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Farm reform: the Achilles’ heel of any Indian government

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The Achilles heel of any Indian government is implementing reforms in agriculture. The importance of agriculture is well known, and while we were able to address productivity issues in the 1960s thanks to the Green Revolution, bringing about changes that involve changing structures is more difficult. This year, three hard-to-resolve issues have drawn attention – two of them concern simmering debates, while the third is more medium-term in nature.

The withdrawal of farm laws was certainly a major victory for protesting farmers, but it rolls back reforms that could have helped commercialize the sector. The reforms in themselves did not introduce anything that was not already happening in the pockets of the country. For example, selling outside the mandi is already possible where the APMC model laws have been passed (more than a dozen states have adopted these laws, although the mandi continues to be the backbone). In addition, the operation of eNAM (National Agricultural e-Market) is well advanced, although volumes are limited to specific products and geographic areas. Yet a national law that openly allows farmers to sell their produce outside the mandi has been opposed. This means that farmers will continue to struggle under the mandi system where oligopolistic structures prevail and hamper fair play. Intermediaries are clearly the winners as they will continue to dominate the markets.

Likewise, contract farming is something the government has fought for. Contract farming exists today and most supermarket groups have backend relationships with farmers that ensure the availability of standardized products. This is especially true when food products like ketchups, jams, and wafers meet uniform standards. The same can be seen with fast food chains, which have links with farms to achieve standardized quality of vegetables. Therefore, the concept is not new and although it has worked at the micro level, it is not possible to scale up given the limited sales possibilities. There was actually little reason to oppose this idea, but it led to exaggerated claims that India Inc took over the entire agricultural sector and then impoverished it. Although there was no logic, the relentless protest eventually worked and the law was withdrawn.

The other big reversal is the gradual ban on futures trading in all major agricultural products. What started with chana and mustard now covers the entire soy complex in addition to crude palm oil, moong, paddy and wheat. The message is very clear: futures trading will not have a free hand. Interestingly, the main agricultural exchange, NCDEX, has been successful in reaching and engaging farmer organizations. This link will now be cut. The decision taken is clearly not supported by an economic rationale, as the latest CPI and WPI inflation data for pulses shows that there has been low inflation. Chana had 2.7% inflation while the moong, which is barely traded, was down 0.2%. Paddy is not traded while wheat has limited trade. The same goes for crude palm oil. Oils have been a problem with the CPI inflation high of nearly 30 percent, but here the cause is global with edible oil prices rising sharply by 40 percent according to the World Bank. Since India imports around 60 percent of its needs, the same is reflected here. The current ban, which is to last for a year, practically puts the nail in the coffin of agricultural futures trading, which also means that it will be a throwback to the past for farmers.

The final issue concerns PSM and its link to the direct benefit transfer project the government is working on. As part of the agricultural laws speech, it was argued that an attempt was underway to phase out the MSP system, which would leave farmers at the mercy of private companies. The MSP, although advertised for all crops, is only effective for rice and wheat when there is a supply system which is then linked to the PDS. The government has tried to use direct benefit transfers to replace the PDS to ensure there are no leaks. The problem for the government is that the whole system is convoluted. The MSP is linked to provisioning, which in turn is linked to the PDS and buffer storage. The MSP is open-ended and FCI ends up sourcing large quantities of rice and wheat because the price offered is very attractive. Farmers prefer to cultivate them because it gives them better income, but these two are greedy for water and their cultivation lowers the water table. There is no convincing policy for the disposal of surpluses and therefore large stocks are held by the CFI. To get an idea, we can look at some figures.

Buffer stock standards are set for each quarter. The highest that must be held is 41 million tonnes on July 1, while the lowest is 21 million tonnes on April 1. As of December 7, 2021, 59 million tonnes were held, almost 38 million tonnes more than the January 1 standard. . The government must at some point deal with the issue of supply and distribution, otherwise this cost will continue to be borne by the budget. Cash transfers, which have been largely successful for LPG, have failed here because of the system which must be maintained even if it is inefficient. Ideally, if farmers are brought into the futures platform to sell their grain, the government could pay the option premium to make sure they get a good price. The distribution part can be served by cash transfers where households buy their food grains locally. FCI would only have to keep the buffer stocks.

If we look at buffer stocks, we realize that these stocks have never been drawn for twenty years because India produces large quantities of rice and wheat which end up in surplus in warehouses. Logic demands that buffer stocks be abandoned because the cost of ownership is high and there is no real gain in a world where countries can freely trade agricultural products.

One cannot be sure when these reforms will finally be accepted, as there appear to be many interest groups at work that will ensure that it is difficult to move forward.

The writer is a freelance economist and author of Hits & Misses: The Indian Banking Story

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