The biggest reform, or a farce in 3 Acts?

India has one of the world's largest arable landmasses, focused sunshine, and water in 40% of land, and so, if the three laws are implemented, India will be transformed

On June 3, the Narendra Modi government made three historic moves that have the potential to dramatically transform India very quickly. One, amendment to the Essential Commodities Act, 1955, which will free the prices of cereals, pulses, oilseeds, edible oils, onion, and potatoes from stock limits, except in the case of natural calamities like famine. Two, allowing farmers to sell their crop to anyone, anywhere. Under current laws, they can sell only licensed traders in APMC (Agricultural Produce Market Committee) mandis near them. The APMC is controlled by politicians acting as a cartel, who gobble up the bulk of the profits. Three, allowing farmers to do contract farming by engaging with processors, wholesalers, aggregators, large retailers, exporters etc., which will help them get capital and technology.

India has one of the world’s largest arable landmasses, focused sunshine, and water in 40 per cent of land, and so, if the three laws are implemented, India will be transformed. Farmers will get better prices and India will attract billions of dollars of investment in cold storage, warehouses, processing, and export, reducing massive wastage (when there are bumper harvests) and dramatically raise incomes where they are needed the most. If this happens, it will as big a reform as India has seen at any time, since agriculture contributes 16 per cent of GDP, but 61 per cent of the people depend on it directly or indirectly. So how big is it?

Massive opportunity: In December 2008, Mukesh Ambani told Moneylife in an interview that for a variety of reasons our economy did not get a chance to develop a sustainable value chain in the food business. “The US and Europe saw large players in food by the 1950s and 1960s; but in India, food has always been a disorganised and fragmented value chain. We believe that India’s purchasing power will be food-dominated.” 

“If we can send fresh produce through technology and distribution from any farm in India to anywhere in the world at their quality standards, then imagine the arbitrage. It is bigger than software. Take potatoes, the most common food across the world … everybody eats potatoes. Now, plot the prices. Farmers in UP and Bihar get about Rs 4-5 a kilo; in the Middle East, the wholesale price is about Rs 25-30 a kilo. In the US, Sam’s Club, it is Rs 90 a kilo. In Europe, it is Rs 110 a kilo. The arbitrage is 1:20. If we get our produce right, and if the US market is opened up, you will be surprised how quickly we reach $20 billion. The food market is much bigger than the software services market. And the money goes straight into the hands of millions of farmers. The spinoffs are enormous — jobs, houses, durables, a whole new consumption boom will start in rural areas.”

He told us “having looked at it obsessively for the past year, I feel that we can convert all our disadvantages into an opportunity. We have fragmented landholdings; but we can integrate that with technology. With proper inputs, there is no reason why Indian farmers cannot become world-class. What is missing is distribution. We now have an opportunity to straightway catch the next wave of distribution logistics … I believe that everyone should be able to relate to market economy. If you produce something, you should be able to sell it at a market price.” 

The three new Acts in the play are in sync with this vision — 12 years late. Mr Ambani had estimated that we could reduce the cost to consumers by 20 per cent and increase the efficiency of farmers thrice over. Farm incomes can go up 600 per cent to 900 per cent over the next few years from the current base. “For example, the country produces 150 million tonnes of fresh produce today. We can go to 300-400 million tonnes fairly quickly over a few crop cycles, as long as we can move those millions through the system and have world-class quality.” These are 2008 figures. 

What can go wrong? Lots. In India, there are huge frictional costs of doing business. In this case, precisely because this is new, and agriculture is a state subject, enormous groundwork is needed. Ideally, we need an infrastructure of real time and reliable price discovery, connecting farmers, traders, and buyers; a trading mechanism and physical distribution to fulfil orders. Once this complex infrastructure is in place (just look at the capital market), we will need iron-clad contracts. There will be many disputes, which must be redressed quickly, easily, and inexpensively. If not, the better players will be discouraged to enter. I am sceptical about whether anyone will have the incentive, skin in the game, or accountability to make all this work. Moreover, since agriculture is a state subject, Mr Modi’s good intentions and ambitious will stop at state borders — even those of BJP-ruled states.

Solution: The solution is for the NITI Aayog to select some of these states for a pilot project and get on board a few large business groups (Reliance, ITC, Mahindra, and others have enormous knowledge and can scale up quickly). Make them compete with each other to get the most modern technology at Indian costs, all with the ultimate vision of connecting the Indian farmer to the global market. This experiment must have positive feedback loops, embedded in the design, allowing sensible course corrections. Fortunately, we can learn from developed countries and leapfrog the development process. Finally, Mr Modi must have a single person accountable to reach measurable milestones over the next four years. Otherwise it will all turn out to be a farce in three Acts.

The writer is the editor of moneylife.in

Twitter: @Moneylifers