Farmers

Bihar’s APMC Story Does Not Inspire Much Confidence

This is the third piece in the agriculture reform series. You can read the first two pieces here and here. While this piece stands on its own, for a better context on the overall issue, it makes sense to read the two pieces published earlier, before reading this piece.

Chintan Patel and Vivek Kaul

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 became a law on September 27, 2020. It is one of the three farm laws passed by the Modi government that has been met by stiff opposition from farmers. The law supposedly creates a mechanism allowing the farmers to sell their farm produce outside the Agriculture Produce Market Committees (APMCs).

As we pointed out in an earlier article, the fate of the APMCs or mandis, under the new laws is a topic of much debate. Proponents of the bill claim that allowing farm trade outside the APMCs will encourage competition and help farmers get better prices for their produce. The idea being that there will be more competition for agriculture produce and in the process, farmers will make more money. QED.

Farmer organizations opposing the bill argue that unregulated transactions outside the APMCs will actually result in a price squeeze for the farmers, given the asymmetry or the huge difference of negotiating power between the individual farmer and corporate-backed buyers. As is often the case, both sides can lay claim to a logically coherent argument backed by economic theory. So, which argument has higher odds of manifestation?

When the future is uncertain, the past is often a reliable guide. Using that rationale, it is instructive to look deeper at the Bihar experience vis-a-vis APMC markets. Bihar had done away with APMC markets in 2006. But before we get into the specifics, let’s zoom out a little and take a look at the bigger picture first.

Bihar’s Backdrop

Bihar is India’s poorest state. Given below are tables that chart the per capita income of India’s richest and poorer states.

Source: https://statisticstimes.com/economy/india/indian-states-gdp-per-capita.php

Source: https://statisticstimes.com/economy/india/indian-states-gdp-per-capita.php

As the above tables show, Bihar has the lowest per capita income in the country. It is about 18 percent of the income of Haryana and less than 10 percent of the income of Goa. Ironically, Bihar is endowed with abundant natural resources, especially fertile soil and groundwater, and yet it continues to remain one of the poorest states in the country.

The state has a population of 11.52 crore (2016), with a very high population density of 1,218 per square km as compared to the national average of 396 per square km. It is largely an agrarian rural economy with approximately 88.5 percent rural population out of which 74 percent of the workforce is reliant on the agriculture sector for a livelihood as per the 2011 Census.

Even accounting for shifts in the economy away from agriculture and migration out of rural areas since the last Census, the poverty in Bihar is closely linked to state of its farmers.

The high population density is clearly reflected in the land holding pattern in Bihar. Compared to other states, Bihar has highly fragmented landholdings. As the same piece of land has got divided among more and more family members over the generations, the average holding has fallen dramatically. Even though quite a few migrate to the cities, they still keep their farmland. This also stems from the fact that selling agricultural land in India is not easy.

As the table below indicates, marginal holdings of less than one hectare (around 2.47 acres) constituted about 91.2 percent of all land parcels in 2015-16, compared to the national average of 68.5 percent. Additionally, 97 percent of all holdings are  less than 2 hectares in Bihar. This high skew towards small land holdings is an important statistic, as agricultural marketing policies affect small and marginal farmers differently from those with larger holdings.

Land holdings in Bihar.

APMC Abolishment in Bihar

In 2006, the Nitish Kumar state government made the decision to abolish its state-level APMC Act allowing private players to directly purchase agricultural produce from farmers. Under the erstwhile Bihar APMC Act, both farmers and buyers would pay 1 percent of the sale price to municipal bodies. After the APMCs were abolished, the government introduced Primary Agriculture Credit Societies (PACS). PACS are panchayat level cooperatives with farmer members that fulfil 3 roles in Bihar.

1) Help farmers borrow money for buying farm equipment, farming inputs such as seeds, fertilizers, etc., or to tide through losses. PACS in turn are given credit by cooperative banks which are funded by the state government.

2) A one-stop shop for high-quality seeds, fertilisers, and other inputs.

3) Most importantly, PACS are responsible for procurement of grains particularly rice-paddy and wheat from the farmers at the government-announced minimum support price (MSP). Thus, PACS act as an intermediary between the farmers and the eventual purchasers of wheat and rice – which can be any of the following; Food Corporation of India (FCI), state procurement agencies or private mills, for that matter. For other produce (other than rice and wheat), farmers interact directly with private traders.

Upon procurement of the crop, especially in the case of paddy, it goes to the Bihar State Food and Civil Supplies Corporation, and then on to the Food Corporation of India, who direct it to the Public Distribution System or ration shops as they are more popularly known. The payment is expected to reach the farmer within 48 hours of selling the crop at PACS.

It should be noted that PACS exist nationwide and have long been a part of the cooperative banking system in India, formed to provide credit to rural areas. Bihar however is unique in that it expanded the scope of PACS to b) and c) above. As we shall see later in the article, PACS have not been able to deliver effectively on these objectives.

The deregulation of agriculture market transactions in Bihar in 2006 shares significant similarities with the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 . Although the central law does not call for the closure of state APMCs or creation of PACS-like entities, the core idea of deregulating agriculture trade outside of APMCs is the same.

Thus, there is merit in examining the outcomes of what has happened in Bihar over the last decade and a half,  to form expectations from the new law.

Several leaders of the Bhartiya Janata Party including prime minister Narendra Modi  and other supporters  of the new laws have touted Bihar’s abolition of APMCs to make their case. At the same time, critics have invoked Bihar as a cautionary tale of deregulating agriculture market.   So, the same scenario is being presented to suit diametrically opposite arguments.

What gives? As is often the case, the truth lies somewhere in between two extremes.

Prices

The bane of Indian agriculture is the price difference between the first transaction – what the farmer gets for a commodity, and the last transaction – what you and I pay for the same commodity.  Any changes to agricultural markets like the abolition of APMCs in Bihar needs be assessed against its impact on prices.

The government recognizes the importance of collecting data on prices. Each year, the Ministry of Agriculture and Farmers Welfare publishes data on farm gate prices based on data received from the state governments “to facilitate fine-tuning of agriculture policies aimed at farmer welfare”  .

The average wholesale price of a commodity (e.g. wheat, rice, etc.) at which the farmer sells to a trader at the village site during the specified marketing period after the harvest of each commodity, is termed as the Farm Harvest Price (FHP) for each commodity.  The next few charts track both the FHP and MSP of four commodities (paddy, wheat, maize, and ragi) from 2000- 2017. The central government announces MSPs for 23 agricultural crops during the course of any year, but primarily buys only rice and wheat directly from farmers.

Source:  https://eands.dacnet.nic.in/

The above chart shows that for rice paddy, the MSP has always been higher than the FHP. From 2001-02 to 2006-07, the average difference between MSP and FHP was around 26 percent. This basically means that  the FHP was 26 percent lower than the MSP on an average. From 2006-07 to 2014-15, the average difference reduced to around 18 percent. 2015-16, onwards the difference has inched up to around 24 percent, for the last two years for which the data is available.

                                                                            Source:  https://eands.dacnet.nic.in/

For wheat, the difference between MSP and FHP has been less stark than that for rice paddy.  From 2001-02 to 2006-07, the average difference between MSP and FHP for wheat was around 7 percent. From 2006-07 to 2014-15, the average difference barely moved up to  around 8 percent . However, for the last two years 2015 to 2017, for which data is available, the difference has spiked to around 17 percent.

Source:  https://eands.dacnet.nic.in/

For maize too, the difference between MSP and FHP has been less stark than for paddy but higher than that of wheat.  From 2001-2 to 2006-07, the average difference between MSP and FHP for wheat was around 19 percent. From 2006-07 to 2014-15, the average difference reduced to around 12 percent . However, for the last two years 2015 to 2017, the difference has spiked to around 18 percent.

Source:  https://eands.dacnet.nic.in/

Finally, for ragi, the difference between MSP and FHP has been quite high and has kept increasing.  From 2001-02 to 2006-07, the average difference between MSP and FHP for ragi was around 26 percent. From 2006-07 to 2014-15, the average difference increased to around 31 percent. Finally, for the last two years, 2015 to 2017, the difference has increased to around 37 percent.

The following table summarises the data from the above four charts.

Price Trends Summary
Source:  https://eands.dacnet.nic.in/

What can we infer from the above charts. Let’s take a look pointwise.

1)  The span from 2001 to 2017 can be divided into three periods : 2001-06, 2007-13, and 2015-17. Farm prices improved for paddy in the second period (around 18 percent lower than the MSP)  compared to the first period (around 25 percent lower than the MSP). Of course, they were lower than the MSP during both the periods.

Similarly maize prices improved in the second period (around 12 percent lower than the MSP) from the first period (around 19 percent lower than the MSP). Of course, they were lower than the MSP during both the periods.

For wheat, difference between the farm prices relative to MSP stood at 7 percent during the first period and at 8 percent during the second period. Hence, the difference increased though marginally.

Rice, wheat and maize are the three major cereals produced in Bihar and make up for 80 percent of the cropping area. The difference in prices between the FHP and the MSP, largely came down in the seven year period after the removal of the state level APMC Act. This finding weakens the argument that market deregulation will necessarily lead to lower prices, even though the farmers did not get the MSP.

