The Era of Transformation — Deregulating Indian Agriculture

Saatwik Panigrahi
6 min readMay 2, 2021

The coronavirus pandemic, in its never-ending spiral, has deeply paralyzed the manufacturing and service sector of India. To this end, in FY 2021 the growth rate of GVA of manufacturing plummeted by 9.4%, while services sector contracted by 15.9%. Amidst recessionary trend in the economy, the resilient agricultural sector reaped a record-high food production of 308.65 million tons, or 3.5% growth over the previous year, and hence, remains the silver lining during the prevailing economic adversities.

The finance ministry’s proposed agricultural reforms could be construed as a smaller tranche of governmental efforts in moving towards bringing sectors under the panoply of the private sector. Such long-awaited structural reforms in agricultural marketing contract farming and amending Essential Commodities Act have large-scale implications on the farmers, traders, and other non-state actors. Such would be the implications that it is antithetical to the official policy resolution of 1948 during the framing of constitution that warranted an interventionist-approach towards agriculture. The priorities of Indian agricultural policy has experienced quantum jumps — socialist objectives fostering government intervention to capitalist ideals of free market economy. Policy sphere has witnessed land reforms of the 1950s, green revolution-led subsidized productivity growth in mid 1960s to a renewed focus on doubling of farm incomes in 2016, and recently Farm Bills of 2020 that deregulate agriculture.

In this article, I briefly analyze the conformist and contrarian opinions on the Indian Agriculture Acts of 2020. The article assumes a basic familiarity with the proposed modifications in the law.

Conformist Views

Firstly, the article begins by critiquing the governmental mandate to deregulated a system of government-run wholesale markets.

The Shanta Kumar Committee Report emphasized the sheer inefficiencies ravaging the Public Distribution System and its incapability to cater to Below-poverty line card holders. The Planning Commission too, in 2005, noted that 58% of the subsidized food grains procured by the Food Corporation of India fail to reach the beneficiaries. Ironically, several reports have revealed that FCI has often suffered the brunt of unused stocks that inflict inordinate pressure on public budgets. In line with the views of K Subramanian, Arvind Subramanian, and the Shanta Kumar Committee, the government is systematically dismantling the coverage of PDS and instead rallying behind the implementation of a direct benefit transfer scheme. Arvind Panagariya too argues that though an absolute comparison of farm incomes in Punjab and Bihar relegates the latter, a sole comparison of relative farm incomes through years after the repealing offers a contrasting picture.

As firms enter into contract farming with farmers, it will encourage the export of agricultural produce. Through these reforms, a farmer can connect with big traders and exporters to make his farming profitable. The experience of Indonesia in Contract Farming led to an increase in net income to US$4 600/ ha per season — much higher than GNP per capita of US$3 000. However, the experience has also taught that Contract farming allows the timely delivery of inputs through credit and technical assistance from different institutions that helps to boost the productivity. It reduces the risk of farmers due to specification of prices in contracts. It provides access to efficient distribution channels, storage capacities and competent marketing to markets that could not have been accessed by small farmers. This oversight and expertise could essentially lead to a greater productivity.

Retaining the MSP system means the government is underwriting the whole network for certain crops to ensure farmers receive assured income for those crops. Government of India (GoI) has procured 5.73 lakh tonnes of paddy worth Rs 1,082 crore at MSP since the last week of September.

Additionally, the Economic surveys of 2011–12 and 2012–13, Raghuram Rajan and Basu sought to highlight the necessity of private investments for improving post-harvest infrastructure, and ensuring market linkages. Though the adventurism for bringing agriculture into the panoply of the private sector is definitely a welcome move, the recommendations of Arvind Subramaniam on the two-way approach towards agriculture, depending on the region and progress. The prosperous and MSP-supported agriculture of Northern Plains should witness different policy changes than the less prosperous regions with an acute issue of productivity.

Contrarian Views

According to Swaminathan Committee’s report, the cost-risk returning structure of farming is becoming adverse, hence, dismantling the price guarantee would disincentivize agriculture. Additionally, assenting to the Committee’s recommendation on widening the spatial and horizontal access to MSPs(Minimum Selling Price) by including more crops, Kaushik Basu proposes broadening of MSP concurrent to liberalisation. Being a proponent, the Shanta Kumar committee also reiterates the importance of MSP for scaling down distress sale, protests the skewed preference towards wheat and rice, and calls for greater penetration by increasing access of small and marginal farmers and inclusion of pulses, oilseeds etc.As underscored by the report, 5.8% of all wheat and paddy households sold to a procurement agency, hence, evidencing Basu’s stance on promoting household awareness functioning of markets and MSP.

Shanta Kumar Committee also highlighted that incentivising is precursor for augmenting farm incomes and productivity. An inter-state report by Niti Aaoyog identified the critical role of MSP in stabilising market prices and adoption of modern `technologies, hence increasing yield. According to a study in Karnataka on agricultural economy, if implemented properly, MSP can effectively play the expected roles: to act as incentive price, crop pattern and input intensity navigator, risk abater and technology promoter. Moreover, an empirical scrutiny of productivity and MSP from 1981 to 2010 for all major crops exhibits a positive correlation. However, the growth is limited to certain pockets and is highly reliant on the success in implementation of the programme.

As Jean-Jacques Rousseau contends that in a contract of self-enslavement, there is no mutuality. Quoting a 1959 law enacted in Louisania, Basu tries to draw an analogy between the current laws and Warranteesim/voluntary slavery; By doing so, he proves despite expanded options, real beneficiaries were slave masters. Citing the sprites paradox, Basu expresses his fears about the laws. Quoting Legal Scholars such as Eric Posner, Suresh Naidu, Glen Weyl, and Cass Sunstein have expressed concern about the need for antitrust laws to regulate monopsonies, like big corporate buyers. Indian antitrust regulations should renew their focus on agricultural sectors and take cues from the Capper–Volstead Act of USA and Sherman Acts for preventing the ruthless exploitation of monopsonies.

In 2006, Bihar abolished the APMC Act. The experience of Bihar could serve as a model for implanting new reforms in the system. According to the data of Department of Agriculture — Bihar, maize, rice, and wheat have experienced a growth in productivity rates after the repealing, however, this has been associated with externalities. Farmers claimed that even after it was repealed, traders and middlemen made huge profits by buying the produce well below the MSP. Cooperativisation could essentially be a solution by ensuring an equal distribution of bargaining power and undermining the monopsony. A study by Centre of Advanced Study on India by UPENN indicates that the repealing of APMC act has not changed the rural scenario to a large extent. In case of cereals and horticulture farmers sold their produce to traders in traditional markets operational before the repealing. It attributed the proliferation of markets to increase in production, rather than decrease in bureaucracy.

Lastly, the nature of the amendment of the Essential Commodities Act, which is admittedly inefficient in its present form, by allowing holding of larger stocks, may facilitate big players coming in and heavily influencing markets via their stocking policies. As per the Global Hunger Index, 2020, India is ranked at 94th position out of 107 countries. The low ranking means India is classified as having a “serious hunger problem”

The downside to this Contract Farming could be corruption and misallocation of resources on the part of the contractor. The sophistication and capitalisation of agriculture might eliminate disguised unemployment leading to loss of livelihoods and incompatibilities with the farmers cropping regime. It might also lead to the disruption of an existing farming system. The farmers should be responsive to the advancements in cultivation and establish agreements on quality standards. It could lead to an over dependence on credit and might increase the rural indebtedness. However , in the large presence of small and marginal farmers a sharing of risk, assured access to market and credit facilities , technical assistance , efficient crop management practices and quality maintenance would certainly increase the agricultural productivity.