Agriculture Policy Briefing

Central Ordinance Allowing Purchase of Farm Produce Without Mandi License will Hit State Revenues; Punjab may be Hardest Hit

Vivian Fernandes reports that states were charging multiple taxes, cesses and fees for agricultural produce sold in the regulated market yards. That revenue is under threat from the new central ordinance

The Central ordinance promulgated on 5 June to free up trading in agricultural produce within and between states will result in states like Punjab losing a significant amount of revenue. Punjab charges three percent of value as market fee for produce sold at its regulated market yards and another three percent as rural development cess. In addition, the arhatiyas or commission agents charge 2.5 percent as fee. Rajasthan had imposed Krishi Kalyan Cess during the lockdown but withdrew it after protests.

This year, Punjab procured 127.45 lakh tonnes of wheat between 15 April and 30 May. At the minimum support price of Rs 1,925 per quintal, the state earned Rs 736 cr in mandi cess and a similar amount as rural development fee. The commission earned by the arhatiyas was Rs 613 cr.

These fees are payable on ‘notified’ commodities even outside the regulated market yards even when farmers (sellers) and traders do not use their infrastructure. NITI Aayog Member Ramesh Chand cited the example of ITC, a cigarette company that has diversified into branded staples like Aashirward brand wheat flour and rice. It has a procurement centre in Kapurthala but pays mandi and rural development fees.

The Commission on Agricultural Costs and Prices (CACP) which recommends minimum support prices (MSP) has been speaking out against these levies as they raise costs, distort trade, create state barriers and add to the food subsidy bill.

According to CACP, the levies on wheat procurement during 2019 were 8.50 percent in Punjab, 6.50 percent in Haryana, 4.05 percent in Uttar Pradesh, 3.75 percent in Madhya Pradesh and 3.15 percent in Rajasthan. During 2018, the imposts were higher: 14.50 percent in Punjab, 11.50 percent in Haryana, 8.86 percent in MP, 8.16 percent in UP and 3.25 percent in Rajasthan.

On procured rice, Punjab was charging 14.50 percent, AP 13.13 percent, Haryana 11.50 percent, Chhattisgarh 9.59 percent, MP 9.70 percent, Odisha 9.13 percent, UP 8.63 percent, West Bengal 8.13 percent and Kerala 7 percent. In 2016, this increased the procurement cost of the government by Rs 91 to Rs 213 per quintal, the CACP said.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance promulgated on 5 June, says market fee will be payable only on trades within the precincts of the regulated market yards, private markets, and warehouses, silos or structures deemed as markets under state agri-market laws. Earlier, the regulated markets levied the cess on ‘notified areas’ which could be a block or even a district.

Chand says the purpose of the ordinance is to ensure that farmers get multiple trading platforms and a jab at better prices for their produce. The aim is to make the regulated market yards competitive and not extinct. The ordinance, according to him, will reduce the spread between producer and consumer prices.

But state governments see it as an encroachment on their powers. The ordinance overrides state laws including the agricultural produce market committee (APMC) Acts that regulate trading in agricultural produce. Punjab Chief Minister Amarinder Singh has in a press statement on 5 June denounced the “so-called reforms” as “yet another brazen attempt to erode and destabilise the country’s federal structure.”  He warned that it could “pave the way for disbanding the MSP regime as well as the food procurement regime triggering unrest among the state’s farmers.”

Punjab’s wheat and rice trade has almost entirely shifted to the public sector because public agencies procure these at minimum support prices. Private traders find it profitable to buy them cheaper in areas like eastern Uttar Pradesh. This year, they procured just 0.58 lakh tonnes (less than half a percent) of wheat arrivals at the state’s mandis. The Food Corporation of India, PunGrain, Punsup and Markfed purchased 99.6 percent of the arrivals.

Agriculture Commissioner Balwinder Singh Sidhu says the ordinance has “far-reaching implications” for the state. He says its farmers are free to sell anywhere in India and cites kinnow’s (an orange-like fruit). But Punjab has only allowed free trade in fruits, vegetables, wood and flowers. Trade in cereals, pulses, oilseeds and cotton is licensed.

Punjab fears that over time Food Corporation of India will buy from outside the regulated mandis to escape the levies. For the past two years, it has been chafing at payment of commission fee as well because the arhatiyas provide no service when grain is procured at MSP. Sukhpal Singh of the Centre for Management in Agriculture at the Indian Institute of Management, Ahmedabad, says the commission agents have political clout. About a third of them are Jat Sikhs, a political constituency that can swing the fortunes of the state’s two main parties. That’s one reason why Punjab keeps cereals as a notified commodity to be traded only in the mandis.

Under the constitution, states have the power to regulate agricultural marketing. The Centre has been prodding them to amend their laws for easier trading. They have been reluctant to do so, despite two model acts drafted by the centre in 2003 and 2017. Between March and June, seven states took the lead in amending these laws at the behest of the centre. Five of them are ruled by the BJP and two by its allies.

The trade facilitation ordinance draws upon the centre’s power under the Concurrent List to regulate trade and commerce in foodstuffs, cooking oils and oilseeds, raw and ginned cotton, cattle feed and raw jute.

A trader with an income tax Permanent Account Number (PAN) can now buy agri-produce anywhere in India. The states can set up an electronic registry for them. Such a trader, a farmers’ producer company or a cooperative can also operate an electronic trading platform for agricultural produce. Farmers will have to be paid on the same day or at most within three days. In case of disputes, say over payments, they will have to approach the sub-divisional magistrate who will set up a conciliation board with three or five members, presided over by an official. The Collector will be the appellate authority. Civil courts have been barred from hearing the disputes.

Another ordinance to amend the Essential Commodities Act says stocking limits will be imposed only when prices double. Produce contracted in advance by agri-processing companies or other buyers will be exempt.

Despite the economic liberalisation of 1991, agricultural trading and marketing has been the least reformed. Agricultural economist Ashok Gulati has hailed the ordinances as agriculture’s “1991 moment.” They are indeed a momentous development for the agricultural economy

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