Vijay Kumar Gaba

 Delhi APMC’s Azadpur Mandi (wholesale market) is the largest fruit and vegetable market in Asia. Farmers and traders from across the country bring their produce to this market for selling. This Mandi is also one of the largest import and export hub for fruits and vegetables in India. A visit to this Mandi is always fascinating. From the lorry drivers travelling from all corners of India one can gather first-hand account of the socio-economic state of affairs in the country.

Azadpur Mandi is an ideal reflection of socialist and secular society. One finds very rich traders & commission agents and very poor laborers together struggling to pass through filthy and narrow by-lanes of the Mandi. Hindu, Muslims and Sikhs work, eat and live together here most amicably. The social and legal issues like child labor, drugs, labor exploitation, human rights violation, labor’s dignity etc. are mostly meaningless here; and no one seems to be bothered about these “mundane” issues here. Here one can get cheapest and tastiest street food in the city, which is enjoyed by the rich traders and poor workers equally.

Over last weekend, I met some large fruit and vegetable commission agents in the Mandi to assess the current business conditions and their assessment of the demand in next few months. The following is the summary of discussion.

·         For many of them, business is down 25-50% as compared to pre-Covid average. Moreover, full recovery is not expected even in next 3yrs.

·         The demand for fruits and vegetable from hotel industry is down significantly. Curbs on travel and gatherings have impacted the demand. Their feedback from hotel industry indicates that growth in corporate travel and attendance at social functions may not return in next couple of years at least.

It is pertinent to note that the ratio of per person fruits and vegetables used in food preparation in hotels is usually 2x of the quantity used at home.

·         Marriage attendance that used to be in excess of 1000 is structurally down to 200-300. In the view of most traders, the fat big Indian weddings may not return for few more years, if at all. People are now becoming very comfortable with small gatherings. Virtual participation of outstation guests through live telecast is becoming more of a norm.

·         As per few estimates, in pre Covid period over 2lac outstation students were living in Delhi to take coaching for various examinations. These students were mostly living in paying guest accommodations and guest houses. The number is now estimated to be down to less than 25000, as online coaching has become popular. The demand for fruits and vegetables for catering to these students (canteens and dhabas) may be structurally down.

·         Many corporate and other institutional canteens are still closed or working at lower capacity, as workers and students are preferring to carry home cooked food due to hygiene reasons.

·         A huge part of the credit extended by Mandi traders to the retail merchants and street hawkers in pre Covid period has turned bad with no hope of recovery.

·         Many traders expect the low attendance in wedding, work from home (WFH) and Learn from home (LFH) etc to reflect on demand for textile, footwear, food, jewelry, cosmetic, travel, and fuel demand etc.

Overall, the current mood is despondent and the future outlook is not so optimistic either.

By the way, if you are overwhelmed by the “Aarthiyas are crooks and main force behind the latest farmers’ agitation” narrative, it would be worthwhile to visit Mandi for couple of hours to balance your views.

 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