New Farm Laws: Good Intent, Missing Safeguards

Imagine having to sell your shares sans a stock exchange. Sure, it would on paper, dramatically increase the potential number of buyers. But how would you reach them? Ensure their payment credentials? What about price discovery? Fair dispute resolution?

These are some of the challenges arising out of the new farm laws, said Sukhpal Singh, professor at IIM Ahmedabad in an interview with BloombergQuint.

For over two weeks now, farmers, mostly from Punjab and Haryana, have been protesting the three new laws passed by Parliament. On grounds that the laws skew the playing field towards corporate interests and threaten the livelihoods of farmers and other stakeholders in the agriculture supply chain. Their critics claim the protests are driven by opposition parties and narrow state-led interests, whereas the laws are meant to benefit farmers country-wide.

While that may be the broad intent of the laws, missing safeguards may put farmers at a disadvantage, argues Singh.

“It’s fine that we are giving more choice to farmers. Everybody should welcome that. The point is that—will it really lead to better price discovery and price benefit for the farmers.”

So far, state Agriculture Produce Market Regulation laws governed trade in farm produce. Buyer or trader registration, price information, recovery of dues, dispute resolution all came under the APMC ambit. States have regional markets areas, each running under an Agriculture Produce Market Committee whose jurisdiction covers all of a notified area. For instance, Maharashtra has 307 APMCs with main markets and 597 sub markets as per information on the government website. The Mumbai APMC market area covers all farm trade in Greater Mumbai, Thane taluka and 30 villages of Uran taluka of Raigad district. Except trade in fruits and vegetables, which many states have allowed outside APMC yards.

Over the years, in order to liberalise farm produce trade, states have, on the urging of central governments, permitted private market yards and contract farming, but under the aegis of APMCs.

The new central laws change that.

The Farmers’ Produce Trade And Commerce (Promotion And Facilitation) Act, 2020 allows anyone with a Permanent Account Number to transact in farm produce outside the APMC jurisdiction - that now stands reduced to the physical marketplace and yard. It provides for payment period, an executive-led dispute resolution mechanism and prohibits any state levies on the trades. It bars civil court jurisdiction and overrides state APMC laws.

The Farmers’ (Empowerment And Protection) Agreement On Price Assurance And Farm Services Act, 2020 provides a framework for contract farming that covers written agreements, contract period and guidelines on pricing, delivery and payment. It too includes an executive-led dispute resolution mechanism, bars civil court jurisdiction and overrides state laws.

There is broad agreement that APMCs, now the fiefdom of local politicians and replete with middlemen, commissions and cesses, could do with competition from private markets. But its not clear who will govern the private markets so as to ensure farmers have access to payment guarantees, price information and effective dispute resolution.

In this interview, Singh, the former chairman of IIM-A’s Centre For Management In Agriculture, explains the gaps and solutions.

One National Market For Farm Produce: Viable?

In the Constitution, agriculture can only be legislated on by states but trade and commerce of foodstuffs is on the concurrent list - basis which the union government says it has power to legislate the three farm bills. That issue is now with the Supreme Court. How do you view, structurally, the centre’s efforts to push a single, national market for farm produce as justification for these laws?

I think agricultural markets as in, agriculture as a sector, is in the state list because there is plenty of diversity across states in India. So, some states are at one level of development of agriculture, its markets and marketing structure and the others are much behind. So, one can’t compare Odisha and Punjab or Tamil Nadu and maybe Bihar. So, those subjects were kept in the state list thinking that the state governments need to take into account the regional and local considerations to develop their agricultural sector and agricultural markets.

What is the harm if a central government is envisaging a national market for agricultural produce? In fact, over the years, even the reforms that have been proposed, or in some cases have taken place, in the APMC Act also suggest this.

So, I think the reforms have been going on since 2003 with the first model of the APMC Act which was also given by the central government as a model act which was supposed to be adopted by state governments to amend their APMCs. It's not that the centre has not asked the states to modernise or open up or reform. They did and then in 2017, three years back, said now you need to reform your APMC laws once again by incorporating livestock produce also under agriculture markets.