2) As can be seen from the above table, starting in 2015, difference between FHP and MSP has increased for all the four commodities. Let’s take the case of maize. Between 2007 and 2014, the difference had stood at around 12 percent. It has since jumped to around 18 percent, almost back to pre-2006 levels.

A similar trend can be seen for the other three crops as well.

The official government data is only available till 2017, but this divergence between FHP and MSP is also reported in recent articles discussing the farmer situation in Bihar.

An article from People’s Archive of Rural India on Feb 20, 2021  reports  that “In 2019, a farmer sold his stock of raw paddy at the rate of Rs. 1,100 per quintal – this was 39 percent less than the MSP (minimum support price) of Rs. 1,815 at that time”.
Another article from December 2020 reports that “Paddy has sold for Rs 900-1,000 a quintal in Bihar, almost half the Rs 1,868 fixed by the Centre as MSP”.

The farm prices at which farmers sell continue to be depressed compared to the MSPs and given that difference has only increased in recent years, weakens the argument forwarded by supporters of the new farm laws which extrapolates deregulation to improved price realization for farmers. Economic theory doesn’t always fall in line with things actually happening on the ground.

A key underlying rationale behind dismantling of the APMCs in Bihar was that it would lead to an increase in the number of buyers in the marketplace. A similar argument is also being made in the case of the new farm laws. However, that is not how things have worked out, in markets across Bihar.

In fact, anecdotal evidence from newsreports emanating from Bihar suggests that sales to private traders are often distress sales since farmers don’t have access to a sizeable pool of local buyers .

A 2019 paper by the National Council of Economic Research makes a similar observation: “Despite the abolition of the Agricultural Produce Market Committee (APMC) Act in 2006, private investment in the creation of new markets and strengthening of facilities in the existing ones did not take place in Bihar, leading to low market density. Further, the participation of government agencies in procurement and the scale of procurement of grains continue to be low. Thus, farmers are left to the mercy of traders who unscrupulously fix lower prices for agricultural produce that they buy from farmers..”

Of course, there are other reasons that push farmers to make these distress sales such as a deficient transport network, poor storage facilities, and lack of capital. All of these are exacerbated for small and marginal farmers who form the bulk of agriculturists in Bihar. Given these harsh conditions, it is unsurprising that farmers are unhappy with the present system.

The disillusionment of the Bihar farmer can also be understood looking at incomes of farmers, because ultimately the proof is in the pudding.

Income of Farmers in Bihar

 Source: Study on Agricultural Diagnostics for the State of Bihar in India, 2019 report by NCAER

                                   
The above chart shows that while the net income of farmers in Bihar rose from 2007 to 2010, nevertheless, it has been declining continuously since 2010, up to the point we have data for. The declining income is explained by a rise in costs of agriculture inputs (seeds, power, labour, fertilizers, cost of finance, etc.) without a commensurate increase in sales revenue. The net income per hectare farmed, has moved alarmingly towards zero.

Government procurement of foodgrains 

Farm prices and farmer incomes are significantly affected by the level of government procurement of foodgrains in Bihar. The Central Government extends price support to paddy and wheat through the Food Corporation of India (FCI) and state procurement agencies across the country.

As per this policy, state governments are supposed to purchase paddy and wheat (conforming to certain specifications) from farmers at the declared MSP. Farmers have the option to sell their produce to private traders if they can get better prices in the open market. The objective of foodgrains procurement by government agencies is to ensure that farmers get remunerative prices for their produce and do not have to resort to distress sale. The central government accepts the responsibility to fund the procurement operations.

The next two tables give a breakdown of foodgrain procurement in the recent few years for major rice and wheat producing states.

State wise FCI Procurement of rice-paddy 
Source: Food Corporation of India.

State wise FCI procurement of wheat

Source: Food Corporation of India.

Procurement of paddy in Bihar is around 20 percent of the state’s total production, and that of wheat is almost negligible (less than 1 percent). Compare this to Punjab and Haryana, where procurement levels for paddy are over 80 percent and that of wheat are over 60 percent. This is primarily because of historical reasons, in order to promote the green revolution in the states.

This is one of the reasons for the disparity of wealth between Bihar and the other states. Since government buys paddy and wheat at MSP rates, low levels of government procurement in Bihar negatively impact the FHP for wheat and paddy, and in the process farmer incomes.

If the government purchased 100 percent (hypothetically speaking) of the paddy grown in the state, the FHP for paddy would more than likely be the same as the MSP. At 2016-17 prices, that would mean the farmer would get Rs 1,510 per quintal instead of Rs 1,147 per quintal for paddy – an increase of around 32 percent or Rs 363 per quintal. This additional revenue would directly pass-through as added income for farmers. This explains why procurement at MSP rates is a pressing demand by farmers during any policy debates on improving farmer incomes.

Low procurement of foodgrains by the state of Bihar can be attributed to two main reasons: a) inadequate funding by the state and b) Poorly functioning PACS.

There are several deficiencies in how PACS operate including restrictive registration requirements which limit who can sell to PACS, limited windows of procurement, sub-optimal timing of procurement, rejection of crop by the PACS due to excessive moisture content, and excessive delays in payment.  In fact, the number of PACS  in Bihar has declined by over 82 percent, from 9,035 in 2015-16 to 1,619 in 2019-20.

While the specific problems of PACS are less relevant to the national debate on the farm bills, they point to an important fact. The success or failure of market deregulation is highly dependent on the alternate systems that emerge in that environment, which will be unique for each state. Hence, the “vocal for local” mantra should also be applied when implementing policy solutions that strengthen federalism over a one solution-fits-all approach.

Conclusions

1) The so-called opening up of the agriculture market in Bihar to private players has not fundamentally altered the state of the Bihari farmer. The data on farm prices and farmer incomes is mixed after dismantling the APMCs. The difference between FHP and MSP for commodities like paddy and maize did decrease after APMCs were abolished, but those gains have reversed since 2015. The lived experience of farmers as reported by ground reports and the data on farmer incomes and prices paint a grim picture.

2) The PACS created by the state government for procuring food-grains have proven to be inefficient and non-responsive to farmer needs.

3) The government procurement at MSP continues to be a key contributing factor in improving FHPs and farmer incomes. This underlines why MSPs continue to be a key issue for farmers protesting the new farm laws.

4) The Bihar experiment is pertinent to the 2020 Farm Laws, but extrapolating the outcomes in Bihar to the current farm law debate needs some nuance. The data can be presented selectively, both by opponents and proponents of the farm laws to further their argument. But based on the analysis presented here, it is clear that deregulating agriculture markets in Bihar, did not cause prices to crash, though the difference with the MSPs has risen in the recent years. Neither did it usher in a wave of private buyers vying for agriculture produce, buoying up farmer incomes and prosperity in its wake.

It must be noted that the total output of an agrarian economy is affected by a host of factors including crop yield (how much crop is produced per unit area), land usage (how much area is used for cropping), cropping patterns (choice of high-value vs low-value agricultural produce), and prices . Of these, only prices are affected by the new law.

The other factors are influenced by variables such as irrigation, power availability, fertilizer usage, seed quality, rainfall, weather events, mechanization, among others. In a 2017 paper on agriculture in Bihar, the authors identify the following factors as drivers of agricultural growth. These are, irrigation, flood protection, energy for agriculture, roads, procurement system and agriculture markets.

While government policy has a role to play in shaping some of these variables, Bihar’s APMC abolishment law in 2006 and the central laws in 2020, are limited to procurement and agriculture markets. Thus, commentary correlating the abolishment of APMCs in 2006 with changes in macroeconomic metrics in Bihar such as total agricultural output or agricultural growth is disingenuous.

PS: Such a detailed data dive takes a lot of time and effort and you won’t see it anywhere in the mainstream media. Given this, our work needs your constant financial support. 

Please support Vivek’s work. 

Why Farmers Still Don’t Trust the Government

Chintan Patel and Vivek Kaul

In a recent column, the veteran editor Shekhar Gupta wrote that Indian politics is now clearly divided along economic lines, with the BJP + being ‘unabashed backers of private sector’ and others in the opposition being ‘freshly dyed-in-red socialists’.

While definitive statements on politics of the day are rarely totally correct, they can always be placed in a certain context. Let’s take the case of farm laws pushed very hard by the current union government and passed by the Parliament.

While there is no denying that economic reforms in agriculture are the order of the day, there is also no denying that the way these laws have been drafted and pushed through the Parliament, it makes the union government look like unabashed backers of the private sector, which in a democracy isn’t possibly a good thing.

In the same column, Gupta quoted the former finance and home minister, P Chidambaram’s view on the union budget, presented at the beginning of this month. Chidambaram, as Gupta quoted him, said: “It was a Budget… addressed to the one per cent of Indians who owned 73 per cent of national wealth.”

Of course, Chidambaram’s party, the Congress, which largely governed India up to 1996, with a few brief interludes in between, and then again from 2004 to 2014, has been responsible for a lot of this inequality.

If we were to take a leaf out of Gupta’s book and make a definitive statement, what the Congress practiced for many years was bad socialism and what the BJP is currently practicing in case of the new farm laws, and as we shall see in this piece, is bad capitalism.

But before we get around to doing that we need to go back in history a little.

The State of the Indian Farmer

Up until the mid 1960s, India was dependent on wheat imports, primarily from the United States. In order to set this right, the union government of the day promoted the green revolution. To encourage the farmers to grow a certain kind of wheat, the government provided price support, in the wheat-growing areas of Punjab and Haryana by buying wheat through the Food Corporation of India (FCI).

