The Centre’s initiative in freeing up agri-trade will have a huge impact on the rural economy

 

One of the most important reforms announced last week by finance minister Nirmala Sitharaman relates to the liberalisation of the agriculture sector. By announcing that the outdated Essential Commodities Act will be amended, she set the ball rolling for ending both license-permit raj and inspector raj in the agriculture sector. This is not merely the “1991 moment” of ending an inefficient relic of the socialist era, but the unwinding of 700 years of systematic policy bias against farmers and farm produce traders.

 

A combination of two sets of laws have defined how farm produce is bought and sold in India — the Essential Commodities Act (ECA) and the state-level Agricultural Produce Marketing Committee (APMC) Acts. ECA was enacted in 1955 to control production, supply, trade, and storage of certain commodities deemed to be essential (farm products in the list include onions, potatoes, edible oils, jute, rice paddy, sugar and so on). The Act itself does not lay out the regulations but allows states to issue “control orders” related to dealer licensing, stock limits, the power to fix prices, compulsory purchases and restrictions on transportation. In turn, the authorities are given draconian powers to raid “hoarders”, confiscate stocks, cancel licensing and even imprison offenders.

 

 

The APMC system, meanwhile, forced farmers to sell their produce only through designated channels and mandis. The combination led to an inefficient regime of licenses, permits and inspectors. The drawbacks of the system were well documented over decades and many economists had argued for change. Some attempts were made to reform it piecemeal but the system had largely remained intact till now. 

In 2019 alone, an estimated 76,000 raids were conducted in different parts of the country under ECA. The system was not only unfair to farmers and traders, but it also was not even very good at achieving its main goal of price stability. As illustrated clearly in the latest Economic Survey (Volume 1, 2019-20), ECA actually increased the volatility of prices for commodities such as onion, pulses and sugar. It also did not lower the wedge between retail and wholesale prices. Instead, the Survey found evidence that ECA raids mostly led to the harassment of traders (merely 2-4% of ECA related cases stand up in court).

 

It does not need a degree in economics but plain common sense to understand why the ECA-APMC system failed. Farm production is bunched according to harvests, and price stability depends on storage. By forcing farmers to sell their produce through designated channels, and placing arbitrary restrictions on inventory, the system discouraged price discovery and storage. Anyone who invested in storage ran the risk of being called a “hoarder” and facing prosecution. 

Thus, every year, India sees prices of vegetables such as onions swinging wildly from being too high to too low. Countries that do not even grow food (like Singapore), meanwhile, continue to enjoy stable food prices. 

The systematic bias in agriculture policy goes back to measures introduced seven centuries ago by Alauddin Khilji. Having conquered large swaths of India, he introduced harsh policies to artificially hold down prices and control trade. Contemporary records suggest that these measures were aimed at cheaply supporting a large army and enriching the Turkic nobility while deliberately impoverishing the general population. It is quite extraordinary that Indian school textbooks today present Khilji’s systematic exploitation as “reforms” and blame the traders who were subject to draconian punishments.

This same tilted agricultural policy was used by the East India Company in the late 18th and early 19th century to force Indian farmers to grow indigo (for British industry) and opium (for China), and then sell it at depressed prices through agents. It completely impoverished rural India and caused repeated famines. In the second half of the 19th century, the system was adapted to control raw cotton prices to favour the mills of Manchester. The Berar Cotton and Grain Market Act of 1887 is the forerunner of today’s APMC acts. Importantly, the British were very careful to keep their own hands clean so that the blame fell on the traders. Thus, those who provided the supply chain were accused of “hoarding”. This is the source of the 1950s and 60s film plots.

 

The FM’s announcement, therefore, promises to remove a deep-rooted bias against farmers and the food supply chain (not to mention a source of multilevel rent-seeking). A central law will be introduced to allow farmers to sell their produce as they wish. Barrier-free interstate trade is to be encouraged. State-level APMC laws are already being changed one-by-one to complement this change. Of course, the government will retain the power to intervene in extreme situations, say a war, when markets break down. 

This ends the license permit raj for the agricultural sector — three decades after this was done for the rest of the economy. It also creates a common national market for agricultural products.

Sanjeev Sanyal is principal economic adviser, Government of India.