Impact of the Farm Bill the on FCI

Impact of Farm Bills on the FCI

Recently we have seen a lot of News regarding Farm Bills and Farmers’ protest against them. But exactly What is Farm Bill 2020? Why are Farmers protesting against it? Is it going to change the Agricultural sector? If yes then how? Is there any relationship between FCI and Farm bill? Let us try to get answers to all these questions and understand the impact of the Farm Bill 2020 on FCI.

What is Farm Bill 2020?

On 27 September 2020, President Ram Nath Kovind gave his approval to the three ‘Agriculture Bills’ that were previously passed by the Indian Parliament.

These Farm Acts are as follows:

  1. Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
  2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020
  3. Essential Commodities (Amendment) Act, 2020

FARMERS’ PRODUCE TRADE AND COMMERCE (PROMOTION AND FACILITATION) ACT, 2020

  • Act: It creates a national framework for contract farming where there will be an agreement between a farmer and a buyer before the production or rearing of any farm produces.
  • Provisions:
    • Farming Agreement: The Act provides for a farming agreement between a farmer and a buyer before the production or rearing of any farm produce.
    • Minimum Period of Farming Agreement: The minimum duration of the farming agreement shall be for one crop season or one production cycle of livestock.
    • Maximum Period of Farming Agreement: The maximum duration of the farming agreement shall be five years. It also states that if the production cycle of any farming produce is longer and may go for more than five years, the maximum period of farming agreement may be mutually decided by the farmer and the buyer and to be mentioned in the farming agreement.
    • Pricing of Farm Produced Goods: The pricing of farm produced goods and the process of price determination should be mentioned in the agreement. For variation in prices, a fixed price for the product, and a clear understanding for any additional amount above the guaranteed price must be specified in the agreement. 
    • Settlement of Dispute: The Act facilitates a three-level dispute settlement mechanism– Conciliation Board, Sub-Divisional Magistrate, and Appellate Authority

FARMERS’ PRODUCE TRADE AND COMMERCE (PROMOTION AND FACILITATION) ACT, 2020

  • Act: It permits both intra and inter-state trade of farmers’ produce without limiting the physical premises of Agricultural Produce Market Committee (APMC) markets and other markets notified under the state APMC Acts.
  • Provisions:
    • Trade of Farmers’ Produce: The Act allows the farmers to transact outside the specific trade areas such as farm gates, factory premises, cold storages, and so on. Previously, it was compulsory to conduct trade only in the APMC yards or Mandis.
    • Alternative Trading Channels: It offers lucrative prices for the farmers through alternative trading channels to promote barrier-free intra-state and inter-state trade of agricultural produce. 
    • Electronic Trading: It allows the electronic trading of farmers’ produce (agricultural produce regulated under any state APMC Act) in the specified trade area. It will also provide direct and online buying and selling of agricultural produce via electronic devices and the internet.
    • Market Fee Abolished: As per the Act, the State Governments are restricted from levying any market fee or cess on farmers, traders, and electronic trading platforms for trading farmers’ produce in an ‘outside trade area’.

ESSENTIAL COMMODITIES (AMENDMENT) ACT, 2020

  • Act: It is an act of Indian Parliament which was enacted in 1955 to ensure the delivery of specific commodities or products, the supply of which if blocked owing to hoarding or black-marketing for the purpose of profiteering would affect the normal life of the people. This includes foodstuff, drugs, fuel (petroleum products), etc.
  •  Powers of Central Government:
    • The Government of India looks after the production, supply, and distribution of a whole range of commodities it declares ‘essential’ to make them available to consumers at fair prices. 
    • The Government can also fix the MRP of any packaged product that it may deem to declare as an ‘essential commodity’. 
    • The Centre can add commodities to this list when there will be a need and can remove them from the list once the situation improves. 
    • If a certain commodity is in short supply and its price is inflating, the Government can notify stock-holding limits on it for a specified period.

What are the Problems with Farm Bill?

Under the current policy regime, agricultural markets are the assets of state governments. All states that have notified the Agricultural Produce Marketing Committee (APMC) Act operate APMC mandis (markets) with specified geographical jurisdictions in accordance to the specific states notified GR. Farmers are, therefore, required to sell their produce through auctions to licensed traders at the mandi in their region.

