The Farm Law 1 – Concerns and observations/suggestions

COMMENTS ON EXTRACTS FROM GAZETTE

‘THE FARMERS’ PRODUCE TRADE AND COMMERCE (PROMOTION

AND FACILITATION) ACT, 2020”

(extract of some statements of concern, followed by comments in red italics)

PREAMBLE / PURPOSE

To provide for the creation of an ecosystem where the farmers and traders enjoy the freedom of choice relating to sale and purchase of farmers’ produce which facilitates remunerative prices through competitive alternative trading channels; to promote efficient, transparent and barrier-free inter-State and intra-State trade and commerce of farmers’ produce outside the physical premises of markets or deemed markets notified under various State agricultural produce market legislations; to provide a facilitative framework for electronic trading and for matters connected therewith or incidental thereto.

Summary comments

  • Creating an ecosystem for barrier-free trade is desirable as it can potentially be beneficial for farmers, traders, and consumers; this is why most economists, scientists and others have supported the new farm laws.
  • The implicit assumption in the Act is that the new trade-ecosystem, while easing free trade, will also ensure fair and just, trade  and ‘remunerative prices’ to farmers.  In its present form, the Act does not include specific provisions for price discovery to ensure remunerative prices. It is just assumed that farmers will receive remunerative price
  • The Act appears to balance the terms of trade relatively fairly between Producer Organizations and Traders, as the former may have the capacities to bargain for remunerative prices. But, some Statements in the Act cause concern that the terms of trade can potentially make individual farmers (particularly small and medium farmers) even more vulnerable than in the traditional system by legitimizing the  existing shortcomings and vulnerabilities in the terms of trade.
  • By this Act, Traders will have no incentive or need to trade within APMC market yards as they can freely trade in the ‘trade area’ as defined in the Act (namely, outside APMC physical boundaries), without stringent authentication/license  and  some level of statutory third party protection and payment assurance that APMCs provide. Individual small and medium farmers can become even more vulnerable as they lose whatever limited institutional statutory protection they have in APMCs  in price discovery and payment guarantees.
  • The grievance redress mechanism enunciated in the Act also places individual small and medium  farmers in a vulnerable position by denying basic citizenship rights of access to courts for justice, imposing heavy penalties for non-compliance, and statutorily indemnifying all government and ‘any other’ persons involved in the trade processes.
  • An additional worry is that when international commodity prices are lower than domestic prices (which is the case for the past several years for major commodities) the terms of trade can be even more weighted against the individual small farmer. This is particularly significant in the context of the new changes to Essential Commodities Act (Farm law 3) .
  • A point to note is, though Agriculture is a State Subject, most operational mechanisms intended to facilitate free trade, or mentioned in the Act in passing, are by the Central Govt. The role of State Govts in facilitating trade in local agricultural produce outside of the APMCs needs to be defined more clearly in law, to ensure that the State and Centre complement each other in the interests of fair trade and farmer prosperity.
  • The above concerns about inequities in terms of trade are actually anticipated in the Act in the form of various statements/caveats, but the Act only hints at suggestive mechanisms to correct them without establishing  explicit statutory provisions for addressing them.
  • The inequities in terms of trade can be corrected by statute by providing for acceptable and authentic institutional mechanisms (within the Act or in the Rules) for: (i)  MSP or other specific  processes for price benchmarking and price discovery, (ii) fool-proof and verifiable trader authentication and payment systems,  (ii) fair and equitable access to grievance redress,  and (iv) for building trust in the institutional processes  for free and fair trade in the  new market ecosystem.
  • Without changes to existing Act and Rules (either through amendments or after repeal and redrafting), the inequities in the terms of trade for  individual small and medium farmers with respect to price discovery,  payment systems, and grievance redress will only be legitimized, and further exacerbated.

 Thus, while the Act seeks to emphasize and promote ‘free trade’, it must equally emphasize  ‘fair and just’ trade and remunerative prices,  by  providing statutory protection to individual farmers (in particular small and medium farmers) in price benchmarking, price discovery, payment, and grievance redress .

Specific statements from the Act are extracted below to point to the concerns listed in the summary comments

DEFINTIONS

“farmer” – an individual engaged in the production of farmers’ produce by self or by hired labour or otherwise, and includes the farmer producer organisation

 “farmer producer organisation” means an association or group of farmers, by whatever name called,––(i) registered under any law for the time being in force; or (ii) promoted under a scheme or programme sponsored by the Central or …

  • Individual farmers and farmer producer organizations are not equal entities with respect to capacities for price negotiation, enforcing payment, or access to grievance redress, in the free market ecosystem proposed in the law.