From there, actually the orientation changed a little bit. Earlier, it was regulation—APMC Regulation Act. Then, it became promotion and facilitation of agriculture produce and livestock markets, and contract farming was taken out of that saying that there is a conflict of interest. Under the APMC Act, whether 2003 or 2017, the contract agency or any direct buyer was supposed to seek permission from APMC, pay whatever charges and then also pay mandi fees and other cesses, even if he or she have procured directly from the farmer or from a contract farmer to get that produce.

It has been on the agenda since the first model act, that we need to integrate markets. Earlier, even within the state APMCs were not integrated, you had to seek a separate license for each APMC. Then the model act said that you can also have one single license for the entire set of APMCs in a state.

Somehow, the centre thought recently that the progress and speed on reforms is not as much as it should have been and we have already lost a lot of time in opening up markets. Therefore, perhaps this step was taken that we should make it a central law instead of waiting for each and every state to reform the APMC.

22 states have established private markets, 21 have e-trading, 23 have a single license or a single point levy on the APMC purchases, 20 have contract farming permitted legally now and 17 have what are called farmer consumer market yards. 70-80% of the reforms have been done by each state with some variation here and there but it is definitely not 100% as expected.

The Reducing Relevance Of APMCs

One of the laws permits farmers to sell their produce freely - anywhere to anyone. The other moves contract farming outside APMC jurisdiction. To be able to understand the implications can you explain the centrality of APMCs in the agri-produce market, and hence whether a move of this nature is viable, sustainable and will benefit farmers or not?

So, let me tell you that at least in terms of terminology or wording - farmers were always free to sell wherever he or she wanted. Farmers have been selling to local traders and not even making use of the APMCs in the district or the headquarters. It was the buyer who was concerned restricted).

The buyers had to take permission to buy whether directly or through contract farming or outside the mandi. So, it was buyer freedom which was restricting the farmer freedom in that sense.

Since 2003, the Union Government has asked states to make three more channels available beside the APMC - one of them is direct purchase from farmers inside the mandi, now it’s outside as part of the new trading area. Second is contract farming. Third is private wholesale markets - that in order to give competition to APMCs to perform efficiently and effectively we should also have more mandis of that kind where farmers and traders meet to buy and sell. So, three new channels were made available by law which were not legal earlier through the APMC route, and then eNAM came within the APMC system - that we also needed to discover prices, more widely in a given mandi even if farmers are local, prices should be at least state-wide or multi state-wide or national. So, that has been going on.

The role of APMC depends on how you look at it. One role of the APMC is that there are people who are able to directly access it. Some people say 6% farmers get benefit of MSP. Some say just 10%, it is not very high anyway. The other part about it is, even if you don't get MSP, when you sell at an APMC mandi where MSP procurement takes place it helps other farmers get a little better price. So, when the government intervenes up to 20-30% of produce in a particular crop produce market, it helps other farmers also get it. So that is one role of the APMC.

The second is - APMCs were giving price signals because they were the largest places where the produce was being handled, bought and sold. So, you will be surprised that even food supermarkets, buy directly from farmers—whether Reliance Fresh or Birlas, even they discover their direct farmer purchase prices based on the APMC price. Even today, many contracting companies still contract their price to the APMC mandi price. So, the APMC mandi price is so important in this country because there is no other place where so much material was being handled whether for the government or for private trade. Even if directly 30% was coming through the APMC system, the other 60-70% or 50% was coming indirectly to the APMC or going into the APMC after traders were taking charge of the produce.

Let me also tell you that there is variation in the performance, efficiency and effectiveness of AMPCs across states. For example, Punjab is completely dependent on APMCs. Nothing is sold outside by and large. The other states like Bihar, have no APMCs for the last 14 years. So, everything is already free for all, free for anybody to buy and sell from anywhere. So, it depends, when you talk of the role of the APMC. The initial role of the APMC was to help protect the farmer’s interest. The farmers should not be taken for a ride by the buyer. Therefore, the rules of the game were specified, the permission was required because you have to give bank guarantees to have the counterparty risk coverage for the farmer.

