Change in social contract between farmers and Centre is fuelling distrust, says IIM-A professor

“It is more about the changes in the ‘social contract’ between the farmers and the Union government that is the root cause of fear,” said Sukhpal Singh, professor and former chairperson, Centre for Management in Agriculture at the Indian Institute of Management, Ahmedabad, on why farmers from Punjab and Haryana, among others, are protesting the three new farms laws passed by India’s Parliament.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, the Essential Commodities (Amendment) Act, 2020 and the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 were passed during the monsoon session of parliament during the Covid-19 pandemic.

Thousands of farmers are at the outskirts of the national capital as they march to Delhi to demand the repeal of these laws. One of the reasons farmers are protesting is because they think that they were not consulted before making these far-reaching changes and that the central government is governing issues that are under the states’ domain, said Singh.

Farmers think these laws may affect the procurement of foodgrains under the minimum support price, which guarantees a minimum price for some of the agricultural produce bought by the government, Singh said. The government procures large quantities from Punjab and Haryana. But making MSP a “legal right” is not the solution, according to Singh. Such a law will “kill” the agricultural market in a state because if private buyers are mandated to buy at a government-set MSP, they might look for cheaper costs elsewhere, Singh explained.

What is needed, instead, is a range of pre-production support (like seeds, fertilisers, credit, machinery) and post-production aggregation (marketing and selling through farmer collectives), he said. The government must also invest in warehousing and cold storage to reduce forced sales because of a lack of storage.

Singh was a member of the working group on disadvantaged farmers and the working group on agriculture marketing infrastructure of the erstwhile Planning Commission in 2011. He was also a member of Punjab’s expert committee to formulate policy for development and promotion of farmer producer organisations – producer organisations where primary producers like farmers are members.

In an interview, Singh spoke to IndiaSpend about the impact of the new laws, Agricultural Produce Market Committees, issues with contract farming, the problems with an MSP for private players and the power of arhtiyas or commission agents within an APMC.

Excerpts from the interview:

Farmers from across the country, led by those from Punjab and Haryana, are protesting against the three farm laws. Why is there such strong opposition from farmers, particularly in these two states? What are the main issues?
First, there was perhaps inadequate consultation with stakeholders, ie farmers, traders and policy experts, as ordinances were brought in and then Acts were passed during the pandemic.

Second, in some states, there is a feeling that the Centre is trampling on the domain of states by making laws on state subjects particularly with respect to contract farming, which has more to do with farming [which is on the state list] and less with marketing [since activities such as production, trade, supply and distribution of raw agricultural produce are on the concurrent list, governed by both the states and the Centre]. It seems that the Centre was not able to convince states to open up agricultural markets as quickly and as much as it had planned to, since the early 2000s, else it would not tread into a matter that was in the states’ domain. States were reluctant to make reforms, and therefore this route was taken.

Thirdly, Punjab will lose revenue (6%, including 3% mandi fee and 3% rural development fund cess) as no tax can now be imposed on farm produce transactions in new trade areas outside the APMC or mandi. Punjab has been earning nearly Rs 4,000 crore annually from mandi taxes and cesses.

Fourth, commission agents or arhtiyas in Punjab get 2.5% commission, which is around Rs 1,500 crore annually. Once new trade areas develop, the market may not require the commission agents. Even if buyers go through these agents, their commissions will fall drastically.

More importantly, in Punjab, Haryana and some of the north Indian states, there is an interlocking of the credit and produce market, where arhtiyas lend to farmers and recover [the loan] from the sale of [the farmer’s] produce. The state government has been facilitating this because payments by procurement agencies like the Food Corporation of India are made (in Punjab) to arhtiyas, and not directly to farmers.

Direct payments to farmers instead of routing them through these agents have been an issue in the state for more than a decade now. Central agencies were keen to pay [the farmers] directly but the state government did not support it. It is only during this kharif season, for the first time, that the CCI [Cotton Corporation of India] has bought cotton directly from farmers and has not paid commission to arhtiyas.

Even under the amended state Agriculture Produce Marketing (Regulation) Act, 2017, for which rules were framed in 2020, [the government] makes payments to farmers only indirectly through the arhtiyas. The act also allows some cash payments [upto Rs 10,000] to farmers by the arhtiya.

Further, farmers are agitated about these Acts due to their potential procurement and MSP linkage. The fear comes from some previous documents like the Shanta Kumar Committee report and the Commission for Agricultural Costs & Prices reports, which suggested reduced procurement to cut down costs of the FCI and an end to open-ended procurement from states like Punjab where most of the grains are bought by the FCI.

It is feared that the FCI itself may start procuring directly from the new trade area to cut down its buying costs like market fees and arhtiya commission. It is more about the changes in the “social contract” between the state’s [Punjab’s] farmers and the Union government that is the root cause of fear.

