Farm Reform Laws 2020

The Modi government has seen taking huge bold steps in the economic history of India like demonetisation, the implementation of GST and now these bold and substantial reforms in the agriculture sector, which is widely known as the WATERSHED movement in the history of Indian agriculture. 

These reforms were protested by many from the opposition party, arguing that they will be detrimental to the interest of farmers in the long run. Even though the intent of the law is genuine, its benefit depends primarily on its implementation.

The government passed three Bills, which will replace the existing laws presently governing the agriculture sector. Let us discuss the details of all the three reforms in particular. 

1. Farmers Produce Trade and Commerce (Promotion and Facilitation) Act 2020

Existing farm laws had restricted farmers and traders to sell their produce to mandis, which are governed by the Agriculture Produce Market Committee (APMC) Act of the respective state. Mandis are the marketplaces which carry out the purchase, sales and temporary storage of the farm produce, thereby giving assurance of returns and easy network of intermediaries for bulk sales to farmers. Mandis are regulated by the APMC where the farm produce is sold at minimum support price (MSP) as decided by the state. In the mandi mechanism, the farmer is introduced to the buyer through a mediator/agent who organises auction in the mandi.

The trader with the highest bid gets the whole lot, whereas the farmer (seller ) and the buyer (trader) has to give a percentage of commission to the agent. Hence, it is a win-win situation for the agents but the farmers who toil themselves the entire year in farming get the tiny amount. Though the mandi system was brought in force for the protection and ease of farmers, local monopoly and corruption by way of price-fixing before an auction of the produce, left the small and marginal farmers in a miserable condition. With time, the transparency in the mandi system vanished, and so mostly the large landowners or intermediaries (traders/agents) started benefitting at the cost of the farmers. 

This new bill has ruled out the existing shackles of the Indian farmers by lifting the restriction on the sale of farm produce to mandis. Hence, the farmers can now sell openly to anyone anywhere in the country. For example, with this bill in effect, a farmer of Rajasthan can directly sell to the supermarkets if they wish so. 

Further, the bill has introduced electronic trading of farmers’ produce. As per this reform, an electronic trading platform can be established and operated by companies, partnership firms or registered societies. The payment has to be made within three days while trading via mediators through this platform. In case of purchase directly from the farmer, the payment is to be made immediately or maximum within three days. Delay of the payment even after three days will be fined as high as Rs 50,000 to Rs 10 lakh.  

With this ordinance in effect, the state governments will not be able to levy any market fees, cess for any sales conducted outside the APMC regulated mandis. 

2. The Farmer (empowerment and protection) agreement of the Price Assurance and Farm Services Act 2020

This new reform allows the farmers to enter into an agreement for contract farming with the buyers to produce a crop for a pre-decided price before sowing. The ordinance requires the mentioning of the pre-decided price of the produce in the agreement. For the produce which is subject to the price variation, a guaranteed price and reference to an additional amount above guaranteed price is to be specified clearly.

Further, in case of breach of any terms and conditions of the contract, this regulation provides a three-level dispute settlement mechanism — the conciliation board, Sub-Divisional Magistrate and Appellate Authority. Hence, in case of any dispute between the farmer/trader and the buyer, they first have to place an appeal to the conciliation board and cannot place the same directly to the Appellate authority. 

3. The Essential Commodities Amendment Act of 2020

The Essential Commodities Bill 2020 is an amendment to the existing “Essential Commodities Act”. This Act governs the production, supply, price, distribution, etc. of a list of basic commodities essential for livelihoods like food items, fertilisers and petroleum products. The purpose of this Act is to keep a check on hoarding of these essential items so that the traders/dealers do not take any undue advantage of a change in demand and supply. 

With the new reform in the Essential Commodities Act 2020, the agricultural produce including cereals, pulses, potatoes, onions, edible oil and oilseeds will no longer be regulated by the Act other than in extreme circumstances like war and famine.

