THE Farmers (Empowerment And Protection) Agreement On Price Assurance And Farm Services Act, 2020, aims to create a national system for agricultural agreements to protect farmers in dealings with consumers, businesses, manufacturers, wholesalers, etc. and to deal in their produce in a fair and transparent way. It will function beyond the physical premises of markets notified under the state agricultural produce marketing legislations, writes PRAKHAR DIXIT.
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ACCORDING to the government, farmers faced a variety of problems under the prevailing system of agricultural trade. These range from over-production to low remuneration for crops, high transport costs, high-interest rates, rising indebtedness, and so on. The newly-enacted farm laws are expected to give farmers the right to trade across states, become suppliers of their produce, and monitor the process. In all, it will create a market beyond the physical premises of designated agri-markets.
A major problem with the current MSP-based system is the dependence of the APMC or Agriculture Produce Marketing Committee officials, including the commission agents and other intermediaries. Most farmers find it difficult to enter mandis and rely on the open market to sell farm produce.
MSP has always been a highly-debated subject in the political economy of agriculture. A hyper-technical reading would show that only 6% of farmers have access to MSP-based procurement. Yet the current MSP/assured pricing scheme covers more than 25 million farmers across crops, including pulses and oilseeds. Depending on the denominator—the 2015-16 Agricultural Census places the total number of operating holdings at 146.45 million—between 15% and 25%, and not 6%.
The Farmers (Empowerment And Protection) Agreement On Price Assurance And Farm Services Act 2020:
This law, also known as the Contract Farming Law, was promulgated on 5 June 2020 under clause (1) of Article 123 of the Constitution, as the Parliament was not in session. It has replaced the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020.
The objective of this law is to provide a national structure for agricultural agreements that protect and enable farmers to engage in a fair and open manner with agribusiness companies, processors, wholesalers, exporters or large retailers for farm services and the selling of future agricultural products at mutually agreed remuneration rates.
The Farmers (Empowerment And Protection) Agreement On Price Assurance And Farm Services Act, 2020, aims to create a national system for agricultural agreements to protect farmers in dealings with consumers, businesses, manufacturers, wholesalers, etc. and to deal in their produce in a fair and transparent way. However, according to the production agreement envisaged in the Act, sponsors will make farm services available to the farmer, and bear the risk of output. Further, in case of termination or non-fulfilment of required/ desired crops the sponsor will pay the farmer for the service provided.
Policy-makers believe that Indian agriculture is characterised by instability due to limited holdings and certain drawbacks such as weather dependence, production uncertainty and volatile markets. To resolve the issues through the recognition of higher productivity, cost-effective production and efficient monetisation of production to raise farmers’ incomes, it was felt that agricultural production agreements need to be promoted to improve monetisation. The primary objective is to de-risk agriculture to allow scales of investment by industry in production and processing of high-value agricultural products, and to help farmers enjoy the additional benefits of operational efficiency.
The Loophole
Many critics have expressed concerns about this Act. Though now notified into a law, applicable country-wide, by the central government, reportedly, no subject-matter experts, state governments, farmer cooperatives, or other related groups were consulted, thus striking a blow against cooperative federalism.
Secondly, the Act states that the farmers can enter into “written agreements” with anyone, including a corporation, and sell their products for a fixed time-period (or as provided) in the contract. In other terms, corporations/companies will now have contracts with producers to purchase the produce from farmers. They could set the price for the products, the specifications and the quality, etc., beforehand. This can develop into a big concern for the farmers in the future.
The other contention is that these exclusive arrangements between companies and farmers are already in force for crops of particular grades of processing. In such situations, the processors/exporters usually not only conduct guaranteed buybacks at pre-agreed rates, but also provide farmers with seeds/planting material and extension support to ensure that only crops of the desired quality are grown. Was it appropriate to enact a contract farming law that formalises contract cultivation through the “national framework”?
It would quite correct to claim that there is a reason to object to an Act that merely permits contract farming.
A Detailed Critique
Section 2(g) of the Act defines “farming agreement” as a written agreement between a farmer and a “sponsor”, or a farmer, a sponsor and any third party, prior to the production or rearing of any farming produce of a predetermined quality, in which the sponsor agrees to purchase such farming produce from the farmer and to provide farm services.
