However, the timing of a new set of laws liberalizing India’s internal trade regime in agriculture surprised Raghuwanshi. Farmers like him were anticipating more immediate relief, instead of long-term reforms which may take many months or even years to begin impacting lives.
On 5 June, a set of three related ordinances came into effect—which amended the Essential Commodities Act, allowed barrier-free trade and movement of farm produce across state lines, and introduced a new model of contract farming which could potentially result in assured prices on harvest for farmers based on a pre-decided contract.
The ordinances came on the back of supply disruptions due to the covid-19 pandemic which has devastated fruit and vegetable growers’ business.
On paper, India’s 145 million farmers now have legal backing to look beyond the nearest state-regulated wholesale markets, where they were forced to sell until now, and find a new set of buyers and more remunerative prices. The reforms in the Essential Commodities Act, the government hopes, will lead to more investments in storage infrastructure leading to stable prices, while the new law on contract farming will reduce price risks for growers.
But all of these are mere hopes for now and will take time to show any results, Raghuwanshi said. “Just because the government has allowed buyers to directly purchase from farmers, they are not going to queue up in front of my farm. In a depressed market, when demand is already low, traders are unwilling to even stock," Raghuwanshi said.
What disappointed Raghuwanshi more was this: even as the government framed a new set of laws to empower farmers, it also reduced import duties on lentils, a winter pulse, which has immediately led to lower farm gate prices.
The scepticism of farmers like Raghuwanshi is not misplaced—they bore the brunt of long years of low crop prices, lost their harvests to recurrent climate events like droughts and floods, and paid a heavy price for a consumer-centric food policy which depressed farmer incomes.
Of course, the new set of reforms may eventually benefit growers by eroding the monopoly of trader cartels which control the wholesale markets. The question is: how long will farmers have to wait? Can they expect better prices by October when Kharif crops are ready to harvest?
The new regime
The most significant of the three ordinances is “The Farmers’ Produce Trade and Commerce Ordinance, 2020" which aims to create an ecosystem where farmers and traders have the “freedom of choice", and trade within and between states are not only free from all barriers but also exempt from taxes and fees.
Currently, farmers are only allowed to sell their produce in regulated mandis—also known as Agriculture Produce Marketing Committees (APMC), which are governed by state APMC Acts. In these mandis, a set of licensed traders dictate and often collude to keep prices low. Farmers have no choice but to sell their produce at the mandi at whatever price is offered to them.
These state-level regulated mandis are largely responsible for India’s fragmented markets; for instance, a farmer may be selling potatoes at say ₹5 a kg at the Agra mandi in Uttar Pradesh, while a few-hours ride away, consumers in Delhi may be purchasing the same produce for ₹15 per kg.
The new ordinance makes it possible for anyone with a PAN card to travel to Agra and pick up a truckload of potatoes and sell them in Delhi. Earlier, a buyer would need to be a registered trader in the Agra mandi or have a state license. The new set-up holds the promise of a freer trade regime with no entry barrier for buyers, and can potentially benefit both farmers and consumers.
Importantly, the ordinance opens up an alternative trade channel without dismantling the existing APMCs. It also allows businesses to set up electronic trading platforms, which will make it easier for farmers to access traders in other states. However, an electronic national agriculture market, or eNAM, launched by the Centre in 2016 failed to take off due to a lack of quality assessment and grading facilities in APMC mandis.
The ordinances are a substantial step forward without any doubt, said S. Sivakumar, group head, agri and IT businesses at ITC, adding, “We still have some way to go to see how the ordinances translate into rules and how states get aligned."
Will the small size of the organized retail trade in India—less than 5% of the total production of grains and pulses and less than 1% for perishables—be a limiting factor?
According to Sivakumar, one reason for the small size of retail food trade was the current regulatory structure. “Certainly, we are not going to see a substantial scale-up overnight... but what happens when competition comes in is that the minute there is an alternative, dominant channels like APMCs start improving their systems. This has happened to every other sector like insurance, automobiles and telecom."
“While it is largely true that these reform measures are medium-to-long-term in nature, once the field is opened up, you cannot underestimate the possibility of innovation (say, when it comes to reaching small farmers directly). That may come as a surprise in the short-term," Sivakumar added.
Till now, a small set of traders had a disproportionate influence on the agri value chain and the new ordinances in a way democratizes the supply chain, said Vipul Mittal, national head of the fruits and vegetable business at Bigbasket, an online retailer which currently operates 50 collection points across India where produce is directly procured from farmers.
“But one cannot assume the new system will (automatically) translate into better prices for farmers... we will have to use technology to find alternate mechanisms of price discovery which is going to be the single most challenging task ahead," Mittal added, referring to the reality that new buyers may continue to depend on APMCs for a benchmark price. If inefficiently determined mandi prices serve as the only benchmark in the new system, farmers are unlikely to benefit.
