While each of the reforms announced is individually significant, it is the collective impact of all of them put together which brings about exciting possibilities.
“The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways,” remarked John F. Kennedy.
While he said this of American farmers, their Indian counterparts have had it worse for years.
Indian farmers not just sell everything wholesale, they can only sell to designated individuals at designated places, supposedly at designated prices but mostly below them.
Indian farmers operate in a managed agriculture market, which provided almost no selling flexibility to them. The intermediaries led by the Agriculture Marketing Produce Committees (APMC) would retain a large part of the value and the consumer surplus almost never went to the farmers.
Consequently, Indian agriculture has had an inverted pyramid pricing structure — we have consumer food inflation and farmer distress together.
Additionally, since “agriculture market” is basically the local mandi bound by licences, the effect of these anomalous pricing structures have been even more pronounced.
The measures announced by Finance Minister Nirmala Sitharaman on 15 May are set to change the sector fundamentally.
In an with Business Insider, agriculture economist Ashok Gulati summarised the impact thus: “I’ve been asking for this for 20 years. At least with corona, the reforms have finally come in. What hasn’t happened in years, it finally happening thanks to the coronavirus pandemic. There are positive and big bold steps”.
Four big announcements were made by the Finance Minister as part of Prime Minister (PM) Narendra Modi’s Aatmanirbhar Bharat programme.
Firstly, the government will invest ₹1 lakh crore in creating farm-gate infrastructure. This will focus on cold chains and post-harvest management infrastructure. This measure will help farmers, agritech start-ups and businesses to create a national logistics network making it easier to move agricultural produce around the country. The inability of or the prohibitive costs of such movement has prevented a true national agriculture market to develop so far.
The need for such measures were as early as June 2016. Either the central government can run a post-harvest logistics utility, eliminating subsidies elsewhere or the government facilitates private investments in this space creating new business models — both options can be explored to deploy this ₹1 lakh crore corpus.
Secondly, the government announced sweeping changes to the Essential Commodities Act (ECA), enacted on 1 April 1955. Formulated during the days of abject poverty and shortages, the Act disallowed stocking of any agricultural commodity at any point in the value chain, labelling it black-marketing.
The government has now taken edible oil, oilseeds, pulses, onions and potato out of the purview of the ECA.
Participants in the value chain as well as exporters will be taken out from the purview of ECA, so that they can run their businesses without the overhang of inspector raj.
This change will encourage new private investments in the value chain at scale.
It, of course, needs to be seen if the government goes back on this promise at the first instance of retail onion prices climbing high, which usually happens starting late October for a few months every year.
Thirdly, the central government is bypassing the existing APMC structure to create a new national market where inter-state e-trading will be allowed.
Given that agriculture marketing is a state subject, the new parallel model can possibly come as a rural development or fairs and melas initiative, which are regulated via central laws.
Although states like Karnataka, Gujarat, Madhya Pradesh, Meghalaya and Uttar Pradesh have already abolished most state-specific APMC rules in the last week, the central government is investing in a parallel structure which will become politics-neutral.
Once a separate structure is available for farmers to trade, even those farmers based in states imposing APMC controls can trade through the other route if they see value in it.
Opposing states will have to specifically enact a law to ban this parallel structure in their states, which will then need Presidential approval.
The disincentive for opposing states to not permit this model thus becomes very high.
Fourthly, the government announced creation of a facilitative legal structure to allow farmers to engage with aggregators, exporters, processors and retailers to bring in private investments and know-how to farming.
Essentially, contract farming will now be allowed across the country, where large buyers can enter into forward contracts with better price visibility for the farmers.
This will also allow small farmers — 85 per cent of all Indian landholdings are small — to come together to take advantage of scale for better price visibility.
Of course, the social distrust around land pooling will still need to be overcome — but price incentive may have a higher chance of nudging that change.
While each of these measures is individually significant, it is the collective impact of them which brings about exciting possibilities.
Private investments, technology interventions, nudging farmers to think of agriculture as a business rather than a subsistence activity, removing sell-side barriers and integrating India as one market with required logistics in place — these can be truly transformative over the next few years.
Not only will these proposals uplift the agricultural sector, they can also create more high-value jobs in the sector which currently contributes only 15 per cent to the national gross domestic product (GDP) but supports up to 60 per cent of India’s population.
The biggest risk to these reforms come from three sources.
One, the opposition parties, or even those politicians in the ruling Bharatiya Janata Party (BJP) who derive their political clout from APMC control, will not be happy.
Some of them may try to instigate local revolts, scaring farmers about ‘corporatization’.
Second, the agriculture traders, who now have to reinvent their business models, will definitely oppose these changes.
Many of them may also be BJP sympathizers, especially in the northern states.
Then there’s the ubiquitously vocal-on-social-media middle class, which will resent food price inflation.
Onion prices are notorious for bringing tears to this vocal class, which, in turn, can being governments down — or so goes the apocryphal story from the Delhi 1998 state election.
All of these players are capable of putting pressure on the government to backtrack or dilute changes.
The government, on its part, has, however, made its intent clear. It wants to unshackle the agriculture sector once and for all.
A resolute implementation can change the rules of Indian agriculture, economics and consequently politics.