Indian agriculture has historically been afflicted by outdated laws which made sense at a time when markets were closed and there was need for state intervention to ensure that farmers and consumers were protected. This led to the flourishing of intermediaries called adathiyas which led to a close nexus between the APMCs and this class. In the process, the adathiyas who bought the produce from farmers created a mutually beneficial ecosystem with them by providing facilities like inputs, logistics, credit and buyback, thus making it a system which worked well. All transactions hence took place in the traditional mode of sale.
The mandi system has worked well for these many years where farmers brought their produce and sold to the middlemen who in turn would keep the produce moving throughout the country. The mandi collected its fee from the buyer and the system has been efficient. It was argued that given the strong buyers lobby the farmers did not get the best price which explains the wide discrepancy between the mandi price and the retail price. Private parties which wanted to buy the produce had to go through the mandi system or seek the state permission to buy directly from the farmer which was allowed in some territories.
The new farm laws seek to change the way marketing can be done. It allows the buyer and seller to meet anywhere which can be outside the mandi. There are no taxes levied and hence the mandi fee is out if sold outside. The buyer and seller can transact at a mutually agreed price. This is actually a win-win situation if it works well as there is no compulsion to sell outside the mandi and the farmer can choose the point of sale and the price. Hence if the farmer believes that the mandi price is better, he can sell in the traditional mode and need not go outside. Nobody should complain against such a system as it provides freedom to both sides.
But clearly there are lobbies which don’t want this change. The mandi for instance will lose its hegemony if all transactions take place outside what is an opaque system that is ruled by the select set of buyers. They have a legitimate argument that they need money to run the facility and if the farmers sell outside, the system will collapse. The mandi has a gamut of such facilities like weighing, assaying, civic facilities, storage etc. which will be hard to maintain.
Further, this gives scope for opinions to diverge politically. The stance taken is that once this happens, the mandis will close and soon the buyers, which would be the private players, will start giving a lower price and that the farmers will suffer. This is a farfetched argument because if mandis provide the right price or better price, farmers will not move away from the existing system. In fact, competition will ensure the optimal solution. Therefore, to conclude thus would be erroneous. The government has simultaneously assured the farmers that the MSP system will not be withdrawn as this has been a concern with farmers.
The second law on contract farming follows from the first one. The reforms now allow such contracts which again are optional and not binding on farmers. There is a strong reason to believe that what is missing in India’s agricultural strength is the commercialization aspect. For this to happen it is necessary to have more private sector involvement which can happen if contract farming is universal. Such a situation often replicates the adathiyas system. A company walks in and offers the farmers a choice to sell the product to it with a guarantee on price. In return the farmers are offered inputs and probably credit too, so that it is an end-to-end solution. The company gains in terms of getting a standardised product from a fixed source while the farmers are better off as they will enter this contract only in case the economics makes sense. These contracts would be drafted and signed and hence becomes legally binding.
Can there be any objection? It is argued that the farmers will get a bad deal. To begin with the corporates will give good prices and when the mandis disappear will gradually exploit the farmers. This again is not valid as it has not happened in other sectors where corporates buy from SMEs. This is a weak argument painting India Inc as being exploitative which is not the case. Interestingly in the past corporates have had the experience of farmers reneging on contracts and not able to do anything as it is hard to sue small farmers in a court.
Therefore, both these reforms are welcome, and the objections are extremely hypothetical as the government has only opened the doors for alternatives and not made anything mandatory.
The third reform is more of repealing an Act which made sense at a time when there were shortages in the country. This is the Essential Commodities Act. This Act puts restrictions on the holding of agri products in the form of stock limits at both the wholesale and retail levels. The idea is good for a deficit country but for India this sounds quite antiquated. The problem is that there is a subtle difference between stocking a product and hoarding the same. As most crops are grown once a year and made available for 12 months it must be held by the intermediaries. Therefore, the issue becomes tricky and there has been a tendency for them to be penalised. By doing away with this law, the market becomes more orderly and traders can conduct their business without fear of becoming the subject of legal action.
While all the reforms sound positive for the farming community, one must be measured in expectations as while the doors have been opened, it would not be the case of all farmers using this route. The existing mandi system is entrenched as has been said in the beginning; and moving to new systems is always a challenge. But with corporate India having an option, one can expect more initiatives to be taken which will gradually help in commercialisation of agriculture.
The author is Chief Economist, CARE Ratings.