India turning crisis into opportunity - proposes to bring farmers closer to consumers
In what could turn out to be a defining moment for Indian agriculture, the Indian government has used the COVID19 pandemic to propose reforms which allow more farm product storage, direct selling and contract farming. These changes are expected to improve the prices farmers receive, while supporting food processors and consumers.
India’s Finance Minister on 16th May announced a relief package for the agriculture sector to deal with the challenges of the COVID19 pandemic. The package includes both financial support (separate article on this will be published next week) and changes in legislation:
(i) amending the Essential Commodities Act,
(ii) introducing a federal law to allow farmers to sell their produce outside the wholesale market,
(iii) creating a legal framework for contract farming.
The above three reforms, if implemented properly, can attract investments from companies in creating infrastructure for storage, building a supply chain that connects to smallholder farmers and reducing environmental degradation.
The 1955 Essential Commodities Act (ECA) gave the government the authority to limit how much stock traders, processors or any private agency can hold. The ECA was a scarcity-era legislation, which stopped traders from manipulating prices by hoarding commodities such as cereals, pulses, oilseeds, onions and potatoes. However, India has moved from being a food-deficit nation to a net agricultural exporter. With surplus production in most of the agriculture products consumed in the country, there is less purpose in having such a law. It creates uncertainty in the private sector and discourages investments in storage infrastructure. For example, investments in big storage facility for onions never happened because the ECA was used whenever prices increased more than 100 percent (following drought, for example last year). With limited storage facility available, surplus production of crops led to price crashes. The biggest sufferers were the farmers who sometimes even could not recoup the price of production. The proposed reform would allow imposition of stocking limits only under very exceptional circumstances like natural calamities and famines, following price surges of at least 100 percent year-on-year at an all-India average retail level for vegetables (onion and potato) and 50 percent in the case of non-perishables (grains, oilseeds, etc.).
A Central Law is proposed which will allow farmers to sell their produce outside the wholesale market. Under the Agriculture Produce Marketing Committee (APMC) Act, farmers are required to sell their produce to the nearest wholesale market through licensed traders. Farmers have no other choice but accept the price given by the traders. This makes the chain from farm to fork inefficient, as there are some three to four intermediaries who handle the farm produce before it reaches the end consumers. The Central government had already advised States to temporarily relax the APMC Act during the COVID19 crisis. The new Central law relies on an article in the Constitution that gives powers to the Centre to regulate inter- and intra-state trade and commerce in foodstuffs. The response of states, especially those ruled by the opposition, remains to be seen. If the proposed law is passed by the Parliament, then farmers can chose to sell their produce anywhere in the country, for example using the platform of eNAM (Electronic National Agriculture Market) or selling directly to processors. The law is foreseen to remove all barriers to inter-state trade in farm produce.
A legal framework for contract farming was a politically sensitive subject for a country in which 80 percent of its farmers hold less than one hectare of land. The Government feared that allowing contract farming will enable a big trader or company to exploit those smallholder farmers, leading to social unrest. However, evidence show that when farmers work with large food companies they not only get a better return for their crops but also learn good agriculture practices. By creation a facilitative legal framework for contract farming farmers will be able to bypass APMC markets and engage directly with processors, large retailers and exports. By agreeing on volumes and prices the risk for both farmers and buyers is reduced.
The proposed legislative changes will be presented to Parliament for approval in an Amendment Act, followed by signature from the President. This process may take a few months. Moreover, changing the law may not be a panacea, as companies will find it challenging to work with smallholder farmers unless they form a co-operative-like structure such as a Farmer Producer Organisation (FPO).
Next week NDE-LNV will publish an article containing more details on the financial support package announced by the Finance Minister. The package includes agriculture-related support measures such as agricultural credit, funds for agricultural infrastructure, animal husbandry and food micro enterprises, support for food grain supply for migrant workers, as well as promotion support for herbal cultivation and beekeeping.