Raj inspector in agriculture, writes Sanjeev Sanyal – analysis
One of the most important reforms announced last week by Finance Minister Nirmala Sitharaman relates to the liberalization of the agricultural sector. In announcing that the outdated Commodity Law will be amended, she set things in motion to end both the raj license permit and the raj inspector in the agricultural sector. This is not simply the “1991 time” of ending an inefficient relic of the socialist era, but the unraveling of 700 years of systematic policy bias against farmers and agricultural merchants.
A combination of two sets of laws has defined how agricultural products are bought and sold in India: the Commodity Act (ECA) and the Agricultural Commodity Marketing Committee (APMC) laws at the state level. ECA was enacted in 1955 to control the production, supply, trade and storage of certain products that are considered essential (agricultural products on the list include onions, potatoes, edible oils, jute, paddy rice, sugar, etc. ). The Act itself does not establish the regulations, but allows states to issue “control orders” related to the licensee’s license, stock limits, the power to set prices, compulsory purchases, and transportation restrictions. In turn, the authorities have draconian powers to attack “hoarders”, confiscate stocks, cancel licenses, and even imprison criminals.
Meanwhile, the APMC system forced farmers to sell their products 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 for decades and many economists had advocated for change. Some attempts were made to reform it little by little, but the system had remained largely intact until now.
In 2019 alone, it is estimated that 76,000 raids were carried out in different parts of the country under ECA. The system was not only unfair to farmers and traders, but it was also not very good at achieving its primary goal of price stability. As clearly illustrated in the last Economic Survey (Volume 1, 2019-20), ECA actually increased the volatility of the prices of basic products such as onion, legumes and sugar. Nor did it reduce the gap between retail and wholesale prices. Instead, the Survey found evidence that mostly RCT raids led to harassment by merchants (only 2-4% of RCT-related cases are filed in court).
You don’t need a degree in economics but common sense to understand why the ECA-APMC system failed. Agricultural production is grouped according to harvest, and price stability depends on storage. By forcing farmers to sell their products through designated channels and by imposing 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 being prosecuted.
Therefore, every year, India sees the prices of vegetables, such as onions, change enormously from being too high to too low. Meanwhile, countries that do not even grow food (such as Singapore) continue to enjoy stable prices.
The systematic bias in agricultural policy dates back to the measures introduced seven centuries ago by Alauddin Khilji. Having conquered large swaths of India, he introduced harsh policies to artificially keep prices low and control trade. Contemporary records suggest that these measures were aimed at financially supporting a large army and enriching the Turkish nobility while deliberately impoverishing the general population. It is quite extraordinary that today’s Indian school textbooks present the systematic exploitation of Khilji as “reforms” and blame the merchants who were subjected to draconian punishments.
This same leaning agricultural policy was used by the East India Company in the late 18th and early 19th centuries to compel Indian farmers to grow indigo (for British industry) and opium (for China), and then sell it at prices. depressed through agents. Rural India was completely impoverished and caused repeated famines. In the second half of the 19th century, the system was adapted to control raw cotton prices to favor Manchester factories. The Berar Cotton and Grain Market Act of 1887 is the forerunner of today’s APMC laws. Importantly, the British were very careful to keep their own hands clean so that the blame fell on the merchants. Therefore, those who provided the supply chain were charged with “hoarding.” This is the source of the film plots of the 50s and 60s.
The FM announcement, therefore, promises to remove a deep-seated bias against farmers and the food supply chain (not to mention a multi-tiered source of rent seeking). A central law will be introduced to allow farmers to sell their products as they wish. Barrier-free interstate commerce should be encouraged. Statewide 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 raj license permit 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 the chief economic adviser to the Government of India.
The opinions expressed are personal.