Agricultural market 'reforms'

'Reform' by stealth

Print edition : June 19, 2020

A farmer sits on a tractor trolley after auctioning his onions at Lasalgaon market in Nashik in Maharashtra on December 19, 2018. Photo: RAJENDRA JADHAV/REUTERS

Using the fig leaf of providing farmers greater freedom, the Central government has used the ordinance route in order to dismantle “controls” in agricultural produce marketing. It marks another foray by the Centre into areas that have constitutionally been seen as belonging to States.

THE Union government has made it clear that it is prepared to cross the rubicon in its pursuit of agricultural market “reforms” that have proved elusive so far. Governments in the past have attempted this by primarily putting pressure on States to initiate such reforms because agriculture is a State subject. Finance Minister Nirmala Sitharaman’s recent announcement that the Central government will introduce a piece of legislation after confining the State-level Agricultural Produce Market Committees’ (APMC) domain to their market yards alone, via ordinances by States, indicates the government’s resolve to open another front in the already tense arena of Centre-State relations.

The ordinances of June 3, approved by the Union Cabinet, give effect to the three reform measures announced by the Finance Minister as a part of the COVID-19 relief package. Under the amended Essential Commodities Act (ECA), cereals, pulses, oilseeds, edible oil, onion and potato have been exempted from its regulation, and a processor or exporter is allowed to stock up to the installed capacity of the plant.

The Farming Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020, supposedly to pave the way for “One India, One agriculture market”, aims to create barrier-free trade within and between States under which any buyer can purchase directly at the farmer’s doorstep. There will be no tax on such trade, and buyers will not require a licence; a PAN card will suffice. Further, the States will not be able to levy any fees or taxes on produce bought under the new central Acts.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020, is intended to facilitate and regulate contract farming.

Agricultural market reforms have been on the agenda of governments in the past, including the National Democratic Alliance (NDA) government that came to power in 2014. Since 2014, the government has attempted some reforms by persuading States to undertake interventions such as e-trading through the adoption of the model Agricultural Produce and Livestock Marketing (APLM) Act, 2017. It also opened another reform front—contract farming—by pushing through the Contract Farming and Services (CF&S) Act, 2018, at the State level in some States. Moreover, it made direct interventions such as the Electronic-National Agricultural Market (E-NAM) with the participation of States as e-NAM needs APMCs to function for physical deliveries and quality assessment. The Government of India even provided a good sum to each APMC to create the e-NAM infrastructure so as to link the APMC market yards with the digital trading platform. The limited success of all these initiatives has apparently convinced the government that States cannot be pushed beyond a point. The latest move indicates its aggressive resolve to push through agricultural market reforms.

One Nation, One Market

Of course, the assault on the States’ realm is being done under the veneer of the promise of One Nation, One Market for agriculture. The stated objective is to provide Indian farmers greater choice in selling their produce and a better price discovery mechanism. Other ostensible reasons cited include attracting private investment into agricultural markets, agribusiness and the food retail sectors.

The move towards enacting a Central legislation to reduce the APMC’s domain was initiated in 2008 by the United Progressive Alliance (UPA) regime. At that time, a few agencies interested in the business of agricultural produce had questioned the constitutional validity of APMC Acts and also explored the constitutional options for enacting a Central legislation to override the APMCs. The options they examined included the transfer of “markets and fairs” to the Union List from the State List; the use of “inter-State trade and commerce” under Item 42 of the Union List; the introduction of a new Entry in the Union List or the Concurrent List; and even the use of the Warehousing Act to provide for agricultural marketing legislation at the national level. Shockingly, the discussion papers on the issue observed that corporate farming would not be possible even if agricultural marketing were to be conducted within the rules framed under the Warehousing Act. This made it obvious that farmers’ freedom was never the primary concern of the “reformers”.

The Congress’ manifesto of 2019 even proposed to repeal the APMC Act and make trade in agricultural produce, including export and inter-State trade, free of all restrictions. Surprisingly, the Bharatiya Janata Party’s (BJP) manifesto of 2019 did not promise anything big on agricultural market reforms, although it has been implementing many initiatives on this front in the past few years with limited success. In fact, the NDA came up with the model APLM Act, 2017, and the model CF&S Act, 2018. The model APML Act did not exclude fruits and vegetables from the domain of the APMCs, unlike the proposals made during the UPA rule. However, these two pieces of legislation were aimed more towards facilitation and promotion of markets rather than their regulation.

