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23/09/2020 7:51 AM IST | Updated 27/09/2020 2:13 AM IST

Farm Bills Throw The Baby Out With The Bathwater, Says Economist R Ramakumar

Higher government spending in agriculture, and not the much touted reform measures, is central to any hope for economic revival in India, believes TISS Professor and economist R Ramakumar.

Hindustan Times via Getty Images
Farmers raise slogans during a protest in Punjab against the Electricity Amendment Bill 2020 and the farm bills of the Central Government. 

NEW DELHIIt is doubtful if the Narendra Modi government’s three farm reform bills––passed under controversial circumstances in parliament––will lead to the establishment of private markets for farmers to sell their produce, said agricultural economist R Ramakumar in an interview with HuffPost India

“The other question is whether private markets would indeed come up as a result of these reforms. I am not sure if they would. The experience of Bihar, Kerala or Maharashtra do not inspire confidence in this respect,” wrote R. Ramakumar, who teaches at the Tata Institute of Social Sciences (TISS) in Mumbai, in response to this reporter’s questions. 

Professor Ramakumar pointed out that the Bihar government abolished its Agricultural Produce Market Committee (APMC) Act in 2006, Kerala never had the law and Maharashtra changed its own APMC law in 2018 on the lines of what is today officially known as the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, which is soon to become law. 

And yet, he said, private markets and investments have not yet flown into these states. “Where are the private investments in these states? Including in Maharashtra, most big corporate retail firms purchase their food items directly from APMC markets, and not directly from farmers. This shows the importance of APMC markets, and the need to strengthen them,” argued Ramakumar. 

Establishment of private wholesale markets for farm produce and provision of a legal framework for contract farming, two of the many ways in which farmers can sell their produce directly to companies by apparently eliminating middlemen, are among the key anticipated outcomes of the agriculture reforms pushed by the Narendra Modi government through the controversial amendments to three laws related with agricultural marketing. 

The three bills, which were passed recently under controversial circumstances in parliament, are: the farmers produce trade and commerce (promotion and facilitation) Bill, the farmers (empowerment and protection ) agreement of price assurance and farm services bill, and the Essential Commodities (Amendment) Bill. 

Thanks to these bills, which will soon become laws once the President grants assent, private wholesale markets are expected to be among the several new avenues which would henceforth be legally available to farmers for selling their produce to private buyers at competitive prices. 

Thus far, farmers had to sell food grains at the government run APMC markets which are controlled by vested interests. But now they can transact anywhere and in a variety of ways, which include the private wholesale markets as well as contract farms. 

According to Professor Ramakumar, however, this is easier said than done. Going by the experiences of Bihar and Maharashtra, the economist said, it won’t be easy to merely replace private markets with the well established APMCs. 

“We have to study these experiences closely. We will then understand that the replacement of APMCs with private markets is no piece of cake. These APMCs have built and nurtured trust and networks for decades. You cannot simply take them out of the game one fine morning,” added the Professor at the School of Development Studies in the TISS. 

Can we reduce taxes in the APMC framework? Can we improve the process of price formation in the APMC markets? Such steps would have helped farmers enormously. Unfortunately, the present exercise is akin to throwing the baby out with the bathwater.Prof R Ramakumar

He is, however, no uncritical supporter of the APMC system. “We need APMCs, but better APMCs,” the Professor said. 

“Can we reduce taxes in the APMC framework? Can we improve the process of price formation in the APMC markets? Such steps would have helped farmers enormously. Unfortunately, the present exercise is akin to throwing the baby out with the bathwater,” he added. 

Responding to a question about the often discussed and widely feared scrapping of the Minimum Support Price, the TISS Professor explained, “Yes, MSPs would remain on paper. But, if the policies of procurement and MSPs are less favoured in the future, and if private markets with no commitment to MSPs come to dominate agricultural marketing, the instrument of MSPs will be rendered sterile. That is a fear.” 

Prof Ramakumar further said that he believes the fortunes of agriculture are linked with the revival of India’s overall economy.

