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India is divided over the agricultural acts introduced last month. Three contentious acts, which are claimed to change the way India's farmers do business have sparked protests that have spilled onto the streets.

The government claims that two of these - The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 and The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, would create a competitive pricing environment for the farmers. Under the proposed system, farmers will be able to sell directly to buyers at prices to be agreed between them.

The Farming Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 will promote interstate and intrastate trade and commerce without barriers outside of physical facilities in markets notified under state agricultural produce marketing legislations. The ordinance basically aims to create additional business opportunities outside the Agriculture Produce Marketing Committee (APMC) market yards to help farmers obtain remunerative prices due to additional competition. The measure will help small and marginal farmers who will save money on transporting their products to wholesale markets. The acts are expected to train farmers to engage with food processors, aggregators, wholesalers, large retailers and exporters on an equal footing - without any fear of exploitation.  The ordinance will create an ecosystem where farmers and merchants will enjoy the freedom to choose between selling and buying of agricultural products.

The third act, namely the Essential Commodities (Amendment) Act, will remove cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities and would allow buyers to procure unlimited amount of these goods. This will create higher processing and storage facilities and by reducing wastage, it will increase the incomes of farmers on the perishables. The contentious farm sector acts, meant to liberalise agriculture by opening it up to private players and companies, were opposed by several opposition political parties as well as farm lobbies.

Farmers fear that the new legislations will allow private market forces into the largely government-regulated farm sector in India. The APMC in every state decides the prices it will pay the producers and then sells them further. Farmers are apprehensive that under the new acts that will allow market forces to settle prices, the situation will mostly go against them as they are ill-placed to compete with large corporates.

The fear surrounding the new legislations also stems from the long-standing convention of minimum support price (MSP), which the government offers as a cushion to farmers against a sharp price fall during a particular season. Farmers and opposition parties are apprehensive that the MSP would lose its teeth in the realm of unbridled market dynamics.

Under the new laws, a number of entities including corporates, traders and even the end customer can procure from farmers without a licence or payment of fee, unlike in the APMC structure. This opens up the sector to corporates who can directly procure from farmers without the interference of middlemen. Several farmer groups are scared that this will allow large corporates exercise control over farm prices in the long run when the free market system is fully established.

At the other end, opposition political parties argue that since agriculture and markets are state subjects – entry 14 and 28 respectively in List II – these bills are a direct encroachment upon the functions of the states and against the spirit of cooperative federalism enshrined in the Indian Constitution. The Centre, however, argued that trade and commerce in food items is part of the concurrent list.

Background 

But while the debate over the expediency or the legality of these acts continues, the question that arises is: Did India need these new acts?

A number of economists have welcomed these acta and argue that they will bring significant changes in India’s farm dynamics - if implemented earnestly. Agricultural economist Ashok Gulati likened the act to “delicensing of the agricultural sector” and said it will provide an additional option to farmers to sell their produce. The government has, however, made it clear that MSP and APMC-based procurement will continue. But before the economics, it was probably the political compulsions that played a key role in the hasty introduction of the agricultural acts. Since the election campaign in 2014, Prime Minister Narendra Modi has repeatedly promised to double farmers’ income. But the government did little except increasing the MSP of agricultural commodities.

The country may have woken up to the crisis in agriculture when about one lakh farmers marched to New Delhi on November 30, 2018 but the crisis has been plaguing the sector for a long time. The Delhi march was preceded by many protests across state capitals starting with the ‘Long March’ of March 12, 2018 in Mumbai. In fact, there have been numerous farmer protests across the country since 2014. There was the long dharna by Tamil Nadu farmers in 2017 in Delhi. Then there was the death of five protesting farmers in police firing in June 2017 in Madhya Pradesh.

Data collected by the National Crime Records Bureau on unlawful assemblies suggests that there was an unprecedented rise in farmers’ mobilisation in the first two years of the Modi government (The Print, September 25, 2020). Between 2014 and 2016, the number of farmers’ protests rose by about eight times from 628 to 4,837.

 Economic necessity

At the other end, a robust agricultural growth amidst unprecedented sufferings of the rural economy must have prompted the government to introduce these acts to thrust the growth trend. The gross value-added from agriculture grew by 3.4% in the first quarter of the current year against a 23.9% decline in GDP - suggesting that given adequate support - the rural economy can drive economic recovery. And this can be done if farmers are taken as partners of growth.

The new acts propose to do exactly that by increasing farmers’ income. There are two ways to increase a farmer’s income. One is through higher productivity and thereby higher production in a given quantity of land and another is through higher prices. But higher productivity will increase production but not the income of all farmers in the same proportion due to various marketing constraints and because of the poor bargaining power of the small and marginal farmers. And these bills now attempt to increase the price realisation of farm produce across different farm holdings by opening up the market. 