There is a fear that Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, would expose farmers to price fluctuations of the open market. There is also a demand for a law in the country to make MSP mandatory. Farmers have long been demanding that the MS Swaminathan Committee recommendations on the MSP be implemented. How does the new law impact MSP, and is it possible to make a law on the MSP mandatory?
States like Punjab do not get many private buyers as the government procures most of the produce (wheat and paddy). Farmers feel that if the FCI moves out of the APMC to avoid paying commission to the arhityas and the market fees/cesses to the state mandi board, mandis will collapse as arhtiyas would also move out of mandis.

The demand for legal backing to MSP comes due to the fact that the government has been announcing MSP for 23 crops but procurement is limited to a few crops and a few states only, and farmers in most states (with the exception of Punjab and Haryana) end up selling below MSP, even major crop produce like paddy and wheat. Also, Commission for Agricultural Costs & Prices in one of its reports in 2017-18 (kharif) suggested that “to instill confidence among farmers for procurement of their produce, a legislation conferring on farmers ‘The Right to Sell at MSP’ may be brought out”.

I am not convinced about the demand for MSP as a legal right. If a private player decides that they will not buy at MSP and rather import agricultural produce, and the FCI decides to not procure for various reasons mentioned above, where will the farmer sell? Punjab’s amendments to the farm acts making MSP mandatory are ill-advised, as this law will kill their own market, and discourage private buyers from buying.

Even though Punjab has made a law against selling wheat and paddy below MSP, how does the state know if a farmer has been forced to sell below MSP? It is difficult to enforce such a law. Agricultural markets cannot be run through such diktats. A farmer is desperate to sell and does not want to/cannot store produce or take it back after bringing it to the market yard. So, he would end up consenting to sell at below MSP.

Currently, selling in the private market is the last option for farmers, where public procurement does not take place, and by creating stringent rules (fine or imprisonment), the government [of a state] may create a situation where no sale can be made of the farm produce by the farmer. Maharashtra made a similar provision in 2018 in their APMC Act but had to reverse it after protests by traders.

It is important to realise that MSP is a political or administrative promise, or decision, made by the government to farmers. Why should a private player be tied to it and be penalised?

On the other hand, when the government is trying to liberalise and open the market to encourage private buyers, then it cannot at the same time mandate at what price they should buy (not below MSP in this case).

The FPTC Act 2020 allows farmers to trade outside of mandis. Can you explain, historically, how the mandi system, meant to protect farmers, ended up in a state that experts like yourself have said that “it is a ripe time to abolish the system of arhtiyas”?
Currently, you have many stakeholders, such as cooperatives, primary agricultural credit societies, farmer producer companies etc, who can step in and help farmers sell to state and private agencies and there is no need to rely on arhtiyas for it. Madhya Pradesh had abolished the arhtiya system in the 1980s itself and buyers have been buying directly from farmers since then.

Overnight, after these new Acts, arhtiyas are being called service providers. Some others term them as a “necessary evil”. Arhtiyas became powerful because of the high cost of modern agriculture when institutional credit and finance was not adequately available to small and marginal farmers.

Even now, 30% to 35% of farm loans are from informal sources like arhtiyas, especially for many small and marginal farmers. Due to this, there has been an interlocking of the credit and the produce market. At the same time, some reports suggest, in states like Punjab, there is over-financing of the farm sector.

The arhtiyas only get a license to facilitate the purchase and sale of agricultural produce, and other aspects of their business like lending are informal and illegal. There is no monitoring of their activity. In some states, they overprice inputs, underprice produce and charge high interest on loans.

Many not only have a license to buy produce but also have large agro-industrial interests beyond APMCs but tied to the APMC. Unless farmers are provided institutional finance access adequately, they will depend on these agents. Therefore, solutions to their marketing problems lie outside of markets.

How do you assess the role of APMC and what impact do you see due to the new law?
Madhya Pradesh has reduced the mandi tax to lower the buyer’s cost of purchase, and government bodies (like the Niti Aayog) have advised the same to other states so that buyers continue to buy from APMC mandis. But, in a state like Punjab, where buying costs are high, mandis will find it difficult to compete with new trade areas. Buyers, and even government agencies, may move out to new trade areas if buying charges are not reduced.

The APMC will lose if there is no level playing field. So, arhtiyas are up in arms and farmers are protesting around MSP procurement. Arhtiya interest should not really matter to policy if the intention is to help farmers realise better prices. Arhtiyas have other businesses to rely on and would find new roles sooner rather than later in new trade areas or other market channels.

