Analysing the farm laws impasse from a risk management perspective

The farm laws protests that have occupied centre-stage during the past three months have reached a deadlock with the Centre prepared to discuss every clause in the laws but intransigent farmer unions demanding a repeal of the laws before any negotiations.

While most experts have lauded the intent and the targeted benefits, many have questioned the mode of pushing through the laws without wide consultations necessary in a large democracy, that has led to the impasse.

This presents a classic risk management situation; ‘Implementing farm laws’ is fraught with risks perceived by farmers while ‘Not implementing Farm laws’ presents economic risks to the Centre. Qualitative analysis of risks entails identifying risks, risk drivers and risk response mechanisms, be it risk mitigation, risk acceptance, risk avoidance or risk transfer.

Risk Analysis – Farmers perspective

Risks perceived by farmers’ emanate from: (i) APMC Laws (ii) Contract farming laws (iii) Minimum Support Price (MSP) (iv) Disclosing trader’s PAN card details.

APMC and Contract farming laws: India has 6,630 APMCs (mandis) regulated by respective State governments under the APMC Act with one mandi serving an area of 496 sq. km. Stocks are procured by APMCs at MSP. The new laws mandate establishing private agrimarkets to provide proximity, flexibility, freedom of choice and potential for higher price realisation to farmers.

MahaFPC, (the umbrella body of farmer producing companies in Maharashtra) has made ₹10 crores in four districts from trade outside mandis; farmers at Harda in Madhya Pradesh have sold soyabean at ₹4,266 per quintal against an MSP of ₹3,880 a quintal; in Tamil Nadu, coconut farmers were able to sell at prices higher than the MSP of ₹2,700 a quintal of the de-husked variety.

Farmers’ apprehension that APMC laws may lead to dismantling of mandis has in a sense already been mitigated by the Centre permitting: (a) state governments to frame their own tax structure for mandis (b) APMCs to borrow from Agriculture Infrastructure Fund; and (c) linkage of 1,000 mandis to the e- national Agricultural market.

Yet, farmers’ apprehension that the tax free structure of private agrimarkets may lead to trade shifting to the latter sounding the death knell of APMCs needs to be addressed by respective State governments.

Contract farming entails purchase contract finalisation before the sowing season enabling mitigation of income risk through the assurance of a buyer at a predetermined price. Much before farm laws were introduced, ITC through their e-Choupal network initiated the practice of direct purchase from farmers by eliminating middlemen resulting in a win-win situation.

Risk safeguards in the laws include: (a) Farmer Producer Organisations (FPOs) in the definition of farmer; (b) option of delivering at the farm gate with transport, storage and delivery to buyer’s account.

However, since contracts are subject to quality specifications as also termination clauses, unscrupulous corporate buyers, in collusion with grain traders could dictate prices and farmers may then have no fall-back option without the MSP system for protection; hence the demand for making MSP as law.

MSP: Farmers’ fear of possible withdrawal of MSP leading to loss of financial support if market prices fall below production cost is real. In this regard, the average subsidy paid to a farmer in India is only ₹15,000 against ₹7 lakh ($10,000) in the US and ₹28.3 lakh (£28,300) in the UK.

While one can understand the Centre’s reluctance in not introducing MSP as law as they are signatory to WTO for gradual subsidy withdrawals, considering the inherent external risks (rainfall, floods, drought,) that challenge farming viability, and that farming the world over requires government support for survival, a viable legal remedy may have to be worked out.

On the other hand, procurement through the PDS at MSP is largely confined to wheat and paddy “what the farmer produces” and not “what the consumer needs”.

Therefore, the FCI has excess grain stocks to the tune of 50 million tons at an economic cost of ₹1,50,000 crore. Further, data shows that because of the time lag between harvest and the procurement process, only the better off farmers have the working capital to meet operating costs before selling at MSP to the mandi; other farmers sell their produce to grain merchants who also finance them and remunerate them at rates much lower than MSP.

