Agriculture in India Today.

Now we talk about the latest AGRICULTURE reforms in India and how it's likely to change Indian agriculture forever.

The Story.

The history of Agriculture in India dates back to Indus Valley Civilization and even before that in some places of Southern India. India ranks second worldwide in farm outputs. As per 2018, agriculture employed more than 50℅ of the Indian workforce and contributed 17–18% to the country's GDP. But Selling agriculture produce is hard. You can’t sell this stuff to end consumers directly. Instead, you’re expected to sell the product in your designated “market area”/mandi. The mandis, in turn, are regulated by the Agricultural Produce Market Committee (APMC) comprising of local farmers, government representatives, and agri-commodity traders.

Once you make your way to the mandi, you get in touch with your agent, who helps you clean, sort, and organize your produce. He then takes the end product to the auctioneer who puts it on display. Interested buyers gather on the market platform and start bidding. The highest bidder will eventually take home your output and the agent will help you settle the transaction with the prospective buyer. You walk away with what you get, but not before you pay your agent his commission.

Ideally, this ought to be a fair transaction. At least considering we have a free and fair auction. But that’s not entirely true.

You see, most auctions are rigged. Traders who are responsible for the buying collude. Instead of competing against one another, they work together and artificially deflate prices by bidding low. Now, the collusion works only until the select group of traders can keep co-operating. And to this end, APMCs that issue new licenses (to traders) do their best to keep the club exclusive. Meaning corruption is rife.

At the end of it all, traders walk away with the king’s ransom and farmers are routinely short-changed. It’s a terrible travesty. In fact, by some accounts, farmers only get paid 20–25% of the end consumer price.

But it doesn’t have to be so bad.

Think of it this way. Farmers have little choice of picking their mandis since its illegal for them (in most states) to sell their produce outside of these market areas. Once they get to the mandi they get “one quote” since the traders collude. In essence, the system only has one buyer. Economists call this a monopsonistic marketplace — where the price is determined by a single buyer. And there’s no way you can get a fair quote when you’re operating in such unfavourable conditions.

In fact, efficient price realisation can only happen when there’s unfettered competition. So if you allow farmers to simply choose who they could sell to and foster competition (on the buying side), maybe they can get a fair price.

And that’s precisely what the government wants to do. It wants to open up the market and give farmers more choices. It wants to limit intermediaries and boost farm income. It wants to fundamentally change the way Agri commodities are marketed in India and it wants to do it now.

Now obviously this poses some very interesting challenges. For starters, laws on this subject (on marketing and selling agriculture produce) are framed and enforced by state governments. So if the state governments don’t comply, APMCs might still have some influence.

But what if the central government does something to bypass states altogether? Is it possible? Maybe. But we'll have to wait and see how the government circumvents the political opposition.

What we do know for certain, however, is that when farm produce moves between state borders, central laws will automatically kick in. So farmers will likely be able to sell their produce outside their own states and have a plethora of choice, no matter what. And once this happens, state APMCs will have to buck up. They’ll have to play fair to compete with entities outside. Ergo, farmers will be the ultimate beneficiaries.

The final concern is about free-market forces — those greedy corporates who try to use their size, scale, and bargaining power to browbeat small-time farmers. And sure, this could be problematic. But the thing is, big corporates like ITC and Adani are unlikely to deal with farmers individually. As the agricultural economist Ashok Gulati notes — “They [big corporates] need scale and to create scale you create an aggregation point and that is through farmer producer organizations.”

Meaning if farmers come together and form these small entities taking full ownership of their products, they'll be able to solve the "scale problem".

All we need now is for the government to walk the talk. Implement this law in full, get states on board and unleash the animal spirits so that India can prosper.

In 2012, the National Crime Records Bureau of India reported 13,754 farmer suicides. Farmer suicides account for 11.2% of all suicides in India. Activists and scholars have offered a number of conflicting reasons for farmer suicides, such as monsoon failure, high debt burdens, genetically modified crops, government policies, public mental health, personal issues and family problems.





















The biggest problem with agriculture is that it’s a seasonal activity. And therefore, we might have to endure several months without a bountiful harvest. Now it’s not like you can let people starve during this time just because agriculture takes a break. What you do instead is store the harvest until the next season kicks in.

But India’s storage facilities are woefully inadequate. And if you can’t store the produce, you’re more likely to have a mismatch in demand and supply. And if you can’t plug this mismatch, you’ll have a massive swing in prices. And when prices move around a lot, farmer producers and urban consumers take to the streets with brickbats and broken roof tiles. And that’s not good for anybody.

So what do you do?

Well, you turn to the government, in the hope that they build the necessary warehousing infrastructure. However, as you might be aware, public sector institutions aren’t exactly known for their cutthroat efficiency. So your only choice is to turn to private institutions and incentivise them to take up the mantle instead.

But they already have incentives right? After all, if they aspire to offer consumers a decent stable price throughout the year, they have to make the necessary investments in storage. So why has the private sector refused to indulge, despite the potential to make more money?

Short answer — The Essential Commodities Act (ECA)

The government of India has a central law that confers upon state governments the power to moderate supply & storage of certain essential commodities (like pulses, onions, fruits and vegetables)

And they do this (more often than not) by imposing stocking limits. Imagine you are a wholesale trader stockpiling 100 tons of tomatoes. Unbeknownst to you, the price of tomatoes starts inching upwards. There’s discontent among urban consumers. Protestors start trickling in. The government is alarmed. It’s desperate to halt the march of pricey tomatoes. It believes greedy agri-commodity traders are hoarding excess supplies to artificially inflate prices. So it draws a line — any wholesale trader holding more than 50 tons of tomatoes will be prosecuted if he doesn’t comply with the state diktat.

The government is hoping that once you sell the excess tomatoes (beyond the stocking limit), the added supply in the market will help reign in prices. But this disincentivizes private institutions from building storage facilities since they could be asked to part with their supplies any day. One day you have a warehouse with stockpiles totalling 100 tonnes. The next you have a half-empty facility. It doesn’t make a lot of business sense.


And more importantly, stocking limits don't even help in controlling prices.

Consider for instance what happened with onion late last year.

Onions are grown twice every year — First during Rabi season and then during Kharif season. The harvest from the Rabi season (April/May) usually lasts until the end of the year when harvest from the Kharif season hits the market (in October/November). Unfortunately, the rain gods weren’t kind last year. Floods ravaged warehouses (stocking onions) and all the excess supply started dwindling rather quickly. And onion prices began to soar in the months of August and September (from Rs 7 per kg in Jan to Rs 80 per kg in Sep).

The government immediately jumped to intervene and imposed stocking limits. It forces traders to part with their supplies hoping to moderate prices.

But unbeknownst to the government, there was another problem brewing on the sidelines. The heavy rains that damaged onion supplies also ravaged the farmlands. So the harvest from the Kharif season that was supposed to hit the markets early October was barely making its way to retail consumers. And the traders who were forced to comply with the stocking limits started dumping whatever little they had in the month of October itself. And by November, we barely had any supplies left.


After which prices rose to such disproportionate levels that most people were left seething with rage. Imagine buying onions at Rs. 200 a kg. Preposterous.

From Chapter 4 of the Economic Survey 2019-20
So here we have a central law that does not do what it’s supposed to do and then, further disincentivizes private investors from making the necessary investments in storage and warehousing.

What do you with such a law?

You dilute it. And 65 years after it was originally conceived, the government has finally decided to do away with "stocking provisions" within the Essential Commodities Act.

Remarkable!!!

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