Reforms in the Agriculture Sector - A birds-eye view of the recent Ordinances

Contributed by: Samvad Partners






On June 05, 2020, the President of India promulgated certain ordinances with an aim at bringing about considerable reforms in the development and regulation of marketing of agricultural produce. These reforms are intended to give a much-needed boost to the agricultural ecosystem by doing away with certain restrictions that were hitherto in place for trading in agricultural produce.


Background


Traditionally, Agricultural Market Produce Committees (APMC) constituted by various state governments have been regulating marketing of agricultural produce within the confines of designated market areas. The sale price of agricultural produce has also been subject to determination either by tender system, public auction or other methods, as directed by the APMCs from time to time, thereby making the state government play an important role in price discovery of agricultural commodities. Evidently, thus far, states have played a major role in the trade and commerce of agricultural produce with a view to ensuring that farmers are not exploited by intermediaries.


The COVID 19 pandemic brought about several difficulties in functioning of agricultural trade activities in such designated market areas, with most states imposing a strict lockdown and restricting transportation. With social distancing norms in place APMC markets have remained shut and farmers have had to resort to off-market sales, thereby highlighting the need for reforms in the agricultural ecosystem by bringing about digitizing. It is with this intent that the following ordinances have been brought into effect:

  • The Farmers’ Produce Trade and Commerce (Promotion & Facilitation) Ordinance, 2020

  • The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020

  • The Essential Commodities (Amendment) Ordinance, 2020

Overview Of The Recent Ordinances

(i) The Farmers’ Produce Trade and Commerce (Promotion & Facilitation) Ordinance, 2020 (“FPTC Ordinance”)

The FPTC Ordinance introduces a facilitative framework for electronic trading of farmers’ produce thereby creating a fundamental change in the way agricultural produce is marketed, traded, stored and sold in India. The ordinance, intends to create “One India, One Agriculture Market”, by enabling inter-state and intra-state trade of farmers’ produce and eliminates the physical boundaries peculiar to the APMC markets.

Removing Geographical Barriers


The FPTC Ordinance has effectively done away with restrictions limiting trade of agricultural produce only in market areas and yards formed and designated by the state government. It provides farmers, traders, as well as electronic trading or transaction platforms, the freedom to carry on barrier free inter-state and intra-state trade and commerce of farmers’ produce in a trade area.


Trade area is defined as any area or location or place of production, collection and aggregation from where trade of farmers’ produce may be undertaken, within the territory of India. Interestingly, the definition of a trade area specifically excludes physical boundaries of market areas managed and run by the market committees or any structures notified as markets or deemed markets under the state APMC Acts.


Farmers and traders are thus enabled to enjoy freedom of choice relating to sale and purchase of farmers’ produce as it creates new avenues not only for farmers by providing them access to significantly larger consumer base, but also to private players, who will be free to set up digital platforms for facilitating direct buying and selling of agricultural produce without the interference of APMCs.


Digitization of the Agriculture Sector


The FPTC Ordinance has also introduced a system of electronic trading and transaction platform operating through a network of electronic devices and internet applications for trading in agricultural produce. Any person (other than an individual) having a PAN number can establish and operate such a platform subject to implementation of guidelines for fair trade practices including interoperability with other platforms, logistics arrangements, quality assessment, timely payment, dissemination of guidelines in local language and other such matters.


Deregulation


While only licensed traders and market functionaries are presently permitted to use the state designated market areas for trading in agricultural produce, the FPTC Ordinance clarifies that any trader may engage in inter-state or intra-state trade of farmers’ produce with any other farmer or trader in a trade area.


In the current APMC system, APMC levies and collects market fees from buyers, generally at the rate specified in the byelaws made under the state agricultural produce market legislation or at a rate fixed by the APMC. On the other hand, the FPTC Ordinance prohibits charging of any market fee, cess or levy under state agricultural produce market legislations or any other state law on any farmer or trader or electronic trading and transaction platform. Removal of licensing restrictions and elimination of market fees is likely to make private investment in agricultural sector less cumbersome and more cost effective.


(ii) The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 (“FAPAF Ordinance”)

The FAPAF Ordinance introduces a framework that allows farmers to engage directly with agri-business firms, processors, wholesalers, exporters and large retailers by entering into contract farming arrangements. The stated intent of this ordinance is to empower farmers by permitting them to directly enter into agreements with private players, including large businesses, for sale of farm produce at predetermined prices, such that the process becomes fair and transparent. Private players can also hope to benefit from this, as they can control the quality and standards of the farm produce by engaging directly with the farmers.


Regulation of Contract Farming


Farmers and private parties are permitted to enter into farming agreements which need to broadly cover terms and conditions relating to inputs for the farming arrangement such as supply of produce, farm services, supply of seed, feed, fodder, agro-chemicals, machinery and technology and non-chemical agro-inputs. The mandatory term of the farming agreement needs to be for at least one crop season or one production cycle of livestock and can be for a maximum period of five years unless the production cycle is longer, in which case the maximum period can for a longer period as specified in the farming agreement.


Quality Control


The FAPAF Ordinance permits parties entering into farming agreements to identify and require compliance with mutually acceptable quality, grade and standards of a farming produce. With large businesses having access to world class innovation and technologies, small-scale farmers could benefit from adoption of such technologies which they may have been reluctant to adopt due to the risks and costs involved.


Better Financial Returns and Elimination of Middlemen


In the current system of state designated market areas, several farmers face delay in payment and low returns on their produce due to the presence of multiple middlemen.

The FAPAF Ordinance mandates determination of purchase price at the outset while entering into farming agreements, unless the price is subject to change, in which case there needs to be a stated guaranteed price, along with a clear price reference for additional price (including a bonus or premium) linking to suitable benchmark prices.