With contract farming, although the farmers are allowed to engage with private players, how strong is the grievance/dispute redressal mechanism for the farmers? Can farmers take on big agricultural conglomerates independently given that clauses of the FPTC Act 2020 stipulate that the cultivator be paid within three days of the trade? Is it practical to approach a district magistrate for dispute resolution? What is the ideal mechanism when disputes arise?
Contract farming, as practised in India, across crops and regions, has shown that marginal and small farmers are generally excluded and there are many malpractices against farmers. These include one-sided (pro-contracting agency) contract agreements, delayed payments, quality-based undue rejections and outright cheating, besides poor enforcement of contract farming provisions by state governments. Therefore, a robust contract farming act to regulate it was needed.

In the 2003 model APMC Act, the APMC was supposed to resolve disputes. This was a better system because the farmer knew and was familiar with the Committee members and functionaries. Further, when a license is given to a trader or commission agent, there is a counterparty risk assurance. If there is an issue with payment to farmers, the committee takes note and tries to resolve it.

In states like Karnataka, Gujarat and Maharashtra, there are elections for office-bearers of the APMCs. Representatives of traders, commission agents, farmers, cooperatives and the government stand for elections. So, the argument that mandis are a monopoly and exploitative is not entirely true. At the same time, Punjab has not had an election for APMCs in nearly 40 years. They only nominate chairpersons and members.

Now, in the new trade area [that the law will create], there is no authority to provide counterparty risk. Anybody with a PAN card can buy agricultural produce, which seems to be a free-for-all situation.

I think the government must go back to the 2003 Model APMC Act, which had a model contract agreement with mandatory and optional provisions in a contract. The way production agreement is defined in the new Act is leading to fear among farmers about contract farming being more about corporate farming.

This is despite the Act clearly saying that farmland cannot be leased, mortgaged or bought by the contracting agency. Farmers are also worried because the law does not discuss what happens when companies cancel contracts or there is a delay in deliveries by farmers, etc.

The other problematic aspect of the Farmers (Empowerment And Protection) Agreement on Price Assurance and Farm Services Act is that it says the sponsor would also pay, besides the minimum guaranteed price, a premium or bonus which will be linked to the APMC or e-trading price.

This goes against the very concept of contract farming. The contract price should be left to the contracting parties to decide. Further, if the understanding is that mandis are not discovering prices well, then why peg contract price to such a price? The contract farming Act leaves out many sophisticated aspects of contract farming.

How would these new “liberalisation” laws affect the small and marginal farmer?
Unfortunately, they are not part of contract farming as contracting agencies do not find them attractive enough to be engaged. The policy should have created a provision for group contracts and incentivised it. Further, the Act has defined farmer producer organisations as farmers, which restricts them to supply-side only.

This has given a rudimentary treatment to farmer producer organisations instead of ensuring that they can also take up contract farming (which some farmer producer organisations are doing in any case). Hardly any farmer producer organisations is into farm production. So, treating them as farmers is not a good aspect of this Act.

For small and marginal farmers, the mandi was the last resort for sale. If APMCs are reduced in importance, they will lose more rather than gain unless more of them are organised into farmer producer organisations and become attractive to private agencies for contract farming or direct purchase.

A 2019 study by the National Council of Applied Economic Research in Bihar noted that despite abolishing the APMC Act in 2006, there was lack of private investment in the creation of new markets, and strengthening of facilities in the existing ones, “leading to low market density”. What happened there?
Investments do not come due to a change in law, but due to incentives. Bihar only deregulated the market instead of reforming. Incentives are about infrastructure and supporting policies, which did not happen [in Bihar]. There could have been more investments in APMC and private markets even in public-private mode and better governance of APMCs to allow new buyers to procure directly.

The APMC structure has collapsed in the state with procurement and purchase centres falling. Farmers are paying a commission in privately held mandis unlike in a regulated market. Farmers have not benefited from it other than the fact that the new local, private, informal markets are closer to farmers but not necessarily likely to stick around for long.

The prime minister has said that “new rights have begun to ameliorate the woes of our farmers”, but the farmers are agitating against the three laws. What revisions would you suggest to improve the farm laws? How can India achieve better incomes for farmers?

There are many provisions in both the acts [the FPTC and FAPAFS] like the definition of a trader and a farmer producer organisations, dispute resolution and creation of temporary structures on farmer land, additional contract price linkage to APMC price and such other provisions which need to be reconsidered to protect farmer interest in the Contract Farming Act so that both parties find it smooth to transact and deal with each other as per rules.

To double farmers’ income, farmers need to be collectivised (like in FPOs). This is the only way small and marginal farmers can deal with modern, large buyers. We do not need to meddle with production aspects as small farmers are quite efficient. We need pre-production (like seeds, fertilisers, credit, machinery) and post-production aggregation [marketing and selling through FPOs, etc]. The government needs to invest in warehousing and cold storage to reduce distress sale as we have warehouse receipts Act under which they can get loans against stored produce.

This article first appeared on IndiaSpend, a data-driven and public-interest journalism non-profit.