Of the three ordinances announced by the government that create a legal framework for agricultural markets, the third restricts the powers of the designated mandis — Agricultural Produce Marketing Committees (APMCs).
Along with the amendments to the Essential Commodities Act and a new law on contract farming, the ordinance attempts to free the Indian farmer. It allows farmers to perform inter-state and intra-state transactions freely. It does not do away with APMCs; it gives farmers the ability to sell outside these mandis.
This ordinance is another milestone in the path of freeing up Indian farmers from the licence-permit raj.
What the ordinance allows
While the ordinance on contract farming allows farmers to enter into agreements to produce crops, the ordinance on APMCs governs the sale of crops produced by the farmer without the need for a prior contract. This covers the vast majority of crops grown in India.
Usually, when a farmer sows the crops, there is no fixed buyer. Only after the farmer harvests it does he go looking for a buyer.
The ordinance governs these transactions in three ways:
(i) It limits the operation of APMC laws by states to the market yards;
(ii) It allows private parties to set up online trading platforms for trading in agricultural commodities; and
(iii) It sets up a dispute-resolution mechanism for buyers and farmers to be operated by a sub-divisional magistrate.
The principal feature of the ordinance is that it does away with the requirement for farmers to necessarily use APMCs. So far, while some states exempt farmers from using APMCs, they may still force the farmer to trade with only APMC-licenced traders and pay fees to the APMC.
The ordinance clarifies that when a transaction is done outside the physical limits of an APMC yard, there will be no licencing or fee requirements. Anyone will be able to buy directly from the farmer and not be required to pay any fees to the APMC.
The law also allows private entities to set up electronic trading platforms for farm produce, which can be inter- or intra-state. The central government may specify rules of operation, but there are no licencing requirements to set up markets.
Finally, it sets up a dispute resolution system for buyers and farmers. However, instead of using normal judicial systems, disputes are to be adjudged by executive magistrates in the district.
Impact on farmers
The law frees up farmers from the clutches of APMCs, which have (as we have argued before) become cartels of traders. The law will allow farmers to sell their produce directly to anyone they want. It will increase the competition between buyers and provide better prices to the farmers.
Without a legally mandated intermediary, direct sales to consumers (like restaurants) become possible for farmers. This can reduce the price that consumers pay for food.
The difference between the price that farmers get for their produce and what consumers pay is called the farm-to-fork mark-up. As this Times of India report suggests, this may be as high as 65 per cent for India, compared to as low as 10 per cent for Nordic countries or 25 per cent for a developing country like Indonesia. The law may go a long way in reducing this difference.
The ordinance does not prevent intermediaries from operating. APMCs can continue to operate under state government laws and collect fees for their services. Existing APMCs are entirely exempt from the structure envisaged in the ordinance; it merely introduces another choice for farmers to sell their produce.
Objections that it violates Constitution
The Punjab government and some keen observers (here and here) have objected to the ordinance on the ground that this violates the federal structure of India. The Constitution of India gives powers to regulate markets and fairs to the state legislatures (Entry 28 of the State List of the Seventh Schedule to the Constitution). Therefore, they argue that since the APMCs regulate agricultural markets, the central government should not interfere in them.
This argument is flawed in two ways: The extent of APMC laws and the restrictions they place on inter-state commerce. The states have extended the power of APMCs beyond what is considered reasonable law, regulating markets through measures like market areas and mandated fees. As we have discussed before, a farmer in a district or block has to go to a single APMC. It is analogous to saying an engineer from a district can only work in a licenced software company in the district.
The second restriction is on fees. Even if the farmer does not use any APMC facilities, the farmer or trader must pay APMC fees. It is analogous to cooking one’s meal at home but still be required to pay money to the nearest restaurant.
The core of any market law is freedom. While the market may be regulated, participation in a market has to be free. Forcing people to pay fees or come to a specific market make APMC laws go way beyond a law governing markets and fairs should. The states themselves have been aware of this.
Part XIII of the Constitution of India guarantees freedom of trade and commerce across India. No state can enact laws restricting inter-state commerce without the approval of the President. Most APMC laws, because of their restrictive provisions, impinge on this constitutional freedom. States have approached the President for approval to enact such laws [for example the West Bengal law mentions it has gained the approval of the President under Article 304(b)]. If these laws were mere regulation of markets and fairs, there would have been no need to approach the President.
The Indian farmer has, for too long, been subjected to cruel and unusual laws. This ordinance is a step towards normalising farming in India, and allowing farmers to reap the benefits of freedom that other sectors in India take for granted.
Ila Patnaik is an economist and a professor at the National Institute of Public Finance and Policy.
Shubho Roy is a researcher at the University of Chicago.
Views are personal.