“scheduled farmers’ produce” – the agricultural produce specified under any State APMC Act for regulation

  • Some States do not have APMC Act – is this term applicable only for States with APMC act

“trade area” – any area or location, place of production, collection and aggregation including (farm gates; factory premises; warehouses; silos; cold storages;  any other structures or places, from where trade of farmers’ produce may be undertaken in the territory of India, but does not include  (i) physical boundaries of principal market yards, sub-market yards and market sub-yards managed and run by the market committees formed under each State APMC Act in force in India; and (ii) private market yards, private market sub-yards, direct marketing collection centres, and private farmer-consumer market yards managed by persons

  • APMC market yards are the only place where farmer is protected statutorily by formal regulated processes for price discovery, third party trader authentication, and payment.
  • Traders will have no incentive/need  to buy produce within APMC market yards in the new market ecosystem as they can freely  trade in  the trade area (outside APMC) as defined above, without obtaining registration/license  and without being bound by any system for price discovery (see item 5 on next page)
  • Small farmers will be highly vulnerable as they lose all forms of institutional statutory protection in pricing and payment guarantees in the new Trade Area defined in the Act.
  • This will only legitimize all shortcomings of the present system with respect to price discovery and farmer protections.

“trader” – a person who buys farmers’ produce by way of inter-State trade or intra-State trade or a combination thereof, either for self or on behalf of one or more persons for the purpose of wholesale trade, retail, end-use, value addition, processing, manufacturing, export, consumption or for such other purpose

“person” – (a) an individual; (b) a partnership firm; (c) a company; (d) a limited liability partnership; (e) a co-operative society; (f) a society; (g) any association or body of persons duly incorporated or recognised as a group under any ongoing programmes of the Central Government or the State Government

FEATURES

  1. Any farmer or trader or electronic trading and transaction platform shall have the freedom to carry on inter-State or intra-State trade in farmers’ produce in a trade area.
  1. Any trader may engage in inter-State trade or intra-State trade of scheduled farmers’ produce with a farmer or another trader in a trade area
  1. (a) No trader, except the farmer producer organisations or agricultural co-operative society, shall trade in any scheduled farmers’ produce unless such a trader has a permanent account number allotted under the Income-tax Act, 1961 or such other document as may be notified by the Central Government
  • Weak authentication for Trader, as there are no requirements of license/ guarantee other than PAN– Stronger  authentication is needed for traders (like in APMCs) or create some alternate mechanism to ensure free, fair, and just trade.

(b) The Central Government may, if it is of the opinion that it is necessary and expedient in the public interest so to do, prescribe a system for electronic registration for a trader

  • The Act recognizes the weakness in trader authentication, but Central Govt makes no commitment  to authenticate traders or enable  this through  State Govts.
  1. PAYMENT –Every trader who transacts with farmers shall make payment for the traded scheduled farmers’ produce on the same day or within the maximum three working days if procedurally so required subject to the condition that the receipt of delivery mentioning the due payment amount shall be given to the farmer on the same day.
  • (Provided that the Central Government may prescribe a different procedure of payment by farmer produce organisation or agriculture co-operative society, by whatever name called, linked with the receipt of payment from the buyer
  • (The Central Government may develop a Price Information and Market Intelligence System for farmers’ produce for dissemination of information relating thereto.)
  • No statutory provisions for price benchmarking or price discovery.
  • Payment terms favour traders – no payment protection/guarantee for farmer, only receipt is compulsory.
  • Payment ‘within maximum of three working days, if procedurally so required” – not clear – does ‘three working days “ period to realize payment  imply cheque payment ?
  • Producer organizations may have the capacities to negotiate  effectively with large traders for remunerative price and for payment guarantees, but not small farmers.
  • Puts individual farmer at disadvantage – trader can give receipt and fake cheque and scoot ! Newspaper reports suggest this may have happened in the few months the Ordinance/Act has been in place
  • The Act recognizes the concerns that arise in its present form, with regard to both price discovery and payment,  but does not commit the Central or State Governments to  statutorily ensure more authentic price discovery or payment systems for individual farmers .
  1. STATE LEVY – No market fee or cess or levy, by whatever name called, under any State APMC Act or any other State law, shall be levied on any farmer or trader or electronic trading and transaction platform for trade and commerce in scheduled farmers’ produce in a trade area.
  • Revenue loss to States – Note that the APMC fee or cess  was not intended originally to be a source of revenue for States as it was to be ploughed back into improving/facilitating  marketing conditions and infrastructure for farmers at APMCs. But Centre needs to convince States or compensate for revenue loss and improvement of conditions in APMCs.
  • No incentive for traders to trade within  APMC boundaries as they need to become licensed and pay cess/taxes, whereas they can freely trade in the area outside the premises of APMCs.  As a result, APMCs can be rendered inconsequential in time.
  1. DISPUTE RESOLUTION – Parties may seek a mutually acceptable solution by filing an application to the Sub-Divisional Magistrate who shall refer such dispute to a Conciliation Board to be appointed by him for facilitating the binding settlement of the If the parties to the transaction are unable to resolve the dispute within thirty days they may approach the Sub-Divisional Magistrate concerned who shall be the “Sub-Divisional Authority” for settlement of such dispute.

Any party aggrieved by the order of the Sub-Divisional Authority may prefer an appeal before the Appellate Authority (Collector or Additional Collector nominated by the Collector) within thirty days of such order who shall dispose of the appeal within thirty days from the date of filing of such appeal.

