Impact on small farmers

Small peasant in peril

Print edition : October 23, 2020

Farmers block a railway track during a protest near Amritsar on September 30, against the passing of new farm bills in Parliament. Photo: NARINDER NANU / AFP

The new laws may have far-reaching adverse consequences for small growers, especially because they are tilted in favour of large growers and private and foreign enterprises involved in the business of agriculture.

The recent promulgation of three farm Bills marks a critical but uncertain turning point in Indian agriculture. Each of the three Acts focusses on one dimension of agricultural marketing. One relaxes restrictions governing the purchase and sale of farm produce, the second eases restrictions on stocking under the Essential Commodities Act (ECA), 1955, and the third introduces a dedicated legislation to enable contract farming based on written agreements.

Indian agricultural marketing reform has always been a challenge, given that both “agriculture” and “markets” are responsibilities of State governments under the Indian Constitution. The Centre typically merely offers guidance in the overall direction of marketing reform. This has often made for very slow progress in market reform in agriculture. The passing of these Acts by the Centre via the ordinance route, and in a hurry, without much discussion in Parliament or consultation with the States, represents an unusual effort to force the pace of reform. The three Acts have been hailed and criticised in equal measure by commentators in the mainstream media. Farmers have taken to the streets in several States protesting against these Acts.

While a lot has been written on the pros and cons of these Acts, this piece attempts to understand these Acts in the broader context of the Indian government’s policy on agriculture in recent years and explores what these imply specifically for agri-food supply chains and farmers in India.

What do these three Acts seek to do? Hitherto, most agricultural trade was regulated by States under a State-level Agricultural Produce Marketing Committee Act (APMC Act).

Introduced in the 1960s in most States, the APMC Act mandated that the first sale of produce by the farmer take place in regulated market yards (mandi) or areas to licensed traders via commission agents. This system of mandi-based trade aimed to ensure that farmers obtained a price that was determined via a transparent process of auction or bidding, accompanied by a degree of regulatory oversight in order to ensure fair terms of trade.

In this framework, and in its original conception, there was no explicit provision for direct marketing arrangements, including contract farming. Although the APMC Acts were designed to protect farmer interests, over time, entrenched vested interests and collusion among traders and agents and their nexus with politicians scarred the system, keeping out competition and manipulating prices in ways that were detrimental to farmers, particularly the smaller ones. One of the three new Acts now mandates that there can be free purchase and sale of agricultural commodities without a licence and without the customary charges that are typically made to the mandi. These new trades in what will be called “trade areas” are thus freed from state regulation and indeed from any regulation. A second Act introduces a dedicated legislation nationwide to enable contract farming based on written agreements between farmers and sponsors.

The third Act pertains to the Essential Commodities Act (ECA) of 1955, that enables the Central government to impose limits on the stocks of specific “essential” commodities, notified under the Act, that private traders and processors could hold at a given time. The ECA served as a tool for the government to calibrate consumer prices of essential commodities, foodstuffs in particular. These notifications were typically frequent and unpredictable, hindering the ability of private players to make business decisions without risk. The recent Act amends the ECA by restricting the imposition of stocking limits to “extraordinary circumstances”—a 100 per cent increase in retail prices of perishables and a 50 per cent increase in the retail price of non-perishables.

“Reform” vision for Indian agriculture

None of these reforms implied by the Acts is wholly new. Ever since economy-wide reforms began in 1991, which resulted in the growth of private enterprises in exports of agro-based commodities, successive governments at the Centre began to envision an increasing role for private-sector participation in agriculture. Policies that governed agricultural marketing, such as the APMC Act and the ECA, were deemed to be anachronistic, inefficient, and iniquitous and seen as a strong deterrent to private investment.

The National Agricultural Policy of 2000 stated, for instance, that “private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow, and assured market for crop production …”. Reforms in several States since then have paved the way for private market yards, and direct buying and selling, among other things. This was later complemented by the creation of Agri Export Zones (AEZ) across the country, where firms involved in agri-processing for exports would benefit from tax breaks and specific infrastructural facilities. Contract farming in high-value crops also became part of a larger strategy for diversification, weaning farmers away from the rice-wheat system that so dominated Indian agriculture. The past 20 years have seen many States reform their APMC Acts to provide space for private players, allowing not just direct purchase but also contract farming. In that sense, these Acts merely intensify a pre-existing trend to facilitate private players.

