Vijay Kumar Gaba

Continuing from last week (See Farm Sector Reforms – 5)

To bring any meaningful improvement in the fragile condition of India's farming community, a comprehensive rural development effort is needed. The traditional farmer welfare measures like periodic hikes in support prices for certain crops, farm input subsidies, interest rate subvention have not yielded the desired results. In view of this, the latest legislative effort I important and desirable.

However, this may not be sufficient. A sustainable improvement in Indian farmers' conditions is possible only under a comprehensive rural development mission. The mission should address the problem with structural reforms at three levels, viz., 1. Farm Level; 2. Policy Level and 3. Social Level. All reforms must be pursued "urgently, vigorously, simultaneously" and in a fully integrated fashion, for having a meaningfully sustainable impact.

Farm level reforms

At farm level farmers are struggling with a multitude of problems. The most prominent being:

·         Uneconomical land holdings (fragmented holdings, unclear land titles) (also see here)

·         Low productivity

·         Vagaries of nature (frequent droughts & floods)

·         Poor price realization

·         Poor market access

The measures initiated so far, e.g., higher support prices, cheaper credit, crop insurance, improved irrigation, cash fertilizer subsidy, better market access (eNAM, roads etc.) have positive impact on the state of agriculture in the country. The latest legislative measures that would enable, contract farming, forward contracts, and higher investment in post-harvest infrastructure would further support the agriculture sector in India.

In my view, the following steps, besides other measures, if taken immediately may help in significantly improving the conditions at the farm level:

·         Enforce land consolidation by linking subsidies and facilities to a minimum farm size. Village or Block level farm cooperatives should be encouraged to achieve this objective. Changes in tenancy rules and allowing large scale leasing by corporates could be misused to exploit of farmers.

·         Digitize all land titles within 2years. Enforce time bound Panchayat level resolution of all title disputes preferably through mediation.

·         Change government procurement system. Government should provide all inputs and technical guidance to the participating cooperatives, and take 50% of the crop in lieu of this. The balance crop should pay for the labor cost and profit. This will ensure three things: (1) Guaranteed timely supply of quality inputs; (2) No debt burden on farmer in case of crop failure. The government can take adequate insurance for recovery of its costs; and (3) Adequate profit to the farmers.

·         The landowners who have never engaged in farming activity in past two decades should be forced to give away their landholdings to cooperatives at 50% discount. Anyways these landowners let out their land on crop sharing basis or nominal lease rental.

·         Make sure not a single drop of river water flows into the ocean from India. Develop river linking and water distribution grid on the models of roads.

·         Allow corporates to develop waste and barren land for farming purposes. For example, many corporates from India and Arab world may be interested in developing Rajasthan and Gujarat desert and barren lands for growing dates, palm, aloe etc.

·         Set up a price equalization mechanism through participation of private corporate sector. Encourage building large scale storage capacities for farm produce. Assure a regulated return of 10% premium on bench-mark yields, and allow bonds issued by warehouses as SLR securities PSL assets.

·         Take factories to farms. Encourage industry to partner with farm cooperatives to set up food processing units at the farms. The farmers' cooperative allots land and provides farm produce, whereas the entrepreneurs contribute capital and undertake marketing and sales responsibilities. Both share the profit in pre-agreed ratio. This should maximize profit of both the industrial enterprise as well farmers, and create ample employment opportunities close to villages.

·         Assist the famers in the water deficient areas to move away from water intensive crops like Paddy, Sugarcane, Banana etc. Provide them cash incentive, technical assistance, marketing & sales assistance and necessary inputs to move to less water intensive cash crops.

Policy level reforms

The following are some of my ideas for the policy level reforms. These ideas are based on the insights gained through numerous interactions with the farmers, organizations and individuals working in rural areas for welfare of the farmers, local administrators etc.

Since independence the government has focused on development of industrial infrastructure in the country. It has actively participated in the endeavor through a large number of public sector enterprise; besides offering a myriad tax and other concessions to the private entrepreneurs. Now, the country has a reasonably strong industrial base. Many of our industries are globally competitive. We have a strong set of entrepreneurs and risk takers. It is therefore high time when the government should reset its priorities and turn its primary focus on agriculture. To meet this end, the government may consider implementing the following five policy level measures:

·         Exit all industrial and banking activities and actively undertake agricultural activities. It should develop barren lands; develop water bodies and irrigation facilities; develop and use technology for enhancing productivity; give employment to landless farmers; take risk with new technologies & crops; partner with marginal farmers in consolidating their land and do farming on that land - just the way it undertook industrial activities immediately after independence.