“I also believe that higher spending in agriculture will be central to any hope for economic revival in India. It will improve rural demand, especially for industrial goods,” he said. 

Edited excerpts from the interview:

What is your opinion about the three contentious farm bills, which will soon become laws? The Prime Minister has described them as “a watershed moment in the history of Indian agriculture”.

Catchy statements do not always capture reality. We may remember similar phrases used for previous policies like demonetisation, and how faulty those self-assessments turned out to be. The reforms in agricultural marketing inaugurated by the three ordinances, and now the Bills/Acts, have been the recommendations of the bureaucracy and a section of economists for over quarter of a century now. They have been arguing that the APMC Acts passed in Indian States after 1969 were harming the farmers rather than helping them, and they need repeal or amendment. In 2003, the first set of Model Acts to be passed by States were released by the central government. Then in 2017 and 2018, another set of Model Acts were released. But except a few States, others were not interested in these reforms. So now, the centre has decided to bulldoze the States and push through a central law.

Whether this is a watershed moment or not is to be decided by the farmers, not the government. Clearly, farmers across the country appear to be upset and concerned about how agricultural marketing in India would evolve from here on. The protests reflect this impression on the ground.

I am also deeply concerned over why the government was running away from a vote in the house of elders. A large section of the members asked for a division in the house. But it appears the government was convinced of a defeat in the event of a division. Even if the government feared defeat, it could have referred the Bills to a standing committee for wider discussions. Would not such an effort have improved the content of the Bills and increased its acceptance? It would have taken another 4 or 5 months, and there was no tearing hurry to pass any of these Bills now.

The often-repeated claim by those protesting against the bills is that they will lead to the scrapping of the concept of the government guaranteed Minimum Support Price. How accurate is this claim? After all, there is no such thing explicitly stated in the bills. The government has also assured that the MSPs will continue.

The Bills do not refer to MSPs anywhere. But that does not reveal the whole story. One has to look at it in a totality. What is the broad policy direction the government is following? Let me try to unpack it.

One, this government has shown no interest in ensuring a remunerative MSP to farmers. Take three crops: paddy, wheat and cotton. Between 2010-11 and 2013-14, the MSPs for these three crops grew at an average annual rate of 9.5%, 7.8% and 14.4% respectively. Take 2014-15 to 2020-21. The MSPs for these three crops grew at an average annual rate of 5.2%, 5% and 6.2% respectively. Take 2020-21, which is the Covid year. The MSPs for paddy and wheat were raised by just 2.9% and 2.6% respectively, which is the lowest growth rate in over a decade.

Two, the government has claimed that it has already raised the MSP of crops to 150% of the cost of production. But this is wrong. The cost of production referred to by the National Commission for Farmers (NCF) in 2006 was the “C2” cost of production (i.e., sum of paid out costs, imputed value of family labour, interest on the value of owned capital assets, rent paid for leased-in land and the rental value of owned land). However, this government chose to interpret it as the “A2+FL” cost of production (i.e., sum of paid out costs and the imputed value of family labour) and announced MSPs at 50 per cent above this cost in Budget 2018-19. This method of MSP fixation has meant that farmers suffer a loss of about Rs 400 to 500 per quintal.

All these end up showing the government in a poor light. The general impression is that MSP is not a favoured tool to improve farmer’s welfare under this government. Most probably, the movers behind this government believe that higher MSPs would lead to higher inflation and would constitute a heavy fiscal burden.

It is in this context that we should see the debate on whether MSPs would remain even after the APMC reforms. Yes, MSPs would remain on paper. But, if the policies of procurement and MSPs are less favoured in the future, and if private markets with no commitment to MSPs come to dominate agricultural marketing, the instrument of MSPs will be rendered sterile. That is a fear.

The Prime Minister stated that the farm bills “liberate” Indian farmers from “bullies” like the “middlemen”. Further, he also said that the bills will double the farmers’ income. What is your opinion about this?

