Today there is nationwide dissent over the three farm bills passed in Lok Sabha and Rajya Sabha in India i.e. Farmers Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020; The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020; and The Essential Commodities (Amendment) Bill. Till now the Agriculture produce was sold across the nation through the Agricultural Produce & Livestock Market Committee (APMC) Model along with a support of Maximum Selling Price (MSP). Now with the introduction of these bills, the Farmers are free to trade outside APMCs and there will not be any MSP for their produce. This triggered a nationwide protest by the farmers. As compared to the earlier regulated market system, now there will be a free market for the famers’ produce. Further, there will be freedom to private players to establish an electronic trading platform under the new bills. Still, there is a nationwide protest. To understand why the protests are taking place, a detailed deep dive is required in the working system of Regulated APMC Model of Agriculture Market (RAMAM) & Essential Commodity Act (ECA) which were in operation till now in the country.
APMC & ECA MODEL:
Let us now understand the Regulated APMC Model of Agriculture Market (RAMAM) first in the detail.
Regulated APMC Model of Agriculture Market (RAMAM)
As per the Regulated APMC Model of Agriculture Market (RAMAM), the farmers are required to keep their produce on the floor for the auction and each buyer who has licenses to operate within that APMC Market limit are entitled to bid for the same. The highest bidder gets the commodity. In turn, the farmers are supposed to pay entry fees and other charges to APMC for the bidding facility and other market facilities. (Somashekhar I, 2014). However, RAMAM works differently in every state. The reason behind the same is that the “Agriculture” is defined as a subject matter in the state list vide entry-14 of the seventh schedule of the Indian Constitution. As a result, each state has adopted the Model APMC Act, 2006 in their own way by tweaking it as per their regional requirements. (Indian Constitution, 1947)
For example, the Maharashtra Government amended its APMC Act in 2006 to allowed private traders and other companies to enter into trade and to deal in agriculture produce under the Direct Marketing License (DML) system. As per the DML system, the Maharashtra Government offered licenses to private traders and corporate buyers to buy directly from farmers, by-passing the regulated APMC mandis. The DMLs were subject to bank guarantees of up to Rs 15 lakh, primarily intended to ensure farmers got their payments in case of trader defaults. (The Indian Express, 2019).
Although prima facie APMC were regulated market places where the farmers were guaranteed the MSP for their produce but in actual the condition was contradictory. For example, for maize, most of the farmers reported getting a price of ₹1,000-1,300 per quintal, as against the official MSP of ₹1,850 in the year 2019-2020. For wheat too, farmers in Bihar reportedly received prices 10-15% lower than the MSP in the year 2019-2020 (LiveMint, 2020).
Further, it was also seen that there were excessive cartelization and price-fixing in the APMCs. APMCs works on a model wherein the farmers bring their produce to the yard of the market and then they keep the produce on the floor of the market for sale wherein the selected seller used to bid very low than the MSP. However, it was seen that the farmer used to get stuck once they used to bring their produce to the market as there was a lack of infrastructure facilities, storage facilities and there was the involvement of huge transportation cost due to which farmer used to avoid taking back their produce if left unsold. (Somashekhar I, 2014).
In India, farmers’ produce is generally first disposed of in the village, then in rural, then in the primary market or secondary agricultural market and hardly any produce is brought to the regulated APMC Markets. The crucial reason behind this is the accessibility and reach of the APMCs market. Usually, these regulated markets are situated far from the limits of villages and towns where actual farming is done or where actually agriculture produce is stored. (Somashekhar I, 2014).
Another aspect of APMC is that they are very rigid in nature. APMC laws were established to ensure that the farmers’ produce should fetch a worth to the farmers instead they created a complex bureaucratic and monopolistic structure wherein few sellers regulate the price in the APMCs. The below example will provide an understanding of the complex bureaucratic and monopolistic structure of the APMCs
“the government created the APMCs under the law by passing the APMC Act. Only the traders who fall under the certain specified criteria as per the law designed by the government can get license and registration to operate within that APMC i.e. only those buyers who have the license can buy in that market which in turn restricted the number of buyers and demand in that particular APMC Market. The MSP is also decided by the government at which the product is supposed to trade. Further, for restricting the demand and the buyers APMC charges fees to the farmers in the name of providing the entry and market platform to the farmers (Somashekhar I, 2014).”
Further, there is one more law i.e the Essential Commodities Act (ECA), 1955 that created more rigidness and inflexibility in the trade of agriculture produce and trade. Let us understand that now.