As part of the COVID-19 package, the Finance Minister announced the government’s intent to act on three fronts: (i) Essential Commodities Act relaxation for major cereal, edible oil, pulses, and onion and potato; (ii) APMC reforms with a Central law for One Nation, One Market; and (iii) a Central law to regulate new channels of direct purchase and contract farming outside the APMCs.

Essential Commodities Act reforms

Although the announcement sounds big, farmers may still not get absolute freedom from the ECA. This is because in a country like India, agricultural policies need to balance both producer and consumer interests. Agricultural price policies keep in view the issue of food inflation and food availability. For example, the Minimum Support Prices (MSP) for 24 crops are determined by factoring in both producer and consumer interests, besides other internal and external factors.

Another aspect of this relaxation of the ECA pertains to allowing large private stocks without limits for various users of farm produce such as exporters, processors and traders or value chain participants in general. However, as per the ordinance, the government can still impose stocking restrictions in situations of war, famine, natural calamity and extraordinary price rise, the latter defined as a price rise 100 per cent in case of perishables and 50 per cent in case of non-perishable over the previous one-year period. This reform in the ECA may appear good from the perspective of these players but may not help farmers directly. These players may prefer to stock up their quota in season when prices are low and therefore would not need to buy later when prices firm up. But since farmers mostly sell their produce immediately after harvest, they may end up selling at low prices. If they retain produce for later sale, they may encounter significant risks: prices may not go up as expected; or private traders may not enter the market to purchase. Nevertheless, the option of imposing stock limits for reasons of natural calamity and emergency may still be retained by the Central government.

More importantly, the move to do away with export bans can indirectly benefit farmers by giving them stable access to export markets. Only the fine print of the proposed ECA reform will reveal who among the stakeholders will benefit and to what extent.

APMC reforms

The second aspect of agricultural market reforms relates to the APMC Act and the domain of APMCs. The Central Act mentioned above and brought through an ordinance will permit new marketing channels outside the APMC’s domain. This will effectively undercut the role of APMCs because buyers will be able to deal directly with farmers without going through the APMC. The provisions of the model APMC Act, 2003, and the model APLM Act, 2017, allow buyers to buy directly from farmers or engage them in contract farming. These Acts even provide for parallel private wholesale markets that act as buyer-seller interfaces. The current rules, however, require these activities to be licensed by the local APMC, implying that the APMC will act as a regulatory agency.

One of the oft-stated arguments for market reform is that APMCs have become monopsonies over time because they do not allow competition. This is said to arise from the fact that they are the agencies that permit other players to carry out business within their notified area for the “notified” commodities. Of course, this is necessarily a conflict of interest. How can an agency with a vested interest in farm produce, which is supposed to regulate the market in the notified area, also be expected to provide space to other competing players like private wholesale markets? Why would it permit direct purchase or allow contract farming if that would undermine its very role as buyer or facilitator?

But there is a more important question. Who has patronised these APMC markets for so long? It is none other than the Union government, which, through its agencies such as the Food Corporation of India (FCI) and the Cotton Corporation of India (CCI), procures from these markets and engages commission agents who are paid a handsome commission for facilitating sale/purchase of farm produce.

For example, the FCI pays 2.5 per cent commission to APMC-licensed commission agents (arthiyas) in Punjab under the State APMC Act. Most of the purchase for the Public Distribution System (PDS) or for other public purposes takes place at these APMC mandis. So, instead of finding fault with them and abandoning them in favour of other channels, the state ought to ensure that these markets function properly. State agencies ought to also buy directly from farmers or Farmer Producer Organisations (FPOs) to reduce the dependence on APMC markets.

Constitutional propriety

An argument used against APMC Acts is that they create barriers for inter-State and intra-State trade. The argument is that buyers have to obtain a licence for each APMC market. In fact, most States provide a single unified licence for all APMC markets within their domain.

It is also said that the reforms would spur e-trading of farm produce, enabling better and more competitive price discovery. This kind of e-trading was attempted in Karnataka and some other States. But whether this leads to better price discovery at the State level, the mandi level or even at the e-NAM level is anybody’s guess. Often, very little competition is actually visible for lots of farm produce; many a time there is no e-auction, the produce is auctioned manually and the data entered into the e-portal.

