Contracts. PAN Cards. Lawyers: Why Farmers Have Reason to Fear Modi’s New Farm Deal

21 Sep 2020 9 min read  Share

Controversial new farm laws do not address enduring farm problems. They may lead agriculture to become a capital-intensive, complicated and globalised business that will likely benefit large farmers and further strain millions of already stressed small to medium, marginal and tenant farmers.

A protest organised by the Congress Party in Punjab/TWITTER

Vijayawada: When Subramanyam harvested his last crop of tomatoes over March and April 2020, he hoped to get more than Rs 5 per kg, which is what it cost to grow them. Instead, private middlemen paid him Re 1 or less, causing widespread losses to him and other farmers in his village outside the town of Kuppam, 600 km southeast of here at the southern tip of Andhra Pradesh.

Subramanyam’s family owns 2 acres of land—less than the size of two football fields—representing 86% of India’s “small and marginal” farmers, who Prime Minister Narendra Modi has said will benefit from three “historic bills” or proposed laws that eliminate middlemen, give farmers more selling options and boost incomes.

“I don’t know about these new laws,” said Subramanyam, his lack of information reflecting criticism that farmers do not know enough about the three bills cleared by the Rajya Sabha, Parliament’s upper house, on 20 September 2020. “I am busy harvesting my tomato crop.”

Subramanyam’s concerns for his future are not connected with the issues that the prime minister talks about. He does not sell his produce at government-controlled markets, which Modi hopes will lose their hegemony once his new reforms kick in.

Subramanyam lives in a water-scarce area, and his farm depends on subterranean water, which is now found up to 900 ft below. A borewell costs Rs 3-4 lakh. He survives—as a third of India’s farmers do—on informal means of credit. Despite lending to what is called “the priority sector lending”, rising nearly 416% to Rs 11.46 lakh crore over 12 year to March 2020, traditional moneylenders hold more rural debt than ever.

Critics believe the three new and—now controversial—agriculture ordinances, cleared by the Lok Sabha on 17 September 2020 and three days later by the Rajya Sabha amidst opposition protests and a controversial voice vote, do not address enduring farm problems. They may lead agriculture to become a capital intensive, complicated and globalised business that will likely benefit large farmers and put more strain on already stressed small to medium, marginal and tenant farmers.

The ordinances led to the resignation of Food Processing Minister Harsimrat Kaur Badal on 17 September—she said given the “huge amount of resentment” building among farmers, she had for months asked the Cabinet to defer the bill—and sparked protests a day earlier by farmers in Haryana and Punjab. Badal said farmers believed the Bills were against their interests and tweeted that she was “proud to stand with farmers as their daughter & sister”.

Ordinances Meant For Emergencies

The government of India announced the three ordinances on 5 June 2020 when Parliament was not in session. By their constitutional remit, ordinances can be issued by the President of India when “immediate action” is required, bypassing Parliament, which must otherwise discuss and approve laws. The Supreme Court has called it an “emergency power”. There was no emergency involved when the three ordinances were issued.

The Lok Sabha and the Rajya Sabha have passed The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 on 14 September 2020, along with The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 (or “Agreement Ordinance” for short) and The Essential Commodities (Amendment) Ordinance 2020.

The “Produce Trade Ordinance” was first promulgated on 5 June 2020 in the “public interest”, to allow farmers freedom to buy and sell produce anywhere, allow inter- and intra-state trading beyond local, physical markets without barriers. It promised remunerative prices through “competitive alternative trading channels” and electronic trading of produce.

The Agreement on Price Assurance and Farm Services Ordinance allows farmers to be free from mandis (government-controlled local markets), engage with wholesalers, processors, large retailers, exporters and aggregators, transfer market risk to them, reduce marketing costs, access modern technology and improve incomes.

The third ordinance dilutes The Essential Commodities Act, 1955. Stock limits in food and other crops will now be imposed on if there is a 50-100% increase in retail prices over the preceding 12 months. A value-chain participant (such as a warehouse), processing units and stocks meant for public distribution and government use are exempt from these limits.