·         Undertake, on mission basis, the task to re-skill the underemployed farmers and farm labor. The farmers and their family members may be trained as dairy workers, domestic help, nurses, tourist guides, artisans, etc. Expecting construction sector to absorb all surplus farm labor is a bad idea.

·         Develop at least 5 very large special agri export zones in rocky and desert areas of central and western India and undertake export of farm produce as a commercial activity. These zones may be developed in public, private or joint sector. Besides, it may acquire farm assets, especially rice farms, overseas to reduce water intensity of Indian agriculture.

·         Encourage various states to make bilateral or multilateral agreements for procurement, processing and trading of farm produce and movement of labor within states.

·         Nationalize all rivers. Develop a national water grid. Set up a national water regulator, who shall work out water sharing formula for all states and union territories every three year and maintain adequate provisions for managing droughts. The idea should be to ensure that not a drop of river water flows into sea from India.

It has taken seven decades for Indian industries to reach a stage where the government may consider fully exiting the industrial activities. It may take 2-3 decades for Indian agriculture to reach a stage where the government will be able to exit farming activities completely.

Please note that I am also not suggesting nationalization of agriculture sector. I am just saying that the government should undertake the activity on commercial basis to provide the sector with much needed escape velocity in terms of capital, technology, and risk taking capability.

Social reforms

The disproportionate rise in aspirational consumption; distortion of social customs (especially marriage, death, birth) for the sake of vanity, ignorance, and misguidance; rise in crime and litigation expenses; rise in cases of chronic diseases and hence prohibitive healthcare expenses form an overwhelming part of "farmers' debt". This debt usually has nothing to do with farming activity. This is in fact true for a large majority of urban poor and lower middle class people also. To cure this problem on sustainable basis, it is important that economic reforms are implemented with social reforms.

The social initiatives like focus on cleanliness, cooking gas connection to BPL families, medical insurance, etc are commendable,. But what we need is a social renaissance. Small correction and incremental improvement might not be enough given the serious nature of the problem, in my view.

I am not a social scientist. I may therefore not be an appropriate person to suggest the steps that could be taken within the Indian sociological framework. But this does leaves me at freedom to throw some thoughts that may not belong to the box. I would suggest the following specific programs at social level:

(a)   The government should take strong affirmative steps to eradicate social distortions that have crept in over a period time in our social, religious and cultural events.

To begin with the government should totally nationalize the religious part of the birth, death and marriage ceremonies. The government should appoint qualified religious persons (QRP) who can perform these ceremonies at the designated venues established by government in every Block of the country. All the expenses like salary of QRP, cost of performing the rituals, food offered to QRP, cost of feeding upto 20 close relatives of the person for whom the rituals are being done, etc. should be borne by the government. Special officers may be appointed to supervise all such ceremonies and issue certificate (Birth, Death, Marriage) on the spot.

The government should actively discourage profligate spending on the social part of these events. All expenses on marriage & birth related parties and social functions relating to death, may be taxed @100%. Meaning, if anyone wanting to spend Rs10,00,000 on marriage party of his/her child, he/she shall be required to pay an equivalent amount as tax. This money may be used exclusively for performing the religious ceremonies stated above.

(b)   A dignified birth and death shall be made fundamental right of every citizen.

In case of birth, the government should assume responsibility of the child from the conception stage, for upto two children for each parent. This includes good diet for mother, medical tests, medicine, delivery expenses and immunization of the child. This should be done on a global standard basis not the way typical government medical facility is run by the government. In case of death, the final rights of the deceased should be performed in a dignified manner, as per his/her religious traditions. This should apply to all unclaimed and unidentified bodies also.

The insurance companies may be directed to make the claim payments on the spot when the final rituals are done on 13th, 17th or 40th day as the case may be, in cases where the deceased's life was insured, either individually or under some government group scheme. The corporates may be required to fund this initiative under their CSR obligation.

(c)    All regular visitors to the holy shrine of Mata Vaishno Devi in Jammu, who are more than 50years of age, would vouch that the assigning the administration of the shrine to an independent Board in 1986 has led to dramatic improvement in the management and infrastructure in and around the Shrine. No one's religious feelings have been hurt and the number of pilgrims visiting the holy cave has multiplied exponentially.

The government may consider constituting an autonomous constitutional body like Election Commission to take over the management and administration of all places of worship in the country to put an end to rampant cases of exploitation, mismanagement, money laundering and other disputes, encroachment of public land, environment degradation, and promote secularism, brotherhood, tolerance etc.