E-NAM has registered traders and farmers on its platform and when produce arrives at an APMC market yard, a sample is drawn and tested for specified quality parameters before being displayed on the e-auction platform. The bidders then bid for that lot. At least three bidders—local or outsiders or a mix—are required for the lot to be sold. Of course, the farmer can still refuse to sell if the price is not attractive enough, but that rarely happens because the costs for a small farmer in carrying farm produce to and from the mandi is like bringing a dead body to a crematorium—it cannot be taken back.

It is also argued that APMC-notified produce can be bought/handled only by licensed entities—traders, brokers, commission agents, warehousepersons, weighpersons, palledars or others operating in the market—all except the producer. Proponents of the dismantling of the APMC system seize this as evidence of the system violating the right of freedom to trade and commerce by Indian citizens or entities. Why should this be so for agricultural products when there are no such restrictions on industrial products or services that can be bought and sold by anyone from anywhere in India? This provision restricts the choice for farmers and those willing to buy their produce and creates a monopsonistic situation, they allege.

Their litany goes on: APMC Acts do not recognise other State traders even if they have their APMC licences; the APMC licence is valid for only one local APMC as per the original APMC Act; APMC rules mandate that purchases be made only within a notified mandi or area; moreover, APMC provisions are more about restrictions than regulation where the latter is good in law, but not the former. In sum, the argument is that APMCs restrict free trade provided under the Constitution’s Article 301 and should be dismantled.

Flawed arguments

But, these arguments for dismantling APMC Acts are themselves not without flaws. First, the transaction between an APMC-licensed trader and an outside trader who buys from this trader is not within the APMC’s purview. The APMC Act only deals with farmer-level sale of produce (first transaction between farmer and buyer directly or through a commission agent), not secondary or tertiary transactions after the initial sale. Further, the model APMC Act, 2003, and the model APLM Act, 2017, provide for a single licence within a State. They also allow direct purchase from farmers and have provisions for any place to be designated as a market yard. Further, e-trading and e-NAM enables any trader from anywhere to bid electronically for the produce in a local mandi. Therefore, it is clear that there is absolutely no need to tamper with the APMC Act or to infringe on the States’ autonomy within a federal framework.

The argument for bringing in a Central trading law is built on the assumption that in the Seventh Schedule of the Constitution, markets and fairs are in the State List (Entry 28) but inter-State trade and commerce are in the Union List (Entry 42). The proposed solution involves the use of Entry 33 of the Concurrent List, which provides for Central legislation overriding State legislation. It is obvious that the government intends to use this Entry to override State legislation in this domain, which is clearly earmarked as being exclusively within the States’ purview.

Entry 26 of the State List has “trade and commerce within the State” subject to the provision of Entry 33 of the Concurrent List. In fact, Entry 27 of the State List includes production, supply and distribution of goods subject to the provisions of Entry 33 of the Concurrent List.

Entry 33 of the Concurrent List reads:

“Trade and Commerce in and the production, supply, and distribution of:

The products of any industry where in the control of such industry by the Union is declared by the Parliament by law to be expedient in the public interest, and imported good of the same kind as such products;

Foodstuffs, including edible oilseeds, and oils;

Cattle fodder, including oil cakes, and other concentrates;

Raw cotton, whether ginned or un-ginned, and cotton seeds and raw jute.”

Here, Entry 33 of the Concurrent List pertains to products of an industry; agriculture is not so, at least until now, by any provisions of policies or laws. The use of the public interest clause of this Entry does not seem relevant. Intra- and inter-State trade in agricultural commodities in general does not fall under that provision. Moreover, there are only a limited number of products specified under this Entry and, therefore, the new law cannot be applied to all agricultural commodities in India unless the Entry itself is amended.

Several major questions arise from the controversial proposal. Can one size fit all in a country like India where there is so much diversity in the nature of market structures and institutions? Some States have a functional APMC infrastructure while others have none. Bihar, for instance, dismantled them in 2006. Has doing away with the APMC regulation helped Bihar? Instead, there is evidence that it is a free-for-all and that private traders have taken over fruit and vegetable trade and set up small markets where farmer sellers are being charged commission. Indeed, there are reports that traders from Bihar are buying farmer produce below the MSP and selling at the MSP in other States such as Punjab and Haryana. So, which Bihari farmer is enjoying the freedom to sell in the absence of APMCs?

Comparison with the U.S.

