Farm reform reversal seen hurting investment

India's repeal of agriculture laws aimed at deregulating produce markets will starve its vast farm sector of much-needed private investment and saddle the government with budget-sapping subsidies for years, economists said.

"All incentives to shift towards a more efficient, market-linked system (in agriculture) have been smothered," said Gautam Chikermane, a senior economist and VP at New Delhi-based Observer Research Foundation.

The u-turn allays farmers' fears of losing the minimum price system for basic crops, which growers say guarantees India's grain self-sufficiency.

"It appears the government realised that there's merit in the farmers' argument that opening up the sector would make them vulnerable to large companies, hammer commodities prices and hit farmers' income," said Devinder Sharma, a farm policy expert who has supported the growers' movement.

Chikermane said no political party will attempt any similar reforms for at least a quarter-century. And, in the absence of private investment, "inefficiencies in the system will continue to deliver wastage."

Though malnutrition accounts for 68 per cent of child deaths in India, the nation wastes around 67 million tonnes of food every year, worth about $12.25 billion—nearly five times that of most large economies—according to various studies.

Inadequate cold-chain storage, shortages of refrigerated trucks and insufficient food processing facilities are the main causes of waste.

The farm laws promised to allow traders, retailers and food processors to buy directly from farmers, bypassing more than 7,000 government-regulated wholesale markets. Ending this prcoess would have encouraged private participation in the supply chain, giving Indian and global companies incentives to invest in the sector, economists said.

"The agriculture laws would have removed the biggest impediment to large-scale purchases of farm goods by big corporations," said Harish Galipelli, director at ILA Commodities India Pvt Ltd, which trades farm goods. "And that would have encouraged corporations to bring investment to revamp and modernise the food supply chain."

Galipelli's firm will now have to re-evaluate its plans. "We have had plans to scale up our business," said Galipelli. "We would have expanded had the laws stayed."

Other firms in warehousing and food processing are also expected to review their expansion strategies, he said.

Poor post-harvest handling of produce also causes prices of perishables to yo-yo in India. Only three months ago, farmers dumped tomatoes on the road as prices crashed, but now consumers are paying a steep Rs 100 a kg.

The laws would have helped the $34 billion food processing sector grow exponentially, according to the Confederation of Indian Industry (CII).

Demand for fruit and vegetables would have gone up. That would have cut surplus rice and wheat output, economists said.

"Crop diversification would also have helped rein in subsidy spending," said Sandip Das, a farm policy analyst.

Food Corporation of India (FCI) racked up a record Rs 3.81 lakh crore ($51.83 billion) in debt by last fiscal year, inflating the country's food subsidy bill to a record Rs 5.25 lakh crore ($70.16 billion) in the year to March 2021.

However, while the central government now has limited scope for change, local authorities "can opt for reforms provided they have the political will to do so," said Bidisha Ganguly, an economist at CII.

Similarly, venture capital-funded startups have also expressed interest in India's agriculture sector.

"Agritech, if it is allowed to take root, has the potential to enable a better handshake of farmers and consumers," Chikermane said.