This essentially convinced the farmers to grow the specific kind of wheat that the government wanted it to, given that there was a ready buyer for it. This procurement of foodgrains initially started with the noble motive of helping the farmers who were taking part in the initial phase of the Green Revolution

Gradually, the FCI started procuring rice as well and thereby encouraged farmers to grow rice in the semi-arid region of Punjab as well as Haryana. In that sense, policies formulated to usher in the green revolution in the 1960s have long become outdated. They promote wrong cropping patterns that are neither environmentally optimal nor responsive to demands of the population. This has also led to depletion of ground water in large parts of Punjab and Haryana.

Thanks to the green revolution and the procurement infrastructure that developed because of it, India now overproduces foodgrains and does not produce enough of other food items, for which there is demand.

As of February 2021, the FCI had a total stock of rice and wheat amounting to 561.93 lakh tonnes. While the total stock that needs to be maintained as of January 1 every year, including the operational stock and the strategic reserve, amounts to 214.1 lakh tonnes.

Clearly, there is a problem of over production and over storage here. It also means that the government ends up over buying rice and wheat, which it doesn’t really need and which then sits in the godowns of FCI and rots.

On the other hand, India isn’t growing enough of something like pulses. While the per capita production has improved in the recent years, it is still not anywhere near where it used to be in the mid 1960s. In 2019-20, the per capita production of pulses stood at 16.9 kg, up from 13.6 kg in 2014-15, but still nowhere near a production of 25 kg per capita in 1964-65.[i]

The over production of rice and wheat doesn’t just lead to underproduction of other agricultural crops, it creates other problems as well. (In order to get a good overview of the other problems, please click here to read a piece one of us wrote in September 2020, when the farmer protests were just about starting).

We wouldn’t be over-stretching if we say that there is a huge problem in the way agriculture is currently practiced in this country. And if Indians, and not just India, has to progress, the Indian agriculture system needs to be set right. The farming laws in their current state are not going to achieve that.

In 2020, farmers formed around 41.5% of India’s workforce but contributed only  around 15-16% of India’s economic output. This basically means that farmer incomes are abysmal. The average household income of farmers was Rs 6,427 a month as per the Situation Assessment Survey of Agricultural Household 2013 – with farmers in some states making much lesser than the average. To give a sense of the state-wise skew on this figure, the income for Punjab was Rs 18,509, for Haryana it was Rs 14,434 (the top two) and that for Bihar it was just Rs 3,557. An average household in India has five members.

This data is on the slightly older side. One thing we can do is to adjust it for inflation between December 2013 and December 2020. The rural inflation as measured by the consumer price index between these two time periods stood at 4.4% per year. Assuming that the farmer incomes have grown at this rate per year, then the average household income of farmers stands at Rs 8,688 per month.

Of course, and as we have seen above, there are variations around the average income across the states, but even with that, the farming income is low. In this backdrop, it is clear that the status quo in Indian agriculture is untenable. Policy-makers face a stiff task of inducing changes in cropping decisions whilst improving farmer incomes.

There is also the promise of doubling farmer incomes by 2022, which was first made Prime Minister  Narendra Modi at a rally in Bareilly on February 28, 2016 and reiterated by Arun Jaitley in the budget speech next day.

The New Farm Laws

On September 27, 2020, President Ram Nath Kovind approved three Farm Bills (which were passed in the Lok Sabha on September 17 and in the Rajya Sabha on September 20). These laws are seemingly an attempt to achieve the twin objectives of raising farmer incomes and modifying cropping pattern. These laws are as follows:

1) The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 (which the farmers refer to as the APMC Bypass Act ) creates a mechanism allowing the farmers to sell their farm produces outside the Agriculture Produce Market Committees (APMCs). Any license-holder trader can buy the produce from the farmers at mutually agreed prices.

2) The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act 2020 (referred to as Farmers Contract Act hereafter) seeks to create a legal framework for contract farming in India, wherein farmers can enter into a direct agreement with a buyer to sell the produce at predetermined prices through verbal or written contracts.

3) The Essential Commodities (Amendment) Act 2020 is an amendment to the existing Essential Commodities Act, deregulating storage limits on items such as cereals, pulses, oilseeds, edible oils, onions and potatoes, except in extraordinary situations.

Farmer groups across the nation have opposed the new laws and brought their protest to the streets, and the ensuing stand-off with the union government has gone on for several months now. While protests against the farm laws have happened all across the country, the main sustained protest has happened on the borders of Delhi, leading many commentators to say that this is primarily a protest of large farmers of North India.

There is no denying that large farmers have the most to lose and are maybe driving this movement, nevertheless, at the same time it needs to be said that large protests typically tend to happen around the seat of power.

As veteran editor and economy watcher TN Ninan wrote in a recent column: “ Much of the action in the French Revolution was centred on Paris.” The same thing happened when the Bolsheviks led by Vladmir Lenin took over the strategic locations in the Russian capital of Petrograd (now known as Saint Petersburg). Hence, Delhi will remain symbolic in the same sense.

In this piece, we look at the different arguments put forth by those who are opposing these laws and try to figure out how much sense they make. We also look at the overall issue of agricultural reforms. Let’s take a look at these pointwise.

1) A chief concern of farmer groups opposing these laws is that the new laws herald a change in policy which will lead to a roll-back on government procurement of foodgrains and minimum support prices (MSPs). The government declares MSPs for 23 crops every year, but it primarily buys rice and wheat directly from farmers at the MSP. In the recent past, it has also bought pulses and oilseeds to promote their production.

Apprehensions regarding the dismantling of the MSP regime explain the mass mobilization of farmers in Punjab, Haryana and western UP – areas with high government procurement of grains, due to historical reasons of the union government wanting to promote the green revolution in the country.

While the new legislation itself is silent on the MSP, the government has repeatedly given assurances that procurement and MSPs will continue. But these assurances in isolation haven’t been enough to placate farmer fears. There are multiple reasons for the same.

As NITI Aayog’s occasional paper titled Raising Agricultural Productivity and Making Farming Remunerative for Farmers published in December 2015, points out: “There is a need for reorientation of price policy if it is to serve the basic goal of remunerative prices for farmers. This goal cannot be achieved through procurement backed MSP since it is neither feasible nor desirable for the government to buy each commodity in each market in all region.”

This paper essentially had the philosophical underpinnings on which the new farm laws are based.

Also, if the government purchases and the MSP are done away with, there will be further danger of free power, fertiliser subsidy etc., being done away with as well. This is something that farmers who benefit from these things, wouldn’t want.

Secondly, if the idea is to promote private corporate trade in agriculture over a a period of time, then it is but natural for the government to gradually get out of the sector. That is how liberalisation of any sector has worked over the years. Hence, the government’s assurance on MSP and procurement haven’t carried much weight with the farmers.

On the flip side, the rice and wheat which the FCI buys directly from the farmers, it distributes through the public distribution system or ration shops as they are more popularly known, at a very low price to meet the needs of food security.

Given that the public distribution system is in place, it will be very difficult for the government to totally get out of the system of declaring MSPs and procuring rice and wheat. Also, the importance of this system has come into focus in the past one year, as the government distributed free rice and wheat through these shops across the country, to negate the negative economic impact of the spread of the covid-pandemic.

Hence, it is highly unlikely that the government will do away with MSPs and procurement, though the level of procurement might come down over the years, with the government only buying as much as it needs to fulfil the needs of food security and not more.

Net net, the system as it exists is likely to change in the years to come. Further, given the way the government pushed the farm laws through the Parliament, it has become difficult for the farmers to trust the government.

2) Other than the MSP issue, there are several other reasons which have farmer groups alarmed.

Central to a bulk of these concerns is the role of the Agricultural Produce Market Committees or APMCs. The new APMC-bypass law does not explicitly call for the closure of existing APMCs (or mandis as they are more popularly known as).  However, it allows private-party transactions between buyers and sellers outside the mandis. Transactions that take place outside the APMCs are not subject to either state cess or state APMC laws.

This effectively creates two parallel marketplaces – one that is highly regulated, and one that is very lightly regulated, if at all. One that is controlled by the state governments and another that is controlled by the union government.

Farmers contend that such an arrangement is effectively a death-knell for the mandis, as non-mandi transactions have been heavily incentivized. They argue that a regulated marketplace within the mandi will be replaced by an unregulated marketplace outside the APMC framework. Transactions conducted outside the APMCs would be no longer regulated in the same way, implying that government officials cannot step in to address irregularities around weighing and measurement of produce and payment disputes.

Now, sarkari interference in a commercial transaction or setting, is mostly viewed as a bureaucratic hurdle by all parties involved. Yet interestingly the prospect of getting rid of this oversight has the farmers concerned implying that their fear of being exploited by buyers and traders in an unregulated setting, outweighs whatever shortcomings there might be in the existing system.

On the flip side, the outside competition should help in driving down the high mandi fees, which exist currently.

Experts who have come out in support of these laws have pointed out that the removal of the APMC cess, removal of barriers of entry for new purchasers and increased competition for crop procurement, which these new laws are likely to bring in, will help drive crop prices higher. So, why then are farmers so resistant to the new unregulated marketplace?

