Agriculture sector and wicked problems

The mainstream narrative on agriculture is simplistic. Deregulate (land sales, produce sales), de-clog (commodities market, storage investments), and digitise (electronic trading) to attract private investments into the sector, ease out exploitative brokers and connect farmers directly to the market. 

If only it were so simple. Instead, we have a classic example of a wicked problem which requires enterprise, persistence and patience with implementation, and that too one which involves multiple stakeholders and a complex political economy. 

The Government of India recently initiated three major reforms - allowing farmers to sell outside the mandis, ease the restrictions on stocking of certain food items, and a contractual framework for contract farming. These three, coupled with the eNAM, provide the basis for perhaps the most promising starting point for meaningful efforts at reform. Then there are the model regulations on tenancy and leasing, which state governments have to adopt. 

It has to be stressed that it is only the starting point. The real work lies ahead.

As I blogged here, the implementation challenges with these agriculture reforms, especially something like the eNAM, are immense. Besides Bihar's experience, having abolished APMC Act in 2006, is not encouraging. Replacing a tightly regulated system with a completely deregulated system is not the answer. Markets are not going to do any magic here. Not by any stretch.

Sales outside the mandis require its set of physical and facilitative infrastructures. The former, involving marketplace infrastructure and storage facilities, is about  public financing and attracting private participation. But private investments in market infrastructure is linked to the success with the implementation of the other two reforms.

The facilitative infrastructures require changing farming practices (adoption of new cropping practices, and sorting and grading at farm gate), engendering trust (among seller farmers and buyer traders), and creating regulatory capacity at the field to prevent exploitative practices by the contracting agency and cheating by farmers. This demands significant work for the local agriculture department officials, especially the extension services. This will be a big challenge. 

The de-listing of some items from the Essential Commodities Act and easing of restrictions on stocking is expected to attract investments into purchases, storage, and marketing of these commodities by large companies. But this depends on its practical implementation. Its real test would be how public policy reacts to the recurrent bouts of price spikes and associated political economy demands, and whether those actions adversely impacts the first-mover investors. Again an issue of trust. 

Contract farming is already successfully deployed in isolated pockets in states like Punjab, Madhya Pradesh, Tamil Nadu, Karnataka, Maharashtra etc. The objective now is to make it more mainstream. The Farmers (Empowerment and Protection) Agreement on Farm Price Assurance and Farm Services Ordinance, 2020 provides a national contracting and enforcement framework. Notwithstanding the challenges with actual contract enforcement of any kind in India, this is a good step. 

More fundamentally, contract farming requires overcoming the problems of small farm sizes, low productivity, and poor crop management practices. Given these antecedent problems (and these are not easily overcome - some of the suggestions like deregulating agricultural land sales will lead to consolidation are just fanciful) and poor quality of public agriculture extension services, the contracting company has to engage actively to cultivate social capital and deploy its services to enable technology transfer. 

In fact, even with a legal framework on contract farming, creating a trust-based relationship may be the most important requirement for a successful contract farming relationship. The political economy of agriculture and the populist narratives around exploitation of farmers makes this all the more important. In the circumstances, a contract farming arrangement intermediated through Farmers' Producer Organisations (FPOs) may be the most prudent approach. 

The government's role will have to be two-fold. One, offer some incentives to large agriculture produce procurers (farming companies and retailers) so as to kickstart the pathway to scaling the idea. Some form of crop insurance subsidy or the likes could be an option. Another option would be to integrate the government's own extension services and other publicly offered linkages to the contract farming system. They could constitute a set of confidence building measures. 

Second, the local government authorities will have to display maturity in dealing with some of the likely problems with contract farming - accusations of exploitation in pricing, non-adherence to contractual terms by both sides, off-contract sales by farmers etc. It is important to outline a clear set of principles and exclusions and ensure that both sides are made aware and are held to account. The high level of social capital inherent in FPOs make them all the more appropriate as the nodal contracting partner for the private company.   

This and this papers have good listing of all the requirements for the success of contract farming. As can be seen, enforcement mechanism is only one among the requirements. 

In many respects, the problems with contract farming is similar to those with failure of contract manufacturing in India. Both the industrial and agriculture landscape are characterised by fragmentation, low productivity, poor quality, and sorely deficient infrastructure. Besides both are mired in complex political economy - of labour in industry, and farmers in agriculture. 

The good thing is that we are now belatedly at the starting line. The challenge is now to execute on these reforms. That's very hard. It's not amenable to one-size-fits-all approaches of nationwide implementation. 

Given the nature of the problems and the vast diversity of contexts, this will require multi-pronged and experimental approaches. It is useful to start with existing structures and see how they can be leveraged to build on these reforms. The Primary Agriculture Credit Societies (PACS), FPOs, existing APMC mandis, existing contract farming companies, and so on have to become critical anchors in this journey. They all need to be co-opted, instead of trying to create new alternative platforms and infrastructures, unless exceptional circumstances demand. Besides, there will have to be sufficient tolerance for failures, and alertness to spot successes and commitment to scale successful ideas. 

In this context, a rare example of informed public commentary on agriculture market reforms comes from former NABARD Chairman Harsh Bhanwala and Nirupam Mehrotra. One of the suggestions is to develop and increase efficiency of existing agriculture marketing pathways,

During Covid-19, the ability of FPOs to deliver was demonstrated successfully in some states. So, we have a proof of concept to work on quickly. It would be a fallacy to just provide these grassroots farmer-level institutions only standalone infrastructure like storage capacity. What should be envisaged is linking up through various interventions — from logistics and digital mode to the value chain. The government had, under the Mission for Integrated Development of Horticulture (MIDH), identified 78 Bagwani clusters. In these clusters, FPOs can be linked with the value chain and export markets. Many FPOs are already conducting activity/commodity-specific trades. Essentially, while building this alternative structure, one should also envision the role it can play in building up an alternative price discovery mechanism. These institutions can be linked to commodity stock exchanges (spot markets), and alternative price discovery can happen, as opposed to the APMC route. As the size of this route increases, it would lead to an effective price discovery mechanism. This route is organically nearer to a National Markets Platform, as opposed to APMCs and even the eNAM, which is housed in (or a part of) APMCs.

