Dilli Chalo Farmers Protest: The perils of deregulated imperfect agrimarkets

AGRICULTURE / GOVERNANCE/ FEDERALISM

Topic: General Studies 2,3:

• Issues and challenges pertaining to the federal structure 
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Dilli Chalo Farmers Protest: The perils of deregulated imperfect agrimarkets

Context: Farmers from Punjab, Haryana and other states are protesting at the gates of Delhi seeking repeal of the new farm laws.

Brief Background of the protests

• The new farm bills will enable, according to the government, many private markets to be established and middlemen to disappear. Thus, farmers would be free to sell to any buyer and farmgate prices would rise. 
• But the protesting farmers do not accept these claims.
• They believe that farmgate prices would fall with the intensification of a corporate presence in agricultural markets. They also believe that the government, ultimately, wants to phase out the Minimum Support Price (MSP) system

Let us look at the major claims and their merits with focus on Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 (FPTC Act).

1. Monopoly of Mandis over farmer produce

• An important assumption behind the FPTC Act is that mandis controlled by Agricultural Produce Marketing Committees (APMC) are monopsonies in rural areas
• This assumption itself is specious. 
• First, official data show that even for paddy and wheat, respectively, only 29% and 44% of the harvest is sold in a mandi, while 49% and 36% is sold to either a local private trader or an input dealer. 
• There are only 6,630 mandis in 2019 with an average area served of 463 km2. The National Commission on Agriculture (NCA) had recommended 41,000 mandis serving 80 km2 so that every Indian farmer should be able to reach a mandi in one hour by a cart. Thus, India needs not less but more mandis.
• Additionally, most small and marginal farmers, given their small marketable surplus, do not find it economical to bear the transport costs to take their harvests to mandis. Thus, they end up selling their harvest to a village trader even if at a lower price.
• In other words, de facto, a large proportion of Indian harvest is not directly sold in a mandi due to structural reasons – less mandis & high cost- and not due to exploitation by APMC Mandis
• Therefore, the argument that APMC mandis have monopoly over farmer’s produce is wrong one.

2. Presence of Private Players will improve market efficiency

• De jure, the freedom to sell outside mandis already exists in many States. 
• Already, 18 States have allowed the establishment of private markets outside the APMC; 19 States have allowed the direct purchase of agricultural produce from farmers; and 13 States have allowed the establishment of farmer’s markets outside the APMC. 
• Despite such legislative changes, no significant private investment has flowed in to establish private markets in these States. 
• Private markets have emerged in some pockets for some crops, but these are by no means widespread.
• The reason for poor private investment in markets is the presence of high transaction costs in produce collection and aggregation (cost incurred in opening centres of collection, salaries, grading, storage etc)
• The more the number of small and marginal farmers are, the higher will these costs be. This is why many retail chains prefer purchasing bulk quantities of fruits and vegetables from mandis rather than directly from farmers.

3. Taxes in mandis are wasteful

• It is being argued by many that taxes in mandis as wasteful and thus the elimination of mandi tax (by new FPTC Act) will help farmers get better price.
• Even if private markets emerge, the size of transaction costs are likely to offset any decline in mandi taxes. As a result, there is no assurance that farmers would receive a higher price in private markets
• Mandi taxes are wasteful is not fully true. Much of the mandi taxes are reinvested by APMCs to improve market infrastructure and rural infrastructure.
• Such rural investments will also be adversely affected if mandis are weakened.

What is the farmer’s fear with regard to MSP?

• The core demand of farmer groups protesting is to safeguard the mechanism of MSP which they fear will be weakened by new farm bills. They are demanding for a legal right to MSP
• Without doubt, MSPs would continue to survive on paper as the government will have to procure to maintain a minimum buffer stock. However, many policy signals point to a strategic design to weaken the MSPs
  • MSPs are rising at a far slower rate over the past five to six years than in the past
  • The government has not yet agreed to fix MSPs at 50% above the C2 cost of production leading to price loss of ₹200 to ₹500 per quintal in many crops
  • Recommendation of CACP to stop open-ended procurement of food grains
• In Punjab, Haryana and western Uttar Pradesh, most crop sales are at the MSP through procurement centres including the mandis.
• If mandis weaken and private markets do not sufficiently replace them, they fear that the void would be filled by unscrupulous and unregulated traders. 

What Steps needs to be taken?

Discussions between the government and the farmers can be structured using a broad framework based on two focus points.

• First, India needs an increase in the density of mandis, expansion of investment in mandi infrastructure and a spread of the MSP system to more regions and crops. 
• Second, we need not just more mandis, but also better mandis. APMCs need internal reform to ease the entry of new players, reduce trader collusion and link them up with national e-trading platforms
• The introduction of unified national licences for traders and a single point levy of market fees are also steps in the right direction.

Conclusion

The Farm Acts were legislative measures that were passed without elaborate discussion with stakeholders. Thus, government has to take steps to address the genuine fears of farmers.