One patronizing line of reasoning, as has been the case whenever reforms are pushed through stealth, is that the farmers are too naive to understand what is really in their best interests, presumably due their ignorance of economics and benefits of free-markets.

The link between reduced regulations and increased prosperity is well established in other sectors in post-liberalized India. That said, discounting the lived experience and opinion of the stakeholders and purported beneficiaries of a given law is unwise.

It is important to note that a large portion of farm trade already occurs outside of APMCs. The chart below shows the proportion of sales across various channels for a list of agricultural commodities. It can be seen that non-APMC transactions feature prominently for most agricultural items.

Source: NSS Report 70th round.
Chart: https://www.theindiaforum.in/article/three-farm-bills.

Let’s take the case of rice and wheat, the two foodgrains primarily bought by the government directly from the farmer. In case of rice (paddy) 63% of the total quantity was sold in local private markets. In case of wheat it was at 25%.

This happens for a host of reasons such as distance constraints, door-step sales to offset past debt, the difference in government procurement infrastructure across different parts of the country, etc.

The best metric of efficacy of any new policy will be its effect on farmer incomes, which are ultimately determined by prices farmers get for their produce. And this is where APMCs play an important role in the price discovery process. Prices for agricultural produce are decided in APMCs by open- auctions or closed-bid tenders.

Thus the APMCs serve as transmitters of pricing information across the market, as sales occurring outside the mandis are influenced by APMC prices as well. Once APMCs become obsolete, as is the fear, how will price discovery happen?  That is one concern raised by farm groups resisting the APMC-Bypass law.

In this sense, there needs to be some level playing field between APMCs and the new markets that are expected to spring up thanks to the new laws.

3) Another concern raised by critics is that the decline of APMCs will lead to fragmented markets and render farmers more vulnerable to exploitation by traders. The APMCs provide a platform for collective bargaining which is only possible with aggregated and coordinated sales. Once sales migrate to private, uncoordinated transactions there is a possibility of monopsonies emerging for each distributed geography pushing sale prices downward.

A monopsony is a market which has a single buyer, giving that sole player an undue advantage on dictating prices. As an example, if Maruti was the only car manufacturer in the country, it would enjoy a near monopsony over the automobile spare parts market. In such thin and fragmented markets, the balance of information and bargaining power will be heavily tilted against farmers, especially ones with small holdings.

While these fears are not unfounded, it should be pointed out that the existing system of price discovery and middlemen has been prone to manipulation by traders and commission agents, much to the detriment of farmers. As Sudha Narayan, a noted agricultural economist points out, even with open auctions, middlemen and traders often collude against farmers to depress sale prices.

Also, it needs to be said here that most of India’s farmers are too small to be dealing with any marketing system on their own. The point being that even in the new markets that are likely to emerge middlemen might continue to be the order of the day.

It is being assumed that buyers who currently buy from big commission agents, will start buying directly from farmers and let go of the middleman. There is a reason why these buyers buy from agents. It is convenient for them to do so. Do they want to take on the headache of building a new system right from scratch? Is it worth their time and money?

These are questions for which answers will become clearer in the days to come. But prima facie given the abysmal ease of doing business in most states, we see no reason why the buyers won’t continue buying from the agents, instead of having to deal with many farmers. This is a point that needs to be kept in mind as well.

For such small farmers to be able to benefit and get a better price for their produce without selling to a middleman, all kinds of other infrastructure is needed. These include everything from more cold storages to improved roads connecting villages to the newer markets that come up, power supply which can be relied upon (so that a cold storage can function like one) and traders who compete to get their produce.

It is worth remembering that arthiyas (commission agents) who buy produce from farmers at APMCs, are locally influential people. Hence, assuming that parallel systems of buying and selling in the form of new trade markets, will come up automatically, is rather lame.

It is worth remembering that many arthiyas are themselves big farmers and can ensure that the system continues to work as it is. They might just move out of APMCs to avoid paying levies (which are very high especially in states of Punjab and Haryana at 8.5% and 6.5%, respectively). Everything else might continue to be the same. This depends on whether creation of new infrastructure is worth not paying the levy.

4) The displacement of trade into the unregulated sphere has another downside. It invisiblizes data. When agriculture sales and storage are not recorded centrally, key data points get lost. Evidence-based policy making requires robust data. Without the availability of data on sale prices, volumes and storage, policy makers could be rendered “blind”, adversely affecting decisions regarding agriculture, food security, and food distribution.

One solution to this problem would be to mandate the recording of all trade outside APMCs be recorded in a central/state registry, especially if the new regulations lead to the creation of new markets with decent infrastructure (as opposed to fragmented, distributed transactions).

5)  Other than profitability, these laws have also been opposed on the grounds of being unduly favourable to corporates. This, as we said at the very beginning, makes the government, look like an unabashed backer of the corporate system.

Section 15 of the Farmers’ Produce Act says “no civil court shall have jurisdiction to entertain any suit or proceedings in respect of any matter, the cognisance of which can be taken and disposed of by any authority empowered by or under this Act or the rules made thereunder.”

Instead, the adjudicating powers are given to Sub-Divisional Magistrates (SDMs) and Additional District Magistrates (ADMs) – both being bureaucrats. This has stoked fears of subversion of justice against the farmer. If there is a small farmer on one side of the dispute and a large or even a medium sized corporate on the other side, whose side is the bureaucrat likely to take? One doesn’t need a degree in rocket science or an advance qualification in computer chip design, to answer this question.

This provision in the new farm laws, which doesn’t allow farmers to take a dispute to a Civil Court, also seems to be in line with the narrative of too much democracy inhibiting economic reforms, that has been promoted in the recent past.

So what is the net learning from all this?

The attitude towards corporates highlights the us-vs-them mentality of farmer leaders and activists. If something is good for big business, it must be bad for them. Their argument is that the “freedoms” offered by the new laws vis-a-vis crop sales or storage already existed for the farmers. The changes introduced by the new farm laws are to essentially unshackle the corporates.

This extreme suspicion of corporates and their profit-making motives is unfortunate and can be attributed to both the legacy of socialist thought in India, the politicians often bad-mouthing businessmen, the less than exemplary behaviour of corporates themselves and instances of exploitative practices by corporates in the past.

A blanket fear of corporate involvement is arguably short-sighted, even if understandable due to past practices. Having a robust supply chain of climate-controlled warehouses and transportation is critical to allowing farmers to tap into larger national and international markets.

One practical way to do this at a substantial scale is to attract investment by large corporates. Corporatization en-masse doesn’t have to mean exploitation of farmers. On the contrary, it can help realize higher incomes, given the correct safeguards and regulatory oversight, which has gone missing in the new laws.

This needs to be communicated as well as demonstrated with a few success stories if such materialize, where deregulation and entry of corporates leads to increased farmer incomes. Once farmers have seen concrete benefits maybe the psychology of distrust against corporate players can be reversed.

As Vijay Kelkar and Ajay Shah write in,  In Service of the Republic: “ The safe strategy in public policy is to incrementally evolve—making small moves, obtaining feedback from the empirical evidence, and refining policy work in response to evidence.” Of course, moving incrementally goes against the very idea of a government which believes in making big moves and building a huge narrative around it.

Trust is perhaps the core issue that fuels farmer opposition. There seems to be a complete breakdown of trust in the current government from the farmers’ end. The seeds of discontent were first sown by repeated inconsistencies between election manifestos and implemented policies.

Such tendencies are not unique to the current ruling party, but that hardly absolves them of some significant reversals on election promises. Issues that farmers find particularly grating are the inconsistencies in the Modi government’s stance towards implementing the Swaminathan commission recommendations and their reversal on the promise to open 22,000 agriculture mandis for improved market access.

Also, what does not help is the way these laws were pushed through the Parliament, without any discussion being initiated with the farmers. The government got talking with them only after the protests erupted. In this environment, it is hardly surprising that there is low trust.

The government did itself no favours by the manner in which it introduced the new laws. Even if the intent is to benefit farmers by bringing in the new laws, the means employed by the government do not inspire confidence. Constitutional norms of deliberation and debate in the Parliament were circumvented to make sudden, sweeping changes on a state subject, reneging on our federal ethos.

Moreover, the laws were drafted unilaterally, without seeking inputs from farmers – the purported beneficiaries. Circumventing these good-faith practices has furthered suspicions held by detractors that the laws are indeed meant to further corporate interests only. What hasn’t helped is the fact that farmers cannot challenge disputes arising under these news laws, in Civil Courts.

As the American experience of the late 19th century and early 20th century shows, unregulated capitalism only leads to robber barons and huge inequality in the society, which India has enough of already. Hence, bad socialism has now been replaced by bad capitalism.

Farmer protests continue to expose the deep fault lines in our agrarian economy. The response to these laws offer some valuable lessons to politicians and policymakers. For one, it is impossible to predict with certainty the effect of these laws on agriculture prices. The arguments put forth by farmers merit meaningful engagement.

Dismissing their concerns as misguided or malicious smacks of hubris. In a democracy, good leadership and policymaking is as much about means as ends. Transparency, debate and discussions are essential before draft bills become laws. It is essential to engage key stakeholders and socialize any big-bang changes to avoid surprises and minimize disruptions. One can only hope that the political class has the wisdom and grace to recognize their mistakes and learn from them.

