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Data shows govt farm laws much needed, will work better with warehouses and transport reforms

Are the farmer protests bursts of emotion or are they rooted in logic? Here’s what the evidence shows.

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The violence that took place on Republic Day in the name of ‘farmers’ protests’ is deeply troubling. What is more troubling is that it occurred despite the Supreme Court ruling that said the implementation of the farm laws should be stayed. The Supreme Court, in its order, had lauded the peaceful protests. It had also observed that the legal representation of some of the farmer organisations had assured that they would not disrupt the Republic Day celebrations because “at least one member of the family of each of the farmers from Punjab is in the Army”. In the 1978 Prag Ice case, the Supreme Court had set a precedent that it is “extremely hazardous for Courts to enter the sphere of experimentation in matters of economic policy which must be left to the Government of the day”. And yet, in the case of the farm laws, the Supreme Court order was swayed by the loudest voices in the hopes of pacifying the situation and overcoming the impasse.

However, despite consultations and concessions, the protesters are still insistent on a complete repeal of the three farm laws that, first, allow farmers to trade anywhere in the country; second, exempt most commodities from stock holding limits and government control; and third, allow farmers to enter into long-term contracts at pre-agreed prices with agri-businesses. Perhaps more than any other time in recent history, it is important to analyse whether the current farmer protests are primarily an outburst of fear and emotions, or grounded in logical arguments based on data and evidence. In this article, we attempt to lay out facts and figures to understand to what extent the protests are justified.

Also read: What explains lower allocation under Modi’s flagship scheme for farmers PM-Kisan?

What the data shows

The unflinching support for the status-quo from the protesting farmers warrants two important questions: Has the existing eco-system for trading agricultural produce benefitted farmers? And, can the reforms potentially benefit farmers?

Unfortunately, to the first question, data shows that the current system of agricultural marketing has not helped farmers much. The average monthly income per farm household is a meagre Rs 6,426 and most smallholder farmers are heavily indebted. Further, despite being a major producer and exporter of many crops, India’s farm productivity is among the lowest in the world. In addition, due to the presence of multiple intermediaries in the agri-supply chain, margins for farmers are very small and they only receive a fraction of the retail price paid by the consumers. In other words, compared to their peers across the globe, farmers suffer both during the production and during the trade of the agricultural produce.

While intended to protect farmers’ welfare, the Agricultural Produce Market Committee (APMC) regulations and the resulting market structure has led to poor outcomes for farmers because of several reasons. First, access is a key challenge since farmers’ sale channels are severely restricted in the current set-up. Estimates suggest that there are only 16 mandis per million-hectare net cropped area in Uttar Pradesh. Farmers in most states are forced to sell their produce at throw-away prices to local intermediaries due to logistical challenges and sparse network of regional mandis. Second, sustaining fair trade practices in the mandis is challenging since most of them are dominated by few powerful traders, have high barriers to entry, and thus suffer from limited competition. Instances of bid manipulation and collusion have significantly hurt sales prices for farmers in many cases. It was estimated that wheat prices in major APMC mandis were 2-4 per cent lower than a competitive market due to collusive behavior by the traders. Finally, smallholder farmers have very limited bargaining power and are at the mercy of commission agents and traders for financial credit, pricing, and storage of goods. Survey findings commissioned by the Reserve Bank of India (RBI) reveal that commissions and mandi charges comprise a major share of the costs borne by farmers. Even government intervention aimed at protecting farmers’ interests has not been uniformly successful across the country due to these market inefficiencies. For instance, 68 per cent of all the crops sold in the Rabi season were sold at prices significantly below the minimum support price (MSP) in the mandis.

Also read: Can India actually afford MSP for farmers? It’s a question of political will

Can the three laws improve farmers’ livelihoods? 

