Farm Laws: Regulation-revolution?—Assessing the Need,Intent and Impact of the New Farm Laws from an Economic Perspective

I. Introduction: The Context

Indian agriculture grew at about 1% per annum in the fifty years before Independence. It has grown at about 2.6% per annum in the post-Independence era to become the world’s second-largest food producer (Purkayastha, 2021). This transformation is mainly owed to a rapid increase in area under cultivation and radical progress in farming methods and production technology. Despite this, the agriculture industry has had a stagnated contribution to the GDP of India. ¹ To stir up change in the agriculture sector, in an attempt to revolutionise the industry and catalyse this revolution the government introduced three new bills: The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 The Essential Commodities (Amendment) Act, 2020 were the three key legislations passed by Parliament in September 2020. These sought to deregulate and privatise the industry. Encourage contract farming and create space for private investment and make the industry more competent. The new bills also sought to eliminate the middlemen and create a separate appellate system for legal recourse involving farming practices.

The current system is heavily influenced by middlemen or arthias. It also has heavy government regulation, which also comes with provisions of Mandis guaranteeing a minimum support price and the assurance of sale, giving the farmers a safety net and assuring them a payday at the end of the harvest season. This makes sure there is a steady supply of the necessary crops and a stable and assured income source for farmers. As expressed by Kriti Upadhyay, a journalist with the Diplomat Media

With all of this government intervention in the agricultural sector, the Indian government wanted to modernise by deregulating and allowing for greater privatisation. The three farming laws they passed this past September facilitated interstate trade, contract farming, and direct marketing, and lessened regulation on the whole production process. (Upadhyaya, 2020)

These reforms come at a time when the government is trying to facilitate a v-shaped recovery of the country’s recession-hit economy, after two consecutive quarters of contraction. The government’s annual economic survey vociferously defended these laws and advocated that they will have a positive impact on the industry that is at the present riddled with inefficiency. They claim that these legislations are primarily for the benefit of small and marginal farmers in India, who constitute 85% of the industry. The survey said. ‘Several Economic Surveys have expressed concern at the functioning of the APMCs and the fact that they sponsor monopolies. Specifically, Economic Surveys for the years 2011–2012, 2012–2013, 2013–2014, 2014–2015, 2016–2017 and 2019–2020 focused on the reforms required in this context’. The suggestions on the marketing of agricultural products include the need to provide a choice to the farmers to sell their products directly to a processing factory or the private sector, development of agriculture marketing infrastructure, amendment of the State APMC Acts and the Essential Commodities Act to ensure barrier-free storage and movement of agricultural commodities, it said. According to the survey, the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020, Removal of Various Commodities from The Essential Commodities (Amendment) Act, 2020, will allow private players to produce as much required as per economies of scale, hold in cold storage for uniform rational distribution over a longer duration, facilitating less volatile pricing. The legislation will lead to new investments in cold storage, improved food supply chain, and better engagement of farmers with wholesalers, retailers and exporters. In incentivising private investment the government sought to invite better facilities (Ministry of Finance, 2021).

The proposed farm bills like many legislations before it comes with intended benefits and some unwanted, unappreciated repercussions, while the government holds its feet firmly placed in the belief that this will revolutionise the industry and bring about much-needed reform, many farmers hold legitimate apprehensions of its potential repercussions. The next part of this article unfolds estimated outcomes: The Good, The Bad and The Political.

II. The Good

By deregulating, the bills circumvent the overbearing taxes and cesses levied by APMCs and Mandis. And in the process also eliminate issues related to single window systems, manual weighing, and the absence of advanced grading systems, that often tip in the favour of the seller. By eliminating these problems, the government seeks to recover the damage caused by logistical limitations estimated to be ‘losses to the tune of 4%–6% in cereals and pulses, 7%–12% in vegetables and 6%–18% in fruits. Total post-harvest losses were estimated at ₹44,000 crores at 2009 wholesale prices’ (Ministry of Finance, 2021). These bills seek to shift these risks and unpredictability of the market from the farmer to corporations, through private sponsorship. To that end, it encourages the private investment sector, which will also encourage access to better, more competitive resources, and give the farmers the opportunity to function in a more competitive market, with more opportunities and fewer regulations. As per the government, MSP will continue to remain a safety net to procure crops and maintain prices even if they drop beyond a certain level due to excessive production of certain crops (Choudhury, 2020). Economists agree that the reforms are needed to help guide farmers to produce as per demand and supply to remain competitive.