But all this involves hard work, which is a tad too much for a government primarily engaged in building narratives and following them up purposefully. Also, by trying to push agricultural reforms through the stealth route and not engaging with the status quo, the government has done the cause of economic reforms a great harm. In the time to come, it will become even more difficult for it to push through any new economic reform, unless it sits and talks this one out with the farmers.

For starters it should offer to do away with some of the most controversial clauses in the new laws which favour the corporates at the cost of the farmers. That can at least be a small start.

[i] https://niti.gov.in/sites/default/files/2019-07/RAP3.pdf and author calculations on data from http://agricoop.nic.in/sites/default/files/FirstEstimate2020-21.pdf. Population of India in 2019 assumed to be 137 crore, using World Bank data.

Please support Vivek’s work. 

Why Large Parts of North India Turn Dystopian Every Winter

Pic by Neil Palmer (CIAT). Burning of rice residues in SE Punjab, India, prior to the wheat season.
— Picture by Neil Palmer (CIAT). Burning of rice residues in Punjab, India, prior to the wheat season.

In the end, it’s all about incentives, perverse or otherwise.

My parents moved to Delhi in 2009, after my father retired from Coal India. Since then I have spent all Diwalis in Delhi, though this Diwali due to reasons beyond my control, I will most probably be in Mumbai.

The last few Diwalis in Delhi have been very difficult for me. In fact, last year, I could smell smoke inside the house even before the Diwali day (so, it was clearly not because of crackers). Delhi and many other parts of North India go totally dystopian during winters.

On some days when one gets up and looks out of the window, there is so much smog that one gets a feeling that Armageddon is here.

One of the primary reasons for this smog/pollution is the rice stubble burning that happens in Punjab, Haryana, parts of Uttarakhand and Western Uttar Pradesh. From the looks of it, the situation doesn’t seem to be very different this year.

Newsreports suggest that stubble burning is currently on and was responsible for 40% of Delhi’s pollution on November 1, the highest it has been so far this season. Last year on the same day, the stubble burning’s contribution to Delhi’s pollution had stood at 44% on November 1.

Let’s try and understand this issue in detail and why it happens every year.

This is a great story of how noble intentions on part of politicians and bureaucrats (yes, you read that right) along with incentives that seem right when they are introduced, can really screw up things in the years to come.

And once a system is in place, right or wrong, it is difficult to change it, given that many individuals benefit from the status quo.

Why do farmers burn rice paddy stubble?

They do it primarily because the time farmers have between harvesting rice paddy and sowing the wheat crop, is very short. That’s the short answer. But there is a lot more to it than just this.

Mechanical harvesters found their way into Punjab sometime in the early 1980s. Around four-fifths of the rice crop is harvested using combine harvesters and not human beings (if you still thought humans being carry out harvesting in Punjab, you haven’t moved beyond Hindi cinema of the 1960s).

These harvesters cut and clean rice from the rice paddy, but they leave behind straws on the field. These straws are six to eight inches long and for all practical purposes are useless.

The straws remaining after harvesting of wheat can be used as animal fodder. Rice straw cannot be used as animal fodder primarily because of its high silica content. If this straw is used as animal fodder, it impacts the quality of milk, with the quantity of calcium in the milk coming down. This is not true about straw left behind after harvesting basmati rice, which has low silica content.

But basmati is grown only in a limited area. Like this year, rice was planted on a total area of 27.36 lakh hectares. Of this, basmati was planted on around 6.5 lakh hectares or 24% of the total area under rice. This was primarily because the government does not buy basmati rice under the minimum support price (MSP) structure. (We shall look at this in detail later).

Farmers have a time of around 10-15 days for removing the rice straw and get the fields ready for planting wheat. The easiest thing in this situation is to burn the rice straw. All it takes is a single well-lit matchstick. The cost is close to zero.

This burning leads to higher pollution and deterioration of air quality even in places hundreds of kilometres away. The heat from burning the rice straw leads to an increase in soil temperature which kills beneficial soil organisms. The burning is also a potential source for greenhouse gases. Also, it is worth remembering that the burning of post-harvest rice stubble forms around 50% of the all the crop residue burning in the country.

Let’s take a look at stubble burning in incidences reported in Punjab and Haryana, where most of the burning takes place.

Source: Price Policy for Kharif Crops – The Marketing Season of 2020-2021, Commission for Agriculture Costs and Prices.

As can be seen from above table, the number of stubble burning incidents have come down over the years. The total number of incidents in Punjab and Haryana have come down by 52% between 2016 and 2019. In 2016, the total number of incidents had stood at 1,18,065. By 2019, this was down to 56,742.

So there has been some improvement on the number of fires front over the years. But there are other ways of looking at the situation; the total weight of the stubble burned and the total area of stubble burned. The Chief Secretary of Punjab Vini Mahajan said on October 31, that the total straw burning area in 2020 was 7.49 lakh hectares, which was 5.23% lower in comparison to 7.90 lakh hectares last year.

A Amarender Reddy, the principal scientist at the ICAR-Central Research Institute for Dryland Agriculture recently wrote in The Wire that last year the farmers burnt 11 million tonnes of rice stubble in Punjab and Haryana. This is a little over 40% of the total stubble of 27 million tonnes of rice stubble produced in both the states. Reddy expects the figure to be the same this year.

There has been some improvement on the paddy burning front. One reason has been the distribution of Happy Seeder, a machine which cuts rice stubble and plants wheat seeds at the same time. Reddy writes that the Punjab government has distributed around 24,000 Happy Seeder machines though the state needs nearly 50,000 seeder machines to remove all the rice stubble in the short period of time available before wheat seeds are planted.

Also, farmers have complained about low germination of wheat seeds when the Happy Seeder machine is used. The central government, like most central governments, has allocated more money to solve the problem. Using this money, machines to tackle the rice stubble can be bought at a subsidy.

While, all this is fine, it doesn’t answer the most basic question: why do semi-arid states like Punjab and Haryana, grow a water-intensive crop like rice paddy in the first place?

Why Punjab and Haryana grow rice?

Punjab has the highest yield of 4,132 kgs per hectare when it comes to rice, against the all India yield of 2,659 kgs per hectare. The rice productivity in Haryana is better than the all India average and is at 3,121 kgs per hectare. But this does not take into account the total amount of water used to produce this rice.

As the document titled The Price Policy for Kharif Crops: The Marketing Season for 2016-17, brought out by the Commission for Agriculture Costs and Prices, points out:

“If water consumption is measured in terms of per kilogram of rice, West Bengal becomes the most efficient state, which consumes 2,169 litres to produce one kg of rice, followed by Assam (2,432 litres) and Karnataka (2,635 litres). The water use is high in Punjab (4,118 litres), Tamil Nadu (4,557 litres) and Uttar Pradesh (4,384 litres). … [This] shows that the most efficient state in terms of land productivity is not necessarily the most efficient if irrigation water is factored into. This is because of high rainfall in the eastern region.”

Haryana also uses a lot of water to grow rice.

What this means is that Punjab and Haryana given that they are semi-arid water deficient areas, should not be growing rice in the first place. In the early sixties, Punjab used to grow crops which did not require a lot of water. These included maize, bajra, pulses, oilseeds etc. But over the years, the share of these crops in the overall cropped area has come down dramatically. Take a look at the following table.

Source: Economic Survey of Punjab, 2019-20.

Rice paddy was grown only on 4.8% of cropped area in 1960-61. In 2018-19 it was grown on around 39.6% of cropped area. What happened here? Sometime in the mid 1960s, the central government launched the Green Revolution in Punjab, in order to build food security in India and reduce our dependence on import of American wheat under the Public Law 480 (PL -480).

The farmers were encouraged to plant a high-yielding variety of wheat. In order to incentivise them, the government bought this wheat from them at a minimum support price (MSP) which was declared every year.

A look at the above table tells us that the cropped area under wheat jumped from 27.3% in 1960-61 to 40.5% in 1970-71. The fact that the government bought the wheat at the MSP, led to an increase in wheat plantation.

The government started buying rice at an MSP as well. This led to a jump in number of farmers planting rice in Punjab and Haryana because they had a readymade customer in the government willing to buy at a fixed price. They weren’t subject to the vagaries of price and India’s underdeveloped agricultural marketing system.

The farmers were first incentivised to grow wheat (rightly) and then incentivised to grow rice as well (right from the point of food security, but wrong from all other angles).

Take a look at the following chart which plots the total amount of area on which rice has been planted in Punjab, over the years.

Source: http://punenvis.nic.in/index3.aspx?sslid=5882&subsublinkid=4993&langid=1&mid=1 and Agricultural Statistics at a Glance 2019.

As can be seen there was a major jump in the area under rice production between 1970-71 and 1990-91, from 0.39 million hectare to 2.02 million hectare. This was primarily because of rice being bought by the government at a minimum support price announced every year. The next jump came in the mid 1990s.

In the year 1997, free electricity for farmers was introduced in Punjab. This encouraged farmers to grow rice even more. They could now pump groundwater for free. This could be used to grow rice. Take a look at the following table, which plots the number of tube wells in the state over the years.

Number of tubewells (in lakhs)

Source: Economic Survey of Punjab, 2019-20.

As can be seen from the above table, the number of electrically operated tube wells has gone up dramatically over the years. In 2018-19, the number is more than 13 lakhs. With free electricity, farmers were incentivised to buy electricity operated tube wells and pump as much ground water as required to grow rice.

