Ordinances to transform agriculture sector

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Kailash Choudhary | 21 Jul, 2020
For a very long time, reforms in agriculture marketing have been debated, but no decisive action had been taken. It required leadership and political will to unshackle the farmers from the vice-like grip of intermediaries who take away a large slice of farmers' income by resorting to cartelisation and unfair arbitrage.

Two landmark ordinances were recently promulgated by the President of India, which have the potential to fundamentally transform the agriculture sector and facilitate more holistic development of agriculture markets, from farm to fork, furthering the government's vision of doubling farmer income by 2022.

The aim is to help the farmer become an entrepreneur rather than being subservient to unholy nexus of regulated markets and intermediaries.

The first of these Ordinances, The Farmers' Produce Trade and Commerce (Promotion & Facilitation) Ordinance 2020, provides freedom to farmers to sell when they want, where they want and in whichever market they want, which was restricted by stringent (and variable) APMC regulations. There were previously four key restrictions for farmers - location of market (restricted to the nearest geographic market), number of buyers (limited to licenced traders leading to cartelization, restricting competition and reducing farmer price realization), infrastructure availability (due to lack of private investment outside the mandi) and price transparency (limited visibility of inter-state prices, potential for intermediaries to gain through arbitrage at the cost of farmers).

In addition to these restrictions, farmers face multiple operational challenges including prohibitive transportation costs to the nearest market, long queues at market and delays in auction, local mafia raj, etc. Further, the choice of APMC mandi and procurement at MSP, will continue uninterrupted.

Finally, in order to protect the interest of farmers, the government has mandated an expedient and simple dispute resolution process.

With the new Ordinance in place, a vibrant ecosystem will be created for farmers and traders creating an unrestricted market with 3 key benefits -

First, choice of market, allowing a farmer to sell in any state or national market that offers the best prices. This will limit the high dependence on local traders and enable farmers to realise the best prices for their produce, without having to pay commissions and fees to middlemen. A competitive marketplace will be created with large number of buyers leading to higher price realisation for farmers.

Second, choice of place, allowing farmer to sell from any location - including farmgate, storage points like warehouses or silos, private mandis or the APMC markets. With the option to sell at farmgate or warehouse, farmers can reduce transportation overheads and improve net realisation in addition to sidestepping the challenges faced in current markets.

Third, choice of timing, allowing farmer to store produce and sell post price discovery. Previously, farmers would have to transport their produce to the mandi, incurring significant transportation costs. This would result in a need to sell irrespective of prices, in order to avoid incurring a reverse transportation cost. Under the new Ordinance, a farmer can store and sell, due to choice to market and place.

While historically there has been limited investment in infrastructure along the value chain, in order to support smooth implementation of the Ordinance the government of India has announced an Agri Infra Fund of Rs 1 lakh crore. The fund will catalyse otherwise stagnant investment from cooperatives, FPOs and private sector to facilitate creation of physical infrastructure like assaying and grading facilities, cold chain etc, allowing farmers to store and sell, and reduce wastage or distress sales.

While the first Ordinance facilitates better price realisation post-harvest, the second Ordinance, The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020, enables market linkages at the sowing stage, thereby limiting both production risk and price risk.

The lack of a legal framework for contracting between farmer and buyer in India has historically led to limited private sector participation in production. This Ordinance provides a uniform framework for private investment in markets, without challenging a farmer's ownership rights or right to cultivation - which will provide farmers three benefits.

First, risk mitigation and greater predictability of income. Farmers will have the option to enter into agreements with buyers before sowing, securing the price for their sale. Further, they may be able to enter into agreements that protect them from harvest losses as well, thereby insuring against output risk. This provides greater certainty for farmers in scenarios where either the crop output or market prices are highly variable, but enables them to grow risky crops and benefit from the upside.

Second, access to market intelligence and hence higher value per acreage. With limited forward linkages, farmers don't have access to consumer demand trends and hence, are not able to optimize crop and varietal mix. This Ordinance will enable stronger linkage with both domestic and export markets.

Third, access to better technology and knowhow for farm management and hence, higher yield. As private sector will now have framework to better integrate with farming practices, they can channel expertise to farmers as well as make direct technology investments (e.g. geo monitoring setups, IoT, etc) driving higher yield and promoting sustainable agriculture over long term.

Beyond the benefits, this ordinance also safeguards farmers by providing clear guidance and support to enter into fair trade practices, a stringent dispute resolution mechanism, penalties for misconduct by buyers, etc.

Collectively, these reforms will herald a new dawn for agriculture in India, transforming farmers into vibrant producers, integrated with the national and global economy, who have freedom, choice, higher price realization for their produce and security of livelihood.