Majority of states have implemented the APMC Act, except for Kerala and Bihar being notable exceptions. 

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There is a large variation across states in terms of scope and tightness of these APMC Acts, Such variations in APMC regulations have led to fragmented markets and impeded the emergence of a single national market

In rice, the monthly aggregate price in 2019 ranged from Rs.2042 per quintal in Uttar Pradesh to Rs.5102 in Sikkim. In vegetables, the variation is much higher. The price range for tomatoes in 2019 was Rs.985 per quintal in Rajasthan to Rs.7605 in Andaman and Nicobar island.

The difference in wholesale prices is also driven by transaction costs such as transportation and the relative demand and supply across regions. With agricultural production largely concentrated in the northern and western states due to varied reasons, the wholesale prices are relatively higher in other regions, which are net consumers of these products.

Price variation is remarkable in the case of vegetables, where government procurement is zero. The absence of MSP in vegetables produce leaves zero room for a price floor. Since vegetables are mostly decomposable, the lack of efficient storage and distribution networks inhibits long-distance trade, and markets for vegetables remain largely localized. Their prices are therefore unstable, thus being prone to supply and demand shocks.

Why Farmers are protesting?

The APMCs are controlled by people who exploit them. But it makes a new trade environment outside the APMCs, where the farmers will be free to sell to anyone they want. This will be a liberation for them. It is a fact that in the case of specific commodities and surrounding, such as wheat and rice in Punjab, most of the marketing goes through APMC mandis. But that is because farmers get a handsome price that is the minimum support price (MSP). It is the wholesellers, not the farmers or middlemen, who are limited from trading outside APMC mandis under some states’ APMC Acts.
Further, the assumption that the non-APMC trade area will be a sort of ‘free market’ is not founded. Nothing in the ‘APMC Bypass Act’ stops trade regulation. On the contrary, the Act can be looked as creating a new framework where APMC mandis will be watched by the state government and other areas by the central government.

Farmers fear that they will not earn enough amount and various big companies will enter the market and will earn profits from it.

  • Agro to Profit Algo
    In the new regime, the mandis may find it difficult to sustain. To compete themselves with the trade area, they might have to reduce their fees. A decrease in hiked fees might be a good thing. But beyond that, reduced fees will make it harder for mandis to survive— unless state governments or local authorities step in. The decline of mandis, if happens, is not going to help the farmers.

None of this can deny that there are serious issues of efficiency, equity, and sustainability with the current regime of agricultural marketing. But the ‘dual regulation’ framework is not an answer to this problem. It is weak economics which fails to present the main issues, and reduces farmers’ control on the marketing system.

What is FCI and how it is linked with Farm Bill?

IMPACT OF FARM BILL 2020 ON FCI

The Food Corporation of India is an organization made and administered by the Central Government. The FCI collects food-grains from farmers through various ways like paddy purchase centers/mill levy/custom milling and stores them in depots. FCI maintains many types of depots like food storage depots and buffers storage. The stocks are transported throughout India using various transportation services and issued to the state government nominees at the rates declared by the Government of India for further distribution under the Public Distribution System (PDS) for the consumption of the ration cardholders. The difference between the cost price and selling price, along with internal costs, are repaid by the Union Government in the form of a food subsidy. At present, the annual subsidy by the Government is around $10 billion. FCI by itself is not the one who decides anything about the MSP, imports, or exports. It just put forth the decisions made by the Ministry of Consumer Affairs, Food and Public Distribution, and Ministry of Agriculture.

Let’s understand Impact of Farm Bill 2020 on the FCI:

Following are the list of borrowings of FCI:

Debt Position as on 31st October,2020  (Rs in Crore)
SourceOutstanding as on 31.03.2020Outstanding as on 31.10.2020
Cash Credit Limit3565.28652.76
GOI Guaranteed Bonds29000.0037000.00
National Small Saving Fund Loans254600.00293199.12
Ways and Means Advances10000.00
Short Term Loans40700.0028900.00
 327865.28369751.88
list of borrowings by FCI

Borrowings of FCI since 2014-15 are as following:

Borrowings from different sources by FCI

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YEARCash Credit LimitBONDS   (GoI-guaranteed)NSSF Loan (GoI)STL            ( Scheduled Banks)Total Borrowings
2014-1546,42716,12128,80591,353
2015-1650,60313,00026,37589,978
2016-174,62013,00070,00038,4771,26,097
2017-188,41413,0001,21,00047,4501,89,864
2018-195,19815,7381,91,00041,2262,53,162
2019-203,56529,0002,54,60040,7003,27,865
borrowings of FCI since 2014-15 | Rs. in Crore

Here we can see that from 2015 till date the total amount of borrowings has been gradually increased.