Another suggestion is on moving beyond the MSP by subsidising access to commodities options,

Another viable option is to explore how one can move beyond minimum support price (MSP) as a mechanism to offer remunerative prices. Commodity options could be one such realistic measure for the government. Essentially, there are basically two types of options — call and put options. Buyers of “put” options have the right but not the obligation to sell, or make a delivery, at a predetermined price and date. Therefore, a put option could be used to advantage by farmers. If a farmer buys a put option of a commodity he produces, he locks in his profit by paying a premium. This premium could be partially or fully subsidised by the government.

The point about public subsidy on price of the options is interesting and perhaps one way to get FPOs start engaging with the commodities market. It could work well for some products and for FPOs in certain regions.

Debashis Basu has another suggestion,

The solution is for the NITI Aayog to select some of these states for a pilot project and get on board a few large business groups (Reliance, ITC, Mahindra, and others have enormous knowledge and can scale up quickly). Make them compete with each other to get the most modern technology at Indian costs, all with the ultimate vision of connecting the Indian farmer to the global market. This experiment must have positive feedback loops, embedded in the design, allowing sensible course corrections.

In short, agriculture sector requires reform by allowing million flowers to bloom and building bonds of credibility and trust across different market participants. And develop the system and capacity to learn from emergent evidence and scale successful practices.

Update 1 (21.07.2020)

Christophe Jaffrelot has a contrarian take on the agriculture market reforms of the government.

Update 2 (19.09.2020)

A primer in Indian Express on agriculture market reforms points to the importance of implementation.

Update 3 (20.09.2020)

Three good articles on the four agriculture reform measures - by Mekhala Krishnamurthy, Kavitha Kuruganti, Rajalakshmi Nirmal, and Harish Damodaran et al. All point to the importance of implementation and the perils of unregulated private markets. There is a real danger that without follow-up and regulation, this could end far worse than now. 

Himanshu writes about the present status on state-level agriculture markets,

Out of 36 states and union territories, 18 states have already enacted reforms allowing for establishment of private market yards/private markets, 19 states have enacted reforms allowing for direct purchase of agricultural produce from agriculturists by processor/bulk buyer/bulk retailer/exporter, 20 states have enacted contract farming acts. Kerala and Bihar do not have APMC mandis and Tamil Nadu has a different system.

This appears to be the central concern, 

In any case, mandi trade accounts for less than one-fourth of the total agricultural trade with the rest accounted for by private markets/traders. The absence of regulation and exemption from mandi fees creates a dual market structure which is not only inefficient but will also encourage unregulated trade detrimental to the primary purpose of providing market access to farmers for better price discovery and assured prices. Most farmers realise that the FTPC Bill is not about delivering on the promise of freedom to farmers but freedom to private capital to purchase agricultural produce at cheaper prices and without any regulation or oversight by the government. Farmers also realise that this will eventually lead to shifting of trade from regulated APMC mandis to private markets without any commitment to investment in infrastructure and regulation from government. With unequal and differentiated terms of engagement, the decline and disappearance of the APMC is only a matter of time.

The concerns that APMC will wither away and the role of MSP will decrease may be unfounded. The political economy surrounding agriculture will play itself out in the field. It may be very difficult for governments to be seen diluting their commitment to backstop procurements, especially if there is a perceptible decline in prices and rural distress is evident. After all despite many states already having regulations which effectively allow all these concerns to play out, it is instructive that none of them have actually materialised.

Update 4 (02.10.2020)

Yogendra Yadav hits the nail on its head zeroing in on the flawed assumptions with the prevailing narrative on the agriculture market deregulation legislations.

But this should not be taken to mean that the deregulation is bad, but only draws attention to the importance of its implantation in a manner that addresses these concerns. Poor implementation will certainly leave the farmers worse off.

Update 5 (18.10.2020)

This article outlines the potential/promise from shifting to horticulture. While the author does not point to, it also contains insights about the challenges with actual realisation of the objective. 

Update 6 (25.10.2020)

Ramesh Chand has a very good article making the case for the agriculture reform legislations. 

Update 7 (26.10.2020)

A 2019 RBI survey on agriculture has useful insights about what farmers and traders think are important for them. MSP is seen as the most useful government policy by farmers. Interestingly, provision of market information on prices, weather, agronomic practices etc is highly valued by farmers. 

Update 8 (02.11.2020)

Harish Damodaran has a very good article about Bihar's experience with its 2006 repeal of APMC Act and allowing farmers to trade freely outside. As the article says, the independence of farmers to sell their produce to anyone will remain only in imagination and has limited practical relevance. 

The significant thing is that there are no APMC mandis involved here. Farmers sell grain to the small vyapari, who bags it and supplies to the bigger commission agent-cum-trader. The processors/millers, in turn, only deal with the bada vyapari. They aren’t buying directly from farmers yet – despite Bihar’s Agricultural Produce Market (Repealing) Act permitting it since 2006. “I am now forced to sell to one vyapari, who pays me after 20-30 days. We need a local APMC, where there are more buyers and payment is made within 2-3 days,” sums up Bhubaneswar Yadav.

Update 9 (06.12.2020)

This and this are very good articles on the three legislations, the latter on how it's likely to impact Andhra Pradesh.

Update 10 (18.12.2020)

A good summary of the APMC Act reforms across the years by different states.