Hence, currently MSP benefits only 6 per cent of farmers in those States where the procurement machinery is robust largely in Punjab, Haryana and of late Madhya Pradesh. Thus, legally guaranteed MSP will benefit the richer farmers and widen rural inequality.

In order to overcome the above contradictions and risk perceptions, the Centre should formulate a comprehensive risk mitigation policy that encompasses: (a) expanding/incentivising MSP purchases to include maize, pulses, millets, oilseeds; (b) reducing the procurement quantities of paddy and wheat; (c) intervention by agencies like National Agricultural Cooperative Marketing Federation of India (NAFED) to shore up low prices through purchases; and (d) government paying the difference between MSP and the lower rate at which farmers sell their crops like in the Bhavantar Bhugtan Yojana implemented in Madhya Pradesh for eight crops, mainly oilseeds, or the Bhavantar Bharpai Yojana of Haryana particularly for vegetables, or transfer the price difference directly through the PM Kisan scheme.

Disclosing PAN card details of trader: To eliminate the scope for cash transactions and bring transparency, a risk avoidance mechanism of furnishing PAN card number by the trader to whom farmers’ sell their produce has been introduced, since every transaction will be captured by the Income Tax authorities. The Centre’s risk response is excellent and is in keeping with the drive towards transparency. Try as they might, farmers would have to accept this risk.

Risk Analysis — Government perspective

Three major risks that are at stake are Environmental pollution, Wastages and Ground water depletion.

Environmental pollution: Blatant burning of crop residue reportedly, annually, generates 140 million tonnes (mt) of CO2, 12 mt of noxious gases and 1.2 mt of particulate matter, chokes 50 million people, destroys nitrogen and carbon potential of soil and kills microflora and fauna and therefore the risk mitigator of penalties for burning crop residue is justified.

However, the Centre has assured withdrawal (understandably to get a ‘buy in’ for negotiations) of penalties. From a risk mitigation and sustainability perspective, the Centre may subsidise equipment that reduce greenhouse gases and incentivise less water intensive crops.

Wastages: Agricultural supply chains are of the ‘push’ type with no flexibility to respond to customer demand, as crop growing cycle is long and when the crop is ready, demand pattern might have changed. Hence, farmers tend to overproduce. Delivering food grains to the end consumer involves several intermediaries/stages and a silo approach has resulted in various stakeholders not collaborating to reduce wastage at each stage. Besides, the farmer cannot determine the price of his produce.

Supply chain issues include lack of warehousing capacity, poor storage conditions, damage during transportation, and exposure to elements of nature. To mitigate the risk of supply chain wastages of 1 per cent valued at ₹4,000 crore in the existing FCI controlled Public Distribution system (PDS) of food grains, the farm laws permit entry of private players for storage.

Further, the Centre should mandate Blockchain technology infrastructure since they permit peer-to- peer transactions without intermediaries like bank or middlemen, to achieve: (i) transaction cost reduction (ii) lower storage losses (iii) faster delivery (iv) new customer acquisition based on trust (v) real-time payment that will greatly help small farmers.

Ground water depletion: This is in the range of 122–199 billion cubic metres due to frequent pumping from the ground for water intensive paddy and wheat, (aided by subsidies on electricity) without waiting for its replenishment. Risk mitigators could include disincentives for excess production of wheat and paddy and incentives for diversification to less water intensive crops like oilseeds.

The Centre’s major objective is to double annual farm incomes that currently average a meagre ₹77,124 per household, by 2022. For this to fructify, implementation of farm reforms is necessary.

The Centre has designed adequate safeguards to mitigate most of the risks. But the risk of farmer exploitation by corporates and skewed product-mix of foodgrains needs to be addressed and the Centre may have to modify the laws by including suitable safeguards, to ensure that all farmers get the benefit of MSP and the raison d’etre of reforms are achieved.

The writer is Professor Emeritus, NMIMS, Bangalore