The premise of these three Acts is also largely consistent with the vision articulated in the strategy paper titled “Doubling Farmers’ Income” that the NITI Aayog initiated in 2017. It proposed that the government focus on enhancing agricultural exports as well as diversifying into high-value commodities for both global and domestic markets. The NITI Aayog noted that during 2004-05 to 2011-12, farm gate prices in real terms increased by just 0.78 per cent a year and that this could be increased by removing “middlemen” and “their margin(s)”. Observing that during 2011-12 to 2015-16, the output of the processing industry increased by just 3.6 per cent per year, the paper observed that linking the food processing sector with farmers would offer scope for lifting prices for farmers, while removing the supply constraints faced by growers. The same paper estimated that about one-third of the increase in farmers’ target incomes was “easily attainable through better price realisation, efficient post-harvest management, competitive value chains”, among others. It also noted that Indian agriculture suffered from a lack of modern capital and knowledge. While these concerns have been shared for a long time, the NITI Aayog explicitly proposed market reform, land leasing and responsible private investments in production and markets as key to doubling farmers’ incomes by 2022.

The three Acts thus need to be seen against this larger context. Collectively, they are designed to reduce barriers that diverse agri-food supply chain actors face in connecting to farmers. They aim to do so by reducing reliance on traditional APMC-based intermediaries (“disintermediation” or removing middlemen) and by creating a unified national market that can better connect supply chain actors. The odd thing about these three Acts, therefore, is that although they are born in the name of the farmer, they are not farmer-centric. Instead, they are oriented to the supply chain actors who would now face lower entry barriers and lower transaction costs. The premise is that these gains will then be shared with farmers, enhancing their incomes and ensuring their prosperity. This is, however, a moot question and rests on some possibly untenable assumptions and thin evidence.

A prognosis for farmers

To anticipate the possible consequences for farmers, we need to focus on three questions. To what extent will these Acts facilitate the entry of private players and enable them to engage directly with farmers? Moreover, to what extent can we expect these to benefit the farmers?

The long history of private agribusiness engagement suggests that these are neither widespread geographically nor across crops. In the last few decades, the presence of these players has, by and large, been confined to north-western, western and southern India, in part owing to better infrastructure and the existence of large urban centres that serve as markets for retail trade in food products, for example. Agribusinesses also tend to work with farmers who are better placed to deliver produce and commodities at lower unit cost and of consistently good quality. It is not a coincidence that these tend to be farmers who might have more land, access to inputs, irrigation and extension, and are better connected and educated. To the extent that private players are selective in who they engage with, the benefits of private sector expansion are likely to be circumscribed.

For this thin slice of the peasantry, there could be substantial gains. A majority of studies on income gains from contract farming in India, for example, suggest that contract farmers earn higher profits than non-contract farmers (anywhere between 1.2 to 4 times depending on the commodity and scheme). These gains come partly from savings in transactions costs (estimated at 60–90 per cent for dairy, vegetables and poultry) and sometimes through productivity gains. Often contracting firms introduce new methods of cultivation or technologies (drip irrigation, new cultivars, and so on) which reduce per unit production costs. There is some documented evidence of this for livestock and tomato contract farmers. Many farmers report that they benefit from technical advice from the firms, not just for the contract crops but for other crops as well.

At the same time, studies have also repeatedly shown that although contract farming and direct firm-farmer relationships hold some benefits, they are also associated with significant risks for farmers. Farmers routinely face the uncertain prospect that firms do not pick up the produce they had committed to buy. Quality standards, sometimes imposed arbitrarily and non-transparently, can lead to rejection of produce and leave farmers in the lurch. There is also a concern, based on global evidence, that the emergence of direct relationships in pockets can slowly erode alternatives for farmers and create dependency, which would then provide latitude for firms to squeeze farmers’ margins, a phenomenon referred to popularly as “agribusiness normalisation”.

