Unshackling Indian Agriculture

July 3, 2023

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 was passed by the Central Government, grants the ability to freely purchase and sell agricultural goods in any location within the country, whether within APMC designated markets or beyond them 

The current system of Agricultural Produce Market Committee (APMC) markets is plagued by deficiencies, resulting in a significant portion of marketable surplus being sold outside of Mandis. These transactions lack transparency and fairness, as they contravene APMC regulations, and farmers are often at risk of being discovered and penalized by APMC officials. The newly implemented Act legalizes such dealings, which is beneficial for farmers as it allows them to sell their produce directly at their farm or doorstep, like the sale of milk. 

Furthermore, farmers will now can set their own prices for their produce, potentially shifting the power dynamic from being a “price taker” in a monopoly to a more competitive market determined prices. However, it remains to be seen how small-scale farmers will benefit from this new Act, as many small farms are facing the challenge of decreasing land size. To diversify into high-value crops, small-scale farmers require reliable outlets to sell small lots of produce, such as fresh vegetables and fruits, which may not be harvested all at once.

The conventional supply chains for agricultural products typically involves multiple intermediaries, resulting in a significant ‘mark-up’ between the prices farmers receive and the final cost to consumers. The new Farmer’s Produce Trade and Commerce (FPTC) Bill aims to streamline the supply chain by reducing the number of intermediaries and enabling farmers to sell their produce directly to consumers through their own groups. This not only helps to decrease the price spread, but also creates new business opportunities for rural youth, particularly the children of farmers, in the agriculture trading sector, similar to what has been observed in the denotified crops and dairy industries.

Monopoly of APMCs:  Due to structural constraints imposed by the government regulations in the agricultural sector and monopoly as an Agri produce marketplace, APMCs can exorbitantly charge taxes and use charges. The new FPTC Act serves as a catalyst for these markets to become more efficient and competitive. 

States that are truly committed to the welfare of farmers should eliminate unjustified and excessive Mandi charges and keep them below the reasonable level of 1.5%. This will foster a true spirit of competition between APMC Mandis, and private channels permitted under the new Act. Madhya Pradesh removed commission agents from notified crops during 1985-90, allowing buyers such as FCI to directly pay farmers, which was found to be beneficial for both buyers and sellers. Additionally, Madhya Pradesh is currently considering reducing the Mandi fee to 0.5% of the value of the produce.

The choice of whether to utilize the services of Arthiyas (commission agents) should be left to the discretion of producers and sellers, rather than being mandated by law. The state government should instead opt to impose a maximum limit on commission charges, rather than fixing them. The Agricultural Produce Market Committee (APMC) model employed in Madhya Pradesh (MP) is the most advantageous for farmers and the agricultural sector. It ensures that APMC Mandis are not threatened by the new Farmer’s Produce Trade and Commerce (FPTC) Act.

Forced MSP: Boon or Bane?

In 2018, Maharashtra attempted to enforce a change in law that would result in traders being sentenced to a year in jail and paying a penalty of Rs 50,000 for not adhering to the MSP declared by the government. However, as open market prices were lower than the legally established MSP levels declared by the state, buyers withdrew from the market and farmers suffered as a result. The move was quickly abandoned. Another example of this is in the case of sugarcane, where MSP (Fair and Remunerative Price) is the statutory minimum price. When sugar mills (private sector) found that the FRP for sugarcane did not align with sugar prices, they stopped buying and crushing sugarcane. 

The new FPTC Act has come under criticism from some quarters, with the example of Bihar being cited. It is argued that the scrapping of the APMC Act in 2006 in Bihar did not result in farmers receiving the Minimum Support Price (MSP). However, it is important to note that farmers in Bihar were not receiving MSP even before the scrapping of the APMC Act. Furthermore, data on prices received by farmers in Bihar over the past decade show that average farm harvest prices were only 20% below MSP, indicating that the scrapping of the APMC Act did not have a significant negative impact on prices received by farmers.

Negative Externalities associated with MSP: The government of India’s provision of Minimum Support Price (MSP) for a select group of cereals such as wheat and rice has resulted in the market getting skewed towards these crops. This government policy, particularly for water-intensive crops like rice, has led to significant negative externalities including reduced water availability and soil degradation, which are not considered in the MSP decision-making process. 

Way Forward

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 is a step in the right direction aiming to dismantle the monopoly of APMCs in the agricultural market and introducing competition. Present MSP regime is a case study example of how excessive government regulation is as detrimental for the welfare of the people as no regulation at all. The introduction of the private sector will create necessary infrastructure needed for better price determination and storage facilities in the agricultural markets. 

While the introduction of the private sector in agriculture should be encouraged and appreciated, given the inelastic nature of the agriculture market, government-led social protection is required for the small and marginal farmers. As shown in this article, the majority of Indian farmers are small and marginal farmers having less capacity to absorb market shocks and steep price fluctuations. Scheme like Bhavantar Bhugtan Yojana (Price Deficit Financing Scheme) of Madhya Pradesh, to hedge price risks in agriculture wherein farmers will be compensated for distress sales at prices below Government-announced minimum support prices (MSP) can be a step in the right direction.