Every order of the Sub-Divisional Authority or Appellate Authority under this section shall have force of the decree of a civil court and shall be enforceable as such, and decretal amount shall be recovered as arrears of land revenue.

  • Puts individual small farmers in a vulnerable position for grievance redress. Producer organizations may have capacity  to represent their case strongly  to identified administrators
  1. PENALTIES – Whoever contravenes the provisions of  the rules shall be liable to pay a penalty which shall not be less than twenty-five thousand rupees but which may extend up to five lakh rupees, and where the contravention is a continuing one, further penalty not exceeding five thousand rupees for each day after the first day during which the contravention continues.
  • Vague, imbalanced and unfair to farmers as all actors other than farmers seem to be indemnified (see below) and the farmer may end up paying hefty penalties if he does not comply. 
  1. No suit, prosecution or other legal proceedings shall lie against the Central Government or the State Government, or any officer of the Central Government or the State Government or any other person in respect of anything which is in good faith done or intended to be done under this Act or of any rules or orders made there under.
  • Universal indemnity for all institutional actors and non-institutional actors (see the phrase “or any other person” above) involved in all transactions from price discovery and payment to dispute resolution ! – farmer has no recourse if not satisfied at Sub-Divisional level, and may even be penalised heavily.
  1. No civil court shall have jurisdiction to entertain any suit or proceedings in respect of any matter, the cognizance of which can be taken and disposed of by any authority empowered by or under this Act or the rules made thereunder.
  • Basic citizenship right of appeal to courts in case of grievance denied to farmer  for trade of his own produce.

Some observations that can guide  including relevant  provisions in the Act and  for covering market risk (income loss to farmers from sale of produce in free market). 

  • Many have suggested that the present Farm  Act will encourage  formation of more Farmer Producer Organizations (FPOs) as a potential solution to increase farmer bargaining power in price discovery,  higher technology ingestion, lower costs and increased income. However, past history of FPOs  on scaling to an adequate level is not very encouraging to support this assumption. Possible reasons for this include the structural differences that exist within rural societies that  make it difficult for farmers from different social groups to form homogeneous company like organizations and participate as equals in formal organizational systems and processes.
  • MSP  as determined by CACP needs to be understood in proper context. It represents national average minimum benchmark price based on (1.5 x national average (A2 cost ( or input costs of  farm produce ) + FL cost (or family labour costs) ).  Costs of land rent and other capital costs are excluded.  Further, the benefits of MSP in terms of farmer profits and  income, even if implemented fully across the country, are not the same in all States, even for the same crop. This is because costs (A2+FL) and crop productivity vary by State  (see CACP season reports). This is why it is a minimum support price and States augment the MSP arbitrarily in some years. In some States , particularly rainfed States, the profits  to farmers even at MSP are at best marginal .  MSP is therefore no panacea, but farmers accept it in the absence of any other reliable benchmark for price discovery. 
  • Agricultural commodity markets are highly volatile (unlike FMCG products) and market price volatility hurts livelihoods of all farmers, with its effects being  more severe on small farmers s.
  • This is why, most countries that allow the kind of free trade envisaged in this Act (like USA, Europe, China, among large markets), also   provide statutorily   for price loss coverage against  market risk to farmers.
  • For example, in USA,  the  US Farm Bill specifically provides for Price Loss Coverage (PLC) for farmers, by which producers receive payments when the actual price for a commodity in the open market falls below its statutorily determined reference price. A specific mechanism for determining the reference price every season, based on historical patterns of production and prices, is specified in the Bill,  In addition to price loss compensation, farmers are also covered by statute within the same bill by federally subsidized crop insurance against both climate and market risks. Farmers in US are thus doubly protected (PLC and market insurance) by law against income losses. The US farm Bill is also reviewed every 4 years. Similar mechanisms exist in Europe (CAP), China,  and other countries.
  • In contrast  crop insurance schemes in India  including PMFBY have no coverage of market risk, nor do they have any statutory backing for compensating farmers for climate and other production risks.
  • The present farm Act makes Indian farmers  doubly vulnerable  as there is no statutory protection against price loss through a mechanism similar to PLC, nor crop insurance against market risk. This will make our farming unsustainable against global competition.
  • The Swaminathan  Commission  anticipated these complex factors and had included provisions for risk proofing farmers  against both climate and market volatilities, by creating a market stabilization fund and a national risk management fund to compensate for low market prices, and production and climate risks. No one refers  to this price compensation mechanism when they say they have implemented MSP.
  • We may draw  guidance from the Swaminathan Commission or other national  policies , to arrive at appropriate statutory provisions that suit our conditions to provide statutorily within the Farm Acts for  price loss compensation in volatile markets against a benchmarked reference price, to ensure fair and remunerative prices to farmers envisaged in the Act’s preamble.
  • If we include the above statutorily defined  price loss protection provisions into the  new act, then even  if entire FCI procurement for PDS is through the free market envisaged in the Act (as some of it already is through APMCs), the compensation paid to farmers for price loss in a free market could potentially reduce the present  food subsidy bill significantly.