This has led to the exploitation of groundwater. As the latest Economic Survey of Punjab points out:

“A state-wise assessment of the groundwater resources in the country showed that 80% of 138 blocks assessed were ‘Over-exploited’, 2 blocks were ‘Critical’, 5 were ‘Semi-Critical’, and 22 were ‘Safe’.”

In fact, 95% of groundwater is extracted for the purpose of irrigation.

Along with this, the Food Corporation of India (FCI) buys up a bulk of the rice produced in the state. It is worth remembering here that Punjab is not much of a rice eating state. Take a look at the following chart.

Procurement of rice in major producing states.


Source: Price Policy for Kharif Crops – The Marketing Season of 2020-21.

In 2018-19, Punjab produced around 12.82 million tonnes of rice. Of this, 11.4 million tonnes was procured by the government through FCI and other state procurement agencies. In Haryana, around 4.5 million tonnes of rice was grown. Of this, around 85% was procured. The major reason for this lies in the fact that given that the green revolution started here, FCI has the best infrastructure to procure and store foodgrains, in this area.

The government doesn’t procure basmati under MSP because there is a huge international demand, given its fragrant smell when cooked. Hence, farmers don’t plant much of it. While there is international demand, the farmers also need to suffer the vagaries of price.

This easy procurement along with free electricity encourages farmers to grow rice in what is largely a semi-arid area. But this still does not explain how the farmers came around to burning rice paddy stubble. I mean, I have been going to Delhi for more than 35 years now, but the city was never dystopian during winters earlier. This is clearly a phenomenon of the last decade. What changed?

What led to farmers burning rice stubble?

As we have seen, the government policies over the years, have incentivised farmers to grow rice. At the same time, these policies have led to the water table in Punjab falling dramatically. Given this, the government had to something about this and it did. (I am talking more about Punjab than Haryana here, simply because the number of fires in Punjab is many times more).

As the Economic Survey of Punjab points out:

“It requires 4,500 litres of water to grow one kg of sathi rice when it is sown in April-May. But if sowing is done around mid-June, water requirement reduces to 1,500-2,000 litres. Water requirement is high in April-May because the evaporation rate is high and there is no rain. As a result, all the water used in irrigation is groundwater. In June-July, rainfall supports water needs of the crop.”

This logic essentially led to the enactment of the Punjab Preservation of Subsoil Water Act in 2009. As per this law, farmers are not allowed to sow paddy seeds in nurseries before May 10. They are not allowed to transplant the saplings before June 10. The idea being that by the time farmers start transplanting the saplings in the fields, the Monsoon would have already arrived and hence, lesser groundwater will be used to grow rice. Haryana has a similar law.

The intention behind the law was noble, but the incentive it created for the farmer was again perverse. The end to end production of rice takes 120 days. The process of growing rice used to start in April earlier. But this was pushed back by a month due to the law to prevent the overexploitation of groundwater.

This led to a situation where farmers were left with a time of around 15 days to get their fields ready for the plantation of wheat. The quickest way to turnaround is to burn the rice stubble and that is precisely what has been happening for the last decade.

History plus perverse incentives are at the heart of this problem.

What’s the way out of this?

The central government recently told the Supreme Court that it was planning to bring a new law to tackle the stubble burning problem. This is a classic way of how any government tries to tackle a long-term problem. They either bring a new law or throw money at it, in the hope of solving the problem.

But the question is will this law or any law be of help? The Punjab government did bring in a law to solve one problem and ended up creating another one, without really solving the first one.

In the short-term, innovations like the Happy Seeder have clearly helped. But the problem can only be solved if the Punjabi and other farmers in the semi-arid areas of North India are incentivised to not grow rice and to grow other crops which do not require a lot of water.

But at the risk of repeating a cliché, it is easier said than done.

Let’s take a look at this pointwise.

1) Over the years, the government has bought much more rice and wheat than it needs to maintain the operational reserve and the strategic reserve. Like in September, the rice stock in the central pool of the FCI was at 22.2 million tonnes. As of October every year, FCI needs to maintain an operational reserve of 8.25 million tonnes and a strategic reserve of 2 million tonnes. Clearly, the FCI has much more rice than is required.

This reserve can be brought down by buying lesser rice in the time to come. If this policy is followed for a few years, the farmers will automatically be disincentivised to grow rice. If they are disincentivised to grow rice, there will be lesser rice stubble to burn.

Of course, this is a politically risky move and in the process a section of farmers is bound to face losses, until they move away from growing rice.

2) Another way is to buy more rice from states like West Bengal, which is best suited to be growing rice, given it uses less water to grow rice, in comparison to other states. In fact, West Bengal produced 16.05 million tonnes of rice in 2018-19. Of this, the government purchased just 1.9 million tonnes. The point to remember here is that West Bengal is a rice eating state.

So, unlike Punjab the government cannot buy almost all the rice that is produced. Hence, buying by the central government shouldn’t lead to a shortage of rice in the state, forcing it to buy rice from other states, in the process. The solution lies in helping increase the rice yield per hectare in the state. In 2018-19, West Bengal produced 2,906 kgs of rice per hectare. This was significantly lower than Punjab’s 4,132 kgs per hectare, but more than the national average of 2,659 kgs per hectare.

3) The most important way in weaning away farmers from rice is to change incentives. Let me offer an analogy here. Why does a wealth manager/insurance agent/personal banker/mutual fund agent mis-sell? Simply because their incentives are so aligned.

Along similar lines, if the farmer has an incentive to grow rice (and unlike financial salesmen, the incentive here is an honest one), he will grow rice. We can’t judge him for this.

One way out is to encourage farmers to grow maize, like they used to in the sixties. In 1960-61, 6.9% of the total cropped area in Punjab was used to grow maize. By 2018-19, this had fallen to 1.4%. As the document titled Price Policy for Kharif Crops—The Marketing Season of 2020-21 points out: “Maize cultivation is more water efficient than rice… [It has] a great potential for crop diversification in rice-wheat cropping system areas of north-western plains, where substantial groundwater depletion has occurred.”

The trouble is that maize has low profitability in comparison to rice “due to low and fluctuating prices and yield of maize.”

As the Price Policy document points out:

“There is a need to find alternative uses of maize in the country for industrial uses like feed, starch and ethanol as well as for direct consumption, mainly value-added products… Allowing maize as raw material for ethanol production would help in crop diversification and ensure remunerative prices to farmers.”

This will help increase the demand for maize and help increase its price.

Along similar lines, there is a need to encourage and incentivise the growing of pulses and oilseeds, which we don’t grow enough of. As the Price Policy document points out:

“Instead of promoting water-intensive crops like rice… it is important to promote production of pulses and oilseeds by encouraging farmers to grow these crops by providing better quality seeds, technology and appropriate price support to address gap between domestic production and consumption and maintain stability in the domestic market.”

The fact of the matter is that the private agriculture markets in the country don’t function well. At the same time, in order to encourage farmers to grow particular crops, the government cannot buy a large amount of it, like it buys rice and wheat, simply because it doesn’t have enough money to do so or the right infrastructure to store what it has bought. Pulses are an excellent example. The reason FCI cannot buy pulses is simply because it doesn’t have the right infrastructure to store them.

In this scenario, getting farmers to grow something other than rice is going to be very difficult and will take a lot of concentrated effort on part of the politicians as well as bureaucrats. Will that happen? On that your guess is as good as mine.

The moral of the story being, just because there is a problem, doesn’t mean it has an immediately implementable solution.

 

Why Farmers Are Protesting Against Laws Which Will ‘Supposedly’ Help Them

Over the last week many of you have asked me to write on this particular topic. One gentleman even suggested on Twitter, perhaps sarcastically, that I was slacking. (I guess after this 3,800 word piece, he will clearly not say that).

Well, I wasn’t slacking. This is a complicated topic with multiple issues and because of that I was trying to read as much as I could, before offering my views on the issue. (Also, I might be writing more on the issue in the days to come).

What do the Bills which have been passed by the Parliament seek to achieve?

Yesterday, the Rajya Sabha passed two out of the three Bills being referred to as the Farm Bills. These two Bills are the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, and the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020.

The Lok Sabha had already passed these Bills. There was some ruckus in the Rajya Sabha where the Bill was passed through a voice vote.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, allows the farmers to sell their produce outside the Agricultural Produce Market Committee (APMC) regulated markets. The APMCs are government controlled marketing yards or mandis.

This law allows farmers to sell their produce to cold storages, warehouses, processing plants or even directly to the end consumer (you and I, restaurants, hotels etc.) The state government is not allowed from levying any market fee, cess or any other levy in these other market places (or trade areas). In short, anything that the state government can do is limited to the physical area of the APMCs. The Bill allows intra-state trade and inter-state trade.

So, the farmers clearly have more choice on who they want to sell. But they are still unhappy about it? Why? This is a question that will get answered in the piece.

Now let’s take a look at the other Bill.  The idea behind Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020, is essentially to create a framework for contract farming. This needs an agreement between the farmer and a buyer, before the production happens.

Of course, this hasn’t gone down well with the farmers either.

Why are the farmers protesting?

The passage of both the Bills hasn’t gone down well with the farmers. In fact, farmers in Punjab, Haryana and Western Uttar Pradesh, had been protesting even before the Bills were passed by the Parliament. Why has that been the case? Let’s take a look pointwise.