The Act further reserves to restrict stock limits of these listed items only if there is a steep price rise, i.e. 100% in case of horticultural produce and 50% in case of non-perishable food items. 

Hence, the farmers and traders will now be free to stock or hoard the farm produce without any restrictions from the government. 

Also Read: 4 Reasons Why Mutual Funds are a Better Investment Than Real Estate

How are these reforms beneficial to farmers and the agricultural sector of India? What are the advantages of these farm reforms in 2020?

1. With the amendment of Farmers Produce Trade and Commerce Act 2020 and dismantling of the monopoly of APMC mandis, the entire market will be open to the farmer to sell their produce. This is believed to bring more transparency and fair play in the trading of the farm produce. Also, by bringing the private sector into the picture, there will be a rise in the competition. And a competitive economy is considered as a healthy economy where consumers cannot be exploited, and there is a win-win situation for all. Telecom and insurance industry of India flourished after privatisation was brought in force. 
2. Presently trade within the mandi is taxable. Mandis charge rural development fee, market fee and the agent’s commission by the farmers. But with the reform for making sales anywhere to anyone, no taxes will be levied on trade outside the regulated mandis. This will enable farmers to retain higher margins and uplift per capita income of even marginal farmers.
3. Previously due to the mandi system and MSP mechanism strictly in place, the price rise due to demand was controlled by the law which discouraged private sector companies for any investments in the agricultural sector due to low returns. The government would sometimes ban exports of some farm goods to control local prices, which would limit the ability to store crops. Farmers suffered huge losses when the production of perishable commodities surged. As per statistics, India loses 40% of post-harvest produce annually due to inefficient supply chain. The new reforms are believed to address these issues through private players and new Agri startups by improved infrastructure and processes and take the agriculture sector on an upward trajectory.
4. The main problem that the agriculture sector is facing is structural and infrastructure issues. The government aims to bring privatisation into the agriculture business and to improve the infrastructure of farming in India. It is believed that by bringing private companies close to the farmers, they will have access to more extended credits, the latest technological know-how, a better quality of produce due to increased focus, etc. 
5. The bills will highly encourage agri-startups. Anyone who is working on post-harvesting services or digital platforms for agri-business will have a smooth entry in the sector which will boost the Indian agriculture overall. They will no longer be hindered by a bureaucracy of the states & the License Raj of local APMCs. 
6. Contract farming can protect farmers from any significant price fluctuations due to demand or uncertain conditions. This reform provides security to the farmers in terms of the earnings. It binds the buyer and farmer in a mutually agreed contract even before the farmers start rearing or sowing the produce. Hence, the farmers can rest assured that his crop will be purchased at a specific price and so he can focus more on the quality of the produce. 
7. It is expected that the exports of agricultural produce will rise with these reforms implemented successfully. The farmers will likely be able to carry out profit farming with the freedom to sell anywhere to anyone and entering into a specific price contract with the traders. Hence India will be able to place itself globally as an agriculture giant with an increase in the bargaining powers of farmers. 

Even though these reforms sound to be beneficial to farmers, why are these reforms being protested widely? What are the disadvantages of farm reforms in 2020?