Essential Commodities Act, 1955
The prime purpose of this Act is to control the production, supply and distribution of, and trade and commerce in, certain goods considered as essential commodities. The Act itself does not lay out rules and regulations but allows the States to issue Control Orders related to licensing, regulating and deciding the stock limits, restricting the movement of farmer produce other requirements and charges to be levied. The Act also provides for jurisdiction
- to confiscate the stock,
- to suspend/ cancel licences, and
- impose punishments like imprisonment for not complying with the orders issued by the States.
The Act also gives the power to fix price limits for essential commodities by allowing authorities to issue a notification in this regard. Also, the act specifies the penalties for selling a particular commodity above the limit for which the stock limit order has been issued by a competent authority. Most of the powers under the Act have been delegated by the Central Government to the State Governments with the direction that they shall exercise these powers. Food and civil supply authorities in States execute the provisions of the Act. (Economic Survey 2019-2020, 2020).
Let us see how does this Act was supposed to work and how it actually works.
SUPPOSED WORKING MODEL OF THE ACT:
So when the prices of any essential commodity rise due to various reason (like shortage commodity, more export, hoarding, a sudden spike in demand) then the State / Central Government or the competent authority, authorized hereby, issues the order to limit the stock of that essential product i.e. Stock Limit Order (SLO). Consequently, the traders, dealers, wholesalers, distributors, and retailers dealing in that product are forced to reduce their stock to the limit specified in the stock limit order other appropriate penalties will be charged to them for not complying the order. This reduction in the stock, to reach the stock limit order level, is done by selling out the excessive stock of that product or essential commodity in the open market. When the excessive stock is sold, the supply in the market, for time being, increases then the demand for that product prevalent in the market. Due to more supply than demand in the market, the price of that product or commodity falls. This is how this Act was supposed to work and regulate the price.
ACTUAL WORKING MODEL OF THE ACT:
To understand how the act works in actual, we have divided the whole scenario into three periods as mentioned below:
- Pre Stock Limit Order Period;
- Post Stock Limit Order Period;
- Post Excessive Supply Absorption Period.
Let’s understand the demand, supply and price position in these periods. To understand in an easy way we have taken certain assumptions which are also listed below:
- The demand & Supply for the product is constant across all the above mentioned period
- The Price is only affected by the change in demand and supply and there are no external factors which affect the price.
- People are not stocking any quantity of the essential commodity post-issuance of the stock limit order.
- The produce in the harvest season is full sold rather than keeping as a stock in the warehouse.
1. Pre Stock Limit Order Period
In this period the price of the essential commodity is high due to various reason like;
- shortage of that commodity,
- more export of that product,
- hoarding of that commodity,
- a sudden spike in demand than prevalent supply of that product,
- destruction of the upcoming harvest due to flood or famine, etc
then the State / Central Government or the competent authority, authorized hereby, issues the order to limit the stock of that essential product. When the stock limit orders are released the traders and wholesalers sell their excessive inventory in the open market. Let us now see what happen when excessive stock is sold into the market.
2. Post Stock Limit Order Period
When the stock limit orders are released the traders and wholesalers sell their excessive inventory in the open market as mentioned above. This increases the supply of the product compared to the demand prevailing in the market. Consequently, due to increased supply, the price falls, for time being, in the market for that product. However, the price remains fallen till the time the excessive supply is present in the market. Based on our assumption, there is no excessive stock left with traders, wholesalers and dealers to sell in the open market as they all have complied with the stock limit order.
3. Post Excessive supply Absorption Period
When the dealers, wholesalers, and traders comply with a stock limit order, they release the excessive stock in the market. As we have assumed that the demand is constant, the excessive stock in the market will be absorbed gradually as the demand earlier was higher than the supply and that product was scarce. Post absorption of the excessive stock in the market, the supply comes to the pre-issuance level of the stock limit order. Assuming the consumption and demand being constant throughout that period, the demand and supply come to the pre-issuance stock limit order position ( i.e. demand being higher than supply which resulted earlier rise in price for that commodity) due to which the price again goes upwards.
Furthermore, to tackle this surge in the price in the post absorption period, the State/Central Government cannot issue another stock limit order as the excessive stock is already sold in the market at the time of previous stock limit order. Thus the government becomes powerless to tackle the surge in the price of the essential commodity during the post absorption period. As a result, the scarcity i.e. unsatisfied demand increases with the passage in time and the price reaches new high compared to the previous surge which was present in Pre Stock Limit Order Period
The same has been enumerated in the form of a graph below. For the data set of the graph refer the annexure-1
These stock limit orders have one more effect over the agriculture trading and market. Let us see that also.