A separate assembly of religious leaders, holy men for each religion may be formed. This assembly may be given the task to reevaluate all Holy Scripture, and find if there is any need to reinterpret the scriptures in the light of modern day circumstances and realities. The religious leaders should be requested to weed out the redundancies and misinterpretations, so that no one manipulates the religious sentiments of the people in the name of scriptures and divine mandate. The assembly should also frame a code of conduct for all people responsible for helping people with their religious ceremonies and duties. For example, the Hindu assembly may want to ban flowing the last remains of dead people in holy rivers to save them from dying. The ashes may be used for making bricks that can be used to build places of worships and houses for the poor. It may also encourage people to use electronic or gas based cremation, instead of wood pyres. Alternatively, each family member of the deceased may be required to plant two trees each and take care of it till it grows to become self-sufficient.

These steps, if taken, may make the life of poor (both rural and urban) materially comfortable and substantially increase the happiness quotient of the country, in my view.

These thoughts and suggestions are nothing new. I have been presenting this to the concerned authorities and to the readers (through this post) frequently. I promise to keep pressing with this in future also, till I see some progress on this.

 Continuing from last week (See Farm Sector Reforms – 4)

While announcing the famous Rs20trn economic stimulus package in May 2020, the finance minister had made the following 10 key promises for the farm sector in India. It was categorically stated that the governments sees farm sector as a key driver of overall economic growth and also a powerful engine to drive the “self-reliance” agenda.

1.    Essential Commodities Act to be amended to enable better price realization for farmers by attracting investments and making agriculture sector competitive.

2.    A central law to be enacted to provide for inter-state trade and framework for e trading of agriculture produce.

3.    The government to facilitate appropriate legal framework for an enforceable standard mechanism for predictable prices of crops at the time of sowing.

4.    Financing facility of Rs.1Lakh Cr to be provided for funding Agriculture Infrastructure Projects at farm gate & aggregation points (Primary Agricultural Cooperative Societies, Farmers Producer Organizations, entrepreneurs, Start ups, etc.)

5.    Rs 10,000 Cr. scheme to be launched for Formalization of Micro Food Enterprise (MFE) through Cluster based approach (e g Mango in UP, Kesar in J&K, Bamboo shoots in North East, Chilli in Andhra Pradesh, Tapioca in Tamil Nadu etc

6.    Rs20,000 cr support to be provided under the Pradhan Mantri Matsya Sampada Yojana (PMMSY) for integrated sustainable, inclusive development of marine and inland fisheries. Rs11,000 cr to be provided for activities in Marine, Inland fisheries and Aquaculture and Rs9,000 cr for infrastructure including Fishing Harbours Cold chain, Markets etc. Provisions of ban period support to fishermen (during the period fishing is not permitted) and personal & boat insurance.

7.    Rs 13343cr to be provided for starting National Animal Disease Control Programme for foot and mouth disease and brucellosis.

8.    Animal Husbandry Infrastructure Development Fund to be launched with total outlay of Rs15,000 cr.

9.    Rs4,000 cr support for promotion of  herbal cultivation covering 10lakh hectare. Rs500 cr scheme infrastructure development related to integrated beekeeping development centres, collection, marketing and storage centres, post harvest & value addition facilities etc. 

10.  Operation Green proposed to be extended from tomatoes, onion and potatoes (TOP) to all fruits and vegetables, i.e., (TOTAL).

In pursuance of these promises, the government passed three enabling legislations in the parliament.

I have said it earlier also, and I have no hesitation in reiterating that the measures already taken and the those proposed to be taken are very important and desirable. To the question “"whether these measures sufficient or we would need much more to attain the twin objectives of self-reliant India and sustainably higher economic growth?", my answer is that these measure could deliver the desirable outcome only if these are implemented with the many more structural reforms in the farm sector.

The farming sector in India is characterized by (a) small holdings; (b) low productivity and (c) landless farmers.

1.    During FY11 and FY17, the total operated farm area has decreased from 160million hectare to 157.872million hectare; number of holdings have increased from 138.35 million to 146.45 million and the average holding size has decreased from 1.15 hectare to 1.08 hectare. For the context, the average farm size was 2.4hectare in 1971.

2.    The marginal and small holdings (0 to 2 hectare) account for 86% of total holdings, covering about 47% of the operated area. Medium (2 to 10 hectare) holdings are 13.3% covering 44% of the operated area. Large holdings (above 10 hectare) are merely 0.57% covering 9% of the operated area.