Fear Of Market, Loss Of Government Support

The protests are grounded in the belief that benefits for India’s multitude of small, marginal and tenant farmers—who comprise 86% of all farmers (but own less than half of farmed land)—are likely to be, at best, marginal and at worst, harmful. A “marginal” farmer, whether owner, tenant or share-cropper, cultivates a hectare or less, about the size of 2.5 football fields; and a “small” farmer between 1 and 2 hectares, according to official descriptions.

Farmers fear that the minimum-support-price (MSP) regime, which guarantees minimum prices for a range of produce, will eventually be dismantled or kept intact but not used, leaving them to the vagaries of the market, where prices are often lower than MSP.

The government has denied that MSPs will end, with Prime Minister Narendra Modi reassuring farmers twice within 24 hours that they would stay and on 18 September accusing opposition parties of “lying”.

But buying at MSP occurs only in the mandi, formally called the Agricultural Produce Marketing Committee (APMC). So, farmers will indeed have more options to sell under the new proposed laws, but if market prices are lower than MSP, which they often are, they can only go to the mandi.

Even affiliates of the Rashtriya Swayamsevak Sangh, the Bharatiya Kisan Sangh and the Swadeshi Jagran Manch, have requested the government to ensure that MSP is a part of purchases inside and outside mandis as well.

“The government procurement system acts as a safety cushion, and adds to the bargaining power of the farmer,” economist Ajit Ranade, wrote on 19 September. “If the mandi system collapses, the farmer cannot credibly tell the customer: give me MSP or else I am going to sell my produce in the mandi or APMC.”

Yet, the dismantling of the APMC has figured on reform agendas that precede the current government, with modifications to the Act and contract law shared with states 17 years ago.

The ordinances, said experts, do little to address other major problems, such as remunerative prices for produce, access to formal credit, better formal banking services to tenant farmers, better irrigation and access to quality inputs and extension services.

Important benefits of the ordinances, which the Congress—in its 2019 election manifesto, it supported similar reforms—now describes as a “new zamindari system”, an allusion to large landlords, are likely to accrue to large traders, deep-pocketed commercial farmers and companies, said some experts.

Fifth Major Push Towards Formalisation

The new ordinances are the fifth major push towards formalisation of the economy by the government of Prime Minister Narendra Modi.

Earlier reforms include the Pradhan Mantri Jan Dhan Yojana (PMJDY) or the Prime Minister’s People’s Wealth Programme of expanding basic banking services, Mudra loans or loans to small and micro units, demonetisation—which overnight wiped out 86% of India’s currency, by value, to ostensibly end unaccounted income—and the Goods and Services Tax (GST), which created paperwork that many small businesses were unprepared.

That is likely to happen with farmers too. For instance, if the ordinances become law, farmers can sell their produce anywhere—in private markets and in other states. But any inter-state sales will be allowed only to those who have a permanent account number (PAN) issued under the Income Tax Act, 1961. Very few farmers currently have a PAN number or pay income tax. Those who do pay taxes are likely to have alternative sources of income other than agriculture.

There are two discernible features of Modi government’s major economic changes: one is the speed with which complex economic measures are simplified and presented to the nation; the second is the vigorous push towards formalisation.

Both these characteristics are evident in the new changes to India’s agriculture, which offers livelihoods to about 833 million Indians and is dominated by unorganised markets.

The most recent government committee to suggest reforms was the 2018 Report of the Committee on Doubling on Farmer’s Income (DFI), which appears to have laid the groundwork for the agriculture ordinances by suggesting “one national agricultural market”.

This market, part of the government’s plan, will require something most farmers are not familiar with: contracts.

The Coming Age Of Formal Contracts

Many problems in Indian agriculture have existed for decades. There is no irrigation in 51% of India’s net sown area, where 40% of foodgrain is grown. Marginal farms nearly trebled over 45 years to 2015-16, from about 36 million to about 100 million, indicating how the majority of farms were fragmenting.

Even by government estimates, 22.5% of farmers live below the poverty line, which, often, does not reflect their struggle to survive. The new bills, with their emphasis on formal contracts, might worsen those struggles.

The ordinances give primacy to written contracts in an implied manner; they require farmers to register to do business and benefits accrue only to those with a PAN or other documents as may be mandated.

Though the Price Agreement Ordinance does not overtly insist on a written contract, the fact that access to any dispute-resolution method in the ordinance requires a written agreement (unlike the Indian Contract Act, 1872) makes this a prerequisite by default.