1) As mentioned earlier, the farmers of Punjab, Haryana and Western Uttar Pradesh, are the ones, primarily protesting. Hence, farmers across the country are not protesting against these Bills.

The farmers of these states are primarily protesting because the government procurement infrastructure in these areas is very good. This is primarily because the Green Revolution of the 1960s started here. In order to encourage farmers to adopt a new variety of wheat, the government offered procurement through the Food Corporation of India and a minimum support price (MSP) to farmers, which was declared before every agriculture season. Since then the system has evolved and the government sets an MSP on 23 agricultural crops, though it primarily buys only rice and wheat. In the recent years, it has bought some pulses and oilseeds as well.

The fear among farmers is that the next step in the agriculture reform process will be the doing away of government procurement process as well as the MSP. This is going to primarily hurt the farmers from Punjab and Haryana, who benefit tremendously from this.

2) The farmers who benefit from the government procurement process and MSP are medium and large farmers. As the document titled Price Policy for Rabi  Season—The Marketing Season of 2020-21, published by the Commission for Agricultural Costs and Prices 2020-21, which is a part of the Agriculture Ministry points out:

“As indicated by data received from some states, medium and large farmers occupy a major share in total procurement in the State and share of small and marginal farmers, though improved during last few years, remain low.”

Hence, it’s the bigger farmers who are protesting against the passage of these Bills. (It is important to make this distinction because the media is largely using the word farmers).

The government and Prime Minister Narendra Modi have assured that there are no plans to do away with government procurement or the MSP policy for that matter. The trouble is the protestors don’t seem to be buying these assurances and there is good reason for the same.

3) Why are the big farmers not buying the government’s assurances? The answer perhaps lies in the fact that it is but natural that the next step in the process of reforming agriculture is reforming government procurement and the MSP policy.

As NITI Aayog’s occasional paper titled Raising Agricultural Productivity and Making Farming Remunerative for Farmers published in December 2015, points out:

“There is a need for reorientation of price policy if it is to serve the basic goal of remunerative prices for farmers. This goal cannot be achieved through procurement backed MSP since it is neither feasible nor desirable for the government to buy each commodity in each market in all region.”

This paper essentially had the philosophical underpinnings on which both the Bills we have been talking about are based. Also, if the government purchases and the MSP are done away with, there will be further danger of free power, fertiliser subsidy etc., being done away with as well.

4) The MSP policy has led to excess production and excess procurement of rice and wheat by the government over the years. As of September 2020, the Food Corporation of India had 700.27 lakh tonnes of rice and wheat. As per the stocking norms for food grains, FCI needs to have an operational and strategic reserve of 411.2 lakh tonnes as of July and 307.70 lakh tonnes as of October. These massive stocks of rice and wheat are despite the government deciding to distribute a lot of rice and wheat for free to bring down the negative impact of the covid pandemic.

It has also led to farmers growing rice and wheat at the cost of other agricultural crops. As the NITI Aayog research paper referred to earlier points out: “Per capita intake and availability of pulses in the country has declined to two third since early 1960s. During the 50 years between 1964-65 and 2014-15, per capita production of pulses declined from 25 kg to 13.6 kg.”

Now, you cannot fault farmers for doing this. If they are incentivised to grow something, with a regular buyer available in the form of the government, they are bound to do that. Why take a risk, when a safer option where the government increases the price of rice and wheat every year, and buys what is produced, is available.

In fact, it is safe to say that if the government procurement is lowered (even without the MSP being done away with), the price of rice and wheat will fall. If private markets are established, it will fall even faster. This is something that the big farmers of Punjab and Haryana, don’t want, hence, the protests. It is worth remembering here that the marginal and small farmers, who own land of less than two hectares, are largely consumers of food, and food inflation tends to hurt them.

5) Let’s look at how strong the incentives of big farmers of Punjab and Haryana are. As the document titled Price Policy for Kharif Season—The Marketing Season of 2020-21 points out:

“For example, more than 95 percent paddy farmers in Punjab and about 70 percent farmers in Haryana are covered under procurement operations while in other major rice producing States like Uttar Pradesh (3.6%), West Bengal (7.3%) Odisha (20.6%) and Bihar (1.7%), very small number of rice farmers benefit from procurement operations.”

In total, the procurement system reaches around 11.8% of the rice farmers. This explains by the protests are limited largely to Punjab and Haryana.

6)  Punjabis themselves eat very little rice. But the solid procurement system in place ensures that the Punjabi farmers grow a lot of rice.

Procurement of rice in major producing states 2018-19.


Source: Price Policy for Kharif Season—The Marketing Season of 2020-21.

As can be seen from the above chart nearly 89% of the rice produced by the farmers in Punjab is procured by the government. In Haryana, it is 85%. Clearly, the farmers in Punjab and Haryana have a huge incentive in growing rice and doing away with price risk.

The government procurement system and the MSP have essentially ensured that semi-arid areas like Punjab and Haryana, grow rice, a crop which needs a lot of water. And this has created its own set of problems. “Continuous adoption of rice-wheat cropping system in North-Western plains of Punjab, Haryana and West Uttar Pradesh has resulted in depletion of ground water and deterioration of soil quality, posing a serious threat to its sustainability.” It also creates the problem of stubble burning during the winter months.

7) How do things look for wheat, the other crop procured majorly by the government? Take a look at the following table.

Statewise procurement of wheat.


Source: Price Policy for Rabi Season—The Marketing Season of 2020-21.

As can be seen from the above table Punjab and Haryana are again the major beneficiaries when it comes to procurement of wheat. Uttar Pradesh is the biggest producer of wheat but only around 11-12% of its production gets procured by the government.

As the NITI Aayog paper referred to earlier points out: “The pricing policy has also discriminated against eastern states where procurement at the MSP is minimal or non-existent. With part of the demand in these states satisfied by subsidised PDS sales of the grain procured in other states, prices of wheat and rice in these states end up below what they would be in the absence of price interventions of the government. The price policy has thus also created a regional bias in crop pattern as well as incomes of farmers.” The fact that inequality has gone on for years is disturbing. But this does not mean that the government should procure more rice and wheat from these states as well.

8) The other big fear among farmers, those representing them and many economists, is that large corporates will take over contract farming. The politicians suddenly want farmers to trust corporates and the market process, after spending decades abusing them. This is not going to happen suddenly, especially in an environment where there is big fear of large corporates taking over many other areas of business. All this is happening precisely at a time when the government has banned the export of onions. The messaging just isn’t right, given that if the government trusted the market process, it wouldn’t have banned the export of onions.

9) Another reason that farmers don’t trust corporates is the rise in their input costs. As the document titled Price Policy for Rabi Season points out: “The increase in cost of production was mainly driven by rise in farm input costs such as human labour, machinery, seeds, fertilisers, fuel, etc.” The belief is that this rise in prices is primarily because of the increasing corporatisation of the agri-input sector.

To conclude this section, the government procurement and the MSP where introduced in a certain time when India didn’t produce enough food grains to feed itself. These are policies of a bygone era and help only big farmers in certain states, and hence, they are the ones protesting, despite the assurances by the government.

Will the government be able to do away with procurement and MSP?

This is a tricky question. The procurement and the MSP system are one side of the equation, the supply side. On the demand side, the government sells the rice and wheat thus procured at heavily subsidised prices under the aegis of the Food Security Act, through lakhs of ration shops under the public distribution system.

So, while the big farmers of Punjab and Haryana might feel that the government will do away with procurement and MSP, it is not possible at one go. What is possible is that the government can cut down on procurement, in order to ensure that FCI does not have to maintain excess stocks like it has over the last few years.

The food subsidy system is a system which has been in place and which is much more complicated and much more spread across the country, than just the big-farmers of Punjab and Haryana. Also, with the covid pandemic, the importance of the food security system has clearly come to light. Actually, only once the government does away with the food security system can it do away with MSP and procurement. This is too big a challenge for any government.

Theoretically, it’s possible to do this and give cash handouts to people so that they can buy rice and wheat, but the political repercussions of doing away with food security the way it currently exists, is not something any government will be able to handle. It’s too big a risk.

This problem of  government assuming something and farmers believing the opposite, can only be solved if the two sides talk it out. But that is unlikely to happen, given that the Bills have already been passed.

Reform by stealth

Like has been the case with economic reforms in India in the past, this time was no different as well. The government resorted to reform by stealth and aggressively pushed the Bills through the Parliament, without either talking to the Opposition parties or farmer organisations.

This has led to the firm farmer belief that MSP and government procurement will go in the next round of reform. If the government had tried to talk to the farmers before pushing through the Bills that might perhaps have helped.

Secondly, if contract farming and trade markets other than APMC have to pick up, the state governments need to be on board as well. No corporate or businessman is going to attempt contract farming or setting up trade markets where agricultural produce can be sold by farmers, unless the state government is on board as well.

Hence, some talking would have helped. But then that’s not this government’s style.

My views

Let’s take a look pointwise.

