States like Punjab & Haryana will lose out on hefty mandi taxes, and arhatiyas are faced with potential competition
Again, once inter-state and intra-state sales get going, the farmers will be better off.
Given that just 6-8% of farmers across the country benefit from the government’s MSP operations—and the government has made it clear these are not going to be disbanded—it is very clear the so-called ‘farmer’ agitation is actually one driven by vested interests; the long-overdue agriculture reforms, once they take root, can make a meaningful difference to the sector, so there is no reason for farmers to protest. Indeed, it is not surprising states like Punjab are at the forefront of the agitation given how the 8% or so mandi taxes they collect each time the central government buys grain from farmers will be hit once there is more competition to the mandis.
Indeed, given the high commission that arhatiyas charge, they too will be hit once there are alternatives that will help farmers bypass them. The government should stay the course because it is on the right track; the three Bills aimed at freeing farmers from the arhatiyas, allowing agents to stock produce without being prosecuted and enabling contract farming, can help usher in a far more equitable ecosystem than the one we have today.
Of course, for the reforms to actually work—and for the government to win the confidence of the farming community—it has to ensure that its Rs 1 lakh crore agriculture infrastructure plan is quickly rolled out to create the necessary infrastructure. To start with, it needs to help facilitate the setting up of enough rival mandis as soon as possible so that farmers can start moving away from the existing APMC-regulated mandis where the arhatiyas squeeze them.
The state governments have been very tardy in dismantling the state APMC legislation, and they must now be persuaded—or pushed—to quickly part with land for the new mandis. Only when they get a good price for their produce, other than in the regular mandis, will farmers be convinced the new ecosystem is working in their favour. Indeed, when there are alternative selling avenues, including big retailers or Farmer Producer Organisations (FPOs) buying directly from farmers, even the arhatiyas will offer farmers a better deal. Contract farming will also help aggregate landholdings since, as the last agriculture census (2015-16) showed, 86% of all landholdings were small and marginal (less than two hectares).
Also, while MSPs are not the most efficient way to remunerate farmers—for over 90% of farmers, mandi prices are mostly below MSPs—it is probably politically astute to continue with the scheme until farmers have found better options. Once farmers start getting a better price, and with arhatiyas taking away less of this via their commissions, and once contract farming takes off, dismantling MSPs will be easier. Again, once inter-state and intra-state sales get going, the farmers will be better off.
To be sure, since there are legitimate concerns on whether private-sector purchasers will really offer farmers good terms for their crop, it is important to put in various checks and balances and to ensure there is a good redressal mechanism. It is vital that the MSP system be dismantled, eventually, as this drives up costs, ensures water tables go down—as farmers grow the wrong crops—and distorts crop production patterns. Logistics costs add between 30% and 35% to the purchase price for the government.
Indeed, it would be better, as Icrier professor Ashok Gulati argues, to replace the FCI-driven procurement with the China model—now being used in Telangana—of a per acre cash support instead. Since the scheme does not discriminate between crops in the manner the MSP one does, it will not influence what farmers grow.
If the terms of trade are, more often than not, against farmers, government policy has been an important reason for this. Indeed, the recent ban on onion exports as a response to rising prices makes it clear consumer interests generally trump farmers’ interests; export bans and restrictions on the movement of produce across states have hurt farm profits over the decades. It is unfortunate that, while introducing three reform Bills, the government has opted to carry on some regressive policies of the past.