The more important and worrying statistics however is that there are over 100mn Marginal Farmers, with average holding of 0.38 hectare (0.9 acre) accounting for almost 68% of the total farmers. These farmers mostly do sustenance farming, and under no circumstances can earn decent two square meals from farming activity alone. 100mn farm holdings means about 400mn population, assuming an average family of 4. Marginal farmers with average land holding of 1.4 hectare are another 18% or 25mn.

About 47% of the total operated area is covered by these small and marginal farmers. The uneconomical size of holdings, which are getting further divided with the death of each farmer, ensures low productivity, poor financial conditions, no investment capacity and perennial debt in many cases.

3.    There is huge variation in land holding pattern amongst states. For example, AP and TN have largest proportion of landless farmers (more than 50%): Bihar and West Bengal have largest number of marginal farmers (close to 60%), where Rajasthan has the largest share of large farmers. Same agri policy for all these states is bound to fail.

4.    The average monthly rural household income in India is about Rs6426 and average Monthly rural household expenses are about Rs6223. About 85% of households earn less than their expenses. About half of this income comes from cultivation and rest from other activities like labour (including MNREGA) and animal husbandry. Rural household spend about half their income to buy food. There is little change in real rural wages over past five years. Rural wages are an important component of rural income and a key determinant of minimum support price for farm produce.

…to conclude tomorrow

 Continuing from yesterday (See Farm Sector Reforms – 3)

The Parliament passed The Essential Commodities (Amendment) Bill 2020. The stated objective of the amendment is to make sure that farmers get remunerative prices for their produce, and large scale private investment in agriculture related infrastructure (cold stores, warehouses and agro processing industry) could be attracted. This amendment was considered necessary to achieve the objectives of The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020, that enables contract farming and forward contracts in agriculture produce.

The Essential Commodities (Amendment) Bill 2020, basically changes the following two things:

1.    The power of central government to regulate the supply of food commodities, including cereals, pulses, potato, onions, edible oilseeds and oils etc., has been limited to the extraordinary circumstances like war, famine, extraordinary price rise and natural calamity of grave nature etc.

Prior to this amendment the powers to impose restriction on supply and trade of essential commodities were unrestrained. Even the “essential commodities” and “circumstances” in which the government could regulate the supply were not defined clearly in the law. The recent ban on export of onion is one example of arbitrary action of the government under the extant law.

2.    An objective criterion has been specified to define the circumstance under which stock limits could be imposed in respect of any agriculture produce. As per the latest amendment, stock limits may be imposed on any agriculture produce only if there is 100% or more increase in retail price of horticulture produce (vegetables and fruits) OR 50% or more increase in retail prices of non-perishable agriculture produce like cereals and pulses. The price increase will be seen in relation to the lower of (i) average price prevailing in preceding 12 months or (ii) average retail price in preceding 5 years.

Such stock limits if specified shall not apply in relation to (i) already contracted export obligation; and (ii) stock of food processing units to the extent of rated processing capacity of such units.

Apparently, the new legal changes do not alter the status quo in respect of the following:

(a)   Sugar industry, which is one of the major agriculture processing industry in the two largest states of UP and Maharashtra. The stock limits on sugar, export quotas, administrative prices for sugarcane etc will continue as before.

(b)   Industries like paper, plywood, etc have been using contract farming to procure tree wood from farmers. The new law does not appear to change status quo in respect of these also.

It is feared that the relaxations given under the latest amendments in Essential Commodities Act, could be easily misused to hoard stocks of essential commodities and create artificial scarcities. In my view, many of these fears are emanating from the empirical evidence from the decades of 1960s and 1970s, where the food grain hoarders exploited the poor people. But that was when the foreign trade in food commodities was restricted. There are little chance that the prices of an agriculture commodity could be manipulated sustainably even over a period 3-4months. I am therefore not worried about hoarding etc.

Continuing from yesterday (see Farm Sector Reforms – 2)

The second piece of legislation, namely, The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020, primarily provides for the following four things:

1.    Forward Sale Agreement: A farmer may enter into a written forward agreement with a person to sell his produce at a predetermined price.

Any such agreement shall specify (a) the price (fixed, or benchmarked with a guaranteed minimum); (b) The time of delivery; (c) place and method of delivery; and (d) quality specification for the produce.

The ownership and risk of output due to vagaries of nature of otherwise, shall remain with the farmer till he offers a valid delivery to the buyer.

