Why India needs to tread with caution on agri changes 

Why India needs to tread with caution on agricultural changes 

Impact on small & marginal farmers and implications for food security & poverty important factors to bear in mind

 Representative image. (Credit: Reuters Photo)

The changes proposed by the government raise important issues about the possible impact on the farming community. The proposed changes are fundamental and hence it may be useful to consider their possible impact. Since the fine print has probably not even been conceptualised one can only go by the statements of intent. 

New investments in agricultural infrastructure and contract farming will invariably be built on greater use of existing practices, probably the introduction of some reforms and the inevitable entry of new players. In the case of agriculture, the transformation that may be expected includes – (a) agriculture becoming a technology and capital intensive, (b) emergence of large and probably global players, (c) increased importance of electronic trading and/or e-marketplaces, (d) highly financialised and therefore likely to be more prone to market volatility than at present.

Most of these may seem inevitable and at times may be welcomed by some sections. An important cause for the recent collapse of oil prices into negative territory in the US commodity markets was due to the size of the Exchange Traded Fund (ETF) liquidation, which at the time was estimated at 25 percent of the outstanding futures contracts for the near month a few days before contract expiry date. This should be a cause for worry to any government. 

Information asymmetry

An area where the government may need to tread with extreme caution is the impact of information asymmetry in the context of entry of new participants with deep pockets and with access to technology in the agriculture sector – a luxury beyond the wildest dreams of millions of small and marginal farmers in India. 

Over the past decade-and-a-half, thanks to technology, the nature of the financial and commodity markets nationally and globally have undergone a profound change. Electronic trading of all hues, complex derivative products, algorithmic and high-frequency trading, flash crashes, emergence of ETFs, rise of hedge funds along with the deep pockets of most of these institutional participants should be a cause for concern. The net result is that there is extreme volatility in all commodity markets, including those for agricultural commodities. The price volatility is often beyond the control of even large national governments.

Indians need to understand that price discovery and success in present day electronic markets is dependent on a number of variables and especially the ability to mobilise large amounts of capital, invest in powerful electronic hardware, customised trading software and subscription to expensive information systems that enable automated systems to reduce response time to milliseconds and where a millionth of a second gives a competitive advantage. In comparison, the internet speeds used by most Indians are abysmally slow. 

It is not easy to overcome this information asymmetry at the individual level. The cost of these news and information systems (or professional trading terminals) used by institutions and large speculators vary from Rs 25 lakh to Rs 75 lakhs per year or more excluding the cost of internet bandwidth and other costs. They offer those with sufficient resources not only the latest price quotes almost instantaneously in thousands of assets classes across widely dispersed markets but also allow traders to calculate with reasonable accuracy the time and quantity when commodities may be expected to reach particular destinations, including the near exact location of the consignment carrying ships – something that was not possible some years ago. 

Add to this, any change in rules related to storage of agricultural commodities which will only add to the ability to control the supply of agricultural commodities. Such information and control will invariably exacerbate any shortage in supply. Thus, these changes have the potential to allow certain groups or persons to profitably deploy technology and capital to gain an undue advantage in the marketplace. 

In other words, the competitive landscape will always and systemically be loaded against the mass of Indian farmers. These are not unreasonable fears if the experience in other screen-based, traded markets in the financial sector are anything to go by: High-frequency traders account for about 30 percent to 65 percent, a feature that is likely to be replicated if there is complete deregulation in agriculture.

Protecting the producers 

Globally, most countries have not been able to deal with market volatility and that may be one of the most important reasons for the higher protection to agricultural producers even in the advanced countries. India needs to be cautious in reforming agriculture due to its implications for food security and poverty. Once the old laws are removed it would be impossible to stop speculators from taking advantage.

Instead, the focus should be on making it unremunerative and even expensive for speculators to enter these markets. Gradual opening in phases spread over a period of years may be the preferred method. A good beginning would be to prohibit derivative products of any kind, prohibit ETFs and, make agricultural commodities a 100 percent spot traded without any possibility of squaring off transactions. Also welcome would be measures that limit the amount of stock that non-producers can procure and store through warehouse receipts as a percentage of total crop produced within a geographic radius. This will prevent traders from gaining an undue advantage at the cost of the small and marginal farmers.

(S Ananth is an independent researcher based in Andhra Pradesh. Views are personal)

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH. 

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