There are also relevant questions about corporate commitment, or rather the lack of it, to the long-term ecological and social consequences of these arrangements. Many contracting schemes and direct marketing arrangements tap into unpaid family labour, that often bid women and children from other activities into the contract farm in ways that might not be entirely desirable. Researchers have noted that even where contract farms use hired labour, thus generating a positive employment effect, the conditions of work leave much to be desired. For high-input-use crops, farmers often report that it depletes soil quality, with lingering impacts on yields. Gherkins farmers in Tamil Nadu, for example, have routinely reported that they often have to replace the topsoil for plots that have grown gherkins in order to protect the yields of crops that follow. When there is such decline in soil quality, firms often respond by moving on to contract from another region.

There have also been documented instances of inappropriate advice extended to farmers by contracting firms. In virtually all of these cases, farmers have been left to their own devices, without recourse to formal dispute settlement mechanisms which tend to be both complex and expensive. In contrast, they are themselves exposed to similar action by the firms. The recent example of the food and beverages giant PepsiCo taking farmers to court in Gujarat for supposedly using their proprietary seeds demonstrates that the power imbalance between large business and farmers can often be far more lopsided than it is between local traders and farmers.

In short, the existing evidence is somewhat equivocal on the benefits of disintermediation. The larger question, however, is whether such disintermediation will occur at all. Indeed, there are two things that emerge from the Indian experience of disintermediation. First, many firms engaging in direct purchase relationships are often fickle. Such relationships endure more in high-value, niche commodities, where a well-functioning, competing domestic market does not exist.

Second, directly engaging with farmers, especially across States and of the scale that meets the operational requirement of processing or retail, can be expensive for firms, who would much rather rely on intermediaries to procure the volumes they need, inspect for quality and organise the logistics. This is especially the case since, given the small size of landholdings, businesses would have to deal with a large number of small players. Many thus tend to use aggregators, including farmer organisations and agri-tech players, as intermediaries to source produce. This trend of reintermediation in fact results in lengthening supply chains rather than shortening them. Global evidence suggests that in these sorts of supply chains, the highest value addition is captured by non-farm participants in the supply chain. Farmers can only capture a higher share organising alternative chains that enable them to access consumers directly. These can be via farmer markets, community-supported initiatives in agriculture and by tapping on the consumers’ conscience (“fair trade” labelling, for example) or by undertaking value addition themselves.

Might of global capital

Related to the farmer’s position in the supply chain is the question of the identity of these private players. India is in the midst of an agritech start-up revolution and has seen a vibrant growth of farmer producer organisations and social enterprises. Yet, these are not the only players who will benefit from the new regulations. Waiting in the wings are global behemoths that operate on a scale that dwarfs these enterprises. Even in the early part of the last decade, just four companies controlled between 75-90 per cent of global grain trade. Referred to as the “ABCD” group, ADM, Bunge, Cargill and (Louis) Dreyfus, two of these are privately owned and operate so discreetly that they do not give out market shares. In seeds, four firms account for over an estimated 50 per cent of global seed sales and six firms control an estimated 75 per cent of agrochemical markets worldwide. In recent years, these six have consolidated into just three firms; input and output firms have built alliances and joint ventures as well, spreading themselves across the supply chain. Consolidation has happened in retail as well. Raj Patel, in his book, Stuffed and Starved: The Hidden Battle for the World Food System, explains how these companies are able to extend and maintain their influence over policy in developing countries by influencing national political systems, an option that is barely available to smallholders or even small players.

Therein lie the perils of the new legislation, a source of fear for protesting farmers. Without safeguards and a consolidated effort to strengthen public and collective enterprises, there is a risk that those with deep pockets and a global footprint are better placed to take advantage of deregulation in ways that can also undermine farmers’ interests, as the experience in developed countries has already shown. In the United States, for example, in 2018, the farm share was just 14.6 cents of each food dollar spent. These three Acts, in their current form, run the risk of admitting large-scale global capital at the expense of innovative institutions and social enterprises that enable Indian farmers, small holders in particular, to secure their position and returns from investments in the supply chain. The Central government, in drafting these Acts, seems to be impervious or even indifferent to the perils of such a possibility. Without an urgent effort to revisit these Acts, these threats appear ominously real.

Sudha Narayanan is Associate Professor at Indira Gandhi Institute of Development Research, Mumbai.

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