2.    Contract Farming: A farmer may enter into a written agreement with a person to provide farm services for predetermined fee. The service buyer shall specify the crop, quality, and other specifications, and may provide necessary inputs like fertilizers, seeds, technical knowhow etc. to the farmer. In this case, the risk of output may remain with the service buyer, depending upon the conditions specified in the agreement.

The new law prohibits implicit leasing or sale of agriculture land through such agreement. Also the rights of the share cropper (the farmers who till someone’s land in lieu of a share in the crop) also sought to be protected in the law.

3.    Stock of agriculture commodities: The buyer in either of the above cited two arrangements can stock the produce acquired under the agreement, regardless of any limits imposed by any state legislations or the Essential Commodities Act, 1955 on such stocking.

4.    Registration and Dispute Resolution: All such agreement will have to be registered with the appointed Registering Authority. All disputes in relation such agreements shall be settled as per the resolution mechanism prescribed in the Bill. In the two tier resolution mechanism, the first step would be conciliation (arbitration) at a panel constituted by SDM of the area. The second step would an Appeal to Appellate Authority (Collector). No civil court would have the jurisdiction over disputes relating to the trade specified under this law.

It is pertinent to note the following in this context:

·         The forward market for agriculture commodities in India is mostly informal, unorganized and unregulated. There are stocks exchanges and electronic trading platforms that offer future market in select agriculture commodities, but the farmers’ participation in these markets is miniscule. These markets are mostly used by traders and commercial consumers to either hedging or speculation purposes.

The new law permits forward contracts, but these contracts will be out of the purview of SEBI (regulator for derivative contracts in commodities). These agreements will be unregulated.

·         As discussed yesterday, the full implementation of the new regime may decimate the extant APMC mechanism. In that eventuality, the price discovery of agriculture produce will totally depend on the market forces. In absence of a deeper futures market in all commodities, the price discovery may not be efficient and create harmful volatility in food prices.

The apprehension is that the large corporates who would in a position to dominate the markets. They may entrench themselves deep in the agri ecosystem to dictate the cropping patterns as well prices. In this colonial form, the farmers would be forced to grow whatever these large players want and sell at the price mostly determined by them.

·         A large number of farm holdings in the country do not have clear ownership. In many cases the registered owners are either dead or have been excluded by the family members or encroachers. Besides, millions of farmers are share croppers.

In respect of land holdings that are being used by share croppers; or where the farmer actually tilling the land is not a clear title holder, entering into these agreements may not be possible.

·         As I wrote yesterday also, millions of marginal farmers (land holding of less than one acre) may not benefit much from these legislation. These farmer account for more than two third of the total farm holdings.

…to continue tomorrow

Continuing from yesterday (Farm Sector Reforms)

Before commenting on the three specific agriculture sector reform related bills passed by the Parliament recently, three points need to made clear:

A.    The farm sector in India is in dire need to major reforms. These reforms are not only critical for the farm sector alone, but for the overall economic growth of the country. The solution to most macro economic problems, e.g., large scale unemployment, dwindling household savings, volatile food inflation (and therefore unpredictability of inflation and interest rate trajectory); fiscal discipline of the governments etc would come through these reforms only.

B.    The recent legislative changes are intended to address only two small pieces of the entire rural sector puzzle. Land reforms and social reforms are perhaps the two bigger pieces.

C.    The new legislations do not seek to change the status quo materially as most the procedures and systems provided in the new legislations are already in practice in most of the states for past sometime. The systems like eNAM, routing of payment through government agencies, have made some positive difference for farmers. But these improvements are mostly insignificant for a large majority of farmers who fall in small and marginal category.

Now coming to the first piece of legislation, i.e. The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020.

This legislation basically provides for three things:

1.    Farmers can sell their produce to any person having a valid Permanent Account Number (PAN) in the territory of India.

2.    Any person (other than individual), including Farmer Producer Organization (FPO) and Agriculture Cooperative Society, may establish and operate an electronic trading and transaction platform for facilitating trade and commerce of scheduled farmers’ produce in any area outside the State APMC infrastructure.

3.    The resolution mechanism for disputes arising from the trade in farm produce outside the State APMC framework. In the two tier resolution mechanism, the first step would be conciliation (arbitration) at a panel constituted by SDM of the area. The second step would an Appeal to Appellate Authority (Collector). No civil court would have the jurisdiction over disputes relating to the trade specified under this law.

To understand the implications of this law, it is pertinent to understand the existing system of trade and commerce in the country. Especially the following points are noteworthy.