Under the APMC system, the farmers and traders would have to necessarily rely on middlemen to market, sell and buy farm produce. While the FAPAF Ordinance permits an aggregator or farm service provider to act as an intermediary and become a party to the farming agreement, the role and service of such aggregator or farm service provider needs to be explicitly mentioned in the farming agreement. This construct would result in elimination of middlemen, who do not directly and effectively contribute to the farm produce reaching the end consumer and ensure that farmers receive better prices.


Dispute Resolution Mechanisms Set Out


Both the FPTC Ordinance and the FAPAF Ordinance set out dispute resolution mechanisms for resolving disputes arising out of transactions between farmers and traders. The ordinances mandate that mediation and conciliation need to be undertaken in case of any dispute arises between the farmer and trader. The parties have the option of submitting to conciliation, by an application to the Sub-divisional Magistrate, for referral to a Conciliation Board appointed by him. Similarly, as per the FAPAF Ordinance, where a farming agreement does not provide for conciliation process or if the parties fail to settle their dispute through the conciliation process within thirty days, any party may approach the concerned Sub-divisional Magistrate for resolving the disputes under the farming agreements.

This could potentially save the parties significant costs and efforts and help resolving a dispute in a fair and efficient manner.

(iii) The Essential Commodities (Amendment) Ordinance, 2020 (“EC Ordinance”)

The Essential Commodities Act, 1955 (“EC Act”) was enacted in order to deal with food shortage in India. The extant EC Act provides for the control of production, supply and distribution of, and trade and commerce in certain commodities notified as ‘essential commodities’. The EC Act grants the Central Government powers to issue licenses and permits for the production and manufacture, storage, transport, distribution, disposal, acquisition, use or consumption of, any essential commodity. Therefore ‘essential commodities’ are subject to substantial control by the Central Government.

In contrast, the EC Ordinance removes certain food items such as cereals, pulses, potatoes, onions, edible oilseeds, oils and certain other food products, from the purview of the EC Act. The EC Ordinance, however, empowers the Central Government to regulate the supply of the aforementioned food items, by notification in the Official Gazette, under certain extraordinary circumstances.

Dilution of Central Government’s power in regulating essential commodities

Essential commodities are commodities that have been classified as essential by the Central Government and specified as such in the schedule of the EC Act. This classification is done by the Central Government to ensure that there is no obstruction in delivery of such commodities to the public due to reasons such as hoarding and exorbitant price hikes.

By excluding certain items the definition of ‘essential commodities’, the EC Ordinance effectively dilutes the ability of the Central Government to control stock of such essential commodities and limits its powers only to certain extraordinary circumstances such as war, famine, extraordinary price rise and natural calamity of grave nature.


The EC Ordinance provides that any action by the Central government to impose stock limit will be based on circumstances of price rise. The EC Ordinance also goes one step ahead and specifies that an order for regulating stock limit of any agricultural produce may be issued under the EC Act only if there is a 100% (One hundred percent) increase in the retail price of horticultural produce or a 50% (Fifty percent) increase in retail price, in the case of non-perishable agricultural foodstuff. Such price rise will be calculated in context of the price prevailing in the immediately preceding twelve months, or the average retail price of the last five years, whichever is lower. The EC Ordinance also clarifies that stock limit regulation will not apply to processor or value chain participant of agricultural produce if the stock limit does not exceed the overall ceiling of installed capacity of processing or demand for export in case of exporter.

With a view to protect the interests of general public and consumers, the EC Ordinance clarifies that the relaxation on imposing stock limit will not apply to any order relating to the Public Distribution System, which is a system of management of food scarcity in the country through distribution of food grains at affordable prices, or the Targeted Public Distribution System, which focuses on the people below the poverty line and provides them food grains at highly subsidised prices.

The intent of the EC Ordinance seems to be to ease the regulatory system and bring in more private players to trade in farm produce that may qualify as ‘essential commodities’. On one hand, the deregulation of the regulatory framework will assuage fears of private enterprises of unwarranted regulatory interference in their business operations, while on the other, the qualifications carved out by the EC Ordinance will ensure interest of the consumers are safeguarded.


Conclusion


While several states such as Tamil Nadu, Karnataka, Madhya Pradesh, Uttar Pradesh and Gujarat have supported this move of the Central Government, and had in fact, based on the recommendation of the Central Government to adopt the Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017, initiated steps to amend the relevant state agricultural produce market legislations, via state ordinances even prior to the Central Government’s issuance of the aforementioned ordinances, some other states such as Punjab have expressed their strong reservations on the ordinances fearing that private procurement of farmers’ produce will further drive down the prices of agricultural produce owing to less bargaining power of the farmers.


The full extent of the benefits or drawbacks of the ordinances are not yet tested, but the change in regime regulating marketing of agricultural produce can be of particular advantage to private enterprises (such as food processing companies, retailers and bulk buyers), given that they will now be able to procure agricultural produce directly from farmers. Private players will also have the ability to enter into agreements to directly source produce from farmers specifically customised to their requirements, while having control over grade, quality and standard of such produce. The price determination for sale and purchase of the produce will also be at the behest of the farmers and private enterprises, thus resulting in competitive pricing of produce.


Since private players will be able to establish electronic trading and transactions platform to facilitate direct and online buying and selling of multiple farmers’ produce anywhere across India, it will result in doing away with geographical barriers and eliminating middlemen. It is hoped that the ordinances will not only provide succor to farmers and decongest APMC markets during such unprecedented times but also open a new way of doing business.

Contributed by Samvad Partners


The above article has been authored by Ms. Nivedita Nivargi(Partner) and Ms. Smrithi Surendranath Arya(Associate)

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