An example often cited is that of the United States where 23 States have State-level grain laws, with some even having State warehousing Acts, but where the federal government’s warehousing Act overrides State laws. But we also know that there are no auction systems and no mandis for price discovery there. Moreover, there are no market fees or cesses to be paid, although buyers have to pay annual licence fees. Drawing parallels with the U.S. itself is meaningless because the agricultural sector is so different there. For instance, the average size of a farm in the U.S. is 150 times the size of an average Indian farm.

Second, it is one thing to think of one law for the entire country for agricultural trading (though the first transaction at the farmer level cannot be called trading especially when it involves contract farming and, therefore, is still part of agricultural marketing) but quite another to see who will regulate such transactions when they are outside the APMC’s domain which is restricted to its market yards and sub-yards only.

Under the new advice, which is being acted upon via ordinances at the State level, many BJP-ruled States such as Uttar Pradesh, Madhya Pradesh, Haryana and Gujarat have already carried out amendments to the APMC Act. With this, APMCs will not be able to exercise any control over or oversee any transactions outside their market yards.

Farmer interest protection

Sometimes, a case is made on the argument that if buyers and sellers in other product markets do not need any protection for a transaction, why should farmers be protected? One can only hope that we still agree that cars and bags of wheat or crates of tomatoes sell differently and mean different things to Indian sellers!

Another example cited is of the milk sector where there is little regulation even when millions of producers supply milk twice a day, every day, day after day. What is not mentioned is the important influence that cooperatives have played in the milk sector; the overwhelming presence of the cooperatives ensures that other buyers are forced to imitate the practices of the dominant cooperatives in order to survive in the business.

However, it is important to realise that the most immediate competition for an APMC can come from a private wholesale market in the neighbourhood, but that is still being left with the States under the APMC’s domain. Therefore, it is not really about putting the APMCs in place because whatever expansion of direct purchase or contract farming channels may take place, most farmers would still depend on these physical wholesale mandis, whether public or private. The issue of conflict of interest still remains. Why would a public APMC allow a private wholesale market to come up and function under its wings? The issue was left unattended even in the APLM Act, 2017, where contract farming was taken out of the APMC Act’s purview; the Central government has brought in a separate model Contract Farming Act citing these conflicts of interest. This raises concerns about the motive of the proposed reform.

Therefore, the logical questions that ought to be asked are: Do we need more mandis or more deregulation? Would only more mandis do or do we need more functional and effective mandis? Even if one agrees that APMCs are inefficient and ridden with corruption and malpractices, is moving away from them the solution? Should we throw the baby out with the bathwater or should we actually reform the APMCs as they are the last resort for millions of marginal and small farmers who would never be attractive to corporate buyers, individually or perhaps even collectively, through FPOs?

Contract farming: old wine in new bottle

Although the Finance Minister did not use the term “contract farming”, the third announcement pertains to the legal framework for contract farming and direct purchase for fair price, and quality standards and fair transactions.

Entry 7 in the Concurrent List says: “Contracts including partnership, agency, contracts of carriage and other special forms of contracts but not including contracts relating to agricultural land.” But perhaps it is Entry 33 of the Concurrent List that is being used to frame a Central law, Entries 26 and 27 of the State List being subject to it.

The major limitation of the applicability of Entries 26 and 27 is that, as contract farming by definition involves farm production, it cannot be treated simply as a matter of trade and commerce or even production, supply and distribution of goods as the production is with an independent producer and the latter stages are with the contracting agency.

However, if media reports are correct, there is a minimum price guarantee for the farmer in contract arrangement and provision for a higher price if prices go up under the Central contract farming Act. This is against the very concept of contract farming. The contracted price agreed by two parties in a free market environment cannot be tied to a state-promised price or applied to changed market conditions. After all, contract farming is all about reducing and managing market price risks for the contracting parties.

Finally, the ordinances would have implications for the federal structure as many States may see it as an attack on their autonomy unless they are brought on board before such a law is passed. It can also be argued that States can defend the APMC and State contract farming Acts in public interest. One fails to understand why States would not be keen to reform their agricultural markets when they are competing with each other for new investments. Therefore, one needs to ask: why are such far-reaching reforms, which affect the federal structure of the country, being attempted when the country is struggling with the COVID-19 pandemic? Why the unseemly haste? Perhaps, the government realises opportunistically that this is a good time to stealthily push through “reforms” that would in normal times have met with stiff resistance.

Prof. Sukhpal Singh teaches at IIM-Ahmedabad. The views expressed are personal.

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