Weakening mandis to rising inequality: Here's why new laws worry farmers

The new farm laws that aim to double farmers’ income in two years by deregulating agricultural markets may further widen the inequalities in the sector, shows our analysis of similar legislations from the past. By weakening the government’s price guarantee system, the laws may end up hurting small and poor farmers, who form 80% of the sector and 23% of those who live below the poverty line, say critics.

The privatisation of the sugarcane industry in 1998 and the deregulation of Bihar’s Agriculture Produce Market Committee (APMC), the state-regulated marketing board, in 2006 removed licensing barriers to agricultural markets. But, as we explain later, this privatisation led to no significant changes--the sugarcane farmers are still agitating for fair and timely payment of dues and Bihar’s agricultural infrastructure has not seen any sizeable private investment.

The ongoing agitation in Delhi by farmers and farmers’ unions from across India, especially from Punjab and Haryana, seeks to pressure the Centre to withdraw the laws. Their primary demand is for a statutory minimum support price (MSP), and their main objection is to the opening up of agricultural sales and marketing beyond regulated APMC mandis (government-approved wholesale markets). This, they believe, will kill the mandis and allow exploitative private players to set the terms of purchase from farmers.

The weakening of the established mandi system could further weaken the already floundering system of assured procurement at MSP set by the government, farmers argue, since only two crops--wheat and rice--are procured at MSP by government agencies (and 21 others for which the government announces an MSP are not).

These changes will affect the small farmers the most because their low output does not allow them any bargaining power. Small and marginal farmers tend to get lower prices for their produce than big agriculturists. The income of the farmers with the largest land-holdings rose from seven times that of those with the smallest land-holdings in 2002-03 to nine times in 2012-13, a 2015 study by NABARD showed.

The lack of land reforms and unassured markets were some of the major reasons for farm distress in India, said the 2006 Swaminathan committee report. Without land reforms to reduce the widespread disparities in land holdings, the new laws will not help remove income inequalities.

By contrast, China profited from liberalising its market starting in 1978, by taking small steps: first by reducing control on agri products and simultaneously maintaining control on other farm input institutions; transferring land rights to farmers; bringing in price and market reforms; and setting up rural credit cooperatives.

Farmers’ concerns

The three laws are aimed at enabling barrier-free trade in agriculture and empowering farmers to trade with buyers of their choice, said Narendra Singh Tomar, the Union agriculture minister. They are: the Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020 and The Essential Commodities (Amendment) Act, 2020.

The new laws affect the farmers of Punjab and Haryana more because over 65% of wheat (2019) is procured from these states at MSP by the Food Corporation of India (FCI), the nodal government agency, along with other state agencies. These states and their farmers benefit the most from the current system. (The government declares MSP for 23 crops, and government agencies procure wheat and paddy at MSP. Crops such as lentils, cotton and oilseeds do have MSP, but they are not procured by government agencies. The prices of other crops are determined by domestic and international demand-supply factors.)

It is the farmers who bank on the APMC-MSP model who are most affected by the new laws. For them, the removal of barriers takes away all protections--of an assured price, of dealing with licensed agents, and of dispute settlement by the mandi. Mandis also provide important services such as storage and soil-testing facilities.

“Even with an MSP, the prices received are always less because the produce is sold to middlemen or private players,” said Rajesh Kumar, 54, who raises mustard, lentils and other vegetables on a 3.5-acre plot in Hathras in western Uttar Pradesh. With the entry of the private sector in agricultural markets, the small farmers’ limited knowledge of price dynamics can be easily exploited, he said.

A free market in agriculture could be problematic on multiple counts, according to V.M. Singh, convenor of the All India Kisan Sangharsh Coordination Committee. Farmers growing crops under the contract farming model, for instance, complain that private buyers make unfair and unrealistic demands on quality, often paying less or rejecting entire lots using quality issues as an excuse. Also, fragmented landholdings skew the game against small farmers, Singh said.

On the other side are farmers growing non-MSP crops, such as Manish Pandey, 45, who raises vegetables on his 24-acre farm in Haryana’s Fatehabad district, for whom the new laws mean little. He sells his produce to corporate and cooperative chains such as Reliance Retail, Mother Dairy and Udan Agri Retails. Under earlier laws, these companies had to secure a mandi license to procure his products, but under the new farm laws, that will not be necessary.

Corporate buyers have welcomed the changes. For example, before the legislation came into play, the wood from plantation crops such as Eucalyptus, Subabul and Casuarina was liable to a 1-3% mandi cess by the central government. This has been abolished under the new laws. This reduction in cess and handling/ transportation cost--buyers can now pick up their consignments directly from the farmer--will benefit both farmers and industries, said Suneel Pandey, vice-president of ITC-Paperboard and Speciality Paper Division, who procures plantation wood from farmers through aggregators.

Supporters of the new laws say the APMCs have a poor presence across the country, and they procured only 13.5% of the paddy harvested in 2013, as per the 70th Round of the NSSO (National Sample Survey Office) Survey on the Key Indicators of Situation of Agricultural Households. Only 6% of all farmers in the country gained from selling wheat and paddy directly to any procurement agency, noted the Shanta Kumar Committee Report on reorienting the role and restructuring the FCI in 2012-13.