• Agriculture and trade & commerce in farm produce is a state subject as per the constitution. The states have power to frame laws, rules and regulations for trade & commerce in farm produce. Most states have enacted laws to constitute Agriculture Produce Marketing Committees (APMC) in their respective jurisdictions. These APMCs appoint authorized commission agents ((Adhatiya) and provide market infrastructure to farmers and traders. The trade is facilitated by the commission agent for a fee. APMC also charge fee on each trade executed within their infrastructure. The total cost of trade varies from state to state is usually between 5-9% of the trade value. The cost is usually born by the buyer. In case of inter-state trade, at many places both states involved charge the APMC fee.

• The commission agents usually act as de facto guarantor for counter party default. They pay the farmers even in cases the counter party defaults on payment. The commission agents also provide working capital credit to both the farmer and the trader. This credit may be at a cost or interest free.

• In 2003 the central government had proposed a model law to reform the APMC system. The States were requested to enact laws in their respective jurisdictions to allow private trade and commerce (outside the APMC infrastructure) and establishment of electronic platforms. More than 20 States and Union Territories have already adopted at some part of the model law. For example, UP, Bihar and Delhi allowed establishment of trade areas outside APMC many years ago. In UP, the wheat procurement is mostly through government agencies only. The payments are now done through direct cash transfer to farmers' account and payment comes within 3-7 days.

• The disputes relating to payments are now minimum. Since either the commission agent or the government agencies act as effective counter party for farmers.

• MSP of farm produce should acts as the base price for farmers. The market price should be closer to MSP. But in practice it is usually not the case. The small and marginal farmers (who constitute majority of the total number of farmers) who are located at a distant from the designated APMC or other market place cannot afford to transport their produce to the market place. The aggregator comes to them and buys their produce. In such cases the price offered to these farmers is much lower than MSP. For example, the wheat MSP last year was Rs.1925/quintal. But the price realization for most small and marginal farmers was Rs1600-1650 only.

Now assuming that the new system is implemented fully and private market place for farm produce develops, the following changes would be experienced.

• APMCs, though legally allowed to co-exist may eventually become unviable. The large farmers and traders may use the services of private markets places, electronic platforms, and direct selling. APMCs may therefore lose large chunk of their revenue.

• The farmers may have to make alternative arrangement for working capital financing, which was so far available through commission agents.

• The implicit settlement guarantee of commission agent or government agencies may not be available under the new system. The disputes may rise. The resolution system available under the new law would entail inconvenience, delay and cost for farmers.

• MSP may stop functioning as effective base price in the new system. The price volatility may rise materially, both in case of bumper and deficient crops.

• Marginalization of APMC in due course will make the farmers dependent upon large traders and consumers. We must therefore evaluate this law together with the other two laws to determine the full impact.

  ...to continue tomorrow

Last week, the Parliament passed three important piece of legislation with stated objective to reform and liberalize the production, trade, and pricing of agriculture produce in the country.

The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill

This law purports to allow farmers the freedom to sell their produce outside the regulated Mandi (APMC) framework. The idea seems to be enable development of a new ecosystem where farmers and traders would enjoy freedom of choice in sale and purchase of agri-produce; and the control of state over trade in agriculture produce would reduce to minimum.

It is important to note that this reform was initiated in 2003 with introduction of Model Act. Many states and union territories have already de regulated marketing of fruits and vegetable, trading on electronic platforms like e-NAM, setting up of agri produce markets (Mandis) in private sector, direct marketing of agri produce etc. The reason behind this new law therefore could be lack of adequate response to model law on part of many state governments.

The Farmers' (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020

This law aims to permit farmers to enter into supply contracts with large buyers. These contracts could be exclusive and long term and provide more predictability to income of farmers and help them plan better in terms of adopting better technology and inputs.

This bill effectively facilitates large scale contract farming, whereby large corporate consumers can engage farmers to exclusively produce for them as per given specification and at pre determined price. The bill provides for pegging of prices to the Mandi prices. The famers adopting this arrangement may not avail the protection of minimum support prices as they would be bound by the terms of the contract. All such contracts are proposed to have civil jurisdiction and breach of contract shall have no criminal implications.

Essential Commodities (Amendment) Bill 2020

This bill essentially allows large business consumers to maintain stock of agriculture commodities, purportedly to meet the objective of price stabilization. This may also help in building post harvest infrastructure like warehouses and cold storages etc.

The opinion about the long term implications of these bills is vertically divided.

The supporters of the proposed regime believe that these changes would bring transformative changes to the agriculture and food processing sectors in India. The noted agriculture economist Ashok Gulati, equated these proposals to the industrial reforms and liberalization in early 1990s. It is argued that removing the shackles of state controls and allowing private businesses and farmers to collaborate will lead to significant acceleration in development of farm sector in India, and aid sustainable and faster overall economic growth of the country.

