Nero’s Guests

Indians often complain about the high and rising prices of their groceries. This is no wonder in a country where almost 30% of the average household’s total expenditure is on food alone (not including restaurant meals and alcohol and tobacco consumption), and the annual food inflation has been hovering around 5.4% for the last decade.

Even if consumers are facing rising prices, the food producers or farmers are not taking home huge profits. Growth in farm income per cultivator after adjusting for inflation has been only about 0.4% per annum on average between 2011-12 and 2015-16. This anaemic growth in farm income is despite a decline of more than 7% in the number of cultivators during the 4-year period. So, if the same number of cultivators were sharing the pie in 2015 as there was in 2011, the growth in household income for farmers would actually be negative. In 2011-12, about 23% of farm households were living below the national poverty line, with some states like Jharkhand having almost half of its farm households living in dire poverty. All this is despite repeated waivers of farm loans, huge fertilizer subsidies (even this week the government has increased the fertilizer subsidy from about 30% to about 50% in face of rising international prices of fertilizers), minimum support price (MSP) for some of the major crops, free or cheap electricity, no tax on farm income and other government doles.

Clearly, someone is making a lot of money in Indian agriculture, and it seems it’s neither the farmer nor the government nor the consumer. Then who? To answer that question we need to understand how the agricultural produce travels from the fields to the grocery shops in India.

Farming and agriculture require a lot of initial investment. Think about the seeds, the pesticides, the water, electricity to pump that water, maintenance of the storage facilities after the harvest, etc. All this requires a lot of money that most farmers (even those who own the agricultural land, not to mention the obviously sorry plight of the landless tenant farmer) don’t have. So they take loans. Without access to bank credit in remote rural areas, most farmers are left to be exploited by the exorbitant interest rates of the local village moneylenders (sahukars). Given the highly uncertain remuneration from agricultural production due to high dependence on the weather (e.g., floods and droughts) and local and international market conditions (e.g., over-production or slack in demand leading to low prices), quite often the farmers are unable to pay back their loans. As compensation, the sahukars often ask for unpaid labour from the farm households or pre-pay the farmers for their future uncertain production so that they are not starving in the meantime but the prices are extremely low in lieu of the insurance. These sahukars then not only played the part of the moneylender but also the monopsonist buyer of the farmers’ crops. Then it is in the sahukars’ interest to push the price he pays to the farmer for his produce to as low a level as possible so that the farmer is in perpetual debt and the sahukars can extract the entire surplus of production. To ensure this, the sahukars employed tricks like citing “poor quality”, “low market demand” and “excess supply due to bumper production”.

To protect farmers’ interest against these sahukars, during the 1960s and 1970s, most of the states legislated the formation of the Agricultural Produce Market Committee (APMC), whereby well-defined market yards or mandis were constructed and the farmers were required to sell their products through auction to only licensed traders within the confines of these mandis. The licensed mandi traders, in turn, sell the produce to wholesale traders, who then sell it to the retailers and food processing companies. Of course, as one moves up along this pyramid of intermediaries, there is increasing market power and markup at each stage. This explains the huge gap in prices between what the farmers receive and what the final consumers pay. But, if APMCs were formed to protect farmers’ interest then why is the price farmers get still so low?

The price at which exchange occurs in these mandis is determined by a lot of factors – the minimum support price announced by the government, the demand for particular items in the market, the quality of the produce, etc. One would think that the price is a result of bargaining between the farmers asking for higher prices and the traders trying to push the price down, but de facto there is little bargaining. Almost 90% of India’s agricultural land holdings are as small as 1 hectare, and these marginal farmers are in no position to produce enough to have any real bargaining power while negotiating the price of their produce. Thus, what should have been the minimum support price often becomes the maximum price that the farmers receive from the traders. Farmers don’t like the current APMC mandis because of exploitation by the commission agents, low price realization due to implicit or explicit cartelization and collusion among the traders, delays in payments and a general lack of transparency and asymmetric information in the ‘price discovery’ process. The minimum support price system only works if there is actual procurement by the government at the MSP. It is not uncommon that the government announces a high MSP (that buys the government important goodwill among the general public) but does not carry out actual procurement. Even when procurement occurs, it is often delayed for a long time after harvest so that farmers are forced to panic-sell their produce at low prices. These are the same tricks that the erstwhile sahukars employed and the APMCs were supposed to mitigate! If APMCs are flawed, how do we make things better? The current Indian government’s answer to that question is the set of the following three new laws:

Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 – This act allows intra and inter-state trade of agricultural produce outside the Agricultural Produce Market Committee (APMC) markets identified by the states. The law also allows electronic trading, and the state governments are prohibited from regulating or taxing any trade (physical or electronic) outside the APMC markets.

Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 – This legal provision allows for an agreement between the farmers and the buyers, prior to any farm production, on the pricing methodology of the farm produce. This pricing methodology must include a guaranteed price and a clear reference to any additional amount above the minimum guarantee. These agreements cannot last for more than 5 years and the minimum period of such agreements shall be for one crop season or one production cycle of livestock. After the farmers have sold their produce to the trader, payments must be made within three days. Disputes regarding these agreements can be settled through the three-tier system of a Conciliation Board, Sub-Divisional Magistrate and an Appellate Authority.

Essential Commodities (Amendment) Act, 2020 – The original Essential Commodities Act of 1955 allowed the Government of India to regulate the supply and price to ensure delivery of products deemed ‘essential’ by the government. While the list of ‘essential’ commodities is subject to alteration at any point (e.g., during the COVID-19 pandemic hand sanitizers and face masks were declared essential), the new amendment deregulates food items, including cereals, pulses, potato, onion, edible oilseeds and oils. Deregulation, in this context, means traders can now stockpile unlimited amounts of the produce, provided the retail price does not increase by more than 50% for non-perishable items and by more than 100% for horticultural produce in the preceding year.

The three new laws raise no alarm at the first glance but what lies in between the lines is not so rosy. The farmers fear that the new tax-free private trade outside the APMC mandis will obviously be more lucrative to both the farmers and the traders, which will slowly make the government APMCs with their guarantee of the minimum support price redundant and inefficient over time. While the government has promised a written assurance for the continuance of the MSP scheme, such assurances are not legally binding. It is instructive to note that most of the farmer protest against this alleged dilution of MSP has been limited to Punjab, Haryana and western Uttar Pradesh (the Green Revolution region of the 1970s), from where the government procures most of the cereals at MSP, while the rest of Indian farmers were prescient enough to understand these laws change things very little. Moreover, the farmers fear that without public supervision the unregulated traders outside the APMCs cannot be brought to book in case of disputes with the farmers. It is worth noting, in this context, that the legally binding contract farming agreement and the three-tier redressal system proposed in the new laws are not mandatory but simply a guideline. Verbal contracts are allowed to continue outside the APMCs and these are almost impossible to legally enforce. It is no solace that farmers are assured payment for the crops within three days in the new laws when the price they get can be changed from the previously agreed contract at the whims of the unregulated traders citing “poor quality”. Responding to farmer agitation regarding this lack of oversight of the unlicensed traders, the central government has passed the buck to the state governments saying that they can choose to regulate the traders outside the APMC mandis. Even if the state legislatures regulate these traders it will create another unnecessary layer of bureaucracy and more red-tapes in the system. Moreover, allowing unlimited stockpiling of food by traders by amending the Essential Commodities Act can not only have the obvious impact of creating fake shortages and artificially high prices in the market, but also have a far-reaching impact on the country’s Public Distribution System or the so-called ration shops where the poor still get most of their food grains at a nominal cost. We are already witnessing what happens when essentials go missing in the context of medical oxygen now during Covid, and the same can happen with our food. If the traders procure too much, there might not be enough left for the government to distribute through the PDS, or it would be forced to buy it from the corporates at exorbitant prices.