In your assessment, how much of the overall agri-produce trade today broadly takes place under APMC jurisdiction?

Every growing area was APMC jurisdiction, now it is reduced to the APMC yard (after the central laws were passed). By jurisdiction, what we mean is actually yard or a sub-yard. So, that is the domain of APMC.

Earlier, it was the entire area where the produce was being grown that was called the notified area. So, anything transacted there was within the APMC regulation. The APMC would intervene and say, why are you buying? Why are you selling and so on. Now (after the new farm laws), it is restricted only to the yards. Now, we have the physical place where the actual transaction takes place under the APMC yard or the sub-yard.

How much in your assessment is being traded through APMCs?

It’s anywhere between 30 to 50%, depending on how you look at it because fruits and vegetable markets by and large now are de-notified. I told you, about 15 or 20 states, they don't care what happens. The mandis are there but they're under no regulation. So, I would not call them APMC Mandis but are the almost like free markets where anybody can buy, nobody monitors the charges and so on. So, if you take that out then I would say in terms of volumes, it maybe 25% to 30% and in terms of value it may be even lower because fruits and vegetables are high value crops. Others are low value crops. One-third happens through APMCs.

More Buyers? Counterparty Risk?

Earlier, any purchase of farm produce happened within APMC jurisidiction and required buyer registration. Now the new central law says anyone with a PAN can purchase farm produce.

Yes, that’s the provision and that’s causing some concern among farmers that how can anyone—you and me, who have PAN cards, go and deal with farm produce because who will take the care of the counterparty risk coverage for the farmers?

Earlier, you had an APMC licensed trader, or a commission agent. They were registered and given licenses. They gave assurances and guarantees and they also gave bank guarantees. If there is a compensation due to the farmers, the APMC used to intervene and get that compensation paid to the farmers.

So now here somebody comes and says, I want to buy 6 quintals or 10 quintals - unless you have some way of registering them and regulating them, how do you protect the farmer interest? That is the concern I think. It's too liberal a way of letting people deal with farmer produce.

On the flip side, can’t I argue that if the farmer sees that the person on the other side of the transaction doesn't have a track record, he might not agree to sell to that person at all?

If he might get a few rupees more per kg or per quintal, he may be tempted to sell there because you don't have to go through the hassle of waiting for the auction to take place in the AMPC mandi, he wants to get home within a few hours instead of overnight and so on. So, there are many other compelling reasons why the farmer may have go to the new trade area rather than an APMC if he is not interlocked in the APMC commission agenda or the trader, in terms of credit and agri-produce or input and agri-produce linkage. Which is why it is a very big deal actually in the Indian agricultural markets that a lot of farmers are tied to these mandis because they borrow from there—the informal, non-institutional sources. So, unless that linkage is there, they aren’t going to move out.

So the intent of creating a free market, allowing multiple buyers, more pricing power for farmers...

That is the intention and the objective but what I'm pointing is the downside. Just doing that is not good enough. It is (important) also to make sure that the farmer interest is protected at least as much as it was in the APMC in terms of counterparty risk.

I'm all for choice of channels for farmers. Let 1,000 flowers bloom but the point is, I still feel that in the Indian agriculture market we need to protect the farmers because these are small entities—one hectare, half a hectare and only a few ones produce whatever commodity. They may not even understand these things but there in the mandi the APMC has been facilitating it. Of course, not in all states but many states. In Madya Pradesh, they removed the commission agent in 1980s itself from the mandi system. So, the farmers are directly selling to the government and to private buyers. So, we have so many models. I'm only saying that we're giving new channel -we need to have enough mechanisms in place to make sure that new channels deliver the goods to the farmer whether with the ease of doing business or convenience or whatever.