1. Farmers greatly protested the government’s initiative of opening up the purchase and sales of the produce as they were scared that the corporates will buy the produce solely according to the demand and farmers will not be protected by the support price. The government has clarified that MSP will continue and farmers will be protected with the support price for their produce. 
2. Farmers fear that the giant companies will bargain in the beginning and offer a reasonable price for their produce initially, going further these companies will drop the pre-agreed price of the contract system. The corporates will dictate the farmers regarding the crops to be raised and the sales price. The farmers will get wholly dependent on the corporates and abandoned by the government. Further, the farmers fear the government will not bear any cost of insurance of the crops, on the plea that the contract is between two private parties and the government can’t play any role in it.
3. Corporates will have more bargaining power and resources than small scale farmers. 80% of farmers in India own less than 2 hectares of land, which will put them in a lower pedestrian in terms of bargaining power. Farmers could be forced to sell their produce at the lower price offered by the corporates with the possibility of the mandis system vanishing gradually.
4. According to available estimates, there are over 7,500 regulated agricultural markets in India today, operating under different state-level acts covering a huge variety of notified agricultural produce
5. The individuals working in the post-harvest services presently like self-employed mediators, APMC officials fear that there will be unemployment in this sector and their bread and butter would be taken away with these reforms in place. 
6. States will lose the revenue as they will not be able to collect the mandi tax. The Northern states like Punjab and Haryana, are protesting aggressively as their major revenue comes from mandi tax.
7. While the functioning of mandis is not transparent and corrupted, due to the age-old mandi system, the farmers have now developed a bond with the commission agents. They also avail credit in advance from these agents without offering any security. Farmers and traders feel that with these new reforms, they will have to deal with an all-together new set of private players which makes them insecure and uncertain to a large extent. 
8. Majority of Indian farmers are small and marginal. Small farmers do not have the resources to store or transport their produce to sell in bulk to big private traders. They produce and sell a smaller quantity just after harvesting to fulfil their basic needs. They cannot wait for the market forces to be profitable or prices to rise. Hence, rely mostly on MSP. Leaving them to the mercy of market demand and supply game of private players would discourage them, and there is a possibility they will resort to non-agricultural activities, creating a vacuum in the farming industry.
9. To remove commodities like cereals, pulses, oilseeds, onion and potatoes from the list of essential commodities list seems to be a risky reform as it could lead to hoarding these commodities & charging exorbitant prices from consumers by creating artificial scarcity. It is being feared that the government is opening the agricultural & farm sector for FDI, which would be devastating for the economy. These movers are similar to creating more multi-brand retail kinds of stores destroying lakhs of Kirana stores. The move will help the corporatization of the agricultural sector and can affect the livelihood of a vast number of farmers by converting them to be landless labourers. 

What I believe is that the agricultural sector in India clearly needs reforms by way of high-end technologies, digital tools, entrepreneurs, Agri startups to provide services to farmers. However, the new framework of reform should provide reasonable safeguard to the farmers and traders. Their concerns, doubts and fear need to be addressed by the government. 

Though the laws are a noble declaration of intent, these reforms have raised specific questions which need to be answered. 

Will the mandi system end or will the APMCs upgrade themselves to be more digitally sound and compete with private players?

Will the giant corporations exploit the marginal farmers, or there will be laws set out to protect the weak ones?

How fair and smooth will the redressal committees be set up? Will they not be exploited by the private players as they will have a power of money?

Will Contract farming include insurance of crops to be born by the buyer as a mandatory clause along with the pre-decided pricing? 

What will be the laws and actions for hoarding of commodities beyond a limit to safeguard the interest of the farmers, traders and consumers at large?

Will these reforms end the political exploitation of farmers?

More than 80% of the farmers have small landholdings, and it will be a test of time to witness how they negotiate the market forces.

 As indeed said “Any change is most difficult to adopt at the start, messy in the middle and beautiful at the end” applies even to these reforms. The beauty of these reforms will lie in their efficient implementation. There is no doubt that these Land reforms in 2020 have been a step forward in the history of agriculture. The reforms can take the Indian agriculture open from the clutches of age-old bureaucratic practices of large landowners and farmers. However, the government should closely monitor their implementation so that the voice of those suffering is heard and the challenges faced by them are addressed promptly. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in

Jyoti Arora

I am a Chartered Accountant by profession with  4+ years of experience in the finance domain. I consider myself as someone who yearns to explore the world through travelling & Reading. I believe, the knowledge & wisdom that reading gives has helped me shape my perspective towards life, career and relationships. I enjoy meeting new people & learning about their lives & backgrounds. My mantra is to find inspiration from everyday life &  thrive to be better each day.