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Wednesday, January 26, 2022

Farm reform: the Achilles’ heel of any Indian government

🔴 Madan Sabnavis writes: With many vested interests at work, moving ahead on the much-needed reforms in agriculture will be difficult

Written by Madan Sabnavis |
Updated: December 29, 2021 9:55:35 am
The withdrawal of the farm laws was certainly a major victory for the protesting farmers, but it does push back reforms that could have helped in commercialising this sector. (Illustration by C R Sasikumar)

The Achilles’ heel of any government in India is implementing reforms in agriculture. The importance of agriculture is known and while we were able to address issues relating to productivity in the 1960s thanks to the Green Revolution, bringing about changes that involve altering the structures is more challenging. This year, three issues that are hard to resolve gathered attention — two of them pertain to debates that have been brewing, while the third is more medium-term in nature.

The withdrawal of the farm laws was certainly a major victory for the protesting farmers, but it does push back reforms that could have helped in commercialising this sector. The reforms per se did not introduce anything that was not happening in pockets of the country already. For instance, selling outside the mandi is already possible where the Model APMC laws have been passed (over a dozen states have passed these laws, though the mandi continues to be the pivot). Also, the operation of eNAM (e-National Agricultural Market) is well afoot, though the volumes are limited to specific commodities and geographies. Yet, a national law that overtly allows farmers to sell their produce outside the mandi has been opposed. This means that farmers will continue to struggle within the ambit of the mandi system where oligopolistic structures prevail and impede fair play. The intermediaries quite clearly are the winners as they will continue to rule the markets.

Similarly, contract farming is something the government batted for. Contract farming does exist today and most of the supermarket groups have backend relations with farmers which ensures that standardised products are available. This holds especially where food products like ketchups, jams, and wafers conform to uniform standards. The same can be seen with fast-food chains, which have tie-ups with farms to get standardised quality of vegetables. Hence, the concept is not new and while it has worked at the micro-level, scaling up is not possible given the limited avenues for sale. There was actually little reason to oppose this idea, but it has led to exaggerated claims of India Inc buying up the entire agricultural sector and then pauperising the same. While there is no logic, the relentless protest finally worked, and the law has been withdrawn.

The other major reversal is the gradual ban on trading in futures of all major farm products. What started off with chana and mustard now covers the entire soya complex besides crude palm oil, moong, paddy and wheat. The message is very clear — futures trading is not going to be given a free hand. Interestingly, the major agri exchange, NCDEX, has been successfully reaching out to farmer producer organisations and getting them on board. This link will now be severed. The decision taken is clearly not backed by economic rationale as the latest CPI and WPI inflation data for pulses shows that there has been low inflation. Chana had inflation of 2.7 per cent while moong which is hardly traded had witnessed a fall of 0.2 per cent. Paddy is not traded while wheat witnesses limited trades. The same holds for crude palm oil. Oils have been a problem with high CPI inflation of nearly 30 per cent, but here the cause is global with edible oil prices increasing sharply by 40 per cent according to the World Bank. Since India imports around 60 per cent of its requirements, the same gets translated here. The present ban which is to last for a year virtually puts the nail in the coffin of futures trading in agri commodities which also means that it will be back to the past for farmers.

The last issue relates to MSP and its linking with the project on direct benefit transfer that the government has been working on. As part of the discourse on the farm laws, it was argued that an attempt was being made to gradually remove the MSP system, which would leave the farmers at the mercy of the private companies. MSP, though announced for all crops, is effective for rice and wheat only where there is a procurement system which then gets tied up with the PDS. The government has been trying to use direct benefit transfers to replace the PDS to ensure that there are no leakages. The problem for the government is that the entire system is convoluted. MSP is tied to procurement, which in turn is tied to the PDS and buffer stocking. MSP is open-ended and FCI ends up procuring large quantities of rice and wheat as the price offered is very attractive. Farmers prefer growing them as it gets them better income, but these two are water-guzzlers and their cultivation lowers the water table. There is no cogent policy for the disposal of surpluses and hence, large stocks are lying with the FCI. To get some idea one can look at some numbers.

The buffer stock norms are fixed for every quarter. The highest that must be held is 41 million tonnes as of July 1, while the lowest is 21 million tonnes as of April 1. As of December 7, 2021, 59 million tonnes were held — almost 38 million tonnes higher than the January 1 norm. The government must at some stage address the issue of procurement and distribution, else this cost will continue to be borne by the budget. Cash transfers, which have been largely successful for LPG, have been a non-starter here because of the system that has to be maintained even if it is inefficient. Ideally, if farmers are brought on the futures platform for selling their grains, the government could pay the option premium to ensure they get a good price. The distribution part can be served by cash transfers where households buy their foodgrains locally. FCI would only have to keep the buffer stocks.

If one looks at the buffer stocks, one realises that these stocks have never been dipped into in the last two decades or so as India produces large quantities of rice and wheat which end up as surpluses in warehouses. Logic demands that buffer stocks be abandoned as the carrying cost is high and there is not any real gain in a world where countries can freely trade in agricultural commodities.

One cannot be sure as to when these reforms will finally be accepted as there do appear to be many vested interest groups at work who will ensure that it will be hard to move forward.

This column first appeared in the print edition on December 29, 2021 under the title ‘The farm stalemate’. The writer is an independent economist and author of Hits & Misses: The Indian Banking Story

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