Can I use the illustration of a stock exchange - without which it would be tough to find multiple buyers with payment credentials. That is the function that a stock exchange does. So, who will account for that role here?

There's no agency as of now in the laws. That is not specified yet. They are saying that the government may create a system where these guys (buyers) may be asked to register, but it is not there as of now. That's what is needed actually that there should be some body who takes care—but how do you collect that information? How much has been traded or bought by whom and at what price? Now we have mandi information which is available in the public domain but how would you normalise that information if you don't have any record?

You were saying that already so much of the trade happens outside mandis. What about the information on that trade, we don't have it even now, do we?

We have it because in some way the traders either end up coming to the local level and to the farmers and intermediate traders. Many of them are registered in terms of traders and stockists and processors and so on. So, if somebody does contract farming, they have to report at least technically. I know some states have a very formal mechanism for this thing. How many farmers you're working with, how much acre is under contract, how much produce is being bought from there and some states will even charge the market fee on that produce as per the APMC act. We have some mechanisms of knowing. Of course, I would say that many states have minted lakhs on it, they are not monitoring the contracting agencies adequately in some states. So, there are concerns.

My concern is that, let’s have multiple channels but have adequate and effective regulations, I don't want it to be over regulated but effectively regulated so that it’s fair for the farmer as well as the buyer. Nobody should suffer any consequences of the market. That's the only concern.

The Problem Of Price Discovery

If a large proportion of farm trade will now happen outside the APMC regulated area, what happens to price discovery? Are there ways right now for the farmer to be able to access prices being traded for that particular produce across districts and across states? Is there any such information available outside APMCs?

No. Until now we didn’t have this new trade area so the only information a farmer used to see was the price in the mandi—the APMC mandi whether regulated or non-regulated. Based on that they used to take a call whether to sell now or where and how. If a different mandi, a distant one, was better priced they would go there, other than the local mandi. It was all going through the APMC. I mean, at least what is officially done—through the APMC Act.

Some states do now have some private wholesale markets (2003 reform)—like in Maharashtra, there are about 50 private wholesale markets and that is the only state which has been able to let this reform proceed in terms of setting up some alternatives to APMCs but other states, they're not even set up a single, private wholesale market. So, the mechanism—that is the least developed mechanism that we have.

The intent of the law is more buyers, more competition and pricing power for farmers. If we don't have aggregated pricing information, if we don't have counterparty risk measures - will these good intents become reality?

No, that's the concern. It’s fine, that we are giving more choice to farmers. Everybody should welcome that. I don't think anybody shouldn’t. The point is that—will it really lead to better price discovery and price benefit for the farmers?

I’ll tell you a little story about the impact of this set of facts in the last couple of months. The latest report from Madhya Pradesh tells us about the impact of the enforcement of these Acts (central laws) on the APMC markets. It is reported that 49 markets have not carried out any business, they have been shut since October, zero business. Some 143 markets have reported a decline of 50-60% in the volumes. The state Mandi board revenues have fallen by something like two-third compared to the same time, and same division of last year because the problem is an unequal playing field between the APMC mandi and the new trade area or the private wholesale market in terms of buying costs.

In Madhya Pradesh, even today you have to pay 0.5% market fee. It was 1.5% earlier. Plus you have commission agents—Madhya Pradesh doesn’t—but the other states have a 1%, 1.5 % or 2%. Punjab has 2.5% commission. So, it’s buying costs will make the APMC unequal and able or unable to attract volumes of produce because on the other side you have zero buying costs. Technically, you may still engage with the commission agent or trader, with some 0.5% commission, but officially don't need to pay to anybody. No mandi fees, no market cess and no other charges. That also is causing a concern for some that this infrastructure which was very vibrant in some states. If these states are not able to lower the cost of buying by lowering the commission or mandi fees or cesses, then naturally, they will lose business because this business will move over to the new trading area, which may benefit the farmers. After a while when the mandi doesn’t remain important in terms of price discovery then the other mandi (new private markets) will start behaving the same way as we have seen with the lack of efficient price discovery in APMCs. Despite there being large number of traders to bid on a farmer’s produce and discovery price. That is the fear.

