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MSP, Middleman & Myths: What Has Changed With the New Farm Laws and Who Benefits

Image: AP

Image: AP

The government has maintained that these laws are aimed at shifting the terms in favour of farmers by getting rid of unscrupulous middlemen and vested interests that distorted markets.

Farmers are camping along the borders of Delhi and have said they will not move until the three farm reform laws that the government recently legislated are taken back. Here is a lowdown on the issues involved.

What are the new `farm laws’ that everyone is talking about?

The government recently legislated three laws — the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020; Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, and the Essential Commodities (Amendment) Act, 2020 — as part of a broad strategy to reform India’s agriculture.

The government has argued that these laws are aimed at shifting the terms in favour of farmers by getting rid of unscrupulous middlemen and vested interests that distorted markets.


The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 seek to facilitate barrier-free trade of farm produce outside the markets notified under the various state Agriculture Produce Market Committees (APMC) laws.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 define a framework for contract-farming.

The Essential Commodities (Amendment) Act, 2020 removes stock limits on agricultural produce to enable merchants to directly purchase produce from farmers in large quantities in times of bumper harvests.

So, why are farmers protesting?

Farmers fear that the new laws would usher in big corporate groups into agriculture produce markets. This could create monopolies, allowing them to fix prices at low levels, hurting farmers.

How is the new model different from the existing APMC system?

APMC regulations require farmers to only sell to licensed middlemen in notified markets, usually in the same area where farmers reside, rather than in an open market. This limited farmers’ ability to sell their harvest outside their local APMCs.

APMC markets were initially set up in the 1960s, primarily aimed to prevent distress sale by farmers, and enable better price discovery for their produce by creating critical infrastructure.

Over the years, however, these APMC-driven markets had become barriers for farmers to get a fair price for their produce as they were forced to sell it through these committees.

Harvest after harvest, crop after crop, season after season, layers and layers of intermediaries and middlemen have been telling farmers what price their produce should fetch.

But how can one say that there are middlemen who govern such markets? Is there any evidence?

There is evidence to demonstrate that buyers in APMCs behave in cartels. The APMC system primarily rests upon a commission-based network. Only licensed intermediaries can operate in these markets. These intermediaries include commission agents, wholesales, transporters, railway agents and storage agents, among others.

There is nothing wrong in that, except that over the years these have led to inter-connected oligopolies where same a group of local business families rule over these markets.

In December 2010, the Competition Commission found out that nearly 20 per cent of that month’s total onion trading at the Lasalgoan APMC, Asia’s largest onion market in Maharashtra’s Nashik, was accounted for by one firm.

This resulted in a large “price spread”, meaning many groups of middlemen pocketed their share before it reached the final consumer, leaving a yawning gap between the price the farmer received and the eventual retail selling price.

A 2012 report by the National Council of Applied Economic Research identified collusion as a major hurdle in fair trade, with a handful of traders monopolising almost all big markets.

How will the new system change this?

The government has now said that the new central law — Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 — will enable farmers to sell their produce at attractive prices. The new law will also remove barriers in inter-state trade, allowing farmers from UP, for instance, to sell to buyers and merchants in Gujarat through an e-trading framework.

Why aren’t the farmers convinced?

At the core of the protests is the fear among farmers that they will lose their bargaining power if large corporations and private traders can enter unregulated agriculture produce markets.

Is that the only issue?

Under the new law, traders are not required to pay any fees. Farmers fear that freeing up markets for private traders without any fee or oversight by state governments will break down the traditional markets.

Why are some state governments supporting the farm protests?

Over the past several years most political parties have pushed for such reforms, which shows how their current opposition to the farm laws is primarily driven by political convenience and opportunism, rather than on merit.

There is, however, a fiscal reason also. Traditional APMC-powered agricultural produce markets are also a source of revenue for some states. In Punjab, for instance, they charge six per cent fee (three per cent each as market fee and rural development fee) on wheat purchases. A six per cent fee was also payable on non-basmati paddy while for basmati paddy, 4.25 per cent fee was charged.

About 90 per cent of wheat and paddy in Punjab are transacted in these markets at minimum support prices (MSPs) that the central government fixes every year. A move away from this system, therefore, could potentially affect everyone on the interconnected chain—the state government, middlemen and farmers.

What are the fears among farmers on MSP?

Farmers fear that the new law could imply that the government will, eventually, stop buying from them at MSPs, leaving farmers at the mercy of large corporations.

What is MSP?

