The farm reforms must be celebrated

By: |
September 22, 2020 6:28 AM

The three agri-reforms that have been brought about will be quite positive for the agri-economy, and assurance that the MSP-based procurement system won’t be withdrawn. Of course, if the system works well for farmers, the government can think of scaling down the MSP/procurement system that has distorted the market

The opposition to the reform measures can be largely political, which is understandable. But to argue that farmers are naïve and will be given a bad deal by large corporates is disingenuous

As a rule, individuals are not inclined to change, and hence any reform that disrupts the status quo equilibrium is treated with suspicion. This holds for the three ordinances passed in the agriculture domain that have caused a stir. Any move that questions existing entrenched systems questions the hegemony of those who wield power, and hence leads to opposition.

Let us examine the three issues that are on the discussion board. The first one relates to sale of produce outside the mandi. This ordinance defines the ‘trade area’ that is outside the mandi, and the ‘trader’ who could be the processor, the exporter or even the retailer. The new dispensation says that the farmer can sell to the ‘trader’ in these ‘trade areas’, which can be a place of production, collection or aggregation. The transaction need not go to the mandi, though the option still exists.

Hence, if an edible oils manufacturer wants to buy soybean from a farmer, the transaction need not go through the mandi and can transacted at the farmgate. Logically, this is an optimal solution because with information on prices being freely available today, the farmer can get the best price and eschew the mandi. These transactions will be free of any fee or cess that must be paid otherwise at the mandi. It is a Pareto optimal situation for the farmer and the trader where both can be better off. However, as this means skipping the mandi, which has vested interest built over the years, it is understandable that there is opposition.

At the limit, one can visualise a situation where most transactions take place outside the mandi and the market yards become less relevant, and the entire hierarchy of the mandi system, which includes commission agents, becomes unimportant. Now, intuitively, it can be argued that farmers will prefer the new ‘trade area’ to the mandi only if they see value in this option. The same holds for the trader who will purchase directly when there are cost advantages.

Quite clearly, mandis will have to reinvent their systems to stay relevant. As there is a loss of fee which is collected that can range from 1-8% depending on the state and product, the fear of viability is genuine.

The way forward is to have open markets and allow free flow of goods across borders where there is transparency. In fact, the idea of eNAM has its genesis in this thought because, at the end of the day, the price discovery system must be transparent. This idea is taken several steps forward with trade being conducted in these new defined ‘trade areas’.

It should be remembered that farmers may still prefer to go through the adathiyas route because these agents often provide a variety of ancillary services, starting with crop advice, buyback, credit and logistics support, among others. This will probably intensify once a parallel system develops.

A corollary of freeing the market dynamics is having written agreements between the farmer and the company under contract farming. This is again a mutually-beneficial system where the corporate ties up with the farmer on pre-decided terms to grow crops of specific variety with support provided on credit and possibly the inputs too with the assurance of a guaranteed buyback. This is a win-win situation for both the sides. Corporates, who are into processing or manufacturing of end-products, would always look out for standardisation in quality of inputs.

Farmers, too, can move to higher quality of crop rather than sticking to the median variety, which is the case today given the tradition that has been practised over the years. Therefore, this move by the government will be extremely beneficial for Indian agriculture and bring about a major transformation in the landscape and make farming more commercial.

The opposition to both these measures can be largely political, which is understandable. But otherwise to argue that farmers are naïve and will be given a bad deal by ‘traders’, meaning large corporates, is disingenuous. Indian farmers are quite sophisticated and do use all the information that is available when taking decisions. The current structures are traditional for sure, which have worked under prevailing conditions.

But any new structure for sale or cultivation would be weighed appropriately before a decision is taken. Hence, the fear that the corporates will take over the entire community and make them subservient is not well-founded.

In fact, such measures will force the existing structures to change and ensure that farmers get a better deal. It is well known that farmers selling perishables like vegetables or fruits are forced to sell their products at lower prices in mandis as they cannot take their goods back to their village if a sale does not take place.

This forces distress sale as commission agents buy at a lower price and deliver at a higher price at the retail end. This has been one reason why there is considerable disparity in wholesale and retail prices for almost all commodities—all of which cannot be explained by logistics costs.

The third reform has been the repeal of the Essential Commodities Act. This is progressive, as the Act which sought to penalise traders who held on to stocks beyond what was permitted did create problems for wholesalers and retailers. It must be realised that most crops are produced once a year and stored and made available throughout the year. The issue is that farmers must sell their crop immediately as they do not have the holding power.

Intermediaries or traders who come into the picture store the crop and bear the costs of storage, interest on loans, possible deterioration in quality, transport, among others. There is, hence, intrinsic value that is being provided by these parties.

The Essential Commodities Act makes it a crime to go beyond the stock limits for all the defined commodities and is invoked whenever there is a shortage in supply of a product. Traders holding the stocks are now classified as hoarders and face penal action. The government has put in the safeguard of this Act being invoked only if retail prices rise by certain levels compared with the past period. This makes sense because if hoarding is seen to increasing prices, this Act can be brought in to check inflation as it has a bearing on overall CPI inflation and hence interest rate policy.

All these three reforms will be very positive for the agrarian economy, and with the assurance being given that the MSP will not be withdrawn, there is comfort being provided. But, logically, in course of time, if the system works well for farmers who are able to get better prices, the government can think of scaling down the procurement system and the MSP as the open-ended procurement scheme has distorted farm markets. Adathiyas will have to compete with corporates to retain their business and the overall system will only improve. Electronic trading will get a boost on the side-lines and the idea of free agricultural markets will see fructification over the next couple of years.


The author is chief economist, CARE Ratings. Views are personal

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