The Union government is of the opinion that farming agreements would protect and encourage farmers to sell to anyone, a wholesaler, a retailer or an exporter. They would have written arrangements to protect the farmer in case the buyer decides to breach the agreement. However, the word in the section, “predetermined quality”, itself explains the bias in favour of the firm/companies/corporates, as the option to determine the quality, type of crops etc., that they want the farmers to produce.
This section adds that besides the farming agreement it may include “Trade and Commerce Agreement” as well as “Production Agreement”.
In a trade and commerce agreement, goods will remain in the possession of the farmers during production, who will receive the price of the commodity as negotiated with the sponsor at the time of delivery. Here the question arises that if before delivery the crops are somehow ruined or not produced as expected, will the sponsor be accountable to pay the amount to farmers.
Though seemingly casually-inserted, the use of the words “may be recovered” in section 14(7) means that recovery as land arrears is always an option with the SDM or Appellate Authority. However, section 15 says that “notwithstanding anything contained in section 14, no action for recovery of any amount due in pursuance of an order passed under that section, shall be initiated against the agricultural land of the farmer”. Thus section 15 forbids recoveries “against a farmer’s agricultural land”. In all, it seems section 14(7) is partially shadowed by section 15. But recovery still lies against the non-agricultural land and other movable/immovable assets of farmers.
Section 2(o) of the Act defines “sponsor” as one who has entered a farming agreement with the farmer to purchase farming produce. However, the dictionary meaning of “sponsor” is one (a company, etc.) who pays the cost of a particular event, programme, etc., as a way of advertising. Ultimately, the “sponsor” under this Act would control the farm produce and may act as the “trader”—contrary to the literal meaning of the word—who utilises the trade area for the purpose of his business.
However, according to the production agreement, sponsors decide to make farm services available to the farmer either in whole or in part, and also agree to bear the risk of output. Further, it is mentioned that in case of termination or non-fulfilment of required/ desired crops the sponsor will pay the farmer for the service provided.
Section 3 to Section 12: Farming Agreements
Section 3 deals with the farming agreements. It is not that contract farming is new to India or that it has no legal backing. Pursuant to the Model APMC Act, 2003, contract farming was allowed, and the APMCs were responsible for documenting these contracts. They were also mandated to settle conflicts in such contracts.
According to this section, a farmer may enter into a written farming agreement for any kind of farming products and such agreements will include the terms and conditions for the supply of the products, including time of supply, quality, grade, standards, price and such other matters and can include other terms relating to providing farm services.
Going by Section 3, the bargaining power (or overall control) still remains with the companies/firms/corporate houses. In other words, the balance of power will be transferred from the farmer to a private corporation, and farmers may end up being the weakest players in the negotiation. A farmer might be pushed to become a land-owning tenant in the interest of corporations.
Last year, a few Gujarati farmers were sued for more than Rs 1 crore for “illegally” growing and selling PepsiCo-registered potato varieties. When the state government intervened, PepsiCo withdrew the cases, but the incident left a question mark over the future of contract farming in which resource-poor farmers face strong multinationals.
In the Union List, three entries discuss taxes and duties on income and properties, precisely excluding those relating to agriculture. In the State List, eight entries include words relating to agriculture. In the Concurrent List, the sale of property other than agricultural land; various contracts not related to agricultural land; and evacuee property, including agricultural land, are discussed.
It is very clear from the Union List and the Concurrent List that agricultural issues are outside the control of Parliament and states have exclusive powers to legislate on them. [Even though section 3(4) says that to facilitate written farming agreements between farmers and sponsors, the central government may issue necessary guidelines along with model farming agreements.]
This section, therefore, raises a very important question: Does Parliament have legislative powers over agriculture? The government may refer to Entry 33 of the Concurrent List i.e., trade and commerce, production, supply and distribution of domestic and imported goods of an industry or foodstuffs or cattle, etc., over which, in the public interest, Parliament has jurisdiction. The Sarkaria Commission report on Centre-state relations said that Entry 33 was used by the Centre to take up disproportionate power in matters related to agriculture.
The further counter would be that even industries are a state subject (Entry 24) but with the restriction that Parliament can, by statute, declare any industry under the control of the Union if required for defence or war (Entry 7 of the Union List) or if Parliament considers it expedient in the public interest (Entry 52 of the Union List).