While it is uncertain that their implementation will be good for the farmers, the intention behind the three new laws is definitely not what the government is touting it to be, namely doubling farmers’ income by 2022 (not to mention that measuring this income is impossible when the government has stopped publishing reliable national statistics in recent years). If the aim is to ensure an increase in prices that farmers receive for their produce, it would be simply a matter of timely and enough procurement of crops at higher minimum support prices. Even the government’s own scheme of direct cash transfers to 80 million farmers is a better bet to increase farm income (although the scheme is almost useless at current levels of funding of merely Rs. 6000, approx. $80, per year per farmer). Instead what the new laws give us is a Kafkaesque labyrinth of legal nitty-gritty that keeps the farmers’ plight unchanged and merely attempts to replace the APMC licensed traders by a handful of private companies – retailers and food processing companies who are now allowed to enter into direct contracts with the farmers. Is that bad? After all, getting rid of one layer of intermediaries, namely the APMC traders, should theoretically reduce the markup charged to the final consumers. It is not so straightforward because there is no guarantee that the increased market power of the handful of companies will not outweigh the positive impact of the abolition of the APMC trading class.

The leftists are always against large corporations but the alternative to corporatization and monopolization is not clear when certain markets, like the one in agriculture and farming procurement and distribution, are inherently characterized by strong economies of scale. Very often the romantic leftists will prescribe to go local, do small organic farming without reliance on GMO seeds and costly inorganic fertilizers and pesticides by the big corporates and form farmer cooperatives to sell the produce to local consumers. All this sounds nice but organic farming is simply not cost-effective – there’s a reason why that organic vegetable in the superstore is costlier and only finds place in the dining table of the rich. India is not rich. If the Left is useless in its romanticism, the nationalist agenda on the Right is also not useful. The regulatory advantage that Indian corporate houses regularly enjoy over their foreign counterparts often suppresses market efficiency. If the political Right is true to its economic doctrine, it should stop wasting time by promulgating laws that promote cronyism and actually start meaningful reforms that Indian agriculture desperately needs. Unfortunately, there is no talk about productivity-enhancing technology adoption that will actually increase farm income, unlike the endless subsidies and replacing the corrupt APMCs with corporate oligopolies. Better agricultural infrastructure can reduce the dependence of the Indian farmer on the vagaries of the monsoon and in turn iron out the excessive volatility in food prices that contributes to large uncertainty in the finances of the hand-to-mouth Indian household. Just as an example, it is quite amusing that the farmers staged tractor rallies in protest against the new laws while only about 10% of Indian farm households possess a tractor. Speaking of better use of subsidy monies, if it is unviable to sustain so many people in agriculture, the solution cannot be to keep on subsidizing the unproductive work but absorbing the under-employed cultivators released from the farm sector into more gainful jobs. Such transition is not easy and the subsidy money is better spent on occupational training for such switch. While we are on the topic of promoting efficient allocation of resources, it is worthwhile to note that stubble burning in north India should stop, free electricity for agriculture should stop, growing water-hungry crops like sugarcane in water-scarce states like Maharashtra should stop, but all these require changes in economic incentives, not necessarily legal sanctions. All these issues should be at the forefront of a national debate regarding improving the desperate and pathetic plight of millions of Indian farmers but it seems everyone is too busy with politics and catering to their lobbies. The Indian farmer meanwhile remains like the guests who were burnt alive at one of the many extravagant parties thrown by the Roman emperor Nero, merely as fuel to light up his garden.

This blog post is already exceptionally long, and I will abstain from commenting on several other issues that are related to Indian agriculture in general (like international competitiveness of Indian agriculture, the issue of WTO rules around farm subsidies, how the agriculture market functions in the West, etc.) and the promulgation of the three new farm laws in particular (like the undemocratic tendency of the current Indian regime to bypass parliamentary debates on crucial issues, propaganda about every aspect of law-making, handling of the farmer protests by the government, clearly politically motivated statements by foreign leaders like Justin Trudeau on the issue, etc.) These are important topics in their own rights, and this is not the place to pass cursory comments on those. However, the floor is open for debate in the comment section.

[Note: The reference to Nero’s Guests is from a heart-breaking documentary on Indian farmers by the legendary rural reporter, P. Sainath. The YouTube link is here: Nero’s Guests by P Sainath – YouTube]

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