considering the importance of MSP and its implementation being a major demand of the farmers, implicitly working towards an MSP-free agricultural sector was the wrong choice made by the Central Government. Implementing MSP in both markets would have been more effective and this is why:
The introduction of MSP in the 1960s was carried out with the sole reason of helping India meet its national goal of self-sufficiency in food. The continued maintenance of this objective is one of the major reasons why MSP is still relevant in today’s agricultural sector (Singh and Bhogal). Implementing MSP in both private and APMC markets is necessary for two reasons: (1) India can successfully continue to achieve food self-sufficiency, and (2) farmers receive the necessary security of price and consequently, increase their income. The principal advantage of MSP is the incentive it produces in farmers to harvest crops that have an MSP assigned to it. As seen in Figure 1, 43% of rice and 36% of wheat sold were procured through MSP for food security. MSP guarantees unsold produce to be purchased, thereby incentivizing farmers to grow them due to reduced market uncertainty and risk. Elimination of MSP for rice and wheat would discard the incentive for farmers to grow them in favor of more profitable crops. Since rice and wheat are the primary food grains grown in India and are a part of the staple Indian diet, this could potentially ruin India’s possibility of achieving food self-sufficiency in the future. Another advantage of providing famers the incentive to grow rice and wheat is that it helps India effectively prepare for unfavorable conditions. With climate change, India has witnessed an increase in droughts and extreme weather conditions that can severely reduce the food output (Singh and Bhogal). Storage of surplus rice and wheat could be beneficial for the government to fight these situations in the future. The third advantage of continuing the implementation of MSP would be the assurance of a reasonable income for the farmers (Singh and Bhogal). MSP behaves as a ‘price security policy’ for the farmers, especially when the output is poor. The government and their public agencies buy the crops at MSP, even if the quality of the crops is not favorable. The price farmers receive at MSP will undoubtedly be higher than the price they would receive for low quality produce in a free market.
However, the policy of legalizing MSP and implementing them in both private and state markets is tricky. To understand why, we need to consider the situation of perishable crops. Due to inadequate resources, most farmers don’t own storage facilities. Without these facilities, farmers become desperate to sell their unsold produce before they rot. Presently, since MSP is not a legal right in India, it isn’t binding to the farmer nor to the buyer. The farmer can willingly sell his produce for a price lower than the MSP. With MSP not being a legal right, farmers are open to exploitation by agribusinesses. According to Paliath, “If a private buyer decides that they will not buy at MSP and rather import agricultural produce, while the government agencies decide to not procure the unsold produce, where will the farmer sell?”. The buyers just have to wait till the farmer has no other choice than to sell their crops for a price lower than MSP. For the farmer, he is in a situation where he needs to decide if he wants to sell his produce at a low price or not sell at all. Most farmers would choose to earn a relatively lesser income than earn no income at all. However, by making MSP a legal right, farmers might not get the option to sell at that reduced price altogether. The farmer might end up losing more income with MSP as a legal right, therefore contradicting the aim of improving farmer incomes.
Policy Recommendation:
Although the MSP system has its limitations, the Central Government should reinstate the original farm laws with amendments to address the issue of building an MSP-free agricultural sector and remove the contract farming component. Unless the government can successfully disprove historical failures of contract farming and guarantee a different outcome, it is a legislation that brings more complications than benefits and should not be included in the re-evaluated Indian Agricultural Act. On the other hand, implementation of MSP in APMC markets as well as private markets will bring several benefits to the farmers, the agricultural sector, and India’s goal to achieve self-sufficiency in food. However, in doing so, the state and central governments need to proactively address some of the current limitations of MSP:
a) Close the loophole wherein buyers can wait out the farmers to purchase the crops at prices lower than MSP.
i. Administer tariffs and/or quotas on the amount of agricultural produce that can be imported into the country. This would reinforce the purchase of domestic produce by limiting foreign options, and thereby increase the bargaining power of farmers without coercing them into making desperate sales.
b) Correctly estimate the annual increase in costs of farming and administer MSP in a way that counteracts this annual increase in costs. At present, MSP has a lower annual increase rate as compared to the annual increase in costs of farming (Singh and Bhogal), thereby reducing its effectiveness every year.
c) Implement the recommendations of the Swaminathan report from the National Commission on Farmers. According to the Swaminathan report, the current formula used to calculate the costs of the farmers is not adequate and they need to revamp their formula to accurately estimate farmer costs and MSP (Agarwal).
Implementing MSP in both public and private markets while simultaneously working towards the improvement of the MSP system can effectively tackle the issue brought up during the farmer protests. The income security provided by the MSP, in addition to a revamp of the older agricultural system will be advantageous to the large population working in the agriculture sector. It has the prospect of significantly improving the livelihood of farmers in the long run.
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