If there are no levies/cess in the new trade areas then isn't it a good thing for farmers too? Also, the APMCs are then forced to become more competitive in the kind of levies they charge, even if these help finance infrastructure such as warehousing etc.

Two points to that. One is that, we are assuming that when somebody is incurring lower buying costs, he would pass on the benefit to the farmer. That is an assumption.

Second is, look at Bihar’s experience—no charges, no regulation, nothing for the last 14 years. Have farmers started realising better prices there? 14 years of no regulations of farmer markets, no APMCs—free for all. Have we gained anything there? We learn from various reports, I've also visited the fruits and vegetable markets a couple of times. Private traders have come up and they have set up makeshift kind of mandis on the roadside and for the first time I saw that they were charging 2% commission to the farmers. Most of the selection centres and APMCs are shut, numbers have come down, Government purchases have also come down because of the new infrastructure now which is functional. You have to look at this overall context, simply because the new buyer comes with lower cost of buying does not mean that he or she would pass on that benefit to the farmers.

Will they pass on the benefit to consumers?

That is even more farfetched because there is layer after layer of things after processing, retailing and distributing. You don't know how many hands it will pass through to really come available at a reasonably cheaper price.

The Bihar Experience

Any further insight you can give us on how the dismantling of APMC laws has worked for Bihar. Has it improved the lot of farmers in Bihar in terms of a wider set of buyers, pricing power...

The only thing I can say about farmers’ benefit is, a lot of farmers also mentioned during my visits, that the markets have come closer to their producing areas now. So, they don’t have to travel that much to take their produce on bicycles and motorbikes and so on. But, the negative side, they are paying 2% commission. Generally, in a regulated market the farmer does not pay commission.

The second part is, now how did you discover the price? How do you say that my price by this private mandi is good enough? Because there is no APMC mandi is there which is regulated, to compare with. There is no reference price now but just small private markets on roadsides. They do their own bit depending on how many people are bringing the produce. They are just deciding the price every day. How does a farmer make out whether his price is good enough? You can of course compare with how much the other farmer bought at but he doesn't have another market to benchmark against. That is the concern.

Dispute Resolution

The dispute resolution mechanism in both laws is executive driven. Any dispute between the transacting parties will be taken to the Sub-Divisional Magistrate then eventually to the collector on an appellate level. At every level, the arbitrator is the executive. Both laws have specific provisions that no civil court jurisdiction will apply. But this is not new, the earlier APMC Model Acts had it too?

Yes definitely, because the thinking in the government policy circles has been that let's not put farmers into very troublesome and lengthy judicial processes for small transaction issues they may have of a few thousand rupees with the contracting company or with the trader and so on.

First reforms itself in the APMC Act provided for APMC as a dispute resolution authority. The farmer knows the APMC, he goes there to sell, he knows the members, he knows sometimes the secretary and the chairperson also. So that was found as reasonable and locally relevant dispute resolution platform for farmers.

Now when you're moving it, the problem is once you have cleared a new trade area which is not in the domain of APMC, you can't use that (earlier) mechanism. So you have to find an alternative which is now, the administrative structure. So, some farmers and their representatives feel that this is even more complicated, and it will not be in the interest of the farmers because you don't have farmer representatives. The APMC committee has 50-60% members who are farmers. When an election takes place, you have representatives of farmers, commission agents, traders and government and co-operatives. So that is a kind of multi stakeholder, elected body. So, they said the farmers’ interest could have been better protected in the earlier system. Here you have an administrative structure, which may not be able to give farmers a resolution for their disputes. That’s their worry. Now, the government is thinking about it.

Fixing The Gaps

What do you recommend are the broad solutions to these challenges?

