The Farmers Bills 2020: The Cost of Liberalization

Esha Goyal

Screenshot 2020-12-10 173427

Governance may only happen with the trust, and in the interests of the governed. The Farmer Bills are no exceptions.

The farmers’ protests currently happening in Delhi and other parts of the country are the result of the new farm laws enacted by the government. This article aims to explain how the new farm laws – the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 (hereinafter ‘FTPC Act’), the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, and the Essential Commodities (Amendment) Act, 2020 – take away state protection and leave farmers at the whims of the free market, leaving them susceptible to being exploited by private players which now have authority to deal with farmers directly. It places specific provisions of these legislations in context to shed some light on the ongoing debate.


Weakening State Support

The main reasons for the ongoing protests are the severe financial drawbacks that will be faced by farmers if the new Acts replace the older Mandi system. In the old Agricultural Produce Market Committee (APMC) era, the State APMC was responsible for setting up Mandis in certain geographical areas in a state, where farmers could sell their produce through an auction, and theoretically, receive a fair value for the same. Add in the MSP(Minimum Support Price), wherein the State would buy certain crops at a notified minimum price, and the farmer could be reasonably sure that his produce would be sold at a decent value. The new FTPC Act supersedes the old APMC system (section 14) and creates an electronic trading and transaction platform which allows free trade of farmers’ produce (section 3) and does away with all the restrictions, including the APMC taxes (section 6). Prima facie, this appears to increase the market size and lower transaction costs since the same exchange can now take place with anyone, without an additional tax, thus doing away with the monopsony of the Mandi. Why then, are the farmers protesting?

One reason behind the protests is the perceived weakening of the MSP system by the new laws. The Minimum Support Price was started during the Green Revolution to incentivize the production of wheat and paddy, and has continued since, leading a significant number of farmers to take up cultivation of these crops and rely on MSP for remuneration, which is often higher and more reliable than the market price. Since Punjab and Haryana supply a significant amount of the government procurement, any change in the MSP structure hits these states the hardest. In addition, the taxes earned by the sale through Mandis are often reinvested in the Mandis itself, which provides infrastructure for non-MSP crops as well. Given the importance of Mandis in the agricultural economy of these states, the weakening of the Mandi structure by allowing sale to private individuals and firms not only reduces the revenue of the state governments but also raises doubts that private firms, being profit driven, would choose to bargain to buy crops at a lower, more competitive price, placing farmers from Haryana and Punjab in direct competition with other states.

Further, though APMC taxes may have been circumvented, what has been overlooked is that the real transaction costs of transportation of produce to the buyer still has to be borne by the farmer, who may now be selling at a lower price. The problem with the existing Mandi system was not the concept as much as the lack of infrastructure and an insufficient number of mandis to make it accessible to the farmers. Unless private corporations make substantial efforts to reach the small farmers, the argument that the farmer will be better off overlooks the fact that the produce will in most cases be sold to the village trader as before, who will then make it available to the market, whether a Mandi or a private purchaser, keeping the gains (if any) out of the hands of the farmer.

The second argument for doing away with the Mandi-MSP system is to bring in economic efficiency through diversification of crops and avoid overproduction of wheat and rice just due to the MSP incentive. The economic logic that a free market without government intervention would reach an equilibrium where the supply for all crops would match the demand seems to be sound, but ignores the human cost of this drastic shift in production. The Acts have retrospective application (Section 1(2)), which means that farmers do not have enough time to change their pattern of production in order to survive the change in law. Though government procurement will not suddenly dry up, the change in the Mandi structure indicates that the government would not buy much more than the official reserve required, as it was doing till now. Given that a substantial amount of produce will then be sold through the new platform, the chances of prices fluctuating and dropping are much higher.


Perceived Impact

India’s population is largely agrarian, with a majority of agriculture being carried out in small landholdings. In real terms, MSPs have been at a decadal low while costs associated with agriculture have continued to rise. This diminishing income is further hit by many other shocks to farmers such as Demonetisation in 2016 and Covid-19, affecting financial liquidity, distribution and sale of crops. These changes strike a severe blow to farmers’ incomes, not to mention the compounded effects of contract farming and private hoarding, which have also been legalized by the new laws (Section 3 read with Section 7(2) of the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020).

The farm bills can nevertheless be defended on the ground that the MSP system will prevail and only the monopsonic Mandis are being removed. This would be wrong for two reasons. First, Mandis were not the only buyers of farm produce in the market anymore and as many as 19 states had already allowed sale outside the Mandis. What the new law does do, however, is replace the Mandi with oligopsonic corporations as the main buyers, which in a free market setting would be the price makers, instead of the price takers, since a large number of farmers are too small to have any real bargaining power individually..

Second, one of the main demands of the protest is for a declaration by the government that the MSP will remain. This is because though the Acts do not explicitly do away with it, and a press note released by the government explicitly states that MSP will continue, the Essential Commodities (Amendment) Act, 2020 amends Section 3 of the Essential Commodities Act, 1955 and does away with treating many agricultural commodities as essential. This, in addition to the weakened Mandi Structure seems to indicate that the time left for public procurement is also limited since the new Acts push for more sales to take place outside the Mandi to private players, instead of the government.


Lessons for the future

The present protests are also glaring examples of the trust deficit between the government and the people. This trust could have been built by having a pre-legislative consultation with the farmers, instead of passing these Acts as ordinances in the first instance and then rushing them them through the parliament. Such trusts building would have saved the huge social costs of the mass protests.  Any genuine agricultural reforms also need to include actual investment and provision of safety nets, to protect the interests of the most vulnerable stakeholders i.e. – the farmers.

There is a need for investing in physical infrastructure and institutional capability to actually implement these changes. Faceless online transactions sound utopian, and are probably more economically efficient than a physical marketplace. However, it would be foolish to assume that sale of agricultural produce which had happened till now through known contacts in a physical market can suddenly go online. Even from the buyer’s perspective, some inspection of these perishable goods would be preferred. The state would have to invest in providing infrastructure to facilitate sales, as well as set up and implement the dispute resolution system proposed under Section 14 of the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020.

Given a tradeoff between future efficiency and present impoverishment of farmers, instead of turning the whole system on its head at once, the agricultural reforms if necessary, should have been implemented gradually, with adequate provision of safety nets for farmers. This would have allowed for transition, for farmers to gradually adjust into the new system, while also allowing the potential problems of a privatized agricultural procurement system to come to light.


Conclusion

The talks between the farmers and the government have not resulted in a definite conclusion yet. While it may be argued that these reforms would prove effective and efficient in the long run, Keynes’ himself has famously said, “In the long run we are all dead.”  Rash changes in policy may seem good in theory, but the impacts on the lives and livelihoods of people cannot be disregarded. The real policy-making lies in mitigating such impacts on vulnerable stakeholders and building trust within them.


The author is a III year BA.LLB (Hons.) student at NLSIU, Bangalore.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s