National Savings Scheme Fund (NSSF) Loan

The NSSF Loans are sanctioned to FCI every year since the year 2016-17 in lieu of food subsidy and are off-balance sheet expenditure of the Government. These loans are for a period of 5 years and to be repaid on equal annual instalments. The details of NSSF loans provided to FCI since 2016-17 is as under:-

Status of NSSF Loan by GOI: 

YearLoan AmountRepayment done as on  dateOutstanding as on 31/10/2020 in crRate of Interest
2016-1770,000.0042,000.0028,000.008.80%
2017-1865,000.0026,000.0039,000.008.40%
2018-1997,000.0019,400.0077,600.008.52%
2019-201,10,000.001,10,000.008.50%
2020-21(till 31.10.2020)38,599.1238,599.127.40%
Total3,80,599.1287,400.002,93,199.12 
borrowings from NSSF | Rs. in Crore

As we can see here repayment of loan is not done in year 2019-20.

Subsidy Position of FCI

Year  Opening
Balance
(1st April)
Subsidy claimed during the yearSubsidy received during the year  Closing
Balance
(31st March)
2013-1431753894107553045633
2014-15456331050169199558654
2015-165865410338311200050037
2016-17500371096007833481303
2017-188130311650161982135822
2018-1913582212044770098186171
2019-20 (RE)18617113173475000242905
subsidy position of FCI | Rs. in Crore

We can see that the amount claimed and received as the subsidy has been increased from the year 2013 till present.

In December 2019 Food Corporation of India has raised Rs 8,000 crore to fund the state-run agency’s plan to increase storage capacity for food grains. As we can see that FCI has borrowed a lot of amounts from various institutes.

FCI takes around billions of rupees every year from the government to procure farm produce on MSP and distribute it at a subsidized price. As of 2020, the net food-grain stock with FCI is 2 and a half times more than it is required and the budget is around 1.5 lakh crore rupees- more than the overall budget of the state of Punjab. The Union government has to repay 2.5 lakh crore rupees of FCI’s borrowings which it has borrowed from PSBs to obtain grain at MSP and sell it at a subsidized price.

FCI being inefficient, it is necessary to solve the issues as soon as possible. With the three bills in the farm sector, the government is trying to solve the FCI issue partially. Once the agriculture sector becomes independent from the monopoly of APMCs, the farmer will sell the produce anywhere in the country including in cities where the prices are much higher.

Once the agriculture sector develops a sophisticated market and private investment starts pouring into storage and transportation, the prices of the product will automatically rise above the Minimum Selling Price (MSP).

Once the farmers start getting higher prices in private selling, they won’t sell the foodgrains to FCI and the stocks of the organization, which are 2.5 times than the mentioned limit as of now, will not go up. Moreover, with the private investment, storage and transportation facilities will be improved and this will have a positive impact for FCI which spends around 20 percent of the total cost on distribution.

The three farm bills which were introduced by the government can improve the performance of FCI over the next few years although they are not directly related to anything to do with the organization. In the agriculture sector, almost everything- power, seed, irrigation, fertilizer- is subsidized on the both input and the output side, the prices are hiked through MSP. The government can block subsidies on the input side as well as scrap MSP, and use that money which will be at least 5 percent of India’s GDP to directly transfer it to poor people, irrespective of the sector- agriculture or industry- they are employed in.

Agriculture needs to be looked at as the important pillar of the economy and the government’s job should be to create the essential regulatory framework, not to subsidize and waste the taxpayer’s money. The FCI needs to undergo serious reforms.

We have seen that FCI doesn’t have any sources for revenue it operates on subsidies provided by the government. We can conclude by saying that if Farm Bill gets implemented then it will help to reduce both FCI borrowing and Government spending and will help FCI to solve some of its issues.

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