1991 reforms for India, 2020 reforms for Bharat

Nearly three decades ago, India set out to radically improve the lives of its poorest citizens. Thanks in large part to the liberalisation, privatisation and globalisation reforms in 1991, the country has managed to lift up 300 million Indians out of poverty. The President has given his ascent on the three farm Bills: Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020 and Essential Commodities (Amendment) Bill, 2020.

Supporters say that with the Bills’ passage, 2020 is to Bharat, the rural India, what 1991 was for India. But is it?

The tragedy of Indian agriculture

India’s 90 million farmer families face significant challenges. Despite agriculture being highly regulated by the government, two out of every three families have average annual farm losses of about ₹500. Only one out of every 15 farmers has technical knowledge of agri business and only one out of every two farmers has access to bank loans for farming. The situation is so severe that one farmer commits suicide in India every 42 minutes.

While the common argument is that the government should regulate more to protect farmer families, the numbers tell us that whatever regulations the government already has in place aren’t working.

So, what is the focus of the new Bills?

Sell anywhere to anyone at any price

Reforms : Earlier, a turmeric farmer from, say, Ankapur Village of Telangana could legally sell her produce only in the Nizamabad Agricultural Produce Market Committee (APMC), a government regulated agri market. Traders facilitate such transactions, charging their commission and mandi tax.

In reality though, almost 65 per cent of the produce was sold illegally outside the APMC. With the reform Bill, farmers have the extra option to legally sell their produce anywhere in the country, to any party. So, a turmeric farmer could sell her produce to BigBasket in Delhi for example, without any mandi tax or trader commission, at a mutually agreed upon price. The farmer and the outside party can contract with ease.

Concerns : First, the Bill does not specify that the contract price should be above the Minimum Support Price (MSP) declared by the government. It is feared that without mandating that contract prices be above the MSP, APMCs will slowly be priced out as farmer families choose to contract with third parties. Traders may become irrelevant as agri-trading companies might set up their own markets.

Governments will lose mandi tax, which is a major source of revenue for States like Punjab and Haryana. Bihar failed in 2006 when APMCs were dismantled, resulting in farmers facing challenges in selling their produce at good price. So, it is argued by those against the Bills that MSP be guaranteed and mandi tax levied even for non-APMC sales.

Second, according to the Bill, companies are not required to have a written contract with the farmer, making it difficult for farmers to prove terms. Coupled with the fact that there is no required MSP and that contracts need not be registered with the government, farmers will be in a weak position to fight corporations, if anything goes wrong.

Private business

Reforms : Since the passage of the Essential Commodities Act, the government has heavily regulated the role of agri-business companies and traders in hoarding the produce. Despite India losing a third of the agri produce post-harvest, businesses found it difficult to devise solutions to decrease that loss, mainly due to the regulation.

Governments had restrictions on hoarding on food commodities and could seize any excess stocks maintained by the traders. Now with the new Bill, such regulation is diluted. Besides farmers and farmer collectives, agri-businesses and traders can manage post-harvest facilities without such interference by the government.

Concerns : The reform Bill may result in corporations dominating the agri business. Farmers may earn less and consumers may pay more due to private hoarding. Some critics argue that the government should build large storages and processing capacities to prevent corporate takeover.

We believe that:

MSP breeds incentives among farmers to grow MSP supported paddy and wheat even in water scarce regions like Punjab. The government has an obligation to buy at a minimum price whatever is sold to them. Then the grains are hoarded in the Food Corporation of India warehouses, where more than a third of the stock gets wasted.

The government should allow markets to determine the prices based on demand and supply, without needless interference. But MSP should continue in its current form, till markets show us that they can deliver results for the farmers, even without the MSP.

APMCs are a perfect example of cronyism. In our work at Kheyti, we learned that farmers’ most preferred buyer is supermarket chains, not APMCs. Traders are unhappy with this reform because the creation of alternative markets means their political connections are no longer relevant. For APMCs to stay relevant, they should become more competitive and transparent. They should add value to the farmer, instead of merely resorting to coercion. Start-ups like Ninjacart and Waycool are already proving a win-win model by reaching tens of thousands of horticulture farmers

State governments , particularly in Punjab and Haryana, are unhappy losing mandi tax. Imposing such tax on non- mandi transactions goes against the spirit of the regulation.