The people and organizations opposing the legislative changes believe that the proposed laws are ill conceived and are being enforced without adequate consultation with the stakeholders. In their view, many of these provisions are already present on the statute book and have not brought any meaningful change to the farmers' conditions in past decade.

It is also argued that these changes will bring back the pre independence colonial model in the Indian agriculture, where the large corporates will decide the crop and prices. The farmers will continue to be exploited; and the shield of MSP will also be removed.

In my view, the intent behind the proposed legislations is good. The farm sector in India definitely needs urgent and transformative reforms. But for reforms to have the desired impact, these needs to be comprehensive and holistic, not selective as proposed....to continue

US Federal Reserve Chairman Jerome Powell tried to set many speculations aside in his statement post the recent meeting of the Federal Open Market Committee (FOMC), Powell made the following three things very clear:

1.    US Fed policy Bank Rates, and therefore general rate environment, shall stay low till at least 2023.

2.    There is no threat of material rise in inflation in near term, and 2% inflation target shall remain valid till 2023. Even a temporary violation of 2% inflation target before 2023 shall not impact the decision to keep rates near zero till 2023.

This is in sharp contrast to the forecasts made by many global strategists, economists and fund managers, who believe that inflation could become a serious problem in 2021-22. In fact Powell expressed his concerns about the disinflationary pressures persisting.

3.    The job market is expected to improve and below trend unemployment rate of 4% shall be achieved by 2023.

The Federal Reserve however refrained from announcing any additional liquidity enhancement measures, including increasing the bond buying.

The consensus is reading the Federal Reserve's latest policy statement to mean that (a)   USD weakness may persist for some more time at least; (b) The market may continue to drive the Federal Reserve's action insofar as the monetary support (bond or stock buying etc) is concerned; (c) Powell backstop is there but may not be as strong as Draghi backstop.

This long term guidance by Fed must comfort markets and fuel the risk appetite of market participants. I would not like to read too much into the sell-off in markets post the Powell comments. It might be due to unwinding of the positions taken specifically for this event. No announcement related to enhancing Fed's asset purchase program may have disappointed many who were expecting Powell to announce this. But this is most likely a knee jerk reaction.

In this context, the recent statement of RBI Governor Shaktikanta Das is pertinent to note. Addressing to the National Executive Committee of FICCI, Das emphasized as follows:

"On the back of large policy stimulus and indications of the hesitant economic recovery, global financial markets have turned upbeat. Equity markets in both advanced and emerging market economies have bounced back, scaling new peaks after the ‘COVID crash’ in February-March. Bond yields have hardened in advanced economies on improvement in risk appetite, fuelling shift in investor’s preferences towards riskier assets. Portfolio flows to EMEs have resumed, and this has pushed up EME currencies, aided also by the US dollar’s weakness following the Fed’s recent communication on pursuing an average inflation target. Gold prices moderated after reaching an all-time high in the first week of August 2020 on prospects of economic recovery.

Financial market conditions in India have eased significantly across segments in response to the frontloaded cuts in the policy repo rate and large system-wide as well as targeted infusion of liquidity by the RBI. Despite substantial increase in the borrowing programme of the Government, persistently large surplus liquidity conditions have ensured non-disruptive mobilisation of resources at the lowest borrowing costs in a decade. In August 2020, the yield on 10-year G-sec benchmark surged by 35 basis points amidst concerns over inflation and further increase in supply of government papers. Following the RBI’s announcement of special open market operations (OMOs) and other measures to restore orderly functioning of the G-sec market, bond yields have softened and traded in a narrow range in September."

The governor was very guarded in his outlook for the economy. he stated, "high frequency indicators of agricultural activity, the purchasing managing index (PMI) for manufacturing and private estimates for unemployment point to some stabilisation of economic activity in Q2, while contractions in several sectors are also easing. The recovery is, however, not yet fully entrenched and moreover, in some sectors, upticks in June and July appear to be levelling off. By all indications, the recovery is likely to be gradual as efforts towards reopening of the economy are confronted with rising infections. (emphasis supplied)

Obviously, the incumbent governor does not concur with one of his predecessors Dr. C. Rangrajan who appears quite buoyant about the economic recovery in India.

What does it mean for Indian investors?

• Unless there is a Lehman type moment in global markets, the Indian equities may continue to remain supported.

• Precious metal trade should take a hit.