According to Mittal, it is crucial to understand that the new legislations were not the only factors holding back investments in agriculture. “The Indian farming ecosystem is unique in the sense that it has a large number of farmers with a small landholding and you have to leverage this reality... The success of Amul (India’s largest dairy cooperative) did not happen overnight."
The loose ends
While there is an obvious buzz and at least some optimism about the legal changes paving the way for a national market for farm produce, it remains to be seen how state governments react to the Centre framing laws on agriculture marketing, which, so far, was an exclusive domain of the states. Punjab chief minister Amarinder Singh has already termed the move as a “brazen attempt to destabilize the country’s federal structure." More Opposition-ruled states may toe a similar line.
According to M. Govinda Rao, former member of the 14th Finance Commission and former director of the National Institute of Public Finance and Policy, the new ordinances were necessary for economic efficiency and competitive markets but the Centre could have discussed these with states. “Along expected lines, BJP-ruled states like Madhya Pradesh and Gujarat did not protest. Punjab which stands to lose the most in mandi taxes did so and states like Maharashtra are too busy fighting the pandemic... West Bengal does not have a significant marketable surplus to be impacted," Rao said.
Even if the Centre manages to get the states on board, there are several pain points going forward. Reaching the doorstep of millions of small growers (or connecting them to distant markets in other states) will be a herculean task.
APMCs currently aggregate a large chunk of India’s farm produce. A new buyer who wants to purchase directly from farmers will have to set up the physical infrastructure—or a private mandi—close to the farm gate where produce can be weighed, sorted and graded.
“You cannot carry out trade on a highway crossing. Someone has to pay for the physical infrastructure and businesses may not be willing to invest in physical assets in a depressed market," said Himanshu, associate professor at the Jawaharlal University, adding, “the chaos in Bihar after it abolished the APMC Act serves as a warning for the free-trade enthusiasts."
A November 2019 study by the National Council of Applied Economic Research flagged the sordid experience of small farmers in Bihar, whose poor economic condition often compels them to sell at a lower price.
Despite the abolition of the APMC Act in 2006, private investment in the creation of new markets and strengthening of facilities in existing ones did not take place in Bihar, leading to low market density, the study found. Farmers did get to sell the crop at their doorstep but at the cost of being fleeced by traders.
Inadequate market facilities and institutional arrangements (coupled with low government procurement at support prices) were responsible for low price realization and instability in prices.
The learnings from the Bihar example, therefore, will be crucial before the Centre frames rules under the new ordinances. Moreover, if transactions between traders and farmers which take place outside APMC market yards are not recorded, there will be no way to track distress sales. Also, policymakers will have no estimate of stocks lying with private traders since warehouses can now function as a “trade area" outside APMCs. “The government should make it mandatory for warehouses to register themselves with the regulatory authority and issue electronic receipts. This will make it easier to have an idea regarding stocks," said Siraj Hussain, a former agriculture secretary and visiting senior fellow at Indian Council for Research on International Economic Relations (Icrier).
The farmers’ share
A long chain of intermediaries—beginning with the village-level aggregator and ending with the roadside push-cart seller—coupled with inefficient APMCs is often blamed for eating into the profit margins of the Indian farmer, giving credence to the argument that APMCs need to be abolished for better price realization.
But, interestingly, data on the share of the consumer rupee (or a rupee of consumer spending on food) earned by the farmers depicts a somewhat different reality. Despite inherent market inefficiencies, Indians farmers who grow pulses received as much as 60-68% of the consumer rupee, according to a 2019 Reserve Bank of India survey. The ratio for rice is a more muted 49% and it crashes substantially for perishables (28% for potato and 33% for onion).
Comparative numbers from the US department of agriculture show that, in 2018, US farmers received even less—roughly 14.6 cents of each food dollar spent by the end consumer.
But since the US food market is weighted much more toward processed foods—where end product prices are generally higher—a farmer could hope to recoup investments even by garnering a lower ratio of the consumer dollar.
Ultimately, when retail prices are kept artificially low for years due to inflation targeting and trade policy decisions, a marginal rise in the share which goes to the farmer may not help much. So, liberalising internal trade alone might not unlock an era of prosperity for the Indian farmer.
Naturally, farmer organizations which are otherwise vocal chose not to respond publicly to the ordinances. Some were even scathing. “There is no evidence to show that de-regulation of markets, as is the case with Bihar or Kerala, have actually ensured remunerative prices for farmers," said Kavitha Kuruganti from the Alliance for Sustainable and Holistic Agriculture, a farm policy advocacy group.
“Small and marginal farmers can neither go in search of distant markets (in other states or via electronic trading platforms) nor can they expect better farm gate prices as long as they are trapped in the clutches of local traders who double up as credit agents."