Is Indian Agriculture Undergoing its “1991” moment?
This article aims to de-clutter the government’s agricultural reforms namely: empowering farmers to sell their produce to anyone and not restrict them to the Agricultural Produce Market Committee (APMC) mandi yard via an amendment to the APMC Act, letting them enter contracts on a pre-defined forward price including free inter-state movement & marketing of their produce and lastly, an amendment to the Essential Commodities Act (1955).
The Problem
Imagine that you are a small manufacturer of chairs. You own a factory and produce a small amount of those basic plastic chairs that have a ubiquitous supply as well as demand in the Indian market.
Suppose you produce a hundred of these chairs and wish to sell them. Now, the government intervenes, and says that you cannot sell them to just anyone you wish to but rather forces you to compulsorily sell them to a nearby chair-mandi set up under the supervision of the government, where all chair manufacturers of the region, who produce the exact same chair as yours, come to sell their chairs to government licenced traders, supported by agents who auction your chairs off to those buyers. Agents and traders form a cartel to manipulate things in their favour and bid at unreasonably lower prices, with the agent keeping a huge commission with himself, and paying a small bribe to the government representative to buy his silence. Corruption is rampant. Eventually, you only get the “Minimum Support Price” that was solely decided by the government. The unilateral setup of the chair-mandi ensures that the traders cartelise and do not let the price go a penny beyond the Minimum Support Price, and eventually, the minimum price set by the government to protect your interests becomes the effective maximum price at which you and other chair manufacturers sell their produce. You can legally not sell to any other entities except the licenced agents at the chair-mandi. You get only a small portion of the selling price, the same as other chair manufacturers get, and your power as a supplier is diluted. The buyers and crony agents control the system.
Now imagine that a wholesaler of chairs requires chairs for an office. They command a margin higher than those basic plastic chairs you make and hence give you an opportunity to earn much more.
But since you cannot sell to the wholesaler directly, and can only sell to the chair-mandi that buys only a select type of government-approved chairs (the plastic ones that you saw earlier), hence, you decline the order. Since you cannot sell outside the chair-mandi, and the chair-mandi only buys the basic plastic chair, you are not able to produce anything apart from that plastic chair. You cannot participate freely in the market. Hence, you lose out on economic opportunities.
The system forces you to produce what others are already producing, and to then sell it to only a nearby mandated set up at the minimum price. Your profit margins are low, you can barely afford your payments such as interest and raw material. You are caught in a vicious cycle. Manufacturing chairs is all you know. You can’t switch professions. Will your business survive? Even if it does, will it be sufficiently profitable for you to grow as an entrepreneur?
No.
This is the plight of millions of farmers across the country. They sell their products only to their nearby APMC (Agricultural Produce & Livestock Market Committee) mandis and auction their produce to licenced buyers. Since all farmers in the region produce the same crops, due to excessive control by APMC, the buyers strongarm them and the auctions fetch a low price. Buyers get too much power, but sellers do not. APMC has an absolute monopoly.
In other industries (from chairs to clothes), the system allows all businesspersons to manufacture products of choice, sell them to whoever they want across the world, at a mutually agreed price and quantity. This is what free-market is all about. However, farmers, who run the business of manufacturing (growing) crops, do not have access to this free-market, and hence suffer in the shackles of corruption.
The Reform
The government’s “Farmer’s Produce Trade and Commerce (Facilitation and Promotion) Bill, 2020” amends the APMC Act and says that this system will be opened up, and farmers will be allowed to sell their produce to anyone they want, with no inter-state barriers either, at a price negotiated mutually. The government established mandis will continue to exist, and the Food Corporation of India, as well as other licenced traders, will still buy the farmers’ produce at the government-mandated price, however, the farmer will no longer be forced to sell only at those mandis. Farmers will now be able to sell the produce anywhere they wish to. Moreover, the second bill, the “Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020”, ensures that the farmers can even enter pre-defined contracts with third-parties, thereby agreeing on a price, quantity and a product of choice even before the farming begins, assuring them of a certain price to sell the produce at. This is called a forward contract. This gives the supplier (farmer) more power, as now instead of producing what is being purchased at the nearby mandi, s/he can produce what the nationwide market desires and can sell to any entity. Additionally, it provides the farmer with a layer of certainty. In India, the prices of agricultural produce are extremely volatile. It is a common occurrence wherein farmers are seen throwing their produce on the highways and roads as a protest to the abysmally low prices.
This also (indirectly) allows the farmer to be more dynamic. If an entity wants to purchase a large quantity of specific fruit, the farmer can enter a forward contract, and stop producing the rice that everyone’s producing to only produce that fruit. S/he can differentiate the product from the rest and enjoy the forces of the free-market.
Another Problem with the Supply Chain
Let’s get back to the chair example. Imagine that the licenced trader who had bought a hundred chairs from you stores them in her warehouse to sell them further. She may paint those chairs, or add hooves to their legs, in order to add some value. Now, she would want to store those hundred chairs in her warehouse until she finds the right buyers, however, the government suddenly issues a diktat that one can only store fifty chairs. This forces her to sell her chairs quickly, thus agreeing to the low prices by the buyer. From the next time, she ensures that she buys only a small number of chairs from the chair-mandi, thus restricting the size and scale of her business operations. She as a wholesaler suffers, the chair manufacturer as a producer suffers, and less economic value is created from the entire value chain.
This exists in the agricultural supply-chain and is called the Essential Commodities Act. The Act was introduced in 1955, when India faced frequent famines. However, post the Green Revolution in the late 1960s and early 70s, the agricultural produce rose significantly (read exponentially). The increase was so much that India turned from a net-importer of grains to a net-exporter, backed by surplus produce in most agricultural commodities. Thus, the ECA Act became redundant. Despite that, the Act still exists and acts as a means for state government officials to extort bribes from traders who simply want to scale up their businesses.
This restricts growth since food processing is a vital part of the food & agricultural value-chain. Converting raw tomatoes into jam or vegetables into pickles is a lucrative business, only if operated at scale. This disincentivises entrepreneurs and investors to set-up food storage and processing businesses, which are essential for the agricultural economy.
This Act will now be amended and will only be exercised when India faces an extreme scarcity of any agricultural commodity, thus letting the wholesalers, food-processors and other relevant entities to scale up their operations and enjoy the fruit of the economies of scale. This will encourage private investment in this segment. The Cabinet approved the amendment to the Act on June 4th 2020. The Bill for this particular amendment is currently awaiting approval from the Upper House of our Parliament.
A 1991 Moment?
1991 brought an end to similar government interventions in the value-chain and allowed for opening up businesses to the market-forces, along with allowing businesses to scale their operations, leading to privatisation of several industries and exponential growth in the services sector, and decent growth in manufacturing. While manufacturing and services were liberated, agriculture, upon which rests more than half our population, continued to be governed by the same pre-1991 mechanisms. Farmers, who are entrepreneurs by nature, were converted to helpless human beings surviving on government support. Even though these three farmer bills carry the same gravitas for the farmers, we cannot ascertain their impact until a few years, therefore, it may be too soon to call it a 1991 moment, however it definitely carries the potential.