MSPs, which began with the Green Revolution, is the price at which the government buys crops from farmers. It acts as a kind of guaranteed floor price, aimed to prevent distress sale by farmers.

While the government announces MSP for 23 major crops, setting them at 1.5 times the cost of cultivation to account for inflation, it mainly benefits paddy and wheat growers because the government procures only these two commodities in sufficiently large quantities.

What are the farmers demanding on MSP?

Farmers want a law guaranteeing that all major produce will be bought at these government-fixed prices. The idea is to ensure that no minimum state-set prices for all major farm produce.

The aim is to prohibit sale of any farm produce below the MSP threshold. Effectively, this would imply that even if a private trader were to buy any of the 23 major crops on which the government fixes MSP, it has buy these at price equal to or higher than the MSP.

Who buys at MSP?

The government, through the Food Corporation of India (FCI), buys agricultural produce, primarily paddy and wheat, at MSP. In the process, over the years, the government has become the biggest hoarder of sorts of paddy and wheat, procuring, and storing these staples at levels much beyond the country’s buffer stock requirements.

For instance, as of September 2020, the FCI held 70 million tonnes of rice and wheat in stocks, whereas food-security norms require reserves of 41.1 million tonnes as of July and 30.7 million tonnes as of October each year.

Who does the MSP benefit?

The MSP policy benefits, government statistics show, benefits only a fraction of the farmers. The 70th round of the National Sample Survey showed only 13.5 per cent of paddy growers and 16.2 per cent of wheat growers received MSPs.

Why cannot the government enact a law on MSP?

Many economists say that a law mandating MSP as the floor price for purchases of 23 major staples, could be inflationary. A private trader buying wheat and paddy at MSP every year would simply get translated into higher prices for final consumers.

A legally mandated MSP as a floor price could also harm prospects of Indian farmers in the export market. There would be years when the MSP will be higher than the prevailing international markets. This would prevent an agri-commodity exporter to buy at a higher price and export at a lower rate.

Also, what happens if private traders stay away from buying these products at MSP even for the domestic market? This would result in the government or the FCI being the only monopoly buyer in the market.

The policy also serves as an incentive for farmers to grow only those crops that enjoy MSP support over other crops. As farmers shift land towards these crops, over the years, this has caused imbalances of water and land resources. India’s import dependence on many food products such as oilseeds is a result of this.

How can the government break this impasse on MSP?

The government has maintained that the recently announced reforms will result in better price discovery. The government has already offered broad concessions to farmers, proposing to amend two farm-reform laws, and offered in writing an assurance to continue the system of minimum support prices (MSP).

Some experts pointed out that the government can implement a price-deficiency mechanism for assuring farmers of a fair price. This system has been tried out in Madhya Pradesh, which broadly means that the government pays the difference between market price and MSP to farmers.

What are the other concessions that the government has offered to farmers?

It also offered to bring in additional legal safeguards for farmers’ rights engaging in contract farming, if needed, including a bar on any seizure of farmland to recover dues, and protection to farmers from penalties for crop-residue burning.

The government has proposed to amend The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 to bring parity between private markets and notified markets controlled by state governments by introducing a system of registration. It also proposed to allow states to levy cess and service charges equivalent to those applicable in notified markets

The new laws make local magistrates the final authority to settle disputes between traders and farmers. The government has now proposed to amend laws to allow farmers to approach civil courts of their choice for settling disputes between farmers and traders.

The government also said it would amend The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 to bring additional safeguards to secure farmers’ right over his land “if needed”.

“The contract-farming law already prohibits transfer, sale, lease, mortgage of a farmer’s land. Agribusinesses (sponsors) cannot confiscate farmers’ land due to any reason arising out of contractual farming. If needed, a fresh clarification on this will be issued,” the government stated

Farmers have opposed penalties on pollution-causing crop-stubble burning, invoked through an ordinance in October. The government has said it will come up with a solution to this issue.

In October, the government promulgated an ordinance to set up the Commission for Air Quality Management in the National Capital Region (NCR) and Adjoining Areas. The law is aimed at lowering air pollution in the NCR region that is significantly driven by burning of crop stubble.

The farmers who burn crops will be subject to steep penalties with a jail term of 1 year and fines of up to Rs 1 crore.

Farmers have been demanding an incentive of Rs 200 per quintal of crop residue to options other than burning financially viable. The Supreme Court has already said the government may consider giving Rs1 00 per quintal. The Centre can consider paying a direct subsidy of Rs 200 per quintal to farmers to prevent stubble burning.

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first published:December 14, 2020, 21:27 IST