I want to state two points as a premise. One, middlemen are not all villains. In a country where production is unequally distributed across space and time you will need middlemen as intermediaries. Two, there will be middlemen even if private markets take over. And they will have costs and margins.

Now, the question is this. There are mandi taxes and other taxes to the government under the present APMC system. The argument is that these taxes can be saved and passed on to the farmers as higher prices. Will this happen? It will happen if there are no transaction costs for the new private players. Let us see the experience of retail firms that have established collection centres in rural areas for perishables. Their transaction costs are very high, to the extent that many have shut shop over the years due to lack of viability. If these transaction costs are equal to the mandi taxes paid currently, how will the farmer benefit? If these transaction costs are higher than the mandi taxes, will not the higher costs be passed on as lower prices to the farmers?

Farmer Producer Organisations (FPO) can help in aggregation, and reduce transaction costs. But we do not have a large or widespread presence of FPOs in India despite commendable efforts being made by NABARD and other agencies.

This is why we need an internal reform of APMC markets as a priority. We need APMCs, but better APMCs. Can we bring down the number of intermediaries in the APMC framework? Can we reduce taxes in the APMC framework? Can we improve the process of price formation in the APMC markets? Such steps would have helped farmers enormously. Unfortunately, the present exercise is akin to throwing the baby out with the bathwater. 

...if the policies of procurement and MSPs are less favoured in the future, and if private markets with no commitment to MSPs come to dominate agricultural marketing, the instrument of MSPs will be rendered sterile. That is a fear.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill 2020 allows intra-state and inter-state trade of farmers’ produce. Isn’t permitting trade widely, especially inter-state, in farmers’ produce a good thing?

There is no doubt that expanding the size of the market and bringing in more numbers of players would help farmers. But look at steps that have been taken till now within the APMC framework. Have we not unified licenses of traders across APMCs? Have we not connected more numbers of APMC mandis in India to e-trading platforms like E-NAM? Are not such steps helpful to the creation of “One Nation, One Market”? We should have taken such steps forward.

The other question is whether private markets would indeed come up as a result of these reforms. I am not sure if they would. The experience of Bihar, Kerala or Maharashtra do not inspire confidence in this respect. Bihar annulled the APMC Act in 2006. Kerala never had an APMC Act. Maharashtra did in 2018 what this Bill envisages. Where are the private investments in these States? Including in Maharashtra, most big corporate retail firms purchase their food items directly from APMC markets, and not directly from farmers. This shows the importance of APMC markets, and the need to strengthen them. 

Specifically, and linked to the point mentioned in my previous question, the section 2 (m) of the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, which was introduced as a bill and passed in parliament, broadens the spaces for trade in farmers’ produce outside the APMC run yards or mandis. Isn’t that a positive thing for farmers?

Maharashtra did precisely this in 2016 and 2018. In 2016, the State delisted fruits and vegetables from the jurisdiction of APMCs. In 2018, it issued an ordinance to amend the Maharashtra Agriculture Produce Marketing (Development and Regulation) Act, 1963. As part of this amendment, the jurisdiction of the market committee was strictly limited to principal market yard, sub-market yard and market sub-yard. There is now no restriction, legally, to open a private market outside the APMCs or to sell outside the APMCs. We have to study these experiences closely. We will then understand that the replacement of APMCs with private markets is no piece of cake. These APMCs have built and nurtured trust and networks for decades. You cannot simply take them out of the game one fine morning.

Section 2(n) of the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, which was also introduced as a bill and passed in parliament, defines who is an eligible trader of farmers’ produce outside the traditional APMC establishments. If ‘arhatiyas’, the infamous middlemen, can be permitted to trade in farmers’ produce, shouldn’t a wide variety of other traders also be allowed to do the same? 

One of the reforms we need to consider within the APMC framework is indeed this. Currently, there are entry barriers for trade in APMC markets. These are not just physical barriers i.e., not being able to procure a trading license. There are also financial barriers. You need to have a backing of at least a few crore rupees to be able to stake claim to the status of a trader in APMCs. As a result, many small players are unable to enter these markets and trade. How do we ease these entry barriers? This is an important issue.

