Farm Laws To Badla, Change Is Scary…But It Need Not Be
A combine harvester in a wheat field in India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Farm Laws To Badla, Change Is Scary…But It Need Not Be


Everybody in the market was incensed but scared, yet the government was adamant. A traditional system of trading, seen as hugely exploitative and prone to corruption, in which the middleman doubled up as a financier/warehouser/consultant, was being banned. It was to be replaced by new-fangled, technology-driven structures. The government claimed this would clean up the Augean stables and create new opportunities. But the market players feared they would become fodder for big capital, robbed of savings and inheritance. Cornered, they were being mobilised to hit back against the new policies. A big part of India’s economy could be held to ransom.

Farm Laws To Badla, Change Is Scary…But It Need Not Be

Quiz questions:

  1. What is the market I am referring to?
  2. Who are the principal players who were feeling threatened?
  3. Which year is this turmoil from?

Your answers:

  1. India’s agriculture mandis, or regional commodity exchanges.
  2. Farmers and arthiyas, their traditional middlemen-cum-financiers.
  3. Circa 2020, after the government had rammed through three infamous farm laws.

Afsos, galat jawab! Sorry, wrong answers. The correct ones are:

  1. India’s stock markets.
  2. Share traders, brokers, and badla financiers, the traditional intermediaries who enabled cash-cum-forward stock trading.
  3. Circa 2001, when the government banned badla from July 2, that year.

Change Creates New Champions, Smashes Old Protectorates

The point is simple. As an economy grows and modernises, there is a clash between traditional market structures familiar to entrenched beneficiaries whose interests are being served efficiently, versus new instruments that are likely to smash old protectorates and create fresh champions.

So, if you think this dynamic is playing out uniquely against Punjab and Haryana farmers now, rewind to 2001.
The Calcutta Stock Exchange building. (Photographer: Brent Lewin/Bloomberg)
The Calcutta Stock Exchange building. (Photographer: Brent Lewin/Bloomberg)

A cabal of 10 rogue brokers at the Calcutta Stock Exchange had abused badla limits, getting trapped in a payments crisis. Badla was the homegrown Indian system in which cash, futures, derivatives, and options markets got intertwined in a complex bundle. Worse, the broker not only traded on your behalf he even financed this 'mixed up' transaction, using the five-day settlement window to create leverage upon leverage, using stock he did not own, trying to maximise arbitrage profits. Predictably, operators would often lose control of their risk exposures, leading to frequent defaults. The government had dared to prohibit badla once, in 1993. But a gang of brokers had rebelled, forcing the state to rescind the ban.

However, by 2001 the National Stock Exchange had overtaken older exchanges, so the stranglehold of traditional brokers had loosened. The markets had become digital, and derivates were taking off. This gave the government enough gumption to reimpose the ban.

To use a cliché, all hell broke loose. I shudder to think what would have happened if there was Twitter in those days – hashtags like #BadlaBanKillsIndianStocks and #GovernmentBadlaOnIndianStocks would have trended ferociously. Just read some of these authentic comments from marquee experts:

  • Overnight suspension will have an adverse impact on trading and liquidity. This, in turn, will further hammer down the prices when sentiment is already weak. – FICCI
  • Only a few brokers will survive in the emerging scenario. – voices from Calcutta Stock Exchange
  • It will be a long time before markets attain the present volumes. – Fund Manager at Zurich Asset Management
  • The baby has been thrown out with the bathwater …because they have a broker as a scapegoat, badla ban it is. – BSE Broker
The BSE building and the Mumbai skyline in the early 2000s. (Photographer:Scott Eells/Bloomberg News)
The BSE building and the Mumbai skyline in the early 2000s. (Photographer:Scott Eells/Bloomberg News)

Eerily Similar Prophecies of Doom

Doesn’t the cacophony sound eerily like the prophecies of doom bouncing off the blighted farm laws today? In fact, here are the tangents between the two protests.

What Arthiyas Do For Farmers, Badla Brokers Used To For Stock Traders

Often the ties are or were generational, with families of farmers and traders or brokers dealing with each other from granddad downwards. It also went beyond cut-and-dried transaction commissions, with arthiyas/brokers providing emergency loans during family celebrations or tragedies. More often than not it was a relationship of mutual need and trust. Of course, the interest rate may have been usuriously high in the late teens or early twenties, but since the concept of IRR (internal rate of return) was alien to both the lender and indebted, the villainy was invisible. In a few ‘bad egg situations’, the exploitation grabbed headlines.

Mandis And Badla Trades Suffer(ed) From Similar Concentration Risks

Both systems are or were lopsided. Almost the entire purchase of wheat and rice at minimum support prices is done from the farmers of Punjab, Haryana, and West Uttar Pradesh. Hardly any other agricultural commodity is purchased from elsewhere, even though MSP is declared for several other crops. Similarly, 95% of the badla trades were concentrated in the top 10 stocks. So, the protests, then and now, while vociferous and seemingly pervasive, had a narrow base.

Workers scoop wheat from a truck at a wholesale grain market in Rewari, Haryana, on May 8, 2019.(Photographer: T. Narayan/Bloomberg)
Workers scoop wheat from a truck at a wholesale grain market in Rewari, Haryana, on May 8, 2019.(Photographer: T. Narayan/Bloomberg)

Dominant Players Threatened By Powerful New Entrants

Today, farmers are petrified that without a statutory security net, they will be hopelessly outmaneuvered in price or rental negotiations. They fear the big guys could buy their crops or usurp their lands under contract farming rules, or do both, for a song. Earlier, retail brokers were scared that once institutions and foreigners, who were outside the ambit of badla trades, began to invest in the new futures, options, and derivates markets, the smaller guys would simply die.

Heated, Polarised, Split-Down-The-Middle Debate Between Pro-Changers And Naysayers

Then, as now, there were equally vocal protagonists on either side. The doomsayers felt India’s equity markets would shrivel up in badla’s absence; the optimists were sure a thriving futures and options segment would emerge. Now, wheat and rice growers believe the farm laws are the death knell; others are excited about the prospect of massive investments in rural infrastructure and supply linkages with agriculture industries.

Farmers gather at a protest site in Singhu, Delhi, on Dec. 3, 2020. (Photographer: Prashanth Vishwanathan/Bloomberg)
Farmers gather at a protest site in Singhu, Delhi, on Dec. 3, 2020. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Future Beckons, Provided…

So, what eventually happened to our stock markets after badla was banned in 2001? The ‘crisis’ was extremely short-lived, with modern futures and options markets simply skyrocketing. Today, nobody even remembers badla trading!

It is my wager that something similar will happen once the government irons out a few wrinkles in the three farm laws, and provided—provided—there is conscious action to ensure that:

  • wheat and rice farmers are incentivised to switch to more lucrative cash crops, especially in Punjab and Haryana,
  • the current regime of subsidies is replaced by a robust income support program,
  • strong farmers’ collectives are encouraged, and
  • safety nets like crop insurance, a trusted/fair contract farming dispute resolution mechanism, and other such measures, are firmly installed.

Only then shall we ensure a huge win for our farmers!

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.

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