• The bond yields may remain stable, and RBI may maintain yields around current levels even if the food inflation shoots up in next couple of months.

• MPC may maintain status quo on policy rates in its next meeting, while continuing to maintain accommodative stance.

• Economic growth and therefore corporate earnings may not see a sharp recovery even in FY22.

In recent days the following three global trends have evoked much interest amongst market participants:

1.    The production, consumption and import of commodities in China have increased materially.

2.    The USD weakness is persisting. The China letting CNY appreciate against USD is noteworthy.

3.    BP in its yearly outlook virtually declared "peak oil" demand, stating that the oil demand growth may not be seen through 2050.

These three trends are important in my view as these could materially influence the markets in short term.

For past two decades, China has been a major driver of the commodities' demand and hence prices in the global market. The slowdown in Chinese economy in past 5years has led to correction in commodity prices, impacting a large number of commodity driven economies like Australia, Canada, OPEC countries, Brazil etc. This is cited as one of the reasons of sustained deflationary pressure on US, Japan and EU economies. The central bankers in these economies have been able to unabashedly print money to support their fiscal profligacy as the inflation has not been a concern.

As per the latest reports that trend might be about to change. As per a recent ING Bank research report, "Domestic demand is driving China's economic growth. Retail sales returned to positive growth. And new-infra and traditional infrastructure investments increased, which matched the growth in these items in industrial production. But external circulation may remain a challenge to growth." The reports further highlights that "China’s new-infra plan and traditional infrastructure projects in transportation have led overall investment spending. Fixed asset investment (FAI) shrank only -0.3%YoY YTD in August from - 1.6%YoY YTD in July. The "computer, telecommunication" category, which represents new-infra investment plans, grew 11.7%YoY YTD, which results in part from China’s push towards self-reliance in technology. Rail transportation investment also grew 6.4%YoY YTD.

These growth numbers are high compared to the headline growth rates, which means these are the engine of investment growth in China currently."

The Chinese monetary authorities recently allowed CNY to appreciate below 6.8/USD level. This could be seen as a reconciliatory gesture by Chinese authorities to the global community. China has allowed CNY to weaken even above 7/USD level in the trade and currency war with USA and Japan. The international relations of China have worsened materially after the outbreak of COVID-19 pandemic. This reversal of CNY could be seen as first, though small, sign of China wilting under global pressure. This could be comforting news for the global markets.

British Petroleum's (BP) annual outlook fo energy market is respected world over. Last year, BP forecasted demand for fossil fuels could peak by 2030. However, in 2020 outlook, BP has made a major shift in its assessment. As per the energy major, peak demand for oil may have already happened. The report implies that global crude demand may never again surpasses 2019’s average of around 100 million B/D. A natural corollary to this is that that 2019 could also mark the peak of carbon emissions from energy use.

This may potentially change many things - global trade balance, sustainability investments, geopolitics, cost of doing manufacturing, etc. Arab world countries making conciliatory moves towards Israel may, for example, be just one of the effects of this. BP announcing major investment plans with RIL in renewable energy sector to support electric mobility is another.

The September 2020 Global Fund Managers' survey conducted by the Bank of America research team found that 58% of the global fund managers believe that global equities are now in a bull market. This percentage is materially higher than the 46% in August 2020. The proportion of fund manager who believe it to be a bear market rally has reduced in September 2020 to 29% from 35% in August 2020.

An overwhelming proportion of fund managers believe that "Long US Tech Stocks" is the most crowded trade. Though, the fund managers believing gold to be a crowded trade has reduced materially in September, as compared to August. "Short USD" trade is also seen gaining some popularity .

Continuing with the theme, JP Morgan Research (as quoted by Niels Jensen of Absolute Partners), finds that S&P500 is now pricing in almost 0% probability of a recession in US; while 5yr US Treasuries are pricing in almost 100% probability of a recession.

In his latest communication to investors, Niels warns that investors (and fund managers) may be flirting dangerously with TINA (There is No Alternative) in their chase for equities, especially US Tech Stocks. As per Niels, One of the most reliable predictors of long-term equity returns is the starting earnings multiple. When earnings multiples are in the low 20s, the best you can hope for over the next ten years is low single digit annual returns. As you can see, 10-year returns turn negative when the starting multiple is about 25 or higher.

Niels highlights that, as per Shiller's Cyclically Adjusted  P/E Ratio (CAPE), S&P500 trades at massive 32x earnings multiple, which means apocalypse may just around the corner and the investors must be running to the hills.

In a later post, I would like to evaluate where India stands in all this.