Modi government doubles down on farm liberalisation
The Union Cabinet on Wednesday announced far-reaching steps to unshackle the country’s farm sector, approving amendments to the six-decade-old Essential Commodities Act and pushing two ordinances, one aimed at freeing up farm trade from all restrictions and the other guaranteeing a legal framework for pre-agreed prices to farmers.
All these steps, which bring the full force of liberalisation to the farm economy, were announced by finance minister Nirmala Sitharaman on May 15 in the second of her series of briefings last month on proposed reforms.
On May 12, Prime Minister Narendra Modi, announced a package worth Rs 20 lakh crore to spur growth.
The economy grew 3.1% in the March quarter, an 11-year-low, pulling down full-year economic growth to 4.2% in the year ended March 31, compared with 6.1% in the previous fiscal.
The Essential Commodities Act 1955 is mainly used to curb inflation by empowering the Union and state governments to dictate quantities traders can store and also restrict the movement of any commodity deemed “essential”. Under the law, the government generally imposes stock limits to discourage hoarding of items such as pulses and vegetables.
The law was handy during the 1980s when India was still a net importer of food items. The country’s increasing food surpluses have made the law archaic.
The country had 100 million tonne of foodgrains in warehouses across India at the end of April. The country’s annual requirement under various welfare programmes is 60 million tonne. India is likely to produce a record 292 million tonne of food grains in 2019-20.
According to official data released on June 2, total vegetable output during 2019-20 stood at 320 million tonne, 3.13% higher than the previous year.
“Farmers have been unable to get better prices due to lack of investment in cold storage, processing and export as the entrepreneurial spirit gets dampened due to hanging sword of Essential Commodities Act,” the government said in a statement on Wednesday.
Since large stocks held by traders can be outlawed under the ECA 1955 anytime, they tend to buy far less than their usual capacity and farmers often suffer huge losses during surplus harvests of perishables.
Such laws have kept poor farmers poor by restricting opportunities to export when global crop prices go up, according to a landmark 2018 study by the Organisation of Economic Cooperation and Development (OECD), a grouping of 36 countries, and the New Delhi-based research firm ICRIER.
“These are major reforms that will ultimately liberalise the farm sector and free it from dated rules. We need to corporatize agriculture and these moves are aimed at getting more investments and reducing dependencies on the government,” said NR Bhanumurthy, a professor at the National Institute of Public Finance and Policy, New Delhi.
The agriculture sector, which supports half of all Indians, hasn’t been generating enough revenues to keep farmers profitable for nearly two decades due to trade restrictions and an obsession with keeping food prices low to avoid inflation, according to the OECD-ICRIER study mentioned above.
The ECA 1955 allowed for trade restrictions specifically designed to keep domestic food inflation low, including frequent ban on exports, a source of high farm income.
The ECA will be amended and cereals, pulses, oilseeds, edible oils, onion and potatoes will be removed from the list of essential commodities. “This will remove fears of private investors of excessive regulatory interference,” an official statement said. Restrictions can only be clamped during “war, famine, extraordinary price rise and natural calamity”, a Cabinet note said.
The government hopes scaling back the ECA 1955 will help drive up investment in cold storages and the food supply chain. Cold storages are refrigerated warehouses that can store perishables for up to six months. Refrigerated old stocks can cool food prices in times of scarcity.
The Cabinet also followed up on Sitharaman’s announcement to free up farm trade by approving ‘The Farming Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020’.
The ordinance will effectively bring the curtains down on the decades-old agricultural produce market committees regulations (APMC) system that regulates buying and selling of farm produce.
APMC regulations require farmers to only sell to licensed middlemen in notified markets, usually in the same area where farmers reside, rather than in an open market, scuttling price discovery.
Ushered in during the 1960s, APMC regulations were meant to protect farmers from distress selling. Over time, these have often acted as cartels and monopolies, evidence suggests.
In December 2010, when onion prices peaked, a probe by the country’s statutory anti-monopoly body, the Competition Commission of India, revealed that one firm accounted for nearly a fifth of the total onion trade for that month at Lasalgoan APMC, Asia’s largest onion market in Maharashtra’s Nashik.
These reforms in “agricultural marketing” have been a long time in the making and various government panels and economists have often argued for changing existing structures of agricultural trade.
The government’s 2017 ‘Doubling of Farmers’ Income’ report had called for greater liberalisation of the farm sector by “removing laws that force farmers to sell to local monopolies”.
The ordinance will pave the way for barrier-free inter-state and intra-state trade of farm goods outside the physical premises of markets notified under APMCs, the Cabinet note said.
The Cabinet also approved ‘The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020’, which will effectively usher new rules for contract farming and futures.
These rules have not yet been notified. “The ordinance will empower farmers for engaging with processors, aggregators, large retailers, exporters etc., on a level playing field without any fear of exploitation,” the Cabinet’s note said.
The ordinance is the first Indian law to shift the risk of farming from farmers to large buyers and aggregators by potentially ushering a legal framework where contract farming will be undertaken at pre-assured prices. This will protect farmers from price crashes.
“There could be initial hiccups though. States might have to be taken on board and issues of risk mitigation have to be addressed,” Bhanumurthy said. “On the whole, these are far-reaching reforms.”