In theory, these predictions hold merit. A private, deregulated, and competitive market will, in the long run, increase productivity and boost the country’s economy. However, in the short run, this will inevitably lead to loss of livelihood for several farmers, who will have to migrate to other sectors, and many believe that India is not equipped to provide alternate opportunities in other sectors.

III. The Bad

Although the new MSP policy protects paddy and wheat production, it turns a blind eye to other important crops like pulses, oilseeds, fruits, and vegetables. This may lead to disincentivising production, which would increase reliance on imports, consequently pushing the country’s economy further down the recessionary gap. Private investment combined with deregulation also invites the potential of production of only those crops that yield higher returns on investment, which will inevitably lead to either the shortage of supply of produce that yields lower returns but still remain essential to consumer’s needs; resulting in a spike of price levels of such products, which should be covered in essential goods, but no longer will be. There exist schemes like Pradhan Mantri Fasal Bima Yojana (PMFBY), which is mainly focused on mitigating production risk as opposed to price risk. The newly proposed bills dawn a period of uncertainty for several stakeholders. There is a well-grounded fear of loss of livelihood. There exists a lot of apprehension towards privatisation. To put it simply, reforms in the industry are inevitable, but these reforms need to pay more heed to providing a safety net for all the stakeholders involved.

IV. The Political

These reforms need to be reviewed and apprehensions resolved at the earliest lest our already debilitating economy will take another serious blow. The resultant protests have already led to losses in industries like textiles, auto components, bicycles, and sports goods, considering these industries majorly cater to the export market, any further escalation can lead to major losses. The Confederation of Indian Industry had predicted that the protests will obstruct India’s path to economic recovery. Especially since these protests obstructed major transit points, disrupting supply chains, and creating logistical problems. The addition to logistic costs is assumed to be around 8%–10%, as estimated by CII. ² ‘Obviously, this strike (had) repercussions. Agricultural supply has already dipped and this will lead to inflation. Agrarian distress will be further compounded’, as previously predicted by Jawaharlal Nehru University economist, Himanshu (Krishnan, 2020). The CAIT estimates the losses caused by the highway blockage to be to the tune of 60,000 crores (BWO Bureau, 2021). The NHAI also suffered losses estimated to be nearing 2,700 crores resultant of the protests (The Economic Times, 2021).

V. Battles Won, Battles Lost: What About the War?

It cannot be denied that new farm laws would have incentivised much-needed private investment that will bring with it more advanced technology and logistical solutions. However, that would add a certain volatility and uncertainty to the market. Traditionally, during recessionary periods, the government increases spending to increase the money flow in the economy, the decision to cut spending in an important sector like agriculture, and to promote private investment is one that is playing off the rulebook. While it could lead to revolutionary change, and overhaul the entire sector, it comes with risks that could have grave repercussions, driving an already endangered industry to the ground. The potential for exploitation comes bundled with the prospect of opportunity.

The repeal of the laws provides an opportunity to take a step back and reassess previous lapses. Lapses that include but are not limited to lack of transparency. Further, the legislation does not show reliance on or even consensus (Chawla, 2021) on critical data and statistics that should be central to the formulation of such Bills. One of the farmers’ central demands is the continuance of the provision of MSP. However, in the absence of reliable data and enormous variance of estimates, it becomes increasingly difficult to legitimise the burden on taxpayers as the cost of subsidising agriculture. Although the need for change in the industry is undeniable at best, the legislators ought to employ a more transparent, empirical data-driven and theoretically sound approach which balances the competing interests of stakeholders. Shifting the focal point of revolution from short-term fixes to long-term development, increasing the overall efficiency and competence of the Sector and the economy at large.