The emphasis on written contracts and specific actions, such as certification of produce quality, will require the entry lawyers into agricultural trade and likely increase costs.

Agriculture and agricultural trade in India is largely conducted by unwritten agreements, with social pressure deployed if necessary.

This often works well when there are many intermediaries competing for business. An overwhelming number of farmers sell their produce within a radius of 50 sq km, according to this writer’s inquiries, or to intermediaries who visit the villages. Defaults by intermediaries are bad for business, since word spreads quickly.

“People can write whatever they want in the contract, but the reality is that very few even bother to read or understand anything other than price even in an agreement for sale of their houses,” said Subramanyam, the farmer from Kuppam.

“Most cannot even read properly,” he said, “So forget about the contract for sale of their produce every year (vegetables) and taking the pains of registering the contract.”

In many rural areas, intermediaries or middlemen act as guarantors for defaults in oral commitments. Most farmers are not comfortable with contracts, and disputes are resolved informally.

Siva, a graduate from Chittoor district who trades in wood products and whose family grows sugarcane, explained how agreements signed with sugar mills and the contents read out in a village meeting “that very few farmers usually attend”.

“They are nevertheless signed because field agents of the mills visit farmers and get their signatures in a routine manner,” he said. A large part of farm life is conducted through social networks and familiarity that often go back years or even decades.

Absentee landlordism coupled with rising land prices means that unlike three decades ago, agriculture now depends on tenant farmers. Tenancy itself is not formalised. The informal nature of tenancy means most benefits, such as subsidised credit, may not reach those who farm the land.

The fear of “adverse possession” and litigation over proprietary rights also implies that few landowners are willing to sign formal agreements. Reliable statistics related to tenancy are not available and official reports are usually an understatement: the Lok Sabha was informed in March 2020 that there are 531,285 wholly-leased holdings while the total land holding in India were estimated at 138.34 million operational holdings in 2010-11).

Financialisation of Agriculture

The ordinances bring into focus large private investments as part of a greater financialisation of agriculture, an effort to increase the role of formal finance, financial institutions and markets and coalesce past initiatives, such as warehouse receipts and screen-based electronic trading.

For instance, electronic warehouse receipts—issued by collateral managers, who are custodians of the stocks deposited, certify the existence of stocks and carry out administrative work related to transactions—were introduced in 2007 but have not gained traction.

Provisions in the “Produce Trade ordinance” are stacked against individuals establishing such platforms, either by way of capital and even registration. The draft model rules for State Agricultural Produce Marketing (Development and Regulation) Rules, 2007 suggested the same practices, within the ambit of the state market yards.

The combined focus of the ordinances on issues that require large investment, such as contract farming, screen-based trading platforms, warehouses and private market yards, make it certain that agriculture will become more capital intensive and globalised, with uncertain benefits, as we said, to small, marginal, tenant and medium farmers.

The government appears to believe that Farmer Producer Organisation (FPOs) will address the issue of small and uneconomic farm holdings. FPOs are legal entities of “primary producers”, including farmers, fisherfolk, artisans, and will be eligible, as guidelines issued in January 2020 explained, for state grants as capital, state payments for salaries of CEOs and accountants and assistance from a variety of state institutions.

There are many similarities that FPOs share with cooperatives, and it is unclear if they will perform better. “Except for a few successful cooperatives, the cooperative movement in India has failed to bring about a transformation of the rural economy,” said this 2019 paper.

Financialisation of agriculture brings risks of “information asymmetry”—where farmers are not likely to have the information access that traders and companies might—price fluctuations and “flash crashes'', a fast decline in a security or commodity.

The key issue is that information that affects commodity prices is available only through specialised providers at steep annual subscriptions and require high-speed Internet and hardware, something even rich farmers may not be able to afford.

The net result of these ordinances is that Indian agriculture is likely to witness the rise of corporate entities with access to large amounts of capital, technology and control over various parts of the agricultural value chain. They may benefit India’s agricultural economy, but, as the unease of farmers indicate, it is not clear how millions of small, marginal and tenant farmers will.

(S Ananth is an independent researcher and advocate based in Vijayawada, Andhra Pradesh.)