The answer to this lies in a careful analysis of past government initiatives. The first reform, The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, aims to unify agri-markets across the country by allowing farmers and traders to trade freely outside APMC yards and sell directly to outside traders and consumers. Online agri-platforms, such as Unified Market Platform (UMP) in Karnataka and eNAM in other states, were also launched with a similar objective of integrating all mandis through a unified digital platform, thereby increasing transparency and competition in traditional mandis. An empirical study on the impact of UMP in Karnataka found a significant increase (3-5 per cent) in prices for certain commodities. Further, after UMP’s launch, trader participation across markets increased significantly and led to increased competition, thereby benefitting farmers. A government study that examined direct selling of fruits and vegetables by farmers to consumers — Uzhavar Sandhai in Tamil Nadu and Rythu Bazaar in Andhra Pradesh — found that farmers get 15-40 per cent more than wholesale prices, and consumers pay 15-30 per cent less than retail prices.

The second reform, The Essential Commodities (Amendment) Act, aims to incentivise the entry of private agri-businesses in storage and management by removing most commodities from the Essential Commodities Act. Protesters argue that in the absence of strict government control, prices of essential commodities might significantly increase due to increased hoarding and transfer of market control to private players. However, it is pertinent to note that the current policies in this regard have not been particularly effective. The absence of a carefully planned procurement and release strategy has led to a serious loss of revenue and wastage of food. From 1997-2007 alone, 1.83 lack tonnes (LT) of wheat, 6.33 LT of rice, and 2.20 LT of paddy were wasted because of spoilage. Despite maintaining large buffer stocks, the government’s inventory release policies have not been successful in stabilising prices and ensuring timely access for consumers.

For instance, lentil prices doubled in a matter of a few months in 2015, causing significant distress to consumers all over India. Proponents of the reform contend that the entry of private agri-players is likely to increase efficiency in inventory management practices and reduce wastage, ultimately benefitting farmers and consumers alike.

The last reform, The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, envisions an increased yield, improved access to technology, assured income for farmers through contract farming, and direct sales to large market players. Limited evidence from past initiatives, such as ITC e-Choupal, suggest that direct access to market players can increase farmers’ sales prices, and also have a positive spillover effect on the prices in mandis. With the objective of eliminating intermediaries and improving quality of the procured produce, ITC e-Choupalswere established across central India to directly procure soyabean from smallholder farmers. Estimates suggest that increased access to information, and increased competition from the initiative led to a 1-3 per cent increase in mandi prices for the farmers. Similarly, potato farmers working with PepsiCo, under its collaborative farming initiative, earned more than four times per bigha through access to agri-inputs and assured market prices.

While these reforms are promising, it is critical to continue with the reform agenda to further benefit farmers. Research suggests that even successful initiatives from the past have been affected by systemic supply chain and logistics considerations. Estimates from the National Center for Cold Chain Development indicate that there is a shortage of 126 lakh tonnes of cold storage capacity in the country. In absence of robust warehousing and transportation facilities, traders and farmers are less likely to participate in cross-market trade, and the hypothesised gains from integration of markets will remain subdued. Thus, while the government should continue investing in unifying agri-markets, it is also critical to build logistical infrastructure conducive to cross-market trade.

In addition, in order to ensure that farmers are not exploited and receive competitive prices under contract farming, it is also important to aggregate smallholder farmers through Farmer Producer Organisations (FPOs). Through economies of scale, FPOs increase the bargaining power of farmers, and improve production efficiency by allowing timely access to credit, inputs, and technology. Estimates suggest that there are around 7,000 FPOs and there has been a steady growth in their numbers in recent years. Although promising, government support through financial and regulatory incentives is necessary to sustain this growth. Most FPOs are currently in nascent stages, and enforcing best management practices would be essential to keep them out of the way of any political interference.

The Narendra Modi government’s dream of doubling farmers’ income by 2022 will be materialised only if the challenges that plague the country’s agricultural sector are tackled in earnest. While the current reforms that focus on increased private sector participation are promising, the need of the hour is to further this reform agenda by also focusing on increasing efficiency in the public sector undertakings in the agri-domain.

Somya Singhvi has a PhD from MIT and is currently a Postdoctoral Fellow at the Center for Global Development, Washington DC. Lt Karan Javaji is a former officer of the Reserve Bank of India and is currently the co-convener of the BJP Economics Cell for Karnataka. He also graduated from Cornell University. Views are personal.

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