Why The Agri-Reforms Are Revolutionary

Forget about the jargon, the economic terms and the profound words of wisdom spouted by experts as they dissect, analyze and critique the agriculture sector reforms announced recently by finance minister Nirmala Sitharaman. Just look at two simple facts. An Indian farmer is usually lucky to get Rs 4 per kg of tomato grown by him. You and I buy a kg from the local retailer at Rs 25 per kg. The cheapest “branded” tomato ketchup sells for Rs 120 per kg. Similarly, the farmer sells one kg of potato at Rs 5 if he is lucky. You and I pay Rs 25 per kg for the same. And one kg of branded potato chips sells at Rs 400.

That sums up how the Indian farmer has been short changed and betrayed by policy makers since independence. The three major new reforms in the agriculture sector will erase this shameful history and offer a golden opportunity to the Indian farmer. The first reform is to remove cereals, pulses, potato, onion and other items from the purview of the Essential Commodities Act. The second reform measure is to end the monopoly of APMC mandis and allow the farmer to sell his produce anywhere he wants to, including interstate transport and trade. The third reform measure, which will prove to be very controversial, is to allow contract farming on an organized scale in the country.

Removing food products from the Essential Commodities Act will end the frequent interference by the governments when prices rose suddenly. One recent example has been the prices of onions which sometimes go up to Rs 100 a kg. The farmer doesn’t benefit one bit when that happens. He still gets an average of Rs 5 a kg for his onion. It is the middle men and the people who control the “mandis” that make a killing. The recent series of reforms will ensure that such wild fluctuations in prices do not occur except on rare occasions.

That is because of the second reform measure that will eliminate the monopoly of the mandis. An entrepreneur in India can sell his product (two wheelers, fans, mobile phones, garments et al) and services (lawyers, IT professionals, doctors, chartered accountants, plumbers, electrician’s et al) anywhere in India, and often the world. But the Indian farmer is compelled under law to sell his produce only at the designated local mandi. It is no surprise that the Indian farmer is at the mercy of powerful wholesalers who control mandis as oligopolies. The elimination of this practice will increase competition and enable farmers to get a better price. The more, the merrier is truly apt in this case.

The third reform is guaranteed to raise the hackles of “pro poor” and left liberal commentators. It promises to allow contract farming in an organized manner. In simple terms, a large company can lease the land from a group of farmers and produce food grains or fruits or vegetables and pay the farmers rental income plus a share in the proceeds. Critics will argue that this encourage large “capitalist” firms to exploit farmers and eventually swallow their land? Is that possible? Not if the law clearly stipulates that the title deeds of the land remain with the farmers unless they willingly sell it. The truth is, most farmers in India don’t want their children to become farmers. That explains the migration crisis we see today as people from cities flock back to their villages as they have lost jobs.

More than 85% of Indian farmers own less than two hectares or five acres of land. The average output of rice per hectare in India is 2.4 tons per hectare or close to 5 tons for two hectares. The government declared MSP for rice is Rs 18, 150 per ton. So the total gross income for an average farmer and his family of five from wheat per season is about Rs 90,000 a season. If you take two seasons into account, the gross income is Rs 1,80,000 a year. Even a 25% profit margin over all costs (an unrealistically optimistic estimate) means an annual income of Rs %4,000 per year or less than Rs 5,000 a month for a family of five. Growing vegetables and other activities add a bit to the income.

Why would a farmer not lease his land out to a large company and seek work in a factory? This where cold storages and food processing units will play a huge role. The existing laws have discouraged investors from setting up massive cold storage facilities and food processing units on a global scale. Only 10% of India’s 310 million tons of horticulture output is processed. Imagine the difference if corporate players set up large factories where farmers who have leased their land get proper jobs. The three reform measures will enable and encourage investors with deep pockets to set up a swathe of cold storages and food processing units across the country. It will be a win win for all.

Critics laughed when it was suggested a few years ago that India could become a manufacturing hub for mobile phone hand sets. In 2014, domestic production and assembly of mobile phones was about 50 million units. Today, it is 250 million units.

The agriculture reforms promise to do something even more revolutionary. The big caveat is: if vested interests and lobbies allow them to be fully implemented.