The agri reforms represent a fundamental change in the philosophy from socialistic ideology of problem solving to the one that is neo-liberal. Chakravarthi Rajagopalachari, who was called the ‘wisest man in India’ and ‘Gandhi’s Conscience Keeper’, always believed in maximum individual freedom and minimum interference by the state. These reforms are largely Gandhian. Real freedom includes freedom from government interference. These reforms are a step in that direction. As the government lifts restrictions on farmer families, those farmers will have more options.

In the best case scenario, these reforms will allow farmers to get good prices for their produce at the farm gate. Farm advisories will create better crop planning and troubleshooting. Climate protected farming will reduce the business risk of agriculture. Reduced business risk will encourage the insurers to insure crops.

When inflows become more reliable, farm loans can become more accessible. Food may travel fewer kilometres before reaching the point of consumption. Traceability of produce can become a reality. The consumers and the planet will be happy. Farming will become profitable. Farmers will be happy. So, it will be a win-win proposition for all.

Key dimensions

For the reforms to really change the lives of farmers for better, five key dimensions require consideration.

Universal basic income through direct benefit transfer mode : The free-market may increase the market-risk for farmer families in the short-term. Therefore, the government should double DBT from the current level of ₹70,000 crore. Farmers need cash in their hands for consumption. As most of them currently lose money from farming, a reliable source of income can give them more choice to continue or not continue farming based on their access to resources and alternatives.

By reducing the number of people depending on farming, people may choose to move into non-farm activities like animal husbandry, agri-processing or some other lucrative job. Such DBT can ensure that farmers become more resilient to withstand the demand-supply shocks.

E-Nam to become a ‘Unified Payment Interface’ equivalent for agri markets : The Indian payments ecosystem became seamless when National Payments Corporation of India created UPI. It connects all banks and makes interoperability easy. Banks sit on the top of UPI. Then came the innovators like Google Pay, PhonePe and others, who really disrupted the payments market, making digital payments a reality even for street hawkers and panipuri sellers.

National Agricultural Market, eNAM, should take learnings from UPI and provide a seamless application programming interface (API) for innovators, generally agri start-ups and businesses. Such innovators will in turn build solutions that reach the farmers and bridge the information gap. The problem is real. The opportunity is real. The right approach can help markets leapfrog. A special task force should be set up under the leadership of technology policy experts like Nandan Nilekani.

Feedback loop : APMCs were not meant to create cronyism through traders. The nationalisation of banks was not intended to hamper growth. Yet, both of those outcomes came to pass. Periodically, to ensure that the reforms feed into a constructive feedback loop that actually benefits farmers, important tough questions should be asked. Is the objective of benefit to the farmers achieved? Do the benefits outweigh the costs?

Maybe, the ideal solution is five iterations away from today. The golden rule is to ensure that such iterations make the rules of the game more incentive aligned for all the actors. After all, people respond to their incentives. Policy impact evaluation experts like JPal may be engaged for this purpose.

Policy predictability : As the reforms aim to reduce the scope for government intervention, it is important to have predictability and consistency in this philosophy. Public choice theory steers us away from the optimism about the government. It shows us that the root cause to many problems is the poor government capacity. It often craves for arbitrary power. Government’s interference in onion pricing is an example of that.

Areas requiring government intervention like X and Y should focus on removing arbitrary powers that can be misused to harass the private individual. Often, such abuse of power can be the enemy of reforms. If the government exercises arbitrary power in a coercive manner, the private sector will speak with their money by reducing the investments. It indeed breaks the trust, which is a catalyst for reforms.

Farmer forum for dispute resolution: Contract farming will be a transaction between a weak party called a farmer and a strong party called the corporation. Farmers should not be coerced to sell to anyone. If one of the parties doesn’t honour the terms, the other party requires a resolution mechanism. Farmers need a ‘consumer forum’ equivalent at a district or block level. This should be a ‘super fast track’ judicial authority. Without this, all the good intentions of the market-based model can pave the way for hell. A team of retired judges in each State can possibly lead this.

Despite all the growth and advancement in the past thirty years, India still has about 84 million poor, the majority being rural poor. If we combine the power of markets and technology, we have a unique opportunity to change the lives of India’s poor for the better. The reforms may not be the perfect solution, but they are better than the status quo . The Bill is a starting point. With focussed attention on the five dimensions laid out above, the government can sow the seeds of prosperity for the smallholder farmers of Bharat.

The writers are Co-founders, Kheyti