Raghbendra Jha is Emeritus Professor of Economics in the Arndt-Corden Department of Economics at the Crawford School of Public Policy. He is Fellow of the World Innovation Foundation and specialises in development economics, macroeconomics, and public economics.
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India could be an agricultural giant, but its investment landscape needs a makeover – while contentious, its new laws provide that change, Raghbendra Jha writes.
Since November last year, ongoing protests have rocked India. Thousands of people, mainly from Punjab, Haryana, and Uttar Pradesh, have blocked three major road entry points to the national capital, Delhi.
This has made going about their daily business onerous for people living in the region who normally need to work in Delhi, and essential supplies to the capital have had to be re-routed, causing considerable difficulties for those living in and around the city.
These difficulties reached a peak on 26 January – India’s Republic Day – when protestors entered Delhi on tractors and marched onto the iconic Red Fort, creating mayhem both in the fort and in the nearby streets.
Thankfully, there was no large-scale rioting, even at the cost of a number of injuries to police and protestors and the death of one protestor in a tractor accident. Although the blockade continues in at least one location on the border, protestor presence has shrunk considerably in recent weeks.
Protestors are agitating for the repeal of three agrarian laws passed by India’s parliament in September. There are a few reasons these laws are so contentious.
The first law, The Farmers’ Produce Trade and Commerce (FPTC) Act, offers farmers a greater choice in selling their produce. Under the act, farmers now have the option to sell outside the government-regulated physical markets, Agricultural Produce Marketing Committees (APMCs), to private channels, integrators, or cooperatives.
They can now do this through a physical market or on an electronic platform, directly on their farm, or anywhere else, not just at designated APMCs. Essentially, the law provides more options to small farmers without compromising the avenues already available.
The second law, the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services (AFPS) Act, is a simplified and improved version of the Contract Farming Act that has already been adopted by 20 Indian states.
Contract farming acts as a form of price assurance as whatever price was agreed in a contract must be honoured after harvest.
The new law is intended to insulate farmers against the market and price risks so that they can cultivate high-value crops without worrying about market fluctuations that could lower prices in the harvest season.
The third law, the Essential Commodities (Amendment) Act, is a modification of the Essential Commodities Act that lays down transparent criteria for the price triggers behind government decisions to regulate the supply of essential commodities under extraordinary circumstances.
These laws are necessary for a number of reasons.
Under the previous legal framework, farmers could sell their produce only to the state government designated physical markets known as APMCs. Under the new system, this option is still available, but farmers now also have the option to sell their produce to markets anywhere in the country, cutting out many middleman agricultural suppliers.
The Minimum Support Price (MSP) at which farmers can sell their products at APMC markets is still available if the farmers sell through these facilities. Indeed, for the past several quarters the MSP has been kept at 150 per cent of the per unit cost of production. While MSP currently only covers select crops like rice paddy and wheat, some experts have raised concerns for the cost to the government if all crops were to come under the MSP.
Overall, the freedom to sell produce anywhere will benefit small farmers in the east of the country in particular and will reduce entrenched regional and rural inequality. The new laws permit contract farming under terms that are mutually acceptable to businesses entering into the contract. The laws guarantee that farmers will not lose their land or sell crop for a low price in such contracts unless they choose to enter them willingly.
Under the previous Essential Commodities Act state governments have had the freedom to set limits on stocking and warehousing, and processing. This has had the devastating effect of stifling investment in India’s agriculture and the new law will be a liberating factor.
The government has engaged in 11 rounds of talks with those agitating for a reversal of this decision, but those opposed still haven’t provided a cogent argument to convince the government that these laws are against farmers’ interests.
Under the old arrangements, there were middlemen in the system who would buy grain from farmers, keep a healthy margin for themselves, and then sell it at inflated prices to retail markets through APMCs. Some have claimed that these middlemen, who will lose out from the changes, are actually behind the protests, rather than farmers who stand to benefit.
Opposition parties have tried to take advantage of these protests for their electoral gain. One Indian National Congress Leader called the changes a ‘tyranny’, suggesting the ruling Bharatiya Janata Party was destroying democracy.
Some ill-informed foreign commentators have also contributed to the din and some foreign governments, while opposing India’s MSP at World Trade Organization, have asked for the MSP to be retained in India.
The fact is that India could be a powerhouse in international agriculture, provided a robust investment framework is put in place, and these new laws provide such a framework.