Woes of small and marginal farmers

The biggest sufferers of the intensifying farm crisis are the small farmers. They constitute the larger part of the farm households and their number is increasing unchecked. The number of small farms has increased from 71 million in the beginning of the 1970s to 138 million in 2010-11 and further to 146 million in 2015-16. The average size of operational holdings as a result, has declined sharply from 2.28 hectares in 1970-71 to 1.15 hectares in 2010-11 and 1.08 in 2015-16.

What is disturbing is that the top 10% of the households are now cultivating almost 50% of India’s total cultivable land whereas the bottom 50% are cultivating less than 0.5% of that land. In fact, the share of the bottom 50% has declined steadily over the years from 4.1% in 1987-88 to 2.7% in 1999-2000 to 0.4% in 2011-12.

This shows the plight of the small and marginal farm households. Given the size of holdings and the fact that two-thirds of them are in dry land farming areas of the country, it is not surprising that the average income levels for the farming households are extremely low.

While there are no robust estimates of farmer incomes, the background paper outlining the strategy and action plan for doubling incomes prepared by the NITI Aayog, shows a trend of declining farmer incomes since 2011-12. As against a growth rate of farmer incomes at 5.52% per annum between 2004-05 and 2011-12, the incomes of all farmers actually declined at 1.36% per annum between 2011-12 and 2015-16. Extending the calculations to 2017-18 and using the methodology suggested by the NITI Aayog, it is seen that the trend of deceleration of farmer income has continued.

According to the NABARD’s All India Rural Financial Inclusion Survey 2016-17, agricultural households, which accounted for 48% of rural households, earned `107,172 during 2015-16 from cultivation, livestock, non-farm sector activities and wages/salaries. Thus, farmers’ income grew at a compounded growth rate of 12% per annum compared to `77,112 per annum as per NSSO assessment in 2012-13. The income of farm households varies widely across the states. Punjab and Haryana are the first and the second in terms of monthly income – largely due to bigger farm size.

The survey finds that the monthly income of agricultural households from cultivation remained almost the same during the last four years (`3,081 in 2012-13 and `3,140 in 2016-17). If adjusted for inflation, a declining trend is seen. The earnings of small and marginal farmers from cultivation are substantially low. Marginal farmers with less than 0.01 hectare of land earned just `566 per month. Small farmers with land between 0.01 and 0.40 hectare earned `1,488 per month from cultivation against `7,572 earned monthly by a farmer having more than two hectares of land.

Wage earning is the second major source of income of farmers, constituting around 34% of their total income. The rural wage rate in the last three to four years is either almost constant or declining. The annual average growth in wages from agriculture labour has declined from 6.9% in 2014-15 to 1.2% in 2016-17. Income from other allied activities has also declined in recent years.

The low income has often compelled farm households to borrow to meet their exigencies or to buy inputs for cultivation. The farmers’ indebtedness or its impact has often become national issues. According to the NABARD survey, 52.4% of the agricultural households were indebted. Telangana (79%), Andhra Pradesh (77%), and Karnataka (74%) show highest levels of indebtedness across states. The national average of per household outstanding debt was as high as `1,04,602 at the time of the survey.

Small farmers face various marketing constraints that increase marketing costs and or market risks associated with market access and market information. High marketing costs are mainly due to inadequate transportation facilities, lack of reliable and timely market information and lack of competitive markets. According to Vijay Paul Sharma, Professor, IIM, Ahmedabad, (Marketable and Marketed Surplus of Rice and Wheat in India: Distribution and Determinants – Indian Journal of Agricultural Economics April-June, 2016), large farmers sold about 71.4% of marketed surplus to government agencies while small farmers sold about 30.2% to government agencies. The price paid by private traders and processors is lower than the price paid by public agencies. However, large farmers received relatively higher prices from private traders compared with other farm sizes - showing their better bargaining power compared with small and marginal farmers.

Another study by Sharma shows that marginal farmers receive a paltry 2.7% of the marketing surplus in wheat against 30% of the same surplus received by the medium and large farmers. Thus, the middlemen corner 97.3% of the surplus when they deal with the marginal and small farmers. The exploitation of the small farmers is more in the case of wheat than in rice.  

Since small and marginal farmers have low holding capacity, need cash for the next crop and other requirements and have poor access to institutional credit, they are often forced to sell their produce immediately after harvest and are compelled to buy at a later date at a higher price. However, there is also a counter argument that farmers sell their produce at MSP and buy from the PDS - where it is available at a much lower price.

Indian farmers are poor, debt-ridden and are starved of funding and of assured price mechanism. In the absence of a guaranteed support price mechanism, keeping MSP as a benchmark price as a fundamental condition for open agricultural trade and winding up of mandis, the small farmers with poor or no bargaining power are feared to be at the losing end. It is against these crucial factors that one needs to understand the agricultural acts and their possible impact on the structure of India’s agrarian economy.