Essential Commodities Act defanged, inter-state crop movement freed, and contract farming to be legalised
Agriculture reform in the country got a big boost with the government finally deciding to defang the 65-year-old Essential Commodities Act (ECA), which, by terrorising traders and food processors—and even importers and exporters—ensured that there was no steady buyer of farm produce. In the name of protecting the consumer—the ECA was born in a scarcity economy—the government would impose stocking limits on various commodities and these limits would abruptly be lowered if prices rose.
As a result, an exporter building up stock to export would also be forced to cut them; while export bans were implemented under trade policy, the ECA was also a critical part of the same policy. While announcing the change, finance minister Nirmala Sitharaman said that only in very extenuating circumstances of national calamities—like a famine—would reintroducing these changes be considered. Indeed, since the idea of the ECA is to keep control on prices, there are also other measures the government should be looking at. In the case of rice and wheat, for instance, where FCI maintains a buffer stock—and so much more—stocks could be dumped in the market during exceptional price hikes. An active futures market can also be used for the same purpose.
While several states have amended the APMC Act to allow farmers to sell to non-APMC licencees—arhatiyas—the central government has decided to formalise this. As the finance minister said, in no other good—a two-wheeler, for instance—is a producer told to whom he can sell. Yet, that it is what the APMC Act did—ironically, by governments that continued to swear by the farmer.
A central law is to be brought in to change this; it is not clear whether the states will oppose this, or if they will be able to stall it. Indeed, while states still have the right to prevent crops from moving across their borders, this was also a way to ensure farmers never got the right price. The new law will also free farmers to take their produce to the most lucrative market. In order to encourage competition among mandis, though, the government will have to do more. It will have to ensure that private mandis—set up to competition with the APMC mandis—get subsidised credit and land to create critical infrastructural facilities.
Equally important, the government has said it will create a ‘facilitative legal framework’ to allow farmers to enter into contracts with processors, exporters, aggregators, and large retailers, etc, so that a farmer has some certainty over what prices he will receive. In other words, a legal framework will be made to allow contract farming; as a result, a farmer can lock in on a price before the crop is sown instead of being left to the vagaries of the market.
Indeed, to the extent that the middleman can be cut out from the transaction, the farmer should also find it possible to get a greater share of the final retail price. Over time, as farmers start getting better prices, the government can also think of restricting the scope of its MSP policy as well as compulsory procurement by government agencies that distorts markets, and tries to dictate crop choices to farmers.
Given all the changes announced will hurt established interests, it is likely they will try their best to stall it, so the next challenge for the government will be to ensure the proposed reforms actually go through. A good beginning for the agriculture sector, apart from the moves—both today and earlier—is to invest a lot more in creating physical infrastructure like irrigation, cold storages, etc.