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
