The Government of India Leveraged COVID-19 Crisis to Launch Market Reforms and Other Long-Term Measures to Help Indian Farmers.

On May 12, 2020, Prime Minister (PM) Narendra Modi announced a multi-tranche economic package of 20 trillion Indian Rupees (INR) ($263 billion USD) to leverage the ongoing COVID-19 pandemic crisis into an opportunity for progress toward a “Self-Reliant” India (Atmanirbhar Bharat). Following the PM’s national address, Finance Minister (FM) Nirmala Sitharaman conducted a series of press conferences to provide further details on the support measures included in each of the five tranches targeting various sectors of the Indian economy. Reform measures for agriculture and the rural sector were largely covered in the third tranche.

Early-on in the nearly three-month nationwide lockdown that started in late March, supply chain disruptions exposed critical infrastructure gaps and governance issues regarding the competitiveness of India’s agricultural sector. Understanding that the COVID-19 crisis presented an opportunity to improve some of these marketing systems which Indian farmers were required, by law, to use, the Government of India (GOI) proposed major policy reforms to remove many of the long-standing hurdles constraining agricultural growth and farmer income. Specifically, in the third tranche of the economic package, the FM proposed to deregulate major food crops from the 1955 Essential Commodities Act (ECA); allow farmers to sell their agricultural products outside of government-regulated markets; and permit barrier-free inter and intra-state trade of farm commodities. The government also proposed providing a legal framework for farmers to facilitate contract-pricing schemes with processors and other market actors in the supply chains to reduce price risk.

Additionally, this economic package has offered significant fiscal measures to strengthen credit supplies to farmer and agricultural processors, and additional funds for infrastructure development, logistics, and capacity building in the field crop, horticultural and livestock sectors.

Gross Operating Income Initiates Reforms to Unleash the Domestic Market

The combination of the ECA and Agricultural Product Market Committee (APMC) laws determined—and severely limited how domestic agricultural produce could be bought and sold in India. Enacted in 1955 when the country was facing severe food shortages, the ECA was designed to control the production, supply, trade, and storage of certain commodities deemed to be essential, and gave state governments excessive powers to raid so called “hoarders,” confiscate stocks, cancel licensing agreements, and even imprison offenders.

The APMC system forced farmers to sell their produce only through licensed traders at designated market yards (mandis) which, over time, severely constrained competition among agricultural marketing activities, which hurt farmers’ bottom line. In addition, the APMC system’s high operational costs were partially passed on to buyers through various charges and taxes at the point of sale and the buyers, in turn, partially passed on the higher marketing costs to farmers by paying less for their produce. Further, by forcing farmers to sell their produce through designated channels, and placing arbitrary restrictions on holding inventory/stocks, the ECA-APMC system discouraged price discovery and private storage. This gave way to an inefficient regime of licenses/permits, a lack of investment in agricultural marketing and post-harvest infrastructure, increased post-harvest losses.

The closure of the regulated market yards and breakdown of supply chains during the national lockdown underlined the need for having alternate or multiple marketing channels to sell local farm produce due to the problems in marketing the Rabi (winter grown) crops harvested in March-April, particularly horticultural crops. Because of this supply chain disruption, many progressive farmer groups successfully experimented with direct marketing, primarily fresh fruits and vegetables, to consumers. Several state governments also allowed direct farmer marketing and purchases by non-licensee traders and processors by relaxing the ECA (Essential Commodities Act) requirements during this period.