With the PAN thing, I think we should be very clear that we should only encourage those serious players who want to deal with agricultural produce. So, say that they should register if they are an agricultural trader/entity or they are a processor/exporter and they want to operate outside the APMC, the new trade area, they should register.

Their transactions should be recorded and monitored saying how much they have bought and at what price so that we are getting the record and we are also able to cut out the farmer risk in terms of protection of payments and other delays - which is there in the Act but there is no agency to deal with it now. The central and the state governments are now saying that they will try to and want to bring such a thing there.

So, borrow something from the APMCs in terms of a license or bank guarantees; have whatever innovative mechanism of protecting the farmer interest and identifying who the real, genuine buyers are. Not fly by night operators.

On the charges part—I think that the government has been suggesting that if the APMCs still want to remain vibrant, despite the new channels coming up, they should lower their market fees, cesses and commission. Some states are already doing it on the advice of the union government, and others will have to do it too. Some states think that the infrastructure they have created will not be sustained if they only charge let's say 0.5-1%. Because some of the states have been using this market fee and fund for building the agricultural marketing infrastructure, which is very substantial. Not only they have yards but they have drying machines, they have cleaning machines, they have graders and whatnot. So, many of them have a very high level of market infrastructure and that they are saying we will not be able to sustain if we don't get enough revenues. So, that is their concern but that's only in a few states.

This infrastructure, whether it is warehousing or it is drying/cleaning, will it now be supplied by the buyer or third party vendors who will set up large warehousing facilities etc. That is the intent of these new laws?

That’s the expectation that it will be created once you permit them to undertake their own transactions -- whether private wholesale markets come up to do this job or some distant warehouses or cold stores and other infrastructure being put to this use now during the season, or some buyers creating their own collection centre, let's say. They can set up a collection centre where farmers can come in -- all the supermarkets are doing that. They have set up collection centres in local areas and in vegetable growing pockets. The farmers bring their produce, they grade it and take whatever is good quality and pay the farmer and get going. So, that kind of an infrastructure will happen more now because you have freedom to now set it up. Earlier, they even had to take permission to do that. If they wanted to buy vegetables they had to ask the collection centre permission from the APMC and pay charges if applicable. Now all that is gone so they have got much freer to set up this but in Bihar we have not seen that coming up, unfortunately.

So, if there is private sector participation allowed in being able to set up these alternate facilities for warehousing, for quality control then the farmers will have choices.

Some of the things that you are expecting from deregulation, is the job of policy. Investments happen because of incentives not because of just deregulation. It's one step and one important component but people don't invest simply because of deregulation. You simply have to be conducive and have conditions supporting infrastructure, supporting investments, by supporting agencies public or private and the local markets have to support that kind of an investment.

One of the objectives or reforms is getting more private investment in agricultural markets. So, they should also back it up with policy at the same time. You can’t do it phase by phase—like today it’s this and after 10 years, I’ll think of policy. It shouldn’t be that way and it has to be one go. If you want to do that, then do it together. That is the intended purpose of all this.

Will Farmers Have It Better Soon?

Your overall take on these farm laws and whether they will improve the lot of farmers.

When I look at agriculture, I look at the concerns of small and marginal farmers. My research shows that most of the time, they have been excluded from modern channels—like contract farming. No company wants to work with very small and marginal farmers. They say you should have five or three acres of land and this investment and this capacity and so on. Even supermarkets, they work with relatively better producers. That's why I'm very particular about the regulation and policy role in this.

Opening up markets is fine but unless we have systems in place in terms of regulation and policy to make sure that these new channels are inclusive, we may not be able to reach those farmers and benefit them, if we just leave it like that.

So, contract farming—can it be promoted by policies saying, we will encourage group contracts, so the farmers have larger volumes, and our buying or sponsoring company has lower transaction costs over a group rather than 1,000 farmers. The farmers can also have some bargaining power when they have larger volumes. We need to have that kind of an incentivised system through policy. Regulation alone will not be able to go beyond a point.

The transcript has been edited to make for concise reading.