NEW DELHI: New legislation seeking to realign India’s vast and fragmented agricultural markets, along with amendments to the Essential Products Act, are significant structural changes introduced by the Narendra Modi government. So far, farmer protests have been mostly concentrated in northwestern India, Punjab and Haryana, but the laws are likely to have a far-reaching impact in the coming years in all states.
The government expects competitive markets and increased private investment in the food supply chain to improve farm prices. Here are five pointers to consider to understand the short-term impact of these reforms.
First, over the next several weeks, freshly harvested kharif crops will begin to reach markets. The number to take into account is to what extent the arrivals to the existing mandis decrease. For example, if arrivals drop significantly, say more than 25% compared to last October (the peak month of arrivals), this would mean that the trade is leaving the APMC shipyards to take advantage of the zero tax and fee provision of the new regime. But without regulatory oversight and transaction monitoring outside of APMC mandis, it is unclear how the impact on farmers’ welfare will be quantified. If arrivals show no change from year to year, that would mean status quo for now.
Second, data on wholesale prices must be closely monitored to understand the immediate impact of invoices on farm prices. With crop production expected to reach record levels after heavy rains and more plantings, a drop in wholesale prices could cause unrest among farmers. Furthermore, since the Prime Minister has ensured that farmers will not be denied purchase at minimum support prices (MSP). Farmers are likely to hold the government accountable if prices drop and state purchases remain limited for pulses and oilseeds.
The third indicator is how government purchases of food grains will change, especially in states like Punjab and Haryana. Will the Food Corporation of India utilize the services of commission agents and get mandis by paying more than 8% in taxes? Or will the government acquire external mandis while conducting MSP operations? Any disruption to the regular procurement regime can lead to further disturbances in these states.
Fourth, policy makers and the central bank may need to closely monitor how changes to the Essential Products Law will affect retail food inflation. Since the government allows private actors to store agricultural products freely, the possibilities of hoarding to manipulate retail prices cannot be ruled out. The government must closely monitor privately owned stocks, otherwise the current trend of high food inflation may not abate despite record harvests. A transparent regime on privately owned stocks is also required for trade policy decisions.
Finally, farmer groups must closely monitor corporate interventions in agricultural markets. Private companies are unlikely to immediately invest in value chains or establish private markets if state governments are not aligned with the reform agenda. A politically volatile situation will deter them from investing. However, it could well be the case that food companies use the services of much-maligned middlemen while sourcing directly from farmers. But farmers are unlikely to benefit from such transactions.
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