I wish the efforts of the government were directed to such basic and meaningful reform measures within the APMC framework. Such issues could have been considered if the government was ready for wider consultations. A reference to the Standing Committee could have helped. Consultations with farmer’s organisations could have helped.

HuffPost India
Professor R Ramakumar in a file photo.

In a recent paper about the impact of the coronavirus pandemic and its related lockdown on the economy, which you co-authored with Tejal Kanitkar, you also wrote about the adverse impact on agriculture. But the government has said that these ordinances helped farmers during lockdown. Your paper, though, does not mention these ordinances. Did you find any evidence to support the claim that the ordinances helped farmers during lockdown?

There is no evidence to note that. Our paper showed that market arrivals of 15 crops between 15 March and 30 June were lower in 2020 compared to 2019. In crops like wheat, the market arrivals in 2020 were only 62 per cent of the market arrivals in 2019. This is a huge fall. Combined with the fact that prices received by farmers declined, there might have been major losses incurred by the farmers. The same is true for dairy farmers, poultry producers and meat producers.

As is normal during such situations, insiders in the government have floated bizarre reasons to rationalise this fall in market arrivals. A recent report in the Financial Express is an example. This report argues that lower market arrivals during the lockdown is evidence that the ordinances have been effective. To support their claim, they cite “anecdotal evidence” and the fact that the total breakdown of supply chains forced a few players to buy directly from farmers. This would have happened with or without the ordinances. How is that evidence for the effectiveness of the ordinances? It baffles me.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, which was introduced as a Bill and passed amid much controversy in parliament, creates a framework for contract farming as well as a dispute resolution mechanism. Does this not address concerns about the power differential between the farmer and agribusiness? If not, why?

The matter is more complex here. To begin with, contract farming is different from corporate farming. Many commentators confuse between the two. Corporate farming involves a company directly undertaking cultivation in a plot of owned or leased-in land. But contract farming is just a contract between two players – say, a company and a farmer – to sell/buy a product at pre-determined price within a pre-determined time frame. The latter is what we are dealing with.

Contract farming has inherent advantages. It helps the farmer to reduce price risks. This is why many farmers are actually interested in undertaking contract farming with larger companies. Why would they do so if they didn’t find it beneficial? Also, every farmer should be free to enter into any contract with any company, if he/she wishes to.

But experience shows that contract farming also presents us with many challenges. First, assume that the price the company agreed to pay the farmer Rs 1000 per kg four months down the line. But when the harvest came to the market four months later, prices fell drastically. Now, the company finds it more profitable to buy the produce from the market than from the farmer. The farmer is left in a lurch. He/she would prefer to approach the courts, but legal costs are exorbitant. They suffer losses due to the breach of the contract.

We should protect the farmer in such cases of asymmetric power distribution. For that, the government could sign every contract farming agreement as a third party. This would mean that in the event of a breach of contract, the company would be pitted against not just the farmer but also the state. This would disincentivise the companies from breaching contracts, and also boost the confidence of the farmer. 

Another way is to move away from contracts with individual farmers towards group contracts, such as with FPOs or cooperatives, which will improve the bargaining power of farmers. Contracts should also be designed in farmer-friendly ways in consultation with state governments, which can also help avoid clauses exploitative to farmers.

A Bill like we have today is expected to think of such innovative ways of protecting the farmers, and not just blindly opening the door to all forms of contract farming arrangements.

Further, experiences from the world over also show that contract farming arrangement could lead to the promotion of unsustainable cultivation practices or cropping patterns that endanger food security. There is also the fear that it might unduly benefit large farmers to the disadvantage of small and medium farmers. The Bill should have factored in all these concerns.

