The Farmers Bill – Understanding the provisions

While the passage of bills related to agriculture reforms passed by Lok Sabha this week is indeed landmark, it is not exactly new. The bills had already been promulgated as ordinance in May, earlier this year. That makes the current protests interesting as there was no opposition then. If the bill was wrong, why was it not opposed when the ordinance was passed?! Nevertheless, here is a brief look at the provisions of the bill and why it matters so much.

The bills passed by Lok Sabha relate to 1) The bill allowing farmers to sell their produce outside APMC (The farmers’ produce trade and commerce (promotion And facilitation) bill, 2020), 2) The bill allowing farmers freedom to enter into agreement with a “sponsor” (empowerment and protection) agreement on price assurance and farm services bill, 2020) and 3) Amendment of Essential Commodities Act.

A market can become efficient only when buyers and sellers have multiple options to engage in trade. As per the regulations so far, a farmer could sell its produce in government managed APMC (mandi) only. Apart from the fixed prices, he also had to incur cost of bringing produce to the market and in cases, a commission. The first bill ends the monopoly of APMCs and allows farmers to enter into an agreement with any individual or a company giving him a better price, brining competition into the market. While there could be a fear that prices may crash in case of bumper crop, the government determined minimum support price (MSP) would always act as the floor. The bill, in simple terms, means that if a trader in Orissa realises that he can procure wheat from Punjab at Rs 2,500 per quintal and sell in his state at Rs 4,000 per quintal, he can go ahead and enter into a contract. The bill, specifically, prohibits state government from imposing any fees on such trading which can distort the market and, eventually, force farmers to sell within APMC. While this ends the monopoly of APMCs, they can still manage business if they offer market-based prices to farmers.

A question that arises is why these APMCs existed so far? The reason was that India faced huge scarcity of food in earlier decades where policy response was to optimize whatever amount is produced. APMCs helped ensure this. While the shortages have now disappeared, the market inefficiency still remains.

Another law influencing agriculture market is Essential Commodities Act, aimed at managing prices. The act prohibited stocking of food grains and other food items such as potato, onions etc, as traders used to ‘hoard’ it in times of surplus and sell at much higher prices during scarcity. The amendment bill passed this week has freed market players such as food processing companies, wholesalers, large traders etc from this restriction who can now stock quantities as per their needs. The bill still does give government the power to impose stock limits but that can be done only under extraordinary circumstances such as war, famine etc. While there could still be a fear that market players may resort to hoarding, it must be noted that Food Corporation of India (FCI) now holds huge amount of food stocks. This reduces the market players ability to influence prices unlike earlier times.

The third law allows “sponsors” to enter into an agreement with farmers to purchase their produce at a pre-determined price, subject to quality and other parameters, what could be called ‘contract farming’. The sponsor could be, as in the case of first bill, a trader, wholesaler, exporter, food processing company etc. The value of the bill lies in the fact that a certain region/village may be producing a specific variety which can be converted into a high value produce subject to investment. While a corporate may be ready to invest, he would need assured supply. The act would enable the sponsor to ensure the same and create a win-win proposition. An important provision of the bill is a minimum guaranteed price linked to any suitable benchmark. While this provides a floor to the price, government would have to be vigilant and be ready to bring about any amendment if sponsors find a way to short-change the farmers.

But if these bills are so useful to the farmers, why is there so much of opposition? The simplest reason is that state governments lose significant amount of revenue they used to generate as mandi fees. It also renders large number of mandi players, often politically connected, redundant. However, the bills do not dismantle APMCs (nor does it have the power to do so) and if they align themselves with market forces, they can still retain sufficient business.

10 thoughts on “The Farmers Bill – Understanding the provisions”

    1. Thanks Ajay.. 🙂
      We are certainly entering unchartered territory. Like in case of IBC, the need would be to remain vigilant and plug the loophole, when found..

  1. What provision is given for avoiding predatory pricing…..?!! What if reliance does in agriculture produce same as jio?!! This article is very much myopic to understand the reasons for protests….it sounds like govt sponsored this article

    1. Pls read the bill. It clearly says that farmer would receive a guaranteed price linked to APMC or any other benchmark. Bonus or premium would be over and above that. Further, the article mentions “government would have to be vigilant and be ready to bring about any amendment if sponsors find a way to short-change the farmers”. Nothing can be foolproof. Pls read about IBC and amendments made in the years after it was implemented.
      BTW, ‘predatory pricing’ refers to a seller selling a product below manufacturing price.
      Happened to watch “The Social Dilemma”. It talks about how social media is polarizing opinions, among other things. Be open to other view points, Let everyone have a view without assigning a motive.

  2. The biggest assumption here is that private players will give higher price than MSP to farmers and make it competitive. however, the reality is no pvt. players would offer a rupee higher, they will exploit the farmers.
    And this MSP thing is so superficial, acc. to a report, only 6% farmers gets MSP other 94% don’t and I myself is the testimony to that, I am a farmer son and I have seen majority of farmers have to sells their produce below the MSP.

    Most of your articles are very informative but this one did not meet my expectations. however its not your fault also, as you are not aware of the actual situation and you are writing what is available on internet(docs etc).

    1. Thanks Arshpreet on the appreciation of other articles and also, on putting forward your point of view. Just to add to my point – Market for any product requires large number of sellers and buyers to act efficiently. That is the basic principle of economics. Market may fail if there is a collusion among the players, which would become difficult if traders, exporters, pvt corporate, agri based startups, all become a part. We should also take note that our agriculture is currently distorted. We produce more of wheat and rice whereas we import oil and pulses. A free market would identify these opportunities and utilise it.
      Of course, things may still evolve in unanticipated ways and government will have to be ready to make amendments if any unanticipated distortions happen, like in case of IBC passed in 2016.

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