Explained: The A, B, C of India’s farm law reforms

Some farmer organisations in Punjab, Haryana and a few other states are agitating in favour of a repeal of the Modi government’s new agricultural reforms. The government has entered into a dialogue with them and an outcome is awaited. Meanwhile, here’s a guide to the unlimited potential; that the new laws offer to the Indian farmer and farming community.

Indian Home Minister and former BJP President Amit Shah has joined the talks with the farmers agitating for the repeal of the three new farm laws.

The three laws are the Essential Commodities (Amendment) Act 2020, the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 and the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020. These promise to change the face of Indian agriculture – just as P.V. Narasimha Rao’s economic reforms completely transformed the way business is conducted in this country.

Disenfranchised middlemen fuelling agitation

Any reforms that dramatically shake up the existing status quo produces new sets of winners and losers. Under the new laws, the middlemen, who control the farm trade in India, would be the biggest losers since their stranglehold on the rural economy will be broken. These middlemen are the new rural elite; they control the levers of power in village and small towns and enjoy massive influence over the small farmers in their neighbourhoods.

It is the fear of losing this position of wealth, power and authority that is fuelling the ongoing farmer’s agitation.

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Modi government serious about resolving issue

Shah’s intervention indicates that the Modi government’s seriousness about resolving farmers’ misgivings about these reforms. Ironically, many opposition political parties, like the Congress and the Nationalist Congress Party (NCP), which are supporting the farmers’ agitation, had proposed these same reforms when they were in power.

The battle lines are drawn out quite clearly. Several farmer organisations have said they will settle for nothing less than a total withdrawal of the new laws. The Modi government has stated, equally strongly, that it will go not step back from the reforms it has initiated. It has, at the same time, adopted a conciliatory tone, saying it is willing to consider amending some clauses to allay the misgivings of the farming community.

India Global Business takes a close look at the new farm laws to decode what they mean for the farmers and the economy at large.

The Essential Commodities (Amendment) Act, 2020

This new act has taken agricultural commodities such as cereals, pulses, oilseeds, oils, onions and potatoes, among other items out of the list of essential commodities. This will ensure that food processors, traders and others dealing in these items can no longer be penalised for holding stocks in excess of arbitrarily set limits.

It also takes away the government’s powers to clamp down and set prices except in very exceptional circumstances.

This is expected to encourage investors to set up warehouses and cold storage chains – something they were wary of doing so far out of fear that sudden and arbitrary stock holding limits in any of these items would land them on the wrong side of the law.

This amendment, thus, opens the door to private and foreign investment in the agricultural sector, including in food processing, aggregating, warehousing, cold storage and other infrastructure that will increase the shelf life of farm produce.

Farmers can, therefore, be expected to earn higher returns as a result of these new laws.

A recent report by KPMG highlights how the changes will play out on the ground.

The law, as it stood, before the reforms, had

• Provisions to impose stock limit on any of the grains, pulses and vegetables in select geographies or entire country
• Restricted physical movement of the above within India and for export depending on price and demand dynamics
• Provisions to regulate prices of any essential commodity for a specified time period
• Restricted trade in commodity derivatives that acts as risk management tool

The amended Act allows

• Food grains, vegetables, oilseeds, etc., to be regulated only in extreme conditions like war and natural disasters
• Prices to be regulated if they increase 50 per cent (in case of non-perishables) or 100 per cent (in case of perishables) over average price of previous 12 months or five years average retail price
• An opportunity to stock and manage inventory risk effectively by mandating that no ad-hoc stock limits or price regulations can be imposed.

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The Farmers Produce Trade and Commerce Act, 2020

This Act frees farmers from the clutches of the government-nominated licensees they are now forced to sell their produce to. It also allows farmers to sell their produce anywhere in India and facilitate the receipt of remunerative prices, thus, increasing farmers’ incomes substantially.

This system, run by Agricultural Produce Marketing Committees (APMCs), was put in place by the government in an era when India faced massive food shortages and even famines and were meant to protect poor farmers from big retailers and ensure that prices did not rise beyond affordable limits.

Over time, these APMCs transformed into cartels of powerful middlemen comprising the local political elite in different regions. This law effectively breaks up the monopoly of these entrenched middlemen.

It will also enable farmers to enter into contracts with food processing companies, exporters, large, organised retailers, etc., for the sale of their produce at remunerative prices, thus, securing the viability of the farm sector.

The KPMG report referred to above says prior to the reforms

• Farmers carry their vegetable to a wholesale market. The Farmers’ Agreement on Price Assurance and Farm Services Act, 2020 provides a framework for agreements between farmers and companies and encourages the former to engage with agri-business firms, processors, wholesalers, exporters or large retailers.

  Primary trade in farm commodities had to be routed through APMCs or notified private markets

• It was mandatory to pay a mandi (market) cess (0.5- 6 per cent)
• Buyer had to be registered in the market or state
• Inter-state transactions restricted. In case of inter-state movement, mandi cess was applicable in both states.
• Fruits and vegetables were exempted after states adopted few recommended reforms
• Farmer payments were handled by commission agents and there was no regulation on commission charges.

After the reforms

• State APMC Acts will remain in force in physical premise of APMCs, notified markets and sub-markets
• Remaining geography is called Trade Area
• Any person having PAN card can purchase agricultural produce in trade area from farmer or trader and mandi cess is not applicable
• No restriction on inter-state or intra state trades and no mandi cess will be payable.
• Farmer has option to sell through existing mandi system or in trade area
• Opportunity for buyers to establish farm-level linkages
• Payment to farmer have to be made on same day or within a maximum of three days

The Farmers’ Agreement on Price Assurance and Farm Services Act, 2020

This provides a framework for agreements between farmers and companies and encourages the former to engage with agri-business firms, processors, wholesalers, exporters or large retailers.

This will encourage farmers to enter into contract farming deals with food processing companies, aggregators, exporters and large retail chains to sell their future produce at pre-agreed prices. This transfers the market risk from the farmers to the buyers.

Then, this Act will also facilitate the introduction of new technologies to the Indian farming sector, which is starved of both investments and technological innovations. It will also enable farmers to directly market their products to end users, thus, eliminating the middleman’s share; this will increase farmers’ incomes.

The KPMG report says prior to this new law

• Contract farming was part of model APMC Act; states could amend it to according to their needs and few states did during 2013-2014 period
• Central government had a model contract farming act for states to implement, but no headway was made in that direction.
• There were no clear guidelines on legal contracts or dispute resolution framework

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Following the enactment of the new law, there are now

• Clear guidelines for agreement on price assurance and farm services
• Norms for delivery conditions to be specified at farm gate or buyer premise
• Norms for quality assurance at the time of delivery
• Rules ensuring that agreement tenures are in the range of one year to five years
• Rules to ensure that farm agreements contain: Time of supply, quality specifications, fixed price or variable (minimum guaranteed price along with premium and benchmark market to be specified)