Farm Bills: The economics behind it
Updated: Mar 19
By Prof. Amlan Das Gupta
This article is to examines the economic rationale for introducing the three pieces of legislation, first introduced as ordinances in September 2020, and collectively termed as the farm bills 2020.
The Indian agricultural sector is huge, it employs around 40% of the country’s workforce and yet it has been under duress for quite some time. Profits from the business of tilling one’s own land has been falling and today it is debatable whether there is any positive profit margins left at all. It is noteworthy that this situation persists even after heavy subsidies in agricultural inputs and minimum support price. However, this situation is not surprising. The agricultural production in India per year is such that each person in this country of 1.3 crore can receive around 200kgs of cereals every year. In other words, there is no upward pressure on price of agricultural products from the demand side. Therefore, farm incomes are falling. Farmers are increasingly finding it difficult to keep up with their loans. As such, various state governments have been compelled to announce blanket farm loan waivers, much to the chagrin of the RBI that is responsible for maintaining health of the financial system. Most tragically, many farmers are so burdened with debt that increasing numbers have resorted to committing suicide.
The farm bills are supposed to be the solution to this situation. It plans to release pressure on farmers by increasing their incomes. However, if we look at the provisions of the farm bills it is clear that the bill is more about the intermediaries and traders in the agricultural sector than farmers themselves. The first bill opens up new markets for farm produce beyond those under the control of the government. The second establishes written contracts between farmers and buyers and specifies a dispute resolution mechanism outside courts. Lastly, the third, allows traders to hoard food grains to some extent so that they can hold out for favourable prices. The idea is not to directly benefit the farmers but to create a class of alternate intermediaries that can rival the government licensed dealers in the APMC system. The assumption it seems is that, the competition will lead to some of the profits trickling down to farmers.
The last statement in the previous paragraph is perhaps the most crucial element of this scheme. If this assumption is untrue, the farm bills are worthless. Even if it works, the outcome will still be contingent on extra profits being generated. Let us examine the second condition first. Although we know that tilling the land is perhaps not the most profitable business nowadays, the selling and trading of farm produce, still generates healthy profits. As evidence look at the proliferation of agricultural start-ups in India. In 2019 new investment in the Agri-tech sector was around $248 million compared to just $35 million in 2018 according to a report published by NASSCOM India. Investment into retailing of agricultural produce has also been going up with the possible entry of Reliance-Retail in collaboration with WhatsApp into this fray. However, the market space targeted here may be the same that is currently occupied by licensed traders operating through the APMC framework. In that case, the proliferation of these new businesses will have to come at the cost of others. In a capitalist system the replacement of inefficient firms by more efficient ones is the process of creative destruction that drives the system towards efficiency. Therefore, this is not a bad thing. However, if the transition is being driven by government intervention then that does not imply efficiency. Besides, it is unclear as to how much can be eked out of the agri-business sector through better management. According to a careful study of post-harvest wastage in Indian agriculture is not alarmingly high. Therefore, the new businesses will have to be very good at managing their supply chains to make a mark in this market.
Next, let us assume that the new entrepreneurs and start-ups are successful in generating profits, how would a farmer stand to benefit from that. The problem with most trickle down arguments is that they omit the mechanism that causes the trickle down. So let us consider the reasons why businesses may want to share surpluses with their suppliers. The most important factor is bargaining power and farmers traditionally have possessed very little of that essentially because there are many more farmers and produce a lot more output than there are buyers. This would in general drive down prices, especially if the protection of the minimum support price (MSP) is removed and the market outside APMC is unregulated. Another factor that can further tip the balance of bargaining power against farmers is that firms and traders who are buying from them may choose to collude or go out of business if the profits are not proving enough. This is a natural tendency of profit maximizing entities, but while dealers and traders can do this, it is not an option for farmers. So relying on the fundamental capitalist processes of creative destruction to ensure efficiency among farmers may not be a good idea.
In the end, let us reflect on what would be the best possible solution to the difficult situation in the agricultural sector. While it is clear that surpluses are available in the agro trading business the challenge is to make these surpluses available to the tillers. Introducing a new set of intermediaries is definitely not the solution. What is required is to make farmers the residual claimants on agricultural businesses. A very good example of this system working wonders is the transformative effect that the Anand dairy movement has had on the dairy farmers in Gujarat. This process has already begun to happen organically where many large farmers are also obtaining trading licenses and participating in the APMC markets. However, this is not enough as this process is slow and will not immediately benefit the smaller farmers and the landless labourers. A better way of achieving this is the Farmer Producer Organizations initiative. This brings the farmers out of the relatively unproductive but essential production sector to marketing and processing where larger surpluses are to be had. This movement, although at a nascent stage, is perhaps the most promising way ahead.
 http://www.fao.org/india/fao-in-india/india-at-a-glance/en/ Calculated using 275 million metric tonnes of cereal production in the year.  https://www.downtoearth.org.in/blog/agriculture/growth-in-agriculture-is-not-remunerative-to-indian-farmers-73252  An Agricultural Produce Market Committee (APMC) is a marketing board established by state governments in India to ensure farmers are safeguarded from exploitation by large retailers, as well as ensuring the farm to retail price spread does not reach excessively high levels.  https://nasscom.in/system/files/secure-pdf/agritech-in-india-emerging-trends-in-2019.pdf  https://www.livemint.com/companies/news/reliance-aims-to-embed-jiomart-in-whatsapp-11610929194919.html  Jha, S. N., et al. "Assessment of quantitative harvest and post-harvest losses of major crops/commodities in India." Ministry of Food Processing Industries (Govt. of India), ICAR-Central Institute of Post-Harvest Engineering and Technology (ICAR-CIPHET)  The MSP has not been abolished. All players are free to move back and forth between mandis and the other market. Therefore, MSP will still be a major influence. How the prices in the secondary markets will be determined is still unclear.  https://www.theindiaforum.in/article/three-farm-bills  https://www.nabard.org/demo/auth/writereaddata/File/FARMER%20PRODUCER%20ORGANISATIONS.pdf