Subjecting farmers to the vagaries of market forces is not the only way to alleviate these concerns that plague agriculture. The experiences of other nations show that the corporatisation of agriculture could worsen the distress in agriculture. Further, the laws were drafted and tabled in Parliament during the COVID-19 lockdown and passed in both Houses without much discussion or debate. Not to mention that states have legislative powers over agriculture. Loopholes in the act are of a very critical nature and the government should discuss them with farmers.
However, the word “foodstuffs” in Entry 33 of List III cannot include “farm products”. The Centre has bluntly used agricultural products as “foodstuffs”, which would contradict and interfere with the legislative powers of the states arising from Entry 14, 18 and 28 of the State List. Furthermore, even though the Center has the power to legislate on “foodstuffs”, it will still be regulated by state legislations on the subject and not by a central law. This is because states can also legislate on entries in the Concurrent List, as covered by Article 254(2).
In Hoechst Pharm Ltd. v State of Bihar, the Supreme Court held that the effect of the President’s assent to a state act, while conflicting with a previous Union law on a concurrent matter, would be that the state law would prevail in that state and override the central act.
The Centre may also claim it has the power to legislate on contract farming and prevent states from enforcing fees/delays outside APMC areas. In ITC Ltd v APMC, the Supreme Court upheld a state law related to agricultural produce marketing and struck down the central law.
Section 4(4) deals with a condition that the parties entering into a farming agreement may be required to determine a mutually acceptable quality, grade and standard, which would be monitored, to ensure impartiality and fairness. The Act talks about a mutually-accepted standard to determine the quality/grade of such products, but fails to provide a remedy in case such standards are not met.
Section 5 deals with the pricing of farming produce. According to the Act, the price to be paid for an agricultural product may be decided and set out in the farming agreement. The Act aims to secure farmers against price exploitation, but does not set down a price fixing mechanism. There is a concern that giving a free hand to the private sector could corporatise agriculture and exploit farmers.
Section 5(b) talks about a clear price reference for any additional amount over and above the guaranteed price, including bonus or premium, to ensure the best value to the farmer, and says that such a price reference may be linked to the prevailing prices in a specified APMC yard or electronic trading and transaction platform or any other suitable benchmark price.
However, the price reference may not be connected to the prevailing MSP or government procurement rate. In general, there will be no MSP declaration for all crops, as determined by the C2 formula of Swaminathan Commission Report. [C2 is the Comprehensive Cost, which includes the imputed costs of family labour, imputed rent of owned land and imputed interest on owned capital. The National Commission on Farmers, headed by MS Swaminathan recommended that a 50 percent margin over C2 should be used to decide the MSP of the crops.]
Using “may be” instead of “shall” or “will” means that the discretion to link the guaranteed price to the prevailing market prices has been left to the contracting party with the greater bargaining power.
Section 9 deals with linking farming agreements with insurance or credits under any central or state government scheme or financial service provider for risk-mitigation and allow credit to the farmer, or sponsor, or both.
This essentially means that in case of losses to a sponsor/farm service provider he could charge the meagre insurance cover that the government provides for farm produce, cattle, or other agricultural accessories. This would mean that insurance premiums would become more expensive for farmers. Similarly, in the case of an unsecured loan taken by a farmer, any profits that would accrue to him as part of a farming contract might end up being directly apportioned towards repayment of loan liability.
In the event of a financial loss in the deal, recovery shall take place according to section 14(7), which says, “…the amount payable under any order passed by the Sub-Divisional Authority or the Appellant Authority, as the case may be, may be recovered as arrears of land revenue.”
Though seemingly casually-inserted, the use of the words “may be recovered” means that recovery as land arrears is always an option with the SDM or Appellate Authority. However, section 15 reads as follows: “Notwithstanding anything contained in section 14, no action for recovery of any amount due in pursuance of an order passed under that section, shall be initiated against the agricultural land of the farmer”. Thus the non-obstante clause, i.e., “Notwithstanding” in section 15 forbids recoveries “against a farmer’s agricultural land”. So, it seems that section 14(7), though present, is partially shadowed by section 15. But, the recovery still lies against the non-agricultural land and other movable/immovable assets of the farmer.
Although the government had made it clear that while the farming agreements can stipulate that no buyer can take loans against farmlands, nor can any such condition be made to farmers, yet the government has said that the existing provision is clear but can be clarified further if required.
