Covid-19 relief package: Farm sector’s 1991 moment

By MD & CEO, Rallis India, a subsidiary of Tata Chemicals.

On May 15, the finance minister announced a string of reforms that promise to completely change the country’s farm sector, and more importantly the lives of millions of farmers. As part of the third tranche of the economic stimulus package announced to counter the impact of the Covid-19 pandemic, three major reforms were set in motion. 

First, a host of agriculture commodities were taken out of the ambit of the Essential Commodities Act (ECA). Two, the FM said a new set of legal framework will be created to promote contract farming in India, and three barriers that were hitherto restricting the movement of agricultural products across the states will be knocked out for good. These three reforms have the potential to completely change the face of rural India.

For over seven decades, save for the Green Revolution initiated in the late-sixties to the early-seventies, the Indian farm sector has not seen any major reform. All discussions around this subject have been subordinated to the larger agenda of food security.

Over the decades, the contribution of agriculture to the overall national GDP has continued to fall steadily. The sector continues to dominate the economy due to the sheer number of livelihoods it supports. Today, agriculture accounts for only a fifth of India’s GDP (around 17%) but provides a livelihood for nearly 50% of the working population.

In financial terms, the third tranche of the stimulus package aimed at India’s rural economy is set to be around Rs 1 lakh crore, a substantial part of which will go into building a more modern and efficient agricultural infrastructure. But, the centre-piece of the latest round of measures are the new laws to promote contract farming. The changes in the ECA and creating a ‘One Nation One Market’ will now allow private sector investment.

Large scale contract farming backed by the financial muscle of the private sector will solve two of the oldest and most persistent challenges faced by the Indian farm sector, which is the scale of operations and diversity of farm produce. Today, a little over 80% of Indian farmers are small and marginal. These cannot afford to mechanise operations or adopt modern agricultural practices. And, this has a bearing on productivity.

Contract farming will allow large groups of small and marginal farmers to combine their efforts and resources to produce a single crop, thus, unleashing the potential of more modern and scientific agricultural practices. Contract farming will also provide small farmers with a certain level of income guarantee, which until now, was provided by the government in the form of MSP. Moving away from the MSP regime will encourage farmers to diversify into more value-added products.

With the entry of private investors in the farm sector, the role of local mandis will be substantially reduced. Adopting a one-nation-one-market model, similar to the tax reforms that gave birth to the GST, will effectively address inefficiencies in the agrarian landscape, which is dominated by too many intermediaries. The latest round of reforms must be seen in the broader context of the government’s intention to double farmers’ income.

These reforms have to been on the lines of the economic reforms of the early 1990s that benefitted the manufacturing and the service sector.

Agriculture is an ‘economic activity’ that deserves all the benefits that come with a market economy approach, including technology, innovation, world-class infrastructure, and above all, a lot less dependence on government policies.