1) There are multiple problems with the way the APMC markets across the country have been functioning. As the Sixty Second Report of the Standing Committee on Agriculture (2018-19), stated, highlighting some of the problems:

a) “Market Committees are reportedly democratic institution but in fact… [the] Committee is dominated by politicians and traders not by farmers as required.”

b) “The provisions of the APMC Acts are not implemented in their true sense. For example, market fee and commission charges are legally to be levied on traders, however, same is collected from farmers by deducting the amount from farmers’ net proceed.”

c) “Market fee is collected in some States even without actual trade-transaction has taken place and simply on landing the commodity at processing units. While in other States trade transaction outside the market yard is illegal.”

Once we take this into account, there is a clearly problem with the way APMCs function. Also, they restrict competition and tend to assume that the farmers are not smart enough to do their own thing (something that many politicians have made a career of). In that sense the freedom that these Bills provide the farmer are great.

Having said that, the absence of any regulation in non-APMC trade markets is not a good sign.

2) Are the farmers going to benefit almost overnight, as is being projected on the social media in particular and media in general? The simple answer is no. It needs to be pointed out here that as per the Agricultural Census of 2015-16, 12.56 crore or 86.2% of India’s operational holdings are small and marginal that is less than two acres in size.

Hence, most of the farmers really don’t produce enough to be able to deal with any marketing system, the old one or the new one, in a direct profitable way. For such small farmers to be able to benefit and get a better price for their produce without selling to a middleman, all kinds of other infrastructure is needed. These include everything from more cold storages to improved roads connecting villages to the newer markets that come up, power supply which can be relied upon (so that a cold storage can function like one) and traders who compete to get their produce.

All of this is very important if farmers are to get a better price for their produce. A survey carried out by the Reserve Bank of India and published in the central bank’s October 2019 bulletin found:

“The survey findings revealed that farmers’ average share in retail prices vary across crops between a range of 28 per cent and 78 per cent [across 14 crops]. The traders’ and retailers’ mark-ups were generally found to be higher for perishables than nonperishables.” The Survey also found that “retailers’ margins were generally higher than the traders’ margins in consumption centres across commodities, possibly due to significant product loss at the retail stage, particularly for perishables.”

In fact, the state of Bihar did away with the APMC Act in 2006 and didn’t get anywhere near higher incomes for farmers, given that the basic infrastructure to get market transactions going was not available.

This is why all the other infrastructure mentioned earlier becomes important. And it can’t be achieved without the active participation of the state governments. Hence, communication between the central government and the state governments on this issue is very important. And that hasn’t happened. Also, as usual, the central government hasn’t gone into the details. It has talked about how the farmers will benefit and is driving home that narrative aggressively, without really talking about the all the practical issues that will keep cropping up. (Remember demonetisation? Remember GST? Why does this feel like déjà vu?).

3) It is worth remembering that arthiyas (commission agents) who buy produce from farmers at APMCs, are locally influential people. Hence, assuming that parallel systems of buying and selling in the form of new trade markets, will come up automatically, is rather stupid. It is worth remembering that many arthiyas are themselves big farmers and can ensure that the system continues to work as it is. They might just move out of APMCs to avoid paying levies (which are very high especially in states of Punjab and Haryana at 8.5% and 6.5%, respectively). Everything else might continue to be the same. This depends on whether creation of new infrastructure is worth not paying the levy.

This is why, at the cost of repetition, proper healthy communication between state governments and the central government becomes very important. Also, it will be interesting to see whether the central government continues to procure rice and wheat through the Food Corporation of India (FCI) at the APMC mandis in Punjab and Haryana, using arthiyas and paying levies amounting to 6.5-8.5%? Or will it choose to move out, thereby hurting the revenue stream of the state governments? (Did someone say cooperative federalism?)

4) It is being assumed that buyers who currently buy from big commission agents, will start buying directly from farmers and let go of the middleman. There is a reason why these buyers buy from agents. It is convenient for them to do so. Do they want to take on the headache of building a new system right from scratch? Is it worth their time and money?

These are questions for which answers will become clearer in the days to come. But prima facie given the abysmal ease of doing business in most states, I see no reason why the buyers won’t continue buying from the agents, instead of having to deal with many farmers. As mentioned earlier, a bulk of India’s farmers are too small to benefit from any market- oriented system, unless they organise themselves in the forms of cooperatives and farmers-producer organisations.

Also, if governments really want to help these small and marginal farmers, they need to reform the change in land usage norms, and let farmers who want to sell their land be able to sell it anyone else and not just other farmers.

5) There is great fear of Big Business taking over agriculture. As per the Agricultural Census of 2015-16, the number of medium and large operational holdings is at 63.16 lakh (A medium sized operational holding has an area of 4 hectares to up to less than 10 hectares. And a large sized operational holding has an area of 10 hectares or more). These are huge numbers we are looking at. Just imagine the kind of scale needed to deal with these many number of farmers. If just take a look at large operational holdings, they are at 8.31 lakh. Hence, it’s not going to be easy for any corporate to do anything without involving middlemen.

If businesses just concentrated on states which have a higher proportion of medium and large operational holdings they are looking at Punjab (33.21% of the total operational holdings), Rajasthan (19.47% of the total operational holdings) and Haryana (14.35%). Not surprisingly, farmers of Punjab and Haryana are worried. They would rather deal with the known devil, the government, who, they can always vote out in the next election. But how do you vote out a corporate?

To conclude, the central government clearly hasn’t gone into the details of what will it take to really make the life of an average farmer better. As usual it is only interested in selling the narrative that the passage of these Farm Bills will ensure that farmers get a better price for what they produce. (Remember, the 50% higher MSP story they tried selling sometime back?)

When it comes to the opposition parties, they have managed to get low-hanging fruit to put the government on the mat after a while, and not surprisingly, they are cashing in on that.

Meanwhile, nobody is really worried about the farmer.

I would like to thank Chintan Patel for research assistance.

Please support Vivek’s work. 

Where are the jobs?

jobs

One million Indians are entering the workforce every month. This makes it around 1.2 crore a year, which is around half the total population of Australia.

This is India’s demographic dividend, which is supposed to find a job, earn and spend, pull India’s crores out of poverty. At least, that is the story that we have been sold over the years. But the theory is not translating into practice.

The land-owning communities across large parts of the country have been on the streets, protesting. This includes the Marathas of Maharashtra, the Jats of Haryana, the Kapus of Andhra Pradesh and the Patidar Patels of Gujarat.

The average size of the land farmed by the Indian farmer has fallen over the decades and in 2010-2011, the last time the agriculture census was carried out, stood at 1.16 hectares. In 1970-1971 it had stood at 2.82 hectares.

This has happened because of the division of land across generations. Further, this fall in farm size has made farming in many parts of the country, an unviable activity. And this explains why the land-owning castes across the country have been protesting and want a reservation in government jobs.

The trouble is that the government does not create jobs any more. In fact, between January 2006 and January 2014, the number of central government employees went up by just 30,000. The total number of people working for the public-sector enterprises has fallen over the years.

Only three out of five individuals who are looking for a job all through the year, are able to find one. In rural India, only one out of two individuals who are looking for a job all through the year, are able to find one. This has been the state of things since 2013-2014.
In fact, as far as Indian industry is concerned it favours expansion through capital (i.e. buying more machines and equipment) than recruiting more people.

Nikhil Gupta and Madhurima Chowdhury analysts at Motilal Oswal, use data up to 2014-2015, from the Annual Survey of Industries, and based on it conclude that over a period of 35 years up to 2014-2015, the rate of employment in the Indian industry has increased at 1.9 per cent per year on an average. In comparison, the capital employed by industry has grown at the rate of 14 per cent per year.

Clearly, capital has won the race hands down. Or if I were to put it in simple words, when it comes to Indian industry, machine has won over man for a while now. The Indian corporates like the idea of expanding their production and in the process their business, by installing new machines and equipment, rather than employing more people.

One of the reasons for this is the huge number of labour laws that Indian firms need to follow. As Jagdish Bhagwati and Arvind Panagariya write in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.”

The National Manufacturing Policy of 2011 estimates that, on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations.  At the same time, these units sometimes need to file as many as 100 returns a year.

This basically ensures that an average Indian firm starts small and continues to remain small. In the process, jobs aren’t created. This is reflected in the fact that close to 85 per cent of Indian apparel firms employ less than eight people. As per an Economic Survey estimate, close to 24 jobs are created in this sector per lakh of investment. Despite, this firms in this sector continue to remain small.

The points discussed up until now are essentially big structural issues, which have been around for a while. In the recent past, demonetisation which overnight made 86.4 per cent of the currency in circulation, useless, ended up destroying many firms operating in the informal sector. The Goods and Services Tax has added to this.

These days the presence of informal sector is seen as a bad thing because it doesn’t pay its fair share of taxes to the government. This isn’t totally true. People who work for these firms do spend the money that they earn and pay their share of indirect taxes. Also, as the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping unemployment low.”

As economist Jim Walker of Asianomics wrote in a research note sometime back: “There is nothing intrinsic that says that the informal economy is a less effective or beneficial source of activity than the formal economy.” This is something that the Modi government needs to understand.

In its quest for more taxes, it is working towards destroying large parts of the informal economy, which is a huge part of Indian economy. Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a research note: “India’s informal sector is large and labour-intensive. The informal sector accounts for ~40% of India’s GDP and employs close to ~75% of the Indian labour force.” 

And this is something that the government needs to remember in its bid to forcibly formalise the Indian economy.

The column originally appeared in the Deccan Herald on October 15, 2017.