The Essential Commodities (Amendment) Ordinance, introduced and passed as a Bill, according to this ‘legislative brief’ prepared by the PRS Legislative Research, “allows the central government to regulate the supply of certain food items only under extraordinary circumstances (such as war and famine). Stock limits may be imposed on agricultural produce only if there is a steep price rise.” Isn’t this a desirable safeguard? 

We need a broad framework to comment on this issue. In India, we need to be mindful of production and consumption while discussing food/agricultural prices. If prices rise abnormally, consumers are harmed. Remember, a large share of our farmers themselves are net buyers of food. Then there are the urban poor, who should also be able to access food at affordable prices. But if prices fall too much, farmers will suffer losses. So, our national food policy from the 1960s was aligned to balance these two conflicting objectives i.e., to ensure that the interests of the producer and the consumer are taken care of.

The discussions around the amendments to ECA miss the need to ensure this balance. ECA was originally designed to regulate distortionary practises of traders, such as hoarding, which harm consumers. As such, it continues to be relevant. The weakening, if not the loss, of the instrument of ECA might dent our efforts to control high spirals of food prices. And food prices do not just rise steeply and harm consumers only during wars and famines.

The weakening, if not the loss, of the instrument of Essential Commodities Act might dent our efforts to control high spirals of food prices. And food prices do not just rise steeply and harm consumers only during wars and famines.

The other issue is whether the removal of ECA would increase private investment in warehousing and storage. I am afraid I am not optimistic. Because I do not think ECA was the constraint to lower private investment in warehousing and storage. There are deeper and more fundamental reasons why private investment has not percolated in this sphere.

Also, we need decentralised and local storage structures in agriculture and not necessarily in the scale of silos in the United States. For that, we need to increase investments in villages through either cooperatives or FPOs. Those efforts are already happening. FPOs are receiving a major boost in recent years, which is a good sign. At the next level, we need larger storage structures and it is best that these are aligned to the overall objectives of national agricultural policy, including food security and distribution. So, government investment should lead. Where required, private investment too should be welcomed including in viable models of partnership with the government.

But to think that removing ECA restrictions will lead the efforts to increase private investment in storage and warehousing is, for me, unrealistic.

In a recent piece you wrote for The Hindu, youargued in favour of a strong fiscal stimulus for the rural economy to address concerns relating to agriculture as well. Do you feel that a fiscal stimulus is a better intervention than these reforms pushed by the government to address the sector’s current woes? If so, why?

Absolutely. Look at the United States or the EU, and the amount of money they have pushed into agriculture after the lockdowns began. In the United States, the Coronavirus Food Assistance Programme envisages a provision of $16 billion as direct assistance to farmers and ranchers. In addition, another $3 billion is being spent to purchase fresh produce, dairy, and meat and deliver boxes to Americans in need. These are fresh expenditures, and not a rehash of old announcements as in India’s atmanirbhar package. In the EU countries, farmers will receive up to €7000 each from the EU rural development fund. The advances to farmers under the Common Agricultural Policy (CAP) are being raised by 50% to 75%. Further, small farm food companies in the EU countries could get up to €50,000 each.

This is the extent of involvement of governments in the agricultural sector worldwide. But in India, the total fresh spending in agriculture as part of the atmanirbhar package might be less than Rs 5000 crore. Rest are all announcements already made in the budgets or loans to be issued through banks or other financial institutions. We could have doubled our payments to farmers under the PM-Kisan scheme. We could have given them a small debt relief. We could have raised MSPs substantially. We could have announced a rescue package for poultry producers or milk farmers. We did none of these, but just front loaded the first instalment of Rs 2000 per farmer under the PM-Kisan scheme. This was totally inadequate relief, given the income losses experienced in rural India during the lockdown.

I also believe that higher spending in agriculture will be central to any hope for economic revival in India. It will improve rural demand, especially for industrial goods. The spending can also be directed to expand the MGNREGS, which will further improve purchasing power among rural labourers. The spending can also be formatted to expand rural infrastructure investment, including in markets, storage structures and irrigation works. This is the need of the hour. It should be urgently announced and implemented.

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