MINIMAL WAREHOUSE AND STORAGE DEVELOPMENT:
The Stock Limit Orders results into discouragement for the wholesalers and traders to invest in warehousing and storage facilities. (Economic Survey 2019-2020, 2020). As a result, minimal investment inflow was noticed in the sector of storage & warehousing for the essential items. Further, it was observed that the price sensitivity with respect to change in demand and supply was high, during the post-issuance period of the stock limit order, compared to the price sensitivity for that product in the pre-issuance period of the stock limit order. The prime rationale for the same was the sparse storage infrastructure across the nation for these products or commodities. This resulted in the hindrance to the free trade. The scattered & undeveloped storage infrastructure was the prominent reason behind the farmer’s mindset to sell the product as an when it was ready to harvest. As a result, instead of a dispersed supply of certain commodities over the year, the supply was seen soaring during the period of harvest and a huge dip during non-harvest seasons. This unbalanced supply of the product and commodities resulted in high price volatility & high price sensitivity of that product (Economic Survey 2019-2020, 2020).
Hence, the ineffectiveness of ECA emanates from unnecessary Government intervention through the stock limit orders that undermine markets forces in itself. The ECA was enacted at a time when speculative hoarding and black marketing was a threat as agricultural markets were fragmented and transport infrastructure was poorly developed. But the Act, while penalising speculative hoarding, also ends up penalising the much desirable consumption smoothing that storage provides (Economic Survey 2019-2020, 2020).
Now, if the APMC & ECA structure i.e. RAMAM are so redundant and rigid then one needs to understand as to why the farmers are protesting against the new bills. The answer to the same lies within the Bihar model of trade of agriculture produce.
FREE MARKET MODEL (BIHAR):
In 2006, the Bihar government repealed the APMC Act and allowed traders and buyers to interact and trade with the farmers. As a result, the traders were now allowed to buy & sell the farmers’ produce from framers directly at a mutually agreed price. There was no market fee or levy of any type to the transaction between buyers and farmers. Hence, it was expected that the Bihar Agricultural Market will grow and will achieve an equilibrium price which will increase the revenue of the farmers. Further, it was also estimated that Bihar market will get integrated with the national market and there will be direct national purchase from Bihar market. However, the actual results were far contradictory to the expected one. Although, the average prices of major crops such as paddy, wheat, and maize increased during the post abolishment of APMC Act as compared to the pre-period i.e. average price of paddy increased by 126 per cent, whereas of wheat by 66 per cent, and of maize by 81 per cent, there was a huge increase in the price volatility due to which the farmers were not able to sell their produce appropriately. Furthermore, there was a slight increase in the farmer’s revenue but the same was not that much as it was expected (National Council of Applied Economic Research (NCAER), 2019).
The prime reasons for the failure of the abolishment of the APMC Act in Bihar were as follows:
- Absence of the Private Investment (PI) in the agricultural markets, in the creation of storage infrastructure, and agriculture produce procurement.
- The low density of the buyer for agriculture produce. Due to the distance between buyers and farmers, there was no place where they can meet and can trade. As a result, most of the farmers were forced to sell the produce within their villages to commission agents.
- Due to lack of buyer and private players involvement, there was a monopoly of the commission agents and big traders who used to fix price for the purchase of the agriculture produce.
- Lack of government interference, inadequate market facility and institutional arrangements lead to a crash of prices and revenues for the farmers.(National Council of Applied Economic Research (NCAER), 2019).
This depicted that the abolishment of the rigid and inflexible APMC and ECA i.e. RAMAM also resulted in crisis and issues for the farmers. Hence farmers across the nation are worried that the national agriculture market will suffer in absence of the APMC model and government intervention. They fear that they will become powerless as they would not be able to bargain before the big corporates if APMCs will cease to exists. (India Today, 2020). But what government claims that the Act passed in parliament will change the agriculture market totally by making it strong and it will help the farmers to get better prices for their crops. (India Today, 2020). Whether it will strengthen the agriculture market is the big question that the future will unveil.
One question is also discussed across the nation that whether the Central Government has appropriate powers to form law over the matter which is enumerated in the state list as we already saw that agriculture is part of state list being mentioned in item 14 of the state list of the seventh schedule of the Indian Constitution. Let us under the constitutional validity of the same.