What the new laws say

Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 To promote barrier-free inter- and intra-state trade, beyond the premises of markets or mandis notified under state agricultural produce market legislations. The farmers can sell their produce to any person with a permanent account number (PAN) card, without any requirement of mandi license or certification, which otherwise was needed.

Promotes trading beyond the mandis.

The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020

To promote farmers’ engagement with agri-business firms, processors, wholesalers and exporters.

Promotes contract farming

The Essential Commodities (Amendment) Act, 2020

To remove commodities like cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities.

Promotes foreign companies and foreign direct investment into agriculture.

Lessons from the past: Sugar

India’s sugarcane industry was delicensed in 1998, paving the path for private establishments to increase exports of sugar and overcome shortcomings such as low production and productivity even in favourable weather conditions. Sugarcane’s contribution to the agricultural GDP has risen from about 5% in 1990-1991 to 10% in 2010-2011, but deregulation did not result in any significant rise in the farmers’ incomes. Productivity levels are still not optimal: The current average sugarcane productivity is around 70 tonnes per hectare--lower than in Brazil, Colombia and China, e.g.,--with huge geographical variations, leaving much scope for improvement.

Sugarcane farmers have long agitated for better price realisation and timely payments. Also, the contribution of private sector sugar mills to public infrastructure development remains low due to their pursuit of profit, research has documented.

Fair and Remunerative Price (FRP) is a minimum price that farmers get from the sugarcane procurement agency of their region. The Commission for Agricultural Costs and Prices (CACP, a body that makes recommendations for MSPs), in association with the state governments, and in this case, sugar mill owners and traders, calculates and recommends the FRP. Apart from this price, state governments also announce a State Advisory Price (SAP). This has not worked very effectively, and the mills blame poor quality cane for lower prices.

“The privatisation of the mills has not secured us the right price of the sugarcane. Even with the FRP in place, we are either paid late or less,” said Vibhuti Narayan, 26, who assists his father on a seven-acre sugarcane farm in Amethi village of Lakhimpur Kheri district in eastern Uttar Pradesh. Sugarcane is the primary source of income for most farmers in Narayan’s village.

At traders’ mercy in Bihar

In a state-led attempt to liberalise the agricultural market, APMCs were deregulated in Bihar in 2006. By 2010, farmers in the state were facing high transaction charges from private buyers and were hamstrung by the lack of information about the right prices, a committee of state ministers reported that year.

Businesses tend to undertake buying only when it is profitable, as P. Sainath, journalist and founder of People's Archive of Rural India, explains in this video on why privatisation of Bihar’s agricultural markets has not increased farmers’ income or improved infrastructure.

The private sector did not develop the infrastructure necessary for the procurement of agricultural produce in the state and with time, existing public sector facilities deteriorated, according to a November 2019 report by the National Council of Applied Economic Research. This reduced the density of mandis and left the farmers at the mercy of private traders who often fixed low prices.

Bihar’s agro-processing industries do not have enough infrastructure--warehouses, for example, which are few and expensive. Due to unstable crop prices and a weak market structure, crop diversification is poor--three crops (paddy, wheat and maize) constitute over 70% of the total cropped area in the state.

A Niti Aayog task force report on agriculture in Bihar, released in 2015, described the abolishment of its APMC mandis as a “bold” move, but one undertaken without setting up adequate cold storage facilities. It had also left farmers in the area with few options than to sell to private buyers, the report said. The Standing Committee on Agriculture (2018-19) recommended that the six states that do not have APMC markets should create the infrastructure for better price realisation. This would include provision of inputs, machinery and cold storages; better banking and credit services as well as price information; roads and transport facilities to encourage agricultural trade; weather updates, and so on.

How farm reforms could be done right

The farm laws have been supported by economists such as Ashok Gulati, who has compared their initiation to the liberalisation of the Indian economy in 1991, which opened up the economy for the private sector and for foreign investors. Competition would result in more market options for farmers, he says.

But there is conclusive evidence, such as in this report, that liberalisation has led to increased inequalities. The increase in the income of the top 1% of Indians is significantly higher than that of the bottom 50% in the country’s income index. A sharp increase in wealth concentration from 1991 to 2012, particularly after 2002, is commented on by Thomas Piketty, scholar and author of Capital In The 21st century.

There are lessons from India’s past experience of deregulating the farm sector. “Investments do not come due to a change in law, but due to incentives,” Sukhpal Singh, professor and former chairperson of the Centre for Management in Agriculture at IIM, Ahmedabad, told IndiaSpend in this interview. “Bihar only deregulated the market instead of reforming.” Incentives would include infrastructure and supporting policies to, for instance, enable small farmers to create FPOs (farmers producer organisations) and become attractive to private agencies for contract farming or direct purchase. To enable farmers to participate meaningfully in the market economy, they need widespread availability of pre-production inputs (such as seeds, fertilisers, credit and machinery) and post-production aggregation (such as for marketing and selling through FPOs), he added.