Section 11 deals with the termination of farming agreements. Parties can terminate their agreement with mutual consent for any reasonable cause. Furthermore, sections 13 to 16 deal with dispute resolution in relation to farming agreements.
There is a three-tiered dispute resolution system in the act; with a conciliation board/sub-divisional magistrate/collector or additional collector as the appellant. Farmer-buyer contracts have been largely excluded from the sphere of civil courts as well as judicial review by establishing this bureaucrat-led dispute settlement system.
Section 14, which deals with the mechanism for dispute settlement, specifically mentions that where an agricultural agreement does not provide for a conciliation procedure or the parties to an agricultural agreement fail to resolve their dispute within a period of 30 days, any such party can refer the matter to the sub-divisional magistrate concerned, who shall be the sub-divisional authority to settle disputes over agricultural agreements.
Any order passed by the sub-divisional authority shall have the same effect as the decree of a civil court and shall be enforceable in the same manner as a decree under the Code of Civil Procedure, 1908. Any party dissatisfied by the order of the sub-divisional authority can appeal to the appellate authority, which shall be chaired by the collector or additional collector appointed by the collector, within thirty days of the request.
If unresolved within the deadlines in the Act, it will be the farmers who will be most adversely affected by any conflict. The Act puts farmers and traders at the hands of civil servants rather than courts. For, any order passed by the sub-sivisional authority shall have the same effect as the decree of a civil court. Any party dissatisfied by the order of the sub-divisional authority can appeal to the appellate authority, which shall be chaired by the collector or additional collector appointed by the collector, within thirty days of the request.
If unresolved within the deadlines in the Act, it will be the farmers who will be most adversely affected by any conflict. The Act puts farmers and traders at the hands of civil servants rather than courts.
Section 18 deals with the protection of action taken in good faith. The section states, “No suit, prosecution or other legal proceeding shall lie against the central government, the state government, the registration authority, the sub-divisional authority, the appellate authority or any other person for anything which is in good faith done or intended to be done under the provisions of this Act or any rule made thereunder.” The use of “shall” in this section means that the provision is mandatory. In addition, the majority of farmers lack the resources to fight legal battles against large private companies.
Barring the jurisdiction of civil courts over disputes settled by the sub-divisional authority or appellate authority has been seen as antithetical to judicial independence, as it takes away the parties’ right/power to appeal, which is a part of the fundamental framework of the Constitution and Indian jurisprudence. In SR Bommai vs Union Of India, while over-ruling State of West Bengal vs Union Of India, the Supreme Court held that federalism is a part of the basic framework of the Constitution. It can be argued that the federal system has been vitiated after Parliament passed the farm laws since agriculture falls in the exclusive jurisdiction of state legislatures.
Section 20 deals with the overriding effect of the Act, which has led to concerns over further infringement of the federal framework. The central government is required to respect the autonomy of states within the federal arrangement. Any limitation of states’ powers and finances is ill-advised and goes against the structure of the Constitution.
Conclusion
Agricultural distress has been persistent in India due to a variety of factors, such as fragmented land holdings, low productivity, lack of storage and transport, and high indebtedness. Subjecting farmers to the vagaries of market forces is not the only way to alleviate these concerns that plague agriculture. The experiences of other nations show that the corporatisation of agriculture could worsen the distress in agriculture.
Further, the way in which the laws were drafted, and tabled in Parliament during the COVID-19 lockdown and passed in both Houses without much discussion or debate amid an Opposition walk-out have all generated a great deal of controversy, as it is state governments that regulate these aspects of farming. The loopholes in the act are of a very critical nature and the government should discuss them with farmers.
The government should set up a proper contract-farming system so that no farmer is cheated by corporations big or small. The government should create a separate regulatory agency to settle conflicts between farmers and traders/corporations, rather than burdening a sub-divisional magistrate. Not only does this offer further assistance to the privatisation of the agricultural industry, but it will also discourage further abuse. There are multiple shortcomings in the older APMC Act, but a new scheme was not required—filling the gaps and loopholes would have worked much better.
(Prakhar Dixit is a Delhi-based lawyer and acknowledges the inputs of his intern Saman Rizwan in the writing of this article. This article is the first of a three-part series analysing three farm acts legally and procedurally. The views expressed are personal.)