STATE LIST VS CONCURRENT LIST:
The concurrent list article 33 specifies as below:
- Trade and commerce in, and the production, supply and distribution of,— (a) the products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; (b) foodstuffs, including edible oilseeds and oils; (c) cattle fodder, including oilcakes and other concentrates; (d) raw cotton, whether ginned or unginned, and cotton seed; and (e) raw jute.(Indian Constitution, 1947)
Hence the central government claims that laws passed in the Parliament are well within the scope of the concurrent list and as per the Indian Constitution which states that laws on trade & commerce pertaining to the agriculture produce are the subject matter of the concurrent list. Further, the matters specified in the concurrent list are open for both central and state government for the formation of the legislation on the same. However, wherever there will be legislation enacted by the central government on the concurrent list then the legislation of the centre will prevail over the state to the extent where both contradicts each other.
As a result, the challenge over the constitutional validity of these acts was satisfied with entry 33 of the concurrent list of the seventh schedule of the Indian Constitution.
So far we saw how the Bihar’s Model of free-market failed when it was shifted from the regulated market model. In the same context, the National Agriculture Market is also vulnerable when it will be transferred from the regulated market system to a free-market system. In such a case, there are some extra precautions that the government must take in order to protect the market and to achieve the desired results of the free market. Let us discuss those precautions and additional measures the government must focus upon to reduce the risk of failure of the free and open market:
Government Sponsored Buyer:
In the case of Bihar market what went wrong was that there was no demand or participation by private players. Post deregulation, there was no place where buyers and sellers could meet. That created a huge distance between buyer and seller. That distance, in turn, resulted in a vacuum in demand. Low buyers (lower demand) and high sellers (high supply) resulted in fall in prices initially.
To avoid this situation government through Food Corporation of India must maintain the demand across the nation when they feel that there is less participation by private players. This intervention by the Food Corporation of India will help the seller to maintain the prices in the market and in turn, the revenue share of the farmers will also increase. Further such intervention as a buyer will help to keep cartelization in check.
Development of E-Markets:
Post deregulation in Bihar, the major issue the farmers faced was the absence of physical and electronic markets to sell the products. This resulted in fall in demand and prices. The main cause for the same was the distance between the place of agriculture and market. Usually, farmers produce at a distant location in villages and the consumption usually happens in the cities. Further, due to this distance, farmers at times were forced to sell their produce to the commission agents in their villages. This resulted in exploitation by the commission agents.
Hence to avoid the same government must ensure the Alternate Market For Agriculture Produce (AMAP) so that farmers should not be forced to sell their produce to the commission agents and selected traders. This will bring the check on the exploitation of the farmers.
It was also seen that in Bihar there was an absence of storage facilities in the villages and markets where produce was sold, as a result, most of the farmers were forced to sell their produce as storage facilities were absent with them. This also discouraged farmers from producing the perishable produce which requires immediate storage infrastructures.
In order to avoid this, appropriate storage facilities must be developed across the nation in order to protect the farmers’ perishable produce and to encourage them to produce such perishable valuable produce more.
Another important factor was transport from the place of production to the place of storage or place of the market. In the absence of the transport facilities, the farmers usually get stuck to sell their produce within their village to the commission agents or they were forced to pay huge transport cost from place of produce to place of seller. This resulted in fall in their revenue and income. Cartelization of the transporters not only hinders the trading of the agriculture produce but also impacts negatively the revenue and income of the farmers.
Hence, it will be advisable to create an infrastructure wherein the farmers can get appropriate transport facilities so that they can sell their produce on their place of choice at low transport cost.
As of now, we saw that Regulated APMC Model for Agriculture Market and Free Market Model both have their pros and cons. Both failed to deliver the desired result to the farmers and the government. Further, earlier it was contended that the solution to increasing the farmer’s income is to free them from the regulated market. But in Bihar we saw that to save farmers from cartelization and to increase their income the farmers need the regulated market model.
Hence it has become a paradox that the farmer’s income can be increased by doing away the regulated model of the agriculture market but at the same time, farmers need a regulated market to survive and grow.
However, this can be resolved by introducing the additional measure mentioned above. Those additional measures will not only ensure the Free Market Model works but will also help farmers to grow their revenue and produce in long run.
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- The Indian Express. (2019, August 26). Spreading price information using mobile phones is increasing farmer incomes. Retrieved from www.indianexpress.com: https://indianexpress.com/article/india/spreading-price-information-using-mobile-phones-is-increasing-farmer-incomes-5936513/
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Harshad Tekwani is a Chartered Accountant and currently pursuing Master in in Economics. Currently, he is working as a DGM in Governance, Risk and Compliance. He has authored various papers on economics and IND AS, Audit & Law. He has taken various lectures at various professional forums like ICAI, CPE Study Circles, Mentorship Program, etc.