Will farmers get a better deal after recent reforms?
India has moved from a food-scarce economy to a net exporter of food. However, food production does not guarantee food security. Affordability is what matters.
The government has announced major agricultural policy changes as part of the economic package it has unveiled in the wake of the Covid-19 pandemic. These include deregulation of farm foods from the Essential Commodities Act (ECA). Farmers have also been allowed to sell their produce outside government-regulated markets, or Agricultural Produce Market Committees (APMCs).
The move has been celebrated by important voices. The crux of such arguments is twofold. One, laws such as ECA are irrelevant now because we are no longer a food-scarce economy. And two, it will allow farmers greater freedom in selling their produce. This is expected to guarantee better prices. Both these arguments have problems.
India has moved from a food-scarce economy to a net exporter of food. However, food production does not guarantee food security. Affordability is what matters. In the early years of economic reforms, India thought affordability will not be a problem. A universal Public Distribution System (PDS) was diluted into a targeted programme. This was reversed to enact the National Food Security Act (NFSA) in 2013. The NFSA covers two-thirds of the population as beneficiaries. It was passed by a Congress-led government and continues to be implemented by the Narendra Modi government. This bipartisanship is driven more by realpolitik than ideology. It is a recognition of the fact that a large part of our population still cannot afford food from the free market. In case of cereals such as rice and wheat, the government directly procures and then provides subsidised food. For other important crops, it uses a mix of policies including price and export controls and, sometimes, even usurping marketing activities when prices rise.
Any blanket deregulation of agricultural markets requires an end to these policy interventions. In normal times, this will go unnoticed. But what happens when prices rise? Will a government cite its commitment to reforms and refuse to intervene when onions sell for more than Rs 100/Kg like they were a few months ago? That, in a price- sensitive political economy, will have adverse political and electoral consequences.
A story in The Indian Express cites NITI Aayog’s Ramesh Chand to suggest that the latest deregulation will be rolled back in times of a price hike. “Such price increases will have to be at least 100% year-on-year at an all-India average retail level for vegetables (onion and potato) and 50% in the case of non-perishables (grains, oilseeds, etc)”, he said.
The Centre for Monitoring Indian Economy’s database gives monthly all-India retail prices for essential commodities since 2010. Inflation in potato, onion and tomato prices breached the 100% threshold 21 times between January 2011 and April 2020. For non-perishables including 15 items of cereals, pulses, edible oil and sugar, inflation breached the 50% barrier 48 times during this period. So, the government would have had to revoke this reform 69 times in the past 120 months, according to this suggestion. This cannot be the basis for sustainable reform.
Let’s look at the question of farmers not being allowed to sell to buyers of their choice. The claims of Indian farmers being caught in the clutches of a single buyer in the form of APMCs is not supported by data. The National Sample Survey Office released a report on Key Indicators of Situation of Agricultural Households in India. It is based on a survey between January-December 2013. It gives a break-up of farmers reporting sales to different buyers. For 31 crops sold between July 2012 and June 2013, local private traders were the single biggest buyers for 29 crops. Mandis, not all of which would be APMCs, were the biggest buyers in just two crops; arhar in the kharif season and gram in the rabi season. Except in soybean, the share of farmers selling their crops to Mandis did not even exceed 25% for any crop. These figures tell us the true picture of India’s agricultural markets. The private sector has already surged ahead of the APMCs without any reforms. And the farmer is well aware of this change.
Does this mean that farmers will get better prices? Not necessarily. The number of buyers is not the only determinant of pricing power. Bargaining power also matters. This is where Indian farmers face their biggest handicap. Abolition of APMCs could make way for bigger corporate penetration in India’s food markets. But this does not guarantee that farmers will get a better deal. While such corporate players could be competitors at the macro level, thanks to their deeper pockets, they might be even bigger and stronger monopsonists at the local level.
This makes the worst possible outcome entirely possible. The farmers might be left on their own to deal with perhaps a bigger monopsonist than they were faced with